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Water Rate Cost-of-Service Study Section 5. Rate Design HF&H Consultants, LLC | July 8, 2025 | Page 45 of 53 Figure 5-13. Water Rates with Drought Rates Included Pass-Through Adjustment The cost of SFPUC water is the single largest component of the City’s revenue requirements. Because the City has no control over the SFPUC’s wholesale water rate, this cost is simply passed through to the City’s customers. The SFPUC provides projections of its future wholesale water rates, which are built into the rate projections in this study. The SFPUC updates its projections each year as part of the rate-making process legally prescribed in the wholesale Water Supply Agreement. California Government Code Section 53756 authorizes water suppliers to adjust their rates in response to changes in pass-through costs. We recommend that the City incorporate annual pass-through adjustments in its volumetric rates. Each year the City should determine how much, if any, pass-through adjustment is required as soon as the SFPUC submits its updated wholesale rates, which is typically in April or May each year. The wholesale rate used for the projections in this study should be compared with the updated rate and the difference either added or subtracted from the City’s Water Use Charge rates for Residential and Non-Residential customers. The wholesale rates per HCF used in this study18 are as follows:  FY 2024-25 – $5.67  FY 2025-26 – $5.80  FY 2026-27 – $5.86  FY 2027-28 – $5.93 For example, if the updated SFPUC rate for FY 2026-27 is $5.96, instead of the projected figure from the rate study of $5.86, the $0.10 difference shall be added to the Water Use Charge rates charged to all water customers. If the updated SFPUC rate is less than the foregoing rates, the difference should be subtracted from the City’s volumetric rates. In other words, the adjustment should be made in either direction. The pass-through adjustment acts similarly to the Drought Rates, and can be incorporated into the Proposition 218 notice. The pass-through adjustment allows the City to adjust Water Use Charge rates to track any difference between the SFPUC rates that were included in the analysis and the actual rates adopted each year by SFPUC. The pass-through adjustment can 18 Rates included in letter from SFPUC to Tom Smegal RE: Fiscal Year 2025-26 Wholesale Water Rates Notice, dated May 8, 2025. Demand Rates with Drought Surcharge Stage Reduction FY 2025-26 FY 2026-27 FY 2027-28 0 0% $9.18 $9.73 $10.22 1 10% $9.56 $10.13 $10.64 2 20% $10.03 $10.63 $11.17 3 30% $10.63 $11.27 $11.84 4 40% $11.43 $12.12 $12.73 5 50% $12.56 $13.31 $13.98 6 60% $14.25 $15.10 $15.86 ATTY/RESO.0109/CC RESO WATER RATES - EXHIBIT A REV: 11-05-25 MI