ITEM 24 ATTACHMENT 2 - Laserfiche WebLink

City of Pleasanton 2025 Water Rate Study Water Resources Economics 9 costs associated with the specific service they receive. The cost-of-service analysis is the basis of the nexus between the costs incurred by the utility to provide potable and recycled water service, and the potable and recycled water rates charged to customers, which is a requirement of Proposition 218. COST-OF-SERVICE METHODOLOGY The cost-of-service methodology is based on industry standards set forth by AWWA in its M1 Manual; this rate study utilizes the base-extra capacity method. The overall goal of the cost-of-service analysis is to develop “unit costs,” which provide the basis from which proposed rates are directly calculated from. Note that although the study period spans four years, the cost-of-service analysis is limited to a single representative year referred to as the “test year.” The test year in this study is FY 2025. The key steps in conducting a potable and recycled water cost-of-service analysis are outlined below: • Revenue requirement determination: The total rate revenue requirement for the test year is determined based on the results of the proposed financial plan and divided into primary sub- components (operating, capital, etc.). • Cost functionalization: Operating and capital costs are evaluated and assigned to “functional categories” in the water and recycled water system (e.g., customer service, water supply, distribution, etc.). This provides a proportional breakdown of system costs by functional category. • Revenue requirement allocation to cost causation components: Functionalized costs are allocated to “cost causation components” (e.g., water supply, delivery, conservation, etc.), which is used to attribute customers’ use of the system to the City’s incursion of costs. • Unit cost development: The rate revenue requirement allocation for each individual cost causation component is divided by the appropriate units of service to establish unit costs for the test year. Unit costs provide the basis from which proposed rates are calculated. 1.9 PROPOSED POTABLE AND RECYCLED WATER RATES WRE worked closely with the City Council, PWAG, and City staff to determine the most appropriate water rate structure that meets the City’s needs. PROPOSED RATE STRUCTURE CHANGES Currently, the City has the same bi-monthly fixed charges for potable and recycled water customers. To ensure that potable and recycled water customers only pay for the costs specific to each service, WRE recommends implementing separate bi-monthly fixed charges for potable and recycled water customers. Additionally, the City’s current variable charge rate structure consists of a four-tiered variable charge for single family customers and a uniform variable charge for all other customer classes based on usage. Recent court cases have highlighted potential legal risks associated with tiered rate structures for different customer classes, particularly when tier definitions are not clearly cost-justified or specific to agency customer use characteristics. Considering that the City’s current cost structure consists of one supply source and based on input City staff, PWAG and City Council, WRE recommends implementing a uniform variable charge for all customers, including Single Family, to strengthen the legal defensibility of the City’s rate structure.