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BACKGROUND The City's Water Enterprise has been operating a water system in Pleasanton since the 1920's. The City's water system currently serves approximately 69,500 residents, representing approximately 21,000 accounts which includes residential, commercial, industrial, and irrigation customers. In addition to the daily operation and maintenance of the water system, the City's Public Works Department plans, designs and constructs necessary replacement and improvements to the water system through the City's Capital Improvement Program. The Department is responsible for operating and maintaining 22 water storage tanks, 9 booster stations, 3500 fire hydrants, and over 250 miles of water pipelines (ranging from 6 to 27 inches in diameter) in 10 pressure zones. The City purchases approximately eighty percent of its annual 5,900 million gallons of demand from Zone 7 Water Agency (Zone 7). Zone 7 is the Tri-Valley's water wholesale agency and also serves the Livermore, Dublin and southern San Ramon area. The remaining twenty percent of City water demand is provided from the City's own groundwater wells. History of Rate Increase The City's current water rate structure was implemented in Calendar year 2000. In July. 2000 Council approved a 6% water. rate increase for the second half of calendar year 2000 and another 6% increase for calendar year 2001. As noted, water rates have remained constant since this last increase in 2001. In 2002, Zone 7 increased its wholesale treated water rate by 1.7 percent due to additional ,power costs and by 2.5% in 2003 for additional water quality projects. Zone '7 rates were constant during 2004 and 2005 but were raised again in 2006 by approximately 5.2% to construct and operate additional taste and odor improvement projects. Pleasanton Water Enterprise Fund was able to offset these relatively small increases in Zone 7 treated water rates during calendar years 2002-2006. However, Zone 7's Board approved a 7.45 percent increase for all water purchased during 2007. In addition, Zone 7's staff has forecasted that similar rate increases will also be needed in future years to pay for the cost of Zone 7's Asset Management Program and additional water quality improvement projects. In light of Zone 7's 2007 water rate increase and forecasted future rate increases, City staff is recommending an updated assessment and analysis of the City's current and forecasted water revenues and expenditures by HF&H to assure the Water Enterprise Fund can continue to be self-sufficient and adequately fund operations, maintenance and replacement of the City's water system. DISCUSSION Selection Procedure The City selected HF&H to perform the rate analysis and water rate changes made by Council during 2000 and 2001. HF&H was selected because of the firm's considerable Page 2 of 3