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Water Rate Cost-of-Service Study Section 4. Cost-of-Service Analysis HF&H Consultants, LLC | July 8, 2025 | Page 23 of 53 Section 4. Cost-of-Service Analysis GENERAL APPROACH The revenue requirement analysis determines the total amount of revenue that must be recovered from rates. The next step in the process is the cost-of-service analysis, which ensures that costs are proportionally allocated to customers based on how they use the system. Previous rate studies employed a tiered rate structure or the AWWA “base/extra capacity” method that allocates costs based on average day, maximum day, and maximum hour demands. Instead, the methodology has been refined to support a uniform volumetric rate, aligning cost allocations with the actual services provided. This change was made, in part, to respond to recent California Court of Appeal decisions regarding the requirements for property-related fees, which must be justified based on demonstrated costs of service pursuant to Proposition 218. Costs are now allocated across four primary service components:  Demand-related costs, representing general water use across the customer base.  Customer service costs, associated with billing, meter reading, and account management.  Capacity-related costs, which reflect the infrastructure required to meet system-wide needs.  Fire protection costs, allocated separately to public and private fire service requirements. This approach allows for a simplified rate structure, with costs distributed evenly across all units of water consumption, rather than segmented by usage tiers. By aligning cost allocations with the services delivered and the infrastructure required to support them, the uniform rate structure ensures that rates are equitable and compliant with cost-of-service principles. CUSTOMER CLASSES The cost-of-service analysis distributes the revenue requirements among customer classes in proportion to their service requirements. There is no industry standard that specifies which customer classes should be used. The law allows utilities to exercise discretion in determining the appropriate customer classes provided the rates yield charges that are proportional to the cost of providing service for each category. The City currently has multiple customer classes: Single Family Residential and Non- Residential. Non-Residential includes multi family residential dwellings, and commercial, municipal, institutional, industrial, and irrigation customers. All these customers pay the same per unit of water use and are grouped into one class. These classes were last reviewed as part of the previous cost-of-service study in 2022. The contrast in customer classes stems from the typical pattern of usage by each class. Residential use varies according to indoor and outdoor needs throughout the year, producing ATTY/RESO.0109/CC RESO WATER RATES - EXHIBIT A REV: 11-05-25 MI