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groundwater, recycled water,base delivery, maximum day, maximum hour, meter servicing, and customer service. 3. Determine Units of Service and Unit Costs for Cost Components: Each cost component is associated with a specific unit of service;costs within each component are divided by the total units of service to determine the unit cost. For example,customer service costs are associated with the total number of customer accounts. Dividing total annual costs by total customer accounts yields the unit cost of customer service. 4. Distribute Cost Components to Customer Class: The cost of the system,allocated by system component unit costs,are distributed to customer classes and tiers in proportion to their respective demands and burdens on the system using the units of service and unit costs for each component. 1.6.3.RATE DESIGN AND DERIVATION Rates do more than simply recover costs.Within the legal framework and industry standards,properly designed rates should support and optimize a blend of objectives, such as conservation, affordability for essential needs, and revenue stability, among others. Rates can act as a public information tool in communicating these objectives to customers. 1.6.4.PREPARATION OF ADMINISTRATIVE RECORD AND RATE ADOPTION Rate adoption is the last step of the rate-making process. Raftelis documents the Study results in this Report(also known as the administrative record),which reflects the basis upon which the rates were calculated,the rationale and justifications behind the proposed charges,any changes to the rate structures, and anticipated financial impacts to ratepayers. IL-7. Financial Plan Results and Recommendations 1.7.1.FACTORS AFFECTING REVENUE REQUIREMENTS The following items affect the water utility's revenue requirement(i.e.,costs)and thus its water rates. The utility's expenses include O&M expenses,capital project costs, debt service, and reserve funding. • O&M Funding:There are a few factors influencing the increase in spending on O&M. First,higher than usual inflation has led to higher O&M costs than were previously planned for under the current water rates.Next,because of recent drought conditions, Zone 7 purchased water costs are expected to increase in the coming years. Finally, the water system will be bringing on three new full-time employees(FTEs)at the start of the Study period. • Capital Funding:The water utility has approximately$37.9M in planned capital expenditures from FY 2024 through FY 2028(accounting for inflation). Planned capital project costs are anticipated to be entirely cash funded through net rate revenues and existing and future reserves. • Reserve Funding:Reserve targets are adopted to ensure enough cash on hand to meet routine cash flow needs,provide adequate for planned repairs and replacements(R&R)CIP, navigate emergencies in the event of asset failure or natural disaster, and to protect ratepayers from rate spikes. Table 1-3 summarizes the City's current reserve policy. Table 1-3: Reserve Policy Reserve Policv Target PolicN FY 2024 Target Water Operating and Capital 35%of O&M Expenses $11,533,550 Recycled Water Operating 35%of O&M Expenses $918,997 Total $12,452,547 WATER AND RECYCLED WATER RATE STUDY REPORT 5