ITEM 24 ATTACHMENT 2 - Laserfiche WebLink

City of Pleasanton 2025 Water Rate Study Water Resources Economics 48 3. POTABLE WATER COST-OF-SERVICE 3.1 COST-OF-SERVICE METHODOLOGY A cost-of-service analysis was conducted to allocate the proposed FY 2025 rate revenue requirement to customers in proportion to use of and burden on the City’s potable water system. 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 five 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 cost-of-service analysis is “revenue neutral,” meaning that the resulting cost-of-service based rates collect the same amount of revenue as the City expects to collect in FY 2025. The revenue neutral unit costs determine revenue neutral rates, which are then adjusted based on the proposed financial plan increases to arrive at the proposed potable water rates for four years. All values presented in this section pertain to FY 2025 and are revenue neutral unless stated otherwise. The key steps in conducting a 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 system (e.g., customer service, 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, base delivery, max day, 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. 3.2 REVENUE REQUIREMENT The total rate revenue requirement for the test year, FY 2025, is based on the financial plan projections (Table 2-25) and is allocated between the Operating, Capital, and Revenue Offset components, as shown in Table 3-1. The Operating revenue requirement consists of operating expenses (Line 2; from Table 2-25, Line 18), non-rate revenues related to internal transfers (Line 8; from Appendix (Table 8-1, Line 10), and adjustments for cash from reserves (Line 13; from Table 2-25, Line 33). The Capital revenue requirement includes debt service (Line 3; from Table 2-25, Line 25) and rate funded CIP (Line 4; from Table 2-25, Line 31). The Revenue Offset revenue requirement reduces the overall revenue requirement by the miscellaneous non-rate revenues (Line 8; from Table 2-25, Line 4), less non-rate revenues related to internal transfers, and interest income (Line 9; from Table 2-25, Line 5) . The total revenue requirement (Line 16) is equal to the amount of rate revenue collected in FY 2025 (Table 2-25, Line 2).