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• Determine water allocations for each customer class during each drought stage based on the 2021 Water Shortage Contingency Plan • Calculate the financial impacts of reduced water sales and changes to water supply sources • Evaluate various drought rate structures to determine the structure best suited to meet the City's needs • Develop drought rates that recover the financial impacts of each drought stage based on the cost of providing service 1.10.1. PROCESS AND APPROACH Drought rates are governed by the requirements of Proposition 218 and Article X of the California Constitution. The development of the drought rates must show the nexus between the costs of providing water service and the rates charged to customers, must maximize the beneficial use of water(often defined as indoor use for health and hygiene),and must encourage conservation. Drought rates are designed to recover lost revenue due to reduction in water use during each stage,to incorporate the potential changes to the City's water supply sources and their corresponding costs,to align with specific drought stages outlined in the 2021 Water Shortage Contingency Plan, and to provide financial flexibility for the City when declaring drought stages and implementing the appropriate drought rates. The proposed rates are based on the City's proposed water rates for FY 2024,which will go into effect January 1, 2024. There are four steps to conducting a drought rate study,which include: 1. Allocating water reductions between various customer classes based on defined drought stages 2. Calculating financial impacts to the City in each stage 3. Determining the most appropriate drought cost recovery mechanism(rate structure) 4. Evaluating financial impacts to customers For the first step of the drought rate study, City staff provided the Water Shortage Contingency Plan which was adopted in 2021.Table 1-7 shows the overall reduction targets for the entire water system. Table 1-7: Drought Stages and Reduction Line Water Reduction Baseline Stage I Stage 2 Stage 3 Stage 4 Stage 5 Stage 6 1 Target Reduction Goal 0% <10% <20% <30% <40% <50% >50% The water sales by drought stage are calculated using the target reductions developed in the Water Shortage Contingency Plan. Table 1-8 shows the estimated water sales in ccf for each stage of drought that aligns with the percent reductions shown above in Table 1-7. Baseline is defined as water usage estimated in FY 2024. Table 1-8: Estimated Water Sales by Stage (ccf) I ine Water Sales in ccf(FY 2024) Baseline Stage I Stage 2 Stage 3 Stage 4 Stage 5 sl; 1 Total 5,031,962 4,528,766 4,025,570 3,522,373 3,019,177 2,515,981 2,258,585 2 Percent Reduction -10% -20% -30% -40% -50% -54% A key step in a drought rate study is to calculate the financial implications for the City during a drought. Considerations include: • How much commodity revenue is expected due to cutbacks? • How much will this change the City's water supply mix and the costs associated with each source? 10 CITY OF PLEASANTON