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Water Rate Cost-of-Service Study Section 4. Cost-of-Service Analysis HF&H Consultants, LLC | July 8, 2025 | Page 30 of 53  65145 – Water Purchases. The City does not have its own surface water or groundwater resources; the City is not supplied by lakes, river diversions, or wells. Instead, the City purchases treated water from the SFPUC. The cost of its water supply is included in the cost paid to the SFPUC, which is the City’s single largest O&M expense. This cost category is allocated to customers based on demand, as costs vary with the total quantity of water used. Expenses include annual fees the City pays as a BAWSCA member in addition to the wholesale water purchase expenses.  65146 – Water Resource Management. The City must continue to meet evolving state- issued water efficiency standards and regulations. To meet efficiency standards, customers are expected to use water judiciously. Costs in this category also include the City’s water conservation program. Hence, a majority of program costs are recovered through demand function. Customer Service Functions There are four customer service functions. Each of these functions includes costs that are not related to rates of flow. Administrative Support Services. This category of expenses includes costs the Enterprise pays for services provided on its behalf. Specifically, it covers the utility’s proportional share of expenses related to city-wide financial services such as auditing and advising on investments. These are administrative and support costs that benefit the utility’s operations and are allocated based on the number of meters served, independent of the volume of water delivered or rates of flow. Capital Expenses – Investments in the Enterprise infrastructure are necessary to ensure existing levels of service are maintained. In addition, capital projects allow for expansion of the system’s capacity to support growth. Costs are allocated based on the capacity corresponding to each meter served. Non-Operating Revenue – Revenue from miscellaneous fees benefit rate payers by reducing the net amount of expenses that rates need to cover. These costs are independent of rates of flow and are applied to the fixed component of the service charge to reduce the cost of service to each meter. Reserves – Similar to non-operating revenue, rate payers benefit from the Enterprise’s use of reserves. In FY 2025-26, the planned use of $7.5 million in reserves will help offset the need for larger rate increases to meet growing expenses. As a result, the City can charge rate payers less than the total revenue requirement and phase in rates over time to reduce impacts to rate payers. These costs are independent of flow, but are apportioned using a composite allocation of all other functions analyzed. This is shown in more detail in Figure 4-9. Reductions to rates are intended to benefit customers by reducing the Service Charges and the Water Use Charges assessed. Fire Protection The distribution system also includes hydrants for fire suppression and supply to private fire services. To segregate the water supply and distribution costs from Program 65144 attributable to public and private fire protection services an allocation was developed in Figure 4-4 according to the value of pressure and storage assets in the water system. These specific asset types were designed to meet both fire flow and maximum day demand ATTY/RESO.0109/CC RESO WATER RATES - EXHIBIT A REV: 11-05-25 MI