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Much of work of the subcommittee and the advisory group was used as the foundation for this rate study; however, given the immediate needs of the water system this first phase of the rate study is necessarily focused on providing immediate funding that will implement infrastructure improvements to ensure the continued delivery of safe and reliable drinking water to the Pleasanton community. This phase does not consider adjustments to the discount program for seniors and low-income residents; this will be incorporated into the second phase of the rate study to be completed. Per Proposition 218 requirements, water agencies must develop a nexus between their rates and their costs and document their methodology in an administrative record (report/study). A complete copy of the full Water and Recycled Water Rate Study prepared by Raftelis is provided as Attachment 1. Audit and Review of Accounts and Expenditures The first step in analyzing the current water and sewer rates was to review and audit existing customer accounts to determine if there were any differences in the amount of water provided compared to the volume charged for in the billing system; this is a routine operating procedure for a utility. Staff also reviewed existing expenditures to determine if there were areas where costs could be reduced, or economies of scale could be realized prior to developing the expenditures for the rate analysis. Proposed Water Rate Increase The rate study process includes three elements: a financial plan, cost of service, and rate structure. Financial Plan The financial plan includes several components such as inflation, operating costs, revenues, capital projects, and debt service for the next three years. Operations and maintenance costs are proposed to increase by inflation factors. Additional costs as based on the resources necessary to implement critical near-term system infrastructure improvements, including staffing to support meter system operations and maintenance activities, and to advance the selected water supply alternative and other prioritized water projects. The projected inflation for the operating expenses is shown in Table 2 below. Table 2 Expense Inflation General 5% 5% 5% Salaries 3% 3% 3% Health Benefits 7.8% 10% 6% Other Benefits 3% 3% 3% Purchased Water 6% 6% 6% Electricity 5% 5% 4% Capital 12.5% 12.5% 10% Page 5 of 17