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<br /> <br /> MEMORANDUM <br /> <br />Date: March 4, 2025 <br /> <br />To: Mayor and City Council <br /> <br />From: Gerry Beaudin, City Manager <br /> Siew-Chin Yeong, Director of Public Works <br /> <br />Re: City Council Workshop March 4, 2025, Item #2 Accept the Water Enterprise <br />Financial Analysis and Approve the Enhance Scenario <br /> <br /> <br />Regarding the March 4 City Council Water Financial Plan Workshop, page 2 of the agenda <br />report mentions the cost-of-service principles outlined by the American Water Works <br />Association (AWWA). <br /> <br />A cost-of-service analysis is a critical technical process used to determine the cost of providing <br />water service to the City’s customers based on their usage and impact on the water system. <br />This analysis establishes a direct correlation between the utility's costs and the water rates <br />charged to customers, ensuring compliance with ratepayer notification requirements <br />(Proposition 218). <br /> <br />Cost-of-Service Principles <br />The cost-of-service methodology follows the principles established by AWWA and is outlined in <br />the M1 Principles of Water Rates, Fees, and Charges, Seventh Edition (M1 Manual). These <br />principles provide a standardized approach to rate-setting, ensuring that water rates are fair <br />and equitable and directly tied to the costs incurred in providing service. The AWWA <br />framework emphasizes transparency and cost accountability, which helps utilities allocate <br />costs in a manner that reflects customer usage patterns and system demands. <br /> <br />Cost-of-Service Methodology <br />Most rate studies follow the base-extra capacity method to determine appropriate water rates. <br />The primary objective of this analysis is to develop unit costs, which serve as the foundation <br />for proposed rate structures. The analysis is conducted using a single representative “test <br />year.” The key steps in conducting a water cost-of-service analysis are outlined below: <br /> <br />• Revenue requirement determination: The total rate revenue requirement for the test year <br />is determined based on the results of the proposed financial plan and divided into primary <br />sub-components (operating, capital, etc.).