Agenda, closed session, second session — Hillsborough City Council, April 13, 2026 (part 2 of 3)

The Hillsborough Police Department is committed to responding to complaints, concerns and/or questions received through any of the above methods in a timely manner.

The remainder of this Military Equipment Use Inventory List is divided into two sections.

Section One lists qualifying equipment that is owned and/or utilized by the Hillsborough Police Department. Section Two lists qualifying equipment that is not owned or regularly utilized by the Hillsborough Police Department, but which is known to be owned and/or utilized by law enforcement units with which the Hillsborough Police Department collaborates and/or participates for law enforcement purposes. -207-

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Section One: Qualifying Equipment Owned/Utilized by the Hillsborough Police Department1

1. Unmanned Aerial Vehicles (Category 1) - Description, quantity, capabilities, purchase cost a. Equipment Type: Unmanned Aircraft Systems (UAS/Drones) – CA Gov’t Code §7070(c)(1)
b. Quantity Owned/Sought: 5 owned/ 2 sought in FY2025/2026 c. Lifespan: Approximately 5 years
d. Equipment Capabilities: Remotely piloted aerial vehicles capable of providing live and recorded video images captured from aerial positions, including images enhanced by optical zoom lenses.
e. Manufacturer Product Description:

Mavic Air 2: The DJI Mavic Air 2 combines a foldable and portable frame with a high-end camera system. The 3-axis gimbal sports a 1/2″ CMOS sensor capable of capturing 8K Hyperlapse time-lapse shots, 4K60 video, 240 fps slow-motion 1080p video, and up to 48MP stills. In addition, both photos and video can be captured in HDR. All footage can be saved to 8GB of internal storage and on optional SD cards up to 256GB in size.

The DJI Mavic Air 2 contains a host of built-in tracking technologies and intelligent obstacle avoidance. Focus-Track combines three different tracking features with abilities that include tracking of subjects and following predetermined flight paths. The Advanced Pilot Assistance Systems 3.0 (APAS) is aware of the Mavic Air 2 in 3D space and its proximity to people and objects to help avoid accidental collisions. Return to Home (RTH) and precision landing options are supported so one can easily and safely retrieve the drone when the mission is complete.

A 3500mAh battery can keep the Mavic Air 2 flying for up to 34 minutes at a time. While in the air, one can fly the drone at speeds up to 43 mph up to

11.5 miles away. The included remote controller supports Ocu-Sync 2.0 technology to provide one with flight telemetry data and a live view of what the drone sees on an attached viewing device. It can transmit up to 1080p quality video from up to 6.2 miles away.

The BRINC Lemur 2: The Lemur 2 is equipped with high-resolution 4k daytime, night vision & FLIR (Long Wave Infrared) Thermal Sensor/Cameras which can efficiently conduct search and rescue 1 Quantities possessed by the Department as identified in this inventory list may be subject to change throughout the year based on usage, replacement, and urgent Department needs. Any fluctuations in equipment quantity will be reported to the City Council in accordance with AB 481 each year. -208-

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operations, monitor large crowds during events, and aid in law enforcement and firefighting efforts. BRINC Lemur 2 is feature rich for its relatively small size. Some unique features and equipment the BRINC Lemur 2 airframe has: - Floodlights (Low light no light area illumination)- Propeller bumpers (Protection for the propellers)- Perch Mode (Ability to land and observe with the motors off)- 3D LiDAR sensors (Produces real time mapping as it flies in and out of rooms) - 2 Way communications for de-escalation efforts (first responders can call the drone and communicate through an integrated loudspeaker)- Live Stream Off-Site (Remote viewing for incident commanders)- Turtle Mode (Ability to upright itself if it falls on its back)- Ability to lift items up to 1 pound- All manufacturing and repair services are completed in the USA One of the most innovative tools for this drone is its integrated Glass Breaker tool. This tool allows the drone to break tempered, automotive, and most residential glass. The Glass Breaker allows BRINC Lemur 2 to gain access into structures. This attachment can be used to ventilate buildings during structure fires, make entries during crisis situations to enable the search for suspects and victims which directly results into saving lives. The BRINC Lemur 2 drone is versatile, customizable, and can be tailored to meet our Town’s specific requirements.

Additionally, it adheres to the highest safety standards, including collision avoidance systems, failsafe mechanisms, and compliance with local regulations.

The BRINC Responder: The BRINC Responder DFR drone is an unmanned aircraft system designed for public safety “Drone as First Responder” operations. It is used to provide real-time aerial situational awareness during calls for service and other emergency incidents by giving responders an overhead view, visual and thermal imaging, and remote communication capability before or during personnel response. The platform includes up to 42 minutes of flight time, 40x zoom, a 640 px thermal camera, 4G teleoperation capability, two-way communications with a loudspeaker, emergency lights and siren, and mesh-networking capability. The broader BRINC DFR system can also integrate with CAD, RTCC, evidence management, ALPR, gunshot detection, and 911 call-sharing software to support deployment and live video operations.
f. Legal/Procedural Rules Governing Use: Any use of a UAS will be in strict accordance with constitutional and privacy rights and Federal Aviation Administration (FAA) regulations. The use of the UAS potentially involves privacy considerations. Absent a warrant or exigent circumstances, operators and observers shall adhere to FAA altitude regulations and shall not intentionally record or transmit images of any location where a person would have a reasonable expectation of privacy (e.g., residence, yard, enclosure). Drone operators and observers shall take reasonable precautions to avoid inadvertently recording or transmitting images of areas where there is a reasonable expectation of privacy. Reasonable precautions can include, for example, deactivating or turning imaging devices away from such areas or persons during UAS operations. -209-

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g. Training Required: Prior to piloting any UAS/Drone staff members must secure an FAA Remote Pilot License and complete all training required by our FAA COA.
h. Purpose: UAS/Drones may be utilized to enhance the Department’s mission of protecting lives and property when other means and resources are not available or are less effective. To be deployed when its view would assist officers or incident commanders with the following situations, which include but are not limited to:
i. Major collision investigations.
ii. Search and rescue, including for missing persons.
iii. Natural disaster management.
iv. Crime scene photography.
v. Suspect apprehension.
vi. Tactical operations and scene security.
vii. Crisis communication.
viii. Response to specific requests from local, state or federal fire authorities for fire response, rescue, evacuation, and/or prevention.
ix. Hazardous material monitoring, such as a chemical spill or similar event.
x. Terrorist / active shooter event and response.
i. Authorized Use: Only assigned flight operators who have completed the required training shall be permitted to operate the DJI Mavic Air 2, BRINC Lemur 2 and BRINC Responder drones during approved flight. All other applicable HPD policies remain in effect, to include, but not limited to, HPD Policy 324 – Search and Seizure, HPD Policy 334 – Missing Persons, HPD Policy 613 – Unmanned Aerial System Operations, HPD Policy 706 – Vehicle Use, HPD Policy 408 –Special Weapons and Tactics. j. Expected Lifespan: 10 years.
k. Fiscal Impact: BRINC Responder DFR- BRINC offered a $154,998.00 discount off the list price, with a total contract value of $541,397.50 (including sales tax and set-up costs) over five years, payable in annual installments of $108,279.50. The agreement includes two hardware refreshes (Years 3 and 5), unlimited no-fault repairs/replacements, and regulatory approvals (e.g., BVLOS waiver), reducing long-term costs compared to standalone systems exceeding $150,000 per unit annually. l. Fiscal Impact: BRINC Lemure 2- The initial costs of equipment, licensing, software, and training was approximately $120,000 which included the procurement of a Certificate of Authorization (COA) from the FAA through Skyfire Consultants. Ongoing cost associated with current UAS operation and maintenance is estimated to be less than $1000 per year. The one-time purchase price for the Brinc Lemur 2 drones was $109,374.53, which entered the Hillsborough Police Department into a 5-year contract for service and operation.
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2. Breaching Apparatus: Slugs (Category 7) - Description, quantity,capabilities,purchase cost.
a. Equipment Type: Royal Arms Tesar-1, 2, & 4 cost: $1,000, quantity: 200.

Shotgun breaching rounds are specialty shotgun shells utilized for door breaching. The Royal Arms Tesar-2 rounds contain compressed copper powder and are fired through a specialized breaching shotgun barrel. The copper powder is designed to strike and destroy the lock throw inside of the door, allowing entry into the room or structure. The powder is designed to dissipate after striking the lock throw to minimize entry into the target space for the safety of occupants and officers. Designed to breach heavy locks, dead-bolts, and hinges mounted inside of solid oak or steel doors.

Royal Arms Tesar-2 rounds are good until expended if stored properly.

Shotgun breaching rounds are used to gain rapid access to a room or structure when an emergent law enforcement need exists.

Tesar 1 (model FE182) defeat wood doors, locks, and hinges.

Tesar 2 (model FE183) defeat locks, dead-bolts and hinges (oak-steel doors).

Tesar 4 (model FE185) defeat Class 3 doors, locks, and hinges. b. Purpose: To defeat door locking mechanisms and safely enter a structure. c. Authorized Use: Ballistic Breaching may only occur after authorization by the Incident Commander or SWAT Commander in the field, and during training exercises. All other applicable HPD policies remain in effect, to include, but not limited to, HPD Policy 324 – Search and Seizure, HPD Policy 408 Special Weapons and Tactics.
d. Expected Lifespan: Until expended.
e. Fiscal Impact: Individual unit price of approximately $4 each. Estimated between $0 and $1,000 annually.

3. Breaching Apparatus: Kinnetic Breaching Tool (Category 7) - Description, quantity, capabilities, purchase cost
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a. Equipment Type: Kinetic Breaching Tool “KBT”, cost $10,603, quantity:1.

The KBT from Kinetic Breaching Technology is a revolutionary new mechanical breaching tool that bridges the gap between traditional mechanical breaching, shotgun breaching, and explosive entry. The KBT utilizes a proprietary .45 Caliber handgun blank to deliver up to 850 ft/lb of force through a hardened steel ram. Unlike explosive or shotgun breaching, however, all of the force is mechanically driven through a ram. This means that no projectile or explosive energy leaves the device except for the force of the ram which is permanently captured in the device. The ramming surface is narrow enough to focus on a single hinge, yet powerful enough to breach steel security doors. The KBT has an 8-shot cylindrical magazine that allows for multiple shots and also provides for rapid reload in a scenario when more than 8 shots are required (i.e., breaching numerous consecutive doors). At a total length of just 36" it can also be used in very confined spaces while allowing the team to stack up closer to the breacher because no backswing is required. The tool weighs only 28lb and features a shock reduction handle system that reduces recoil force and makes it simple for the tool to be operated by a single person. All the above mentioned increases safety for civilians, suspects and officers. All department members authorized to deploy the Kinetic Breaching Tool must successfully complete a department breaching course and qualifications as required by law and policy.
b. Expected Lifespan: Approximately 10 years.
c. Fiscal Impact: HPD has an inventory of 200 blanks, at a cost of $595 which includes the replacement buffer spring for annual maitenance. Due to operational readiness and capabilities in support of first responder missions the periodic purchase of the KPT .45 caliber blanks and/or KBT may be required during the year. Any such purchase would be through existing HPD budget and/or grant/donation and in compliance with established City purchasing rules.

4. Breaching Apparatus: Vulcan II Munitions Pole (Category 7) - Description, quantity, capabilities, purchase cost
a. Equipment Type: Vulcan II Munitions Pole “Bang Pole”. A lightweight, telescoping pole that extends the reach of NFDD from 8ft to 13ft and has the ability to breach elevated windows, cost: $3,368, quantity:1. b. Expected Lifespan: No expiration.
c. Fiscal Impact: No recurring annual cost.

5. Breaching Apparatus: J&N BGSTK Tactical Munitions delivery Pole (Category 7)- Description, quantity, capabilities, purchase cost
a. Equipment Type: 90 degree NFDD delivery pole, clamp head assembly and protective break head cover - 84" overall length, powder coat finish with poly resin coating. Has the ability to breach deep inset windows while rappelling, cost: $1,400, quantity:1.
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b. Expected Lifespan: No expiration.
c. Fiscal Impact: No recurring annual cost.

6. Breaching Apparatus: J&N BP-2C Compact Straight Tactical Munitions delivery Pole (Category 7)- Description, quantity, capabilities, purchase cost a. Equipment Type: Compact Straight NFDD Delivery Tool W/clamp head assembly, cable line shroud, HD protective case, QR sling and protective cover. Has the ability to fit in narrow hallways, confined spaces as well as inside helicopters while en route to a critical incident, cost: $1,525, quantity:
1 b. Expected Lifespan: No expiration.
c. Fiscal Impact: No recurring annual cost.

7. Breaching Apparatus: J&N Munitions delivery Pole clamp heads (Category 7)- Description, quantity, capabilities, purchase cost
a. Equipment Type: Clamp head F/CTS 7290M & 7290M-CI NFDD's. Center diameter is 1.5". J&N Clamp Head Assembly is stamped with the letter "M", cost: 0.00, quantity: 2
b. Equipment Type: NON-Burning gas head clamp for CTS Vapor, cost: $295, quantity: 1
c. Equipment Type: NON-Burning baffled gas canister clamp head assembly for CTS & DT canisters, cost: $295, quantity: 1
d. Expected Lifespan: No expiration.
e. Fiscal Impact: No recurring annual cost.

3. Specialized Firearms and Ammunition (Equipment Category 10) - Description, quantity, capabilities, purchase cost
a. Equipment Type: The Carbine Rifle is a firearm, capable of accurately stopping an armed subject at various distances. The Carbine Rifle is a magazine fed, shoulder fired firearm, designed for semi-automatic fire.

Benefits of a shoulder fired semiautomatic rifle over the traditionally carried handgun is increased accuracy which helps to minimize collateral injury or death. The Carbine Rifle does not have an expiration and will need to be serviced or replaced when the rifle fails or breaks. The .223 / 5.56 cartridge is used as a lethal option designed to stop a violent encounter. The projectile is capable of penetrating soft body armor being worn by armed subjects. Bushmaster AR-15/M4, cost: $16,500, quantity: 11, Colt AR15, cost: $18,000, quantity: 12, Troy AR15, cost: $6,800, quantity: 4, Lone Star Armory TX4, cost: $5,019, quantity: 3, Daniel Defense MK18, cost: $1,621, quantity: 1.
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i. The Speer Gold Dot .223 Remington, 55 grain, soft point cartridge is the primary duty ammunition deployed during potential lethal encounters. The Gold Dot bullet is optimized to ensure expansion out of barrels down to 10” at a wide variety of velocities out to 200 yards. The Gold Dot in .223 caliber ammunition can be used in department rifles
chambered in both .223 and newer rifles chambered in 5.56, extending the service life of older .223 chambered rifles.

Cost: $6,520, quantity: 11,000.
ii. The Black Hills OTM 5.56, 77 grain, cartridge is duty ammunition has a superior ballistic coefficient and
performance to any comparable projectile in its weight class.

Its OTM design provides accurate performance during critical incidents. This Black Hills 5.56mm NATO cartridge was
designed for AR-15 platform firearms. The Black Hills

5.56mm NATO is loaded with a 77 grain, OTM bullet. The
bullets are extremely accurate and have thin jackets that are held to exact tolerances in diameter and weight. Their
accuracy has been renowned worldwide. Cost: $5,334,
quantity: 6,000.
iii. The Winchester 5.56 Remington, 55 grain full metal jacket cartridge is the primary training ammunition used with
department rifles while offering a lower cost alternative compared to duty use ammunition. This ammunition is being phased out; upon depletion, this ammunition will no longer be purchased.
iv. The Hillsborough Police Department Special Weapons and Tactics (SWAT) was formed in 1996, in response to very
dangerous or violent tactical encounters. The SWAT
Precision marksman element deploys with precision rifles, which enables the stopping of an armed subject at a safe distance. The Precision Rifle does not have an expiration and will need to be serviced or replaced when the Rifle fails or breaks. Hillsborough Police precision rifles include the Centurion Arms Mark 12 precision AR15 with Black Hills
OTM 5.56, 77 grain ammunition, GA Precision .308 semiauto rifle with RUAG .308 164 grain/196 grain ammunition, and Seekins Precision .308 bolt action rifle with RUAG .308 164 grain/196 grain ammunition.

The .308 Winchester cartridge: is a rimless, bottlenecked rifle cartridge. The .308 WIN. cartridge is used as a Lethal option designed to stop a violent encounter. The projectile is capable of penetrating soft body armor being worn by armed subjects.
v. The RUAG .308 WIN., 164 grain, Tactical cartridge is ammunition deployed during potential lethal encounters, when shooting through barriers. The 164-grain projectile is -214-

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capable of accurately striking targets behind an angled window or windshield, without the risk of unpredictable bullet deflection Conventional bullets break apart or fragment when penetrating glass, which does not allow an accurate hit.

Cost: $1,720, quantity: 600
vi. The RUAG .308 WIN., 196 grain, Armor Piercing cartridge is ammunition deployed during potential lethal encounters, when shooting through heavy barriers. The 196 grain
projectile is capable of accurately striking targets behind armor, without the risk of unpredictable bullet deflection.

Conventional bullets break apart or fragment when
penetrating armor, which does not allow an accurate hit.

Cost: $900, quantity: 200
vii. Selections of which of the above ammunition to use is dependent on the threat and the environment (to include barriers, weather conditions, distance, uninvolved parties, etc
viii. GA Precision GAP 10 semiauto precision rifle cost: $7,842, quantity: 2.
ix. Centurion Arms Mark 12 precision AR15. This rifle bridges the gap between standard AR15 rifle and the GA Precision .308 rifle, cost: $2,500, quantity: 1.
x. Seekins Precision HIT PRO. This bolt action .308 rifle for long range precision, cost: $1,995, quantity: 1.
b. Purpose: To be used as precision weapons to address a threat with more precision and/or greater distances than a handgun, if present and feasible. c. Authorized Use: Only members that are POST certified and complete yearly required qualification and training are authorized to use an AR style rifle.

Only members of the Hillsborough SWAT team are authorized to use precision rifles after completing the required CA-POST required training and monthly qualification/training. All other applicable HPD policies remain in effect, to include, but not limited to, HPD Policy 300 – Use of Force, HPD Policy 313.6 – Firearms Training and Qualifications, HPD Policy 408 – Special Weapons and Tactics.
d. Expected Lifespan:
i. AR15 rifle all variants – Approximately 10 years.
ii. Centurion Designated Marksman rifle -Approximately 10 years. iii. Precision 308 rifle-Approximately 10 years.
iv. Seekins Precision HIT Pro rifle- Approximately 10 years v. The RUAG .308 WIN., 164 grain-No expiration.
vi. The RUAG .308 WIN., 196 grain-No expiration.
vii. The Speer .223 Remington, 55 grain – No expiration. -215-

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viii. The Winchester 5.56 FMJ, 55 grain- Phased out.
ix. The Hornady .223 Remington, OTM, 77 grain – No expiration. x. The Black Hills 5.56, 77 grain -No expiration.
e. Fiscal Impact:
i. AR15 Rifle-Annual cost between $0-$41,300 (purchased over 20 years).
ii. The Speer .223 Remington, 55 grain–Annual cost between $0- $6,520.
iii. The Winchester 5.56 FMJ, 55 grain-Annual cost between $0- $10,472.
iv. Centurion Designated Marksman rifle -Annual cost between Phased out this year.
v. The Black Hills .223 Remington, 77 grain–Annual cost between $0- $5,334.
vi. GA Precision GAP 10, .308 Rifle-Annual cost between $0-7,842. vii. The RUAG .308 WIN., 164 grain – Annual cost between $0 - $1,720.
viii. The RUAG .308 WIN., 196 grain – Annual cost between $0 - $900.

4. Flashbangs (Category 12) - Description, quantity, capabilities, purchase cost. a. Equipment Type: A Noise Flash Diversionary Devices (NFDD) is a device that creates a bright flash and loud sound to temporarily divert the attention of subjects in the immediate area. NFDD are used to distract and temporarily incapacitate dangerous suspects by overwhelming their senses of vision and hearing. The distraction allows officers to seize a moment of opportunity to take control of high-risk situations.
i. NFDD CTS 7290 emits a loud “bang” and a flash of light, cost:
$905, quantity: 20.
ii. ALST 460 Blast Strip that emits a loud “bang” and a flash of light.

The blast stripe is a thin sheet (11”X3”) command iniatiated by electric initiator, cost: $1,400, quantity: 20.
iii. Vulcan II Munitions Pole. A lightweight, telescoping pole that extends the reach/height/standoff of NFDD from 8ft to 13ft, cost:
$3,368, quantity:1.
iv. J&N Tactical Munitions Pole BGSTK. A 90 degree NFDD delivery pole, that enables the officer to breach deep inset windows while rappelling.
v. J&N Tactical Munitions Pole BP-2C: Compact Straight NFDD Delivery Tool W/clamp head assembly, cable line shroud, has the ability to fit in narrow hallways, confined spaces, as well as inside helicopters while en route to a critical incidents.
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b. Purpose: To produce atmospheric over-pressure and brilliant white light and, as a result, can cause short-term (6-8 seconds) physiological/psychological sensory deprivation to give officers a tactical advantage.
c. Authorized Use: Diversionary Devices shall only be used:
i. By HPD officers who have been trained in their proper use. ii. In hostage and barricaded subject situations.
iii. In high-risk warrant (search/arrest) services where there may be extreme hazards to officers.
iv. During other high-risk situations where their use would enhance officer safety.
v. During training exercises.

All other applicable HPD policies remain in effect, to include, but not limited to, HPD Policy 300 – Use of Force, HPD Policy 408 – Special Weapons and Tactics.
d. Expected Lifespan: NFDD 7290M – 5 years.
e. Fiscal Impact: NFDD 7290M – Annual cost between $0 - $905. f. Expected Lifespan: ALST 460 - 5 years.
g. Fiscal Impact: ALST 460- Annual cost between $0 - $1,400. h. Expected Lifespan: Vulcan II Munitions Pole – No expiration. i. Fiscal Impact: Vulcan II Munitions Pole – No recurring annual cost.

5. PepperBall Launcher (Category 12) - Description, quantity, capabilities, purchase cost (Not in service-pending)
a. Equipment Type: PepperBall FTC launcher system that uses high pressure air to deliver PAVA powder projectiles (similar to a paint ball delivery system). System capable of launching projectiles at a subject up to 60’.

System capable of area saturation up to 160’. Non-lethal option to offer law enforcement officers to deliver chemical agents and kinetic energy impacts to subjects in a potentially violent encounter. De-Escalation tool used to avoid further injuries or lethal options on a subject. Cost: $1,200, quantity:

4. PepperBall LIVE PROJECTILE, the basic PepperBall projectile contains 2% PAVA pepper powder, and is designed for direct impact and area saturation, especially in confined, interior spaces. Discharged from a PepperBall Launcher, the projectile has a velocity of 280-350 FPS. The projectile has a direct impact of 60ft and an area of saturation of 150+ft. The projectile contains 0.5% PAVA Powder.8230. Cost: $3,412 quantity: 1500 PepperBall VXR LIVE-X PROJECTILE: The VXR Live-X Projectile is a non-lethal round.

The projectile contains approximately 10x the PAVA of the VXR LIVE projectile. This projectile is best for direct impact or area saturation.

Discharged from a PepperBall Launcher, the projectile has a velocity of 280- 425 FPS. The projectile has a direct impact of 150ft and an area of -217-

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saturation of 150+ft. 390+ft. The projectile contains 2.5% PAVA powder.

Cost: pending. Quantity: pending.
b. Purpose: To limit the escalation of conflict where employment of lethal force is prohibited or undesirable. PepperBall FTC launchers give officers the ability to address an armed and/or violent suspect(s) with non-lethal munitions that deliver both chemical agent and kinetic energy impact. This combination can be extremely effective in gaining compliance or reducing threat potential with an armed and/or violent suspect(s). Due to its design, pepper balls can be delivered from a larger standoff distance allowing for added degree of officer safety. Situations for use of the less lethal weapon systems may include but are not limited to:
i. Self-destructive, dangerous and/or combative individuals. ii. Riot/crowd control and civil unrest incidents.
iii. Circumstances where a tactical advantage can be obtained. iv. Potentially vicious animals.
v. Training exercises or approved demonstrations.
c. Authorized Use: Only those officers who have been trained in the use of PepperBall launchers are authorized to use the PepperBall launchers. All other applicable HPD policies remain in effect, to include, but not limited to, HPD Policy 300 – Use of Force.
d. Expected Lifespan:
i. Pepper Ball FTC launcher system: No expiration.
ii. Live Projectile: 1 year.
iii. Live-X Projectile: 1 year.

Fiscal Impact:
i. PepperBall Launcher: estimated between $0 and $1,200 annually. ii. Live Projectile: estimated between $0 and $1,200 annually. iii. Live-X Projectile: estimated between $0 and $1,200 annually.

6. Penn Arms 40MM Launcher (Category 12) - Description, quantity, capabilities, purchase cost (Not in service-pending)
a. Equipment Type: L140-4CER – cost: $12,639, quantity: 8. A cerakoted 40mm single-shot break-open frame launcher with a rifled barrel, collapsible stock and combo rail. Features include: Double-action trigger, trigger lock push button and hammer lock safeties.
b. Purpose: 40mm launchers with less-lethal sponge rounds may be deployed to impact subjects who demonstrate assaultive or lifethreatening behavior. 40mm launchers utilized with less-lethal sponge rounds may also be used to control an actively resistive subject reasonably believed to possess or have immediate access to a deadly -218-

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weapon. The main objectives that officers attempt to achieve in using a 40mm sponge round on a subject exhibiting any of the criteria mentioned above are to effect investigative detention or arrest; control a subject who is in lawful custody; prevent an escape; or protect the officer, the subject, or another person from injury or death. Officers that have been trained in the use of the 40mm single launcher undergo thorough classroom and live-fire training in its use. Additionally, officers trained in using the 40mm single launcher must pass annual qualifications to maintain proficiency.

CTS Sponge Round (Model 4557) cost: 0-$6,656, quantity: 250. i. The Sponge Baton is a spin-stabilization projectile delivering blunt trauma.
ii. The round utilizes smokeless powder as the propellant and has velocities that are extremely consistent. It is a “point-of-aim, pointof-impact” direct fire round that is most commonly used in situations for the incapacitation of an aggressive, non-compliant subject at a distance.
iii. 5-year Warranty/Lifespan.

Section Two: Qualifying Equipment known to be owned and/or utilized by law enforcement units with which the Hillsborough Police Department collaborates and/or participates for law enforcement purposes

1. Equipment Type: Unmanned, remotely piloted, powered ground vehicles - CA Gov’t Code §7070(c)(1)
a. Quantity Owned/Sought: None (outside owned)
b. Lifespan: Approximately 15 years
c. Equipment Capabilities: Vehicles are capable of being remotely navigated to provide scene information and intelligence in the form of video and still images transmitted to first responders.
d. Manufacturer Product Description: Unavailable.
e. Purpose/Authorized Uses: To enhance the safety of potentially dangerous situations by providing first responders with the ability to capture video and still images of hazardous areas prior to, or in lieu of, sending in personnel. f. Fiscal Impacts: None. Equipment owned, maintained, and operated by another agency.
g. Legal/Procedural Rules Governing Use: The use of unmanned, remotely piloted, powered ground vehicles potentially involves privacy considerations. Absent a warrant or exigent circumstances, operators and observers shall adhere to all applicable privacy laws and shall not -219-

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intentionally record or transmit images of any location where a person would have a reasonable expectation of privacy (e.g., residence, yard, enclosure). h. Training Required: The North County Regional SWAT Team provides internal training for staff members prior to allowing them to pilot these vehicles.
i. Other Notes: The Hillsborough Police Department participates in the North County Regional SWAT Team (NCR SWAT). This equipment is owned and operated by NCR SWAT through the San Mateo Police Department. While the Hillsborough Police Department does not own or operate this equipment, it could be used in Hillsborough by NCR SWAT if they are deployed to an incident within city limits.

2. Equipment Type: Armored Rescue Vehicle (ARV) - CA Gov’t Code §7070(c)(2) a. Quantity Owned/Sought: None (outside owned)
b. Lifespan: Unknown
c. Equipment Capabilities: Capable of transporting personnel and equipment while providing them with armored protection from gunfire. d. Manufacturer Product Description: Unavailable.
e. Purpose/Authorized Uses: To move personnel and/or resources in support of tactical operations in which there is reason to expect potential armed resistance requiring protection.
f. Fiscal Impacts: None. Equipment owned, maintained, and operated by another agency.
g. Legal/Procedural Rules Governing Use: The ARV can be deployed any time tactical operators determine that there is a need to move personnel and/or resources into areas in which they have reason to expect potential armed resistance requiring its protection.
h. Training Required: The North County Regional SWAT Team provides internal training for staff members prior to allowing them to drive armored vehicles.
i. Other Notes: The Hillsborough Police Department participates in the North County Regional SWAT Team (NCR SWAT). This equipment is owned and operated by NCR SWAT through the San Mateo Police Department. While the Hillsborough Police Department does not own or operate this equipment, it could be used in Hillsborough by NCR SWAT if they are deployed to an incident within city limits.
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3. Equipment Type: Wheeled vehicles that have a breaching apparatus attached - CA Gov’t Code §7070(c)(3)
a. Quantity Owned/Sought: None (outside owned)
b. Lifespan: Unknown.
c. Equipment Capabilities: Capable of breaching doors, gates, and other points of entry.
d. Manufacturer Product Description: Unavailable.
e. Purpose/Authorized Uses: Breaching doors, gates, and other points of entry.
f. Fiscal Impacts: None. Equipment owned, maintained, and operated by another agency.
g. Legal/Procedural Rules Governing Use: Breaching vehicles can be deployed any time tactical operators determine that it is necessary to complete a lawful breaching. For a breaching to be lawful, it will generally need to be supported by a search or arrest warrant, or exigent circumstances.
h. Training Required: The North County Regional SWAT Team provides internal training for staff members prior to allowing them to drive breaching vehicles.
i. Other Notes: The Hillsborough Police Department participates in the North County Regional SWAT Team (NCR SWAT). This equipment is owned and operated by NCR SWAT through the San Mateo Police Department. While the Hillsborough Police Department does not own or operate this equipment, it could be used in Hillsborough by NCR SWAT if they are deployed to an incident within city limits.

4. Equipment Type: Battering rams, slugs, and breaching apparatus that are explosive in nature - CA Gov’t Code §7070(c)(7)
a. Quantity Owned/Sought: None (outside owned)
b. Lifespan: Unknown.
c. Equipment Capabilities: Capable of breaching doors, gates, windows, and other points of entry.
d. Manufacturer Product Description: Unavailable.
-221-

Page 17 of 19 ends

e. Purpose/Authorized Uses: Breaching doors, gates, windows, and other points of entry.
f. Fiscal Impacts: None. Equipment owned, maintained, and operated by another agency.
g. Legal/Procedural Rules Governing Use: Breaching apparatus that are explosive in nature can be deployed any time tactical operators determine that it is necessary to complete a lawful breaching, and non-explosive breaching methods are not tactically practicable. For a breaching to be lawful, it will generally need to be supported by a search or arrest warrant, or exigent circumstances.
h. Training Required: The North County Regional SWAT Team provides internal training for staff members prior to allowing them to use explosive breaching apparatus.
i. Other Notes: The Hillsborough Police Department participates in the North County Regional SWAT Team (NCR SWAT). This equipment is owned and operated by NCR SWAT through the San Mateo Police Department. While the Hillsborough Police Department does not own or operate this equipment, it could be used in Hillsborough by NCR SWAT if they are deployed to an incident within city limits.

5. Equipment Type: Flashbang grenades, explosive breaching tools, tear gas and pepper balls - CA Gov’t Code §7070(c)(12)
a. Quantity Owned/Sought: None (outside owned)
b. Lifespan: Unknown.
c. Equipment Capabilities: Capable of breaching doors, gates, windows, and other points of entry, creating explosive distractions, and/or deploying tear gas or pepper chemical.
d. Manufacturer Product Description: Unavailable.
e. Purpose/Authorized Uses: breaching doors, gates, windows, and other points of entry, creating explosive distractions, and/or deploying tear gas or pepper chemicals.
f. Fiscal Impacts: None. Equipment owned, maintained, and operated by another agency.
g. Legal/Procedural Rules Governing Use: Breaching apparatus that are explosive in nature can be deployed any time tactical operators determine that it is necessary to complete a lawful breaching, and non-explosive breaching methods are not tactically practicable. For a breaching to be -222-

Page 18 of 19 ends

lawful, it will generally need to be supported by a search or arrest warrant, or exigent circumstances. Tear gas and pepper balls can only be deployed in accordance with all applicable State, Federal and Local laws governing police use of force, crowd control, etc.
h. Training Required: The North County Regional SWAT Team provides internal training for staff members prior to allowing them to use any of these items.
i. Other Notes: The Hillsborough Police Department participates in the North County Regional SWAT Team (NCR SWAT). This equipment is owned and operated by NCR SWAT through the San Mateo Police Department. While the Hillsborough Police Department does not own or operate this equipment, it could be used in Hillsborough by NCR SWAT if they are deployed to an incident within city limits.

6. Equipment Type: Long Range Acoustic Device (LRAD) - CA Gov’t Code §7070(c)(13)
a. Quantity Owned/Sought: None (outside owned).
b. Lifespan: Unknown.
c. Equipment Capabilities: LRAD systems are a type of Acoustic Hailing Device (AHD) used to send messages over long distances. LRAD systems produce much higher sound levels (volume) than normal loudspeakers or megaphones. Over shorter distances, LRAD signals are loud enough to cause pain in the ears of people in their path.
d. Manufacturer Product Description: LRAD systems are a type of Acoustic Hailing Device (AHD) used to send messages over long distances. LRAD systems produce much higher sound levels (volume) than normal loudspeakers or megaphones. Over shorter distances, LRAD signals are loud enough to cause pain in the ears of people in their path. e. Purpose/Authorized Uses: Can be used to disperse unlawful crowds and/or to disrupt the activities of person(s) who represent an immediate threat to others.
f. Fiscal Impacts: None. Equipment owned, maintained, and operated by another agency.
g. Legal/Procedural Rules Governing Use: LRADs can only be deployed in accordance with all applicable State, Federal and Local laws governing police use of force, crowd control, etc.
-223-

Page 19 of 19 ends

h. Training Required: The North County Regional SWAT Team provides internal training for staff members prior to allowing them to use any of these items.
i. Other Notes: The Hillsborough Police Department participates in the North County Regional SWAT Team (NCR SWAT). This equipment is owned and operated by NCR SWAT through the San Mateo Police Department. While the Hillsborough Police Department does not own or operate this equipment, it could be used in Hillsborough by NCR SWAT if they are deployed to an incident within city limits.
-224-

TOWN OF HILLSBOROUGH
April 13, 2026 – Annual Military Equipment Report,
Prepared Pursuant to Government Code § 7072
In accordance with Government Code section 7072, the Hillsborough Police Department hereby submits for City Council review and approval the following annual military equipment report.

1. A summary of how the military equipment was used and the purpose of its use.

All military equipment owned by the Department, which is detailed in Exhibit A to the Department’s Military Equipment Use Policy, was used exclusively for the purposes designated by that Policy. In general, those purposes include use of specialized firearms and ammunition to address threats with more precision and/or from a greater distance than handguns; use of unmanned aerial and ground vehicles for enhanced investigation and community safety; use of armored rescue vehicles for transporting officers, civilians and supporting personnel during high-risk tactical operations; use of a breaching shotgun and ammunition to defeat door locking mechanisms and safely enter a structure; use of wheeled vehicles with an attached breaching apparatus to breach doors, gates, and other points of entry remotely; use of noise flash diversionary devices to produce atmospheric over-pressure and brilliant white light and, as a result, can cause short‐term (6 ‐ 8 seconds) physiological/ psychological sensory deprivation to give officers a tactical advantage; use of long range acoustic devices (LRAD) to disperse unlawful crowds and/or disrupt the activities of person(s) who represent an immediate threat; use of projectile launch platforms and associated munitions to limit the escalation of conflict where employment of lethal force is prohibited or undesirable; and use of pepper ball launchers and projectiles to limit conflict escalation and use of lethal force.

In 2025, the equipment used by the Department included the use of unmanned aerial vehicles (UAV) for tactical operations, crimes in progress for enhanced investigative and community safety purposes; use of Noise Flash Diversionary Devices (NFDD) for deescalation; use of armored rescue vehicles for transportation of officers and support personnel during high-risk tactical operations. All officers received the requisite training and qualifications to commence or continue using the Department’s equipment as appropriate.

2. A summary of any complaints or concerns received concerning the military equipment.

The Department did not receive any complaints or citizen outreach concerning the Department’s Military Equipment Use Policy or ongoing use of said equipment.

3. The results of any internal audits, any information about violations of the military equipment use policy, and any actions taken in response.

ATTACHMENT 4
-225-
There were no violations of the Policy, and accordingly, no audits or actions took place in response.

4. The total annual cost for each type of military equipment, including acquisition, personnel, training, transportation, maintenance, storage, upgrade, and other ongoing costs, and from what source funds will be provided for the military equipment in the calendar year following submission of the annual military equipment report.

Costs associated with military equipment in 2025 included the maintenance of all Department equipment, as well as replacement ammunition when needed. These costs were accounted for in the City’s 2025 budget. The Department will return to City Council for approval of any budgetary requests associated with the purchase of new military equipment.

5. The quantity possessed for each type of military equipment.

The quantity for each type of military equipment, including the new equipment purchased in 2025, is listed in Exhibit A to the Military Equipment Use Policy, available on the Town’s website and in person at the Department.

6. If the law enforcement agency intends to acquire additional military equipment in the next year, the quantity sought for each type of military equipment.

The department will be purchasing 25 new fully outfitted rifles to replace the 20+ year old rifles that officers have been using over the past two decades, well beyond the manufacturers’ service life. The estimated cost for this expenditure will be approximately $130,000 + annual maintenance plan. Replacement ammunition and Noise Flash Distraction Devices (NFDD) will be purchased as needed, in accordance with Department procedures.
-226-

TOWN OF HILLSBOROUGH
San Mateo County
1600 Floribunda Avenue
Hillsborough, CA 94010
11 CONSENT CALENDAR

CITY COUNCIL MEETING
APRIL 13, 2026

AGENDA STAFF REPORT
ITEM SUBJECT: Resolution Approving and Authorizing the City Manager to Execute a TwoYear Agreement with Bay Area Tree Specialists, Inc. for Vegetation Management Services in the Amount of $173,438.00, with an Option for the City Manager to Renew for a Third Year in the Amount of $93,819.00, for a Three Year Total of $267,256.00, with a 10% Contingency in the Amount of $26,726.00 if Needed, for a Total Three-Year Not-to-Exceed Amount of $293,982.00, Contingent on the City Manager Finalizing Contract Negotiations to the Satisfaction of the City Manager and City Attorney, Based on a Previously Adopted Mitigated Negative Declaration
SUMMARY: The Public Works Department maintains vegetation for various Town of Hillsborough (“Town”) facilities including nine Town-owned open space areas totaling approximately 256 acres of wildlands (wildfire mitigation), 36 Town-owned parcels (wildfire mitigation), over five linear miles of utility roads (open space access, public utilities access and wildfire mitigation), numerous utility footpaths (public utilities access), 54 storm drain trash racks (storm water management), numerous storm drain inlets and several lane miles of Town responsibility roadside shoulder areas (wildfire mitigation and traffic safety).

On February 13, 2026, the Public Works Department issued a request for proposals (RFP) for vegetation management services, advertised the RFP on the Town’s website, and notified 16 known service providers of the RFP. On February 26, 2026, the Town hosted a pre-proposal meeting to which six companies attended. Four of these companies submitted proposals to the Town by the March 17, 2026 submittal deadline. Town staff reviewed the proposals and found Go Native, Inc. and Bay Area Tree Specialists, Inc. to be the most qualified and experienced service providers, with fee proposals reasonable for the scope of services provided. Go Native, Inc. provided the lowest costs for grassland vegetation and time and material services; Bay Area Tree Service Specialists, Inc. provided the lowest costs for woodland and shrubland vegetation.

Approving and authorizing the City Manager to execute agreements with both companies, contingent on the City Manager finalizing contract negotiations to the satisfaction of the City Manager and City Attorney, will provide the Town with the best possible vegetation management services costs and will ensure there are sufficient contractual services to complete the work in a timely manner. These two companies have successfully provided these services to the Town in the past. This agenda item is the consideration of the Bay Area Tree Specialists, Inc. contract; the Go Native, Inc. contract will be considered as a separate item on the April 13, 2026 agenda.

FISCAL IMPACT: The vegetation management services contracts will be funded from the Streets operation department (Fire Mitigation expense) from the FY 2025-26 through FY 2028-29 budgets.
-227-
Agenda Staff Report – Hillsborough City Council
April 13, 2026

Page 2 ends

ENVIRONMENTAL ISSUES: The Open Space Vegetation Management Project underwent two levels of environmental review during the FEMA grant approval: a California Environmental Quality Act (CEQA) review and the National Environmental Protection (NEPA) Act review. Under CEQA, the Town prepared and adopted a Mitigated Negative Declaration (MND) and Mitigation Monitoring and Reporting Plan on June 10, 2013 via Resolution No. 13-29. Additionally, under NEPA, the Federal Emergency Management Agency, or FEMA, prepared a Supplemental Environmental Assessment (SEA) tiering from the Final Programmatic Environmental Assessment for typical recurring actions resulting from flood, earthquake, rain, and wind disasters in California, and made a Finding of No Significant Impact that was issued on April 22, 2013.

For CEQA purposes, none of the circumstances requiring preparation of a subsequent or supplemental MND (as specified in CEQA section 21166 and CEQA Guidelines 15162 and 15163) are present. This has been determined as there is no evidence in the record that (1) substantial changes are proposed for the Project that will require major revisions of the MND, (2) substantial changes will occur with respect to the circumstances under which the Project will be undertaken that will require major revisions in the MND, or (3) new information, which was not known and could not have been known when the MND was certified, has become available. Staff has confirmed that the area of treatment and treatment methodology have not changed therefore no substantial changes are proposed for the Project itself. Further, there are no substantial changes with respect to the circumstances under which the Project will be undertaken. Finally, Town staff is not aware of any new information which was not known at the time the MND was adopted.

ATTACHMENT(S): Resolution
PREPARED BY: Paul Willis, Public Works Director
RECOMMENDATION: Adopt the resolution approving and authorizing the City Manager to execute a two-year agreement with Bay Area Tree Specialists, Inc. for vegetation management services in the amount of $173,438.00, with an option for the City Manager to renew for a third year in the amount of $93,819.00, for a three year total of $267,256.00, with a 10% contingency in the amount of $26,726.00 if needed, for a total three-year not-to-exceed amount of $293,982.00, contingent on the City Manager finalizing contract negotiations to the satisfaction of the City Manager and City Attorney, based on a previously adopted Mitigated Negative Declaration. -228-
RESOLUTION NO. 26-

RESOLUTION OF THE CITY COUNCIL OF THE TOWN OF HILLSBOROUGH APPROVING AND AUTHORIZING THE CITY MANAGER TO EXECUTE A TWOYEAR AGREEMENT WITH BAY AREA TREE SPECIALISTS, INC. FOR VEGETATION MANAGEMENT SERVICES IN THE AMOUNT OF $173,438.00, WITH

AN OPTION FOR THE CITY MANAGER TO RENEW FOR A THIRD YEAR IN THE AMOUNT OF $93,819.00, FOR A THREE YEAR TOTAL OF $267,256.00, WITH A 10% CONTINGENCY IN THE AMOUNT OF $26,726.00 IF NEEDED, FOR A TOTAL THREE-YEAR NOT-TO-EXCEED AMOUNT OF $293,982.00.00, CONTINGENT ON

THE CITY MANAGER FINALIZING CONTRACT NEGOTIATIONS TO THE

SATISFACTION OF THE CITY MANAGER AND CITY ATTORNEY, BASED ON A

PREVIOUSLY ADOPTED MITIGATED NEGATIVE DECLARATION
WHEREAS, the Town of Hillsborough (“Town”) maintains vegetation for various Town facilities including nine Town-owned open space areas, 36 Town-owned parcels, over five linear miles of utility roads, numerous utility footpaths, 54 storm drain trash racks, numerous storm drain inlets and several lane miles of Town responsibility roadside shoulder areas; and WHEREAS, a request for proposals (“RFP”) to help maintain vegetation on Town facilities was issued on February 13, 2026, and four proposals were received by the submittal deadline; and
WHEREAS, staff evaluated the proposals and found that Go Native, Inc. and Bay Area Tree Specialists, Inc. meet the Town’s vegetation management qualifications and are the most cost effective; and
WHEREAS, Go Native provided the lowest costs for grassland vegetation and time and material services; Bay Area Tree Service provided the lowest costs for woodland and shrubland vegetation; and
WHEREAS, both companies will provide the Town with the best possible vegetation management services costs and will ensure that there are sufficient contractual services available to complete the vegetation management work in a timely manner; and
WHEREAS, the vegetation management services contracts will be funded from the Streets operation department (Fire Mitigation expense) from the FY 2025- 26 through FY 2028-29 budgets.

NOW, THEREFORE, BE IT RESOLVED that the City Council of the Town of Hillsborough hereby approves and authorizes the City Manager to execute a two-year agreement with Bay Area Tree Specialists, Inc. for vegetation management services in the amount of $173,438.00, with an option for the City Manager to renew for a third year in the amount of $93,819.00, for a three year total of $267,256.00, with a 10% contingency in the amount of $26,726.00 if needed, for a total three-year not-to-exceed amount of $293,982.00, contingent on the City Manager finalizing contract negotiations -229-
Resolution No. 26-
April 13, 2026
2 to the satisfaction of the City Manager and City Attorney, based on a previously adopted Mitigated Negative Declaration.

Mayor of the Town of Hillsborough

Attest: City Clerk
This resolution was adopted by the City Council of the Town of Hillsborough at its regular meeting held on the 13th day of April 2026, by the following vote of the members thereof:

AYES: Councilmembers
NOES: Councilmembers
ABSENT: Councilmembers
ABSTAIN: Councilmembers
-230-

TOWN OF HILLSBOROUGH
San Mateo County
1600 Floribunda Avenue
Hillsborough, CA 94010
12 CONSENT CALENDAR

CITY COUNCIL MEETING
APRIL 13, 2026

AGENDA STAFF REPORT
ITEM SUBJECT: Resolution Approving and Authorizing the City Manager to Execute a TwoYear Agreement with Go Native, Inc. for Vegetation Management Services in the Amount of $320,756.00, with an Option for the City Manager to Renew for a Third Year in the Amount of $160,544.00, for a Three Year Total of $481,300.00, with a 10% Contingency in the Amount of $48,130.00 if Needed, for a Total Three-Year Not-to-Exceed Amount of $529,430.00, Contingent on the City Manager finalizing Contract Negotiations to the Satisfaction of the City Manager and City Attorney, Based on a Previously Adopted Mitigated Negative Declaration
SUMMARY: The Public Works Department maintains vegetation for various Town of Hillsborough (“Town”) facilities including nine Town-owned open space areas totaling approximately 256 acres of wildlands (wildfire mitigation), 36 Town-owned parcels (wildfire mitigation), over five linear miles of utility roads (open space access, public utilities access and wildfire mitigation), numerous utility footpaths (public utilities access), 54 storm drain trash racks (storm water management), numerous storm drain inlets and several lane miles of Town responsibility roadside shoulder areas (wildfire mitigation and traffic safety).

On February 13, 2026, the Public Works Department issued a request for proposals (RFP) for vegetation management services, advertised the RFP on the Town’s website, and notified 16 known service providers of the RFP. On February 26, 2026, the Town hosted a pre-proposal meeting to which six companies attended. Four of these companies submitted proposals to the Town by the March 17, 2026 submittal deadline. Town staff reviewed the proposals and found Go Native, Inc. and Bay Area Tree Specialists, Inc. to be the most qualified and experienced service providers, with fee proposals reasonable for the scope of services provided. Go Native, Inc. provided the lowest costs for grasslands and time and material services; Bay Area Tree Service Specialists, Inc. provided the lowest costs for woodlands and shrublands.

Approving and authorizing the City Manager to execute agreements with both companies, contingent on the City Manager finalizing contract negotiations to the satisfaction of the City Manager and City Attorney, will provide the Town with the best possible vegetation management services costs and will ensure there are sufficient contractual services to complete the work in a timely manner. These two companies have successfully provided these services to the Town in the past. This agenda item is the consideration of the Go Native, Inc. contract; the Bay Area Tree Specialists, Inc. contract will be considered as a separate item on the April 13, 2026 agenda.

FISCAL IMPACT: The vegetation management services contracts will be funded from the Streets operation department (Fire Mitigation expense) from the FY 2025-26 through FY 2028-29 budgets.
-231-
Agenda Staff Report – Hillsborough City Council
April 13, 2026

Page 2 ends

ATTACHMENT(S): Resolution
PREPARED BY: Paul Willis, Public Works Director
RECOMMENDATION: Adopt the resolution approving and authorizing the City Manager to execute a two-year agreement with Go Native, Inc. for vegetation management services in the amount of $320,756.00, with an option for the City Manager to renew for a third year in the amount of $160,544.00, for a three year total of $481,300.00, with a 10% contingency in the amount of $48,130.00 if needed, for a total three-year not-to-exceed amount of $529,430.00, contingent on the City Manager finalizing contract negotiations to the satisfaction of the City Manager and City Attorney, based on a previously adopted Mitigated Negative Declaration. -232-
RESOLUTION NO. 26-

RESOLUTION OF THE CITY COUNCIL OF THE TOWN OF HILLSBOROUGH APPROVING AND AUTHORIZING THE CITY MANAGER TO EXECUTE A TWOYEAR AGREEMENT WITH GO NATIVE, INC. FOR VEGETATION MANAGEMENT SERVICES IN THE AMOUNT OF $320,756.00, WITH AN OPTION FOR THE CITY MANAGER TO RENEW FOR A THIRD YEAR IN THE AMOUNT OF $160,544.00, FOR A THREE YEAR TOTAL OF $481,300.00, WITH A 10% CONTINGENCY IN THE AMOUNT OF $48,130.00 IF NEEDED, FOR A TOTAL THREE-YEAR NOT-TOEXCEED AMOUNT OF $529,430.00, CONTINGENT ON THE CITY MANAGER

FINALIZING CONTRACT NEGOTIATIONS TO THE SATISFACTION OF THE CITY

MANAGER AND CITY ATTORNEY, BASED ON A PREVIOUSLY ADOPTED

MITIGATED NEGATIVE DECLARATION
WHEREAS, the Town of Hillsborough (“Town”) maintains vegetation for various Town facilities including nine Town-owned open space areas, 36 Town-owned parcels, over five linear miles of utility roads, numerous utility footpaths, 54 storm drain trash racks, numerous storm drain inlets and several lane miles of Town responsibility roadside shoulder areas; and WHEREAS, a request for proposals (“RFP”) to help maintain vegetation on Town facilities was issued on February 13, 2026, and four proposals were received by the submittal deadline; and
WHEREAS, staff evaluated the proposals and found that Go Native, Inc. and Bay Area Tree Specialists, Inc. meet the Town’s vegetation management qualifications and are the most cost effective; and
WHEREAS, Go Native provided the lowest costs for grassland vegetation and time and material services; Bay Area Tree Service provided the lowest costs for woodland and shrubland vegetation; and
WHEREAS, both companies will provide the Town with the best possible vegetation management services costs and will ensure that there are sufficient contractual services available to complete the vegetation management work in a timely manner; and
WHEREAS, the vegetation management services contracts will be funded from the Streets operation department (Fire Mitigation expense) from the FY 2025- 27 through FY 2028-29 budgets.

NOW, THEREFORE, BE IT RESOLVED that the City Council of the Town of Hillsborough hereby approves and authorizes the City Manager to execute a two-year agreement with Go Native, Inc. for vegetation management services in the amount of $320,756.00, with an option for the City Manager to renew for a third year in the amount of $160,544.00, for a three year total of $481,300.00, with a 10% contingency in the amount of $48,130.00 if needed, for a total three-year not-to-exceed amount of $529,430.00, contingent on the City Manager finalizing contract negotiations to the -234-
Resolution No. 26-
April 13, 2026
2 satisfaction of the City Manager and City Attorney, based on a previously adopted Mitigated Negative Declaration.

Mayor of the Town of Hillsborough

Attest: City Clerk
This resolution was adopted by the City Council of the Town of Hillsborough at its regular meeting held on the 13th day of April 2026, by the following vote of the members thereof:

AYES: Councilmembers
NOES: Councilmembers
ABSENT: Councilmembers
ABSTAIN: Councilmembers
-235-

TOWN OF HILLSBOROUGH
San Mateo County
1600 Floribunda Avenue
Hillsborough, CA 94010
13 CONSENT CALENDAR

CITY COUNCIL MEETING
APRIL 13, 2026

AGENDA STAFF REPORT
ITEM SUBJECT: Resolution Approving and Authorizing the City Manager to Execute a TwoYear Agreement with Gachina Landscape Management, Inc. for Landscape Services for a Two Year Not-to-Exceed Amount of $153,799.00, with an Option for the City Manager to Renew for a Third Year in the Amount of $80,377.00, for a Three Year Not-to-Exceed Amount of $234,176.00, Including a 10% Contingency in the Amount of $23,418.00 if Needed, for a Total Three-Year Not-To-Exceed Amount of $257,594.00, Contingent on the City Manager Finalizing Contract Negotiations to the Satisfaction of the City Manager and City Attorney, Under CEQA Guideline 15301
SUMMARY: The Town of Hillsborough ("Town") owns and maintains 63 beautified traffic islands, medians, roundabouts, parks, walking paths, public utility sites (e.g., tank sites) and other landscaped sites in coordination with the Hillsborough Beautification Foundation (“HBF”). The Town use licensed contractors to provide landscaping at these sites. The work consists of, but is not limited to, weeding, trimming, irrigation, fertilization, planting, debris clean-up, tree pruning and other landscape activities. HBF provides financial support through fundraising to offset the landscaping costs for 57 of the 63 landscaped sites. The Town pays the landscaping costs for the remaining 6 sites.

On January 21, 2026, the Public Works Department issued a request for proposals for landscape services for the 63 landscaped sites. Eight companies attended the pre-proposal meeting, and the Town received five proposals by the February 16, 2026 deadline. Town staff, in coordination with HBF conducted a thorough review of the proposals and found Gachina Landscape Management, Inc. (“Gachina”) and Bay Pro Landscape Maintenance, Inc. (“Bay Pro”) most qualified and experienced service providers, with a fee proposal reasonable for the scope of services provided.

Staff recommends approving and authorizing the City Manager to execute contracts with both companies to provide landscape services for the 63 identified sites, contingent on the City Manager finalizing contract negotiations to the satisfaction of the City Manager and City Attorney.

Gachina will provide services for 33 sites and Bay Pro will provide services for 30 sites. Doing so will provide the Town and HBF with the best landscape management service costs and will ensure that there are sufficient contractual services available to complete the necessary work. This agenda item is the consideration of the Gachina contract; the Bay Pro agreement will be considered as a separate item on the April 13, 2026 agenda.

FISCAL IMPACT: HBF offsets $209,879.00 of the $257,594.00 through fundraising and the Town pays the remaining $47,715.00 in costs. Funding in the amount of $47,715.00 for the Town’s sites and 10% contingency will be allocated from various contractual general accounts from the FY 2026-27 through FY 2028-29 budgets.
-236-
Agenda Staff Report – Hillsborough City Council
April 13, 2026

Page 2 ends

ENVIRONMENTAL ISSUES: The proposed action is exempt from environmental review under California Environmental Quality Act (CEQA) Guidelines section 15301.

ATTACHMENT(S): Resolution
PREPARED BY: Paul Willis, Public Works Director
RECOMMENDATION: Adopt the resolution approving and authorizing the City Manager to execute a two-year agreement with Gachina Landscape Management, Inc. for landscape services for a two year not-to-exceed amount of $153,798.00, with an option for the City Manager to renew for a third year in the amount of $80,377.00, for a three year not-to-exceed amount of $234,175.00, including a 10% contingency in the amount of $23,418.00 if needed, for a total three-year not-toexceed amount of $257,593.00, contingent on the City Manager finalizing contract negotiations to the satisfaction of the City Manager and City Attorney, under CEQA Guideline 15301. -237-
RESOLUTION NO. 26-

RESOLUTION OF THE CITY COUNCIL OF THE TOWN OF HILLSBOROUGH APPROVING AND AUTHORIZING THE CITY MANAGER TO EXECUTE A TWOYEAR AGREEMENT WITH GACHINA LANDSCAPE MANAGEMENT, INC. FOR

LANDSCAPE SERVICES FOR A TWO-YEAR NOT-TO-EXCEED AMOUNT OF $153,799.00, WITH AN OPTION FOR THE CITY MANAGER TO RENEW FOR A THIRD YEAR IN THE AMOUNT OF $80,377.00, FOR A THREE YEAR NOT-TOEXCEED AMOUNT OF $234,176.00, INCLUDING A 10% CONTINGENCY IN THE AMOUNT OF $23,418.00 IF NEEDED, FOR A TOTAL THREE-YEAR NOT-TOEXCEED AMOUNT OF $257,594.00, CONTINGENT ON THE CITY MANAGER

FINALIZING CONTRACT NEGOTIATIONS TO THE SATISFACTION OF THE CITY MANAGER AND CITY ATTORNEY, UNDER CEQA GUIDELINE 15301
WHEREAS, the Town of Hillsborough (“Town”) owns and maintains 63 beautified traffic islands, medians, roundabouts, parks, walking paths, public utility sites (e.g., tank sites) and other landscaped sites in coordination with the Hillsborough Beautification Foundation (HBF); and
WHEREAS, a request for proposals for landscape services for the 63 landscaped sites was issued on January 21, 2026, and five proposals were received by the submittal deadline; and
WHEREAS, Town staff and HBF staff evaluated the proposals and found that Gachina and Bay Pro were the most qualified and cost-effective service providers; and
WHEREAS, both companies will provide the Town with the best possible landscape services costs and will ensure that there are sufficient contractual services available to complete necessary landscaping services in a timely manner; and
WHEREAS, HBF will fund the landscape service costs for 57 of the 63 sites and the Town of Hillsborough will fund the cost for 6 of the 63 sites; and WHEREAS, HBF offsets $209,879.00 of the $257,594.00 through fundraising and the Town pays the remaining $47,715.00 in costs; and
WHEREAS, funding in the amount of $47,715.00 for the Town’s sites and 10% contingency will be allocated from various contractual general accounts from the FY 2026-27 through FY 2028-29 budgets.

NOW, THEREFORE, BE IT RESOLVED that the City Council of the Town of Hillsborough hereby approves and authorizes the City Manager to execute a two-year agreement with Gachina Landscape Management, Inc. for landscape services for a twoyear not-to-exceed amount of $153,799.00, with an option for the City Manager to renew for a third year in the amount of $80,377.00, for a three year not-to-exceed amount of $234,176.00, including a 10% contingency in the amount of $23,418.00 if needed, for a total three-year not-to-exceed amount of $257,594.00, contingent on the -238-
Resolution No. 26-
April 13, 2026
2 City Manager finalizing contract negotiations to the satisfaction of the City Manager and City Attorney, under CEQA Guideline 15301.

Mayor of the Town of Hillsborough

Attest: City Clerk
This resolution was adopted by the City Council of the Town of Hillsborough at its regular meeting held on the 13th day of April 2026, by the following vote of the members thereof:

AYES: Councilmembers
NOES: Councilmembers
ABSENT: Councilmembers
ABSTAIN: Councilmembers
-239-

TOWN OF HILLSBOROUGH
San Mateo County
1600 Floribunda Avenue
Hillsborough, CA 94010
14 CONSENT CALENDAR

CITY COUNCIL MEETING
APRIL 13, 2026

AGENDA STAFF REPORT
ITEM SUBJECT: Resolution Approving and Authorizing the City Manager to Execute a TwoYear Agreement with Bay Pro Landscape Maintenance, Inc. for Landscape Services for a Two Year Not-to-Exceed Amount of $126,589.00, with an Option for the City Manager to Renew for a Third Year in the Amount of $66,157.00, for a Three Year Amount of $192,746.00, Including a 10% Contingency in the Amount of $19,274.00 if Needed, for a Total Three-Year Not-to-Exceed Amount of $212,020.00, Contingent on the City Manager Finalizing Contract Negotiations to the Satisfaction of the City Manager and City Attorney, Under CEQA Guideline 15301
SUMMARY: The Town of Hillsborough ("Town") owns and maintains 63 beautified traffic islands, medians, roundabouts, parks, walking paths, public utility sites (e.g., tank sites) and other landscaped sites in coordination with the Hillsborough Beautification Foundation (“HBF”). The Town use licensed contractors to provide landscaping at these sites. The work consists of, but is not limited to, weeding, trimming, irrigation, fertilization, planting, debris clean-up, tree pruning and other landscape activities. HBF provides financial support through fundraising to offset the landscaping costs for 57 of the 63 landscaped sites. The Town pays the landscaping costs for the remaining 6 sites.

Gachina will provide services for 33 sites and Bay Pro will provide services for 30 sites. Doing so will provide the Town and HBF with the best landscape management service costs and will ensure that there are sufficient contractual services available to complete the necessary work. This agenda item is the consideration of the Bay Pro contract; the Gachina agreement will be considered as a separate item on the April 13, 2026 agenda.

FISCAL IMPACT: HBF offsets $163,695.00 of the $212,020.00 through fundraising and the Town pays the remaining $48,325.00 in costs. Funding in the amount of $48,325.00 for the Town’s sites and 10% contingency will be allocated from various contractual general accounts from the FY 2026-27 through FY 2028-29 budgets.
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ENVIRONMENTAL ISSUES: The proposed action is exempt from environmental review under California Environmental Quality Act (CEQA) Guidelines section 15301.

ATTACHMENT(S): Resolution
PREPARED BY: Paul Willis, Public Works Director
RECOMMENDATION: Adopt the resolution approving and authorizing the City Manager to enter into a two-year agreement with Bay Pro Landscape Maintenance, Inc. for landscape services for a two-year not-to-exceed amount of $126,589.00, with an option for the City Manager to renew for a third year in the amount of $66,157.00, for a three year amount of $192,746.00, including a 10% contingency in the amount of $19,274.00 if needed, for a total three-year not-to-exceed amount of $212,020.00, contingent on the City Manager finalizing contract negotiations to the satisfaction of the City Manager and City Attorney, under CEQA Guideline 15301. -241-
RESOLUTION NO. 26-

RESOLUTION OF THE CITY COUNCIL OF THE TOWN OF HILLSBOROUGH APPROVING AND AUTHORIZING THE CITY MANAGER TO EXECUTE A TWOYEAR AGREEMENT WITH BAY PRO LANDSCAPE MAINTENANCE, INC. FOR

LANDSCAPE SERVICES FOR A TWO-YEAR NOT-TO-EXCEED AMOUNT OF $126,589.00, WITH AN OPTION FOR THE CITY MANAGER TO RENEW FOR A THIRD YEAR IN THE AMOUNT OF $66,157.00, FOR A THREE YEAR NOT-TOEXCEED AMOUNT OF $192,746.00, INCLUDING A 10% CONTINGENCY IN THE AMOUNT OF $19,274.00 IF NEEDED, FOR A TOTAL THREE-YEAR NOT-TOEXCEED AMOUNT OF $212,020.00, CONTINGENT ON THE CITY MANAGER

FINALIZING CONTRACT NEGOTIATIONS TO THE SATISFACTION OF THE CITY MANAGER AND CITY ATTORNEY, UNDER CEQA GUIDELINE 15301
WHEREAS, the Town of Hillsborough (“Town”) owns and maintains 63 beautified traffic islands, medians, roundabouts, parks, walking paths, public utility sites (e.g., tank sites) and other landscaped sites in coordination with the Hillsborough Beautification Foundation (HBF); and
WHEREAS, a request for proposals for landscape services for the 63 landscaped sites was issued on January 21, 2026, and five proposals were received by the submittal deadline; and
WHEREAS, Town staff and HBF staff evaluated the proposals and found that Gachina and Bay Pro were the most qualified and cost-effective service providers; and
WHEREAS, both companies will provide the Town with the best possible landscape services costs and will ensure that there are sufficient contractual services available to complete necessary landscaping services in a timely manner; and
WHEREAS, HBF will fund the landscape service costs for 57 of the 63 sites and the Town of Hillsborough will fund the cost for 6 of the 63 sites; and WHEREAS, HBF offsets $163,695.00 of the $212,020.00 through fundraising and the Town pays the remaining $48,325.00 in costs; and
WHEREAS, funding in the amount of $48,325.00 for the Town’s sites and 10% contingency will be allocated from various contractual general accounts from the FY 2026-27 through FY 2028-29 budgets.

NOW, THEREFORE, BE IT RESOLVED that the City Council of the Town of Hillsborough hereby approves and authorizes the City Manager to execute a two-year agreement Bay Pro Landscape Maintenance, Inc. for landscape services for a two-year not-to-exceed amount of $126,589.00, with an option for the City Manager to renew for a third year in the amount of $66,157.00, for a three year amount of $192,746.00, including a 10% contingency in the amount of $19,274.00 if needed, for a total three year not-to-exceed amount of $212,020.00, contingent on the City Manager finalizing -242-
Resolution No. 26-
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2 contract negotiations to the satisfaction of the City Manager and City Attorney, under CEQA Guideline 15301.

Mayor of the Town of Hillsborough

Attest: City Clerk
This resolution was adopted by the City Council of the Town of Hillsborough at its regular meeting held on the 13th day of April 2026, by the following vote of the members thereof:

AYES: Councilmembers
NOES: Councilmembers
ABSENT: Councilmembers
ABSTAIN: Councilmembers
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TOWN OF HILLSBOROUGH
San Mateo County
1600 Floribunda Avenue
Hillsborough, CA 94010
15 CONSENT CALENDAR

CITY COUNCIL MEETING
APRIL 13, 2026

AGENDA STAFF REPORT
ITEM SUBJECT: Adoption of an Ordinance Amending Chapter 17.52 of the Hillsborough Municipal Code Relating to Accessory Dwelling Units (ADUs) and Junior Accessory Dwelling Units (JADUs) and Finding the Action to be Statutorily Exempt from CEQA Under Public Resources Code Section 21080.17
SUMMARY: At its March 9, 2026 meeting, by unanimous vote, the City Council introduced and waived further reading of an ordinance entitled, “An Ordinance Amending Chapter 17.52 of the Hillsborough Municipal Code Related to Accessory Dwelling Units (ADUs) and Junior Accessory Dwelling Units (JADUs).”
The ordinance updates Chapter 17.52 to ensure consistency with recent changes to State law, improve administrative clarity, and streamline ministerial review of Accessory Dwelling Units (ADUs) and Junior Accessory Dwelling Units (JADUs). The ordinance includes both Statemandated updates and discretionary refinements informed by implementation experience and administrative efficiency considerations.

The proposed amendments include:
• Required updates to maintain compliance with State ADU legislation • Procedural updates related to application completeness timelines and appeal procedures • Clarifications regarding certificate of occupancy sequencing • Updates to Junior ADU occupancy provisions
• Removal of certain administrative requirements that have proven burdensome or unnecessary
• Limited discretionary refinements to improve clarity and implementation Adoption of the ordinance will:
• Ensure continued compliance with State ADU law
• Improve administrative clarity and processing efficiency • Reduce unnecessary procedural requirements
• Maintain objective standards consistent with State requirements • Strengthen long-term defensibility of the Town’s ADU regulations The ordinance will take effect 30 days following adoption, consistent with California Government Code requirements.

FISCAL IMPACT: There is no fiscal impact associated with this agenda item.

ENVIRONMENTAL ISSUES: The proposed action is exempt from environmental review under the California Environmental Quality Act (CEQA) Guidelines sections 15378(b)(2) and 15378(b)(5) as -244-
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ongoing administrative or organizational activities that will not result in direct or indirect physical changes in the environment.

ATTACHMENTS: Ordinance and Exhibit A Chapter 17.52 - Accessory Dwelling Units PREPARED BY: Liz Ruess, Assistant Director of Building & Planning RECOMMENDATION: Adopt the ordinance entitled, “An Ordinance Amending Chapter 17.52 of the Hillsborough Municipal Code Relating to Accessory Dwelling Units (ADUs) and Junior Accessory Dwelling Units (JADUs) and Finding the Action to be Statutorily Exempt from CEQA Under Public Resources Code Section 21080.17.”
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ORDINANCE NO.

ORDINANCE OF THE CITY COUNCIL OF THE TOWN OF HILLSBOROUGH AMENDING CHAPTER 17.52 OF THE HILLSBOROUGH MUNICIPAL CODE

RELATING TO ACCESSORY DWELLING UNITS AND JUNIOR ACCESSORY

DWELLING UNITS AND FINDING THE ACTION TO BE STATUTORILY EXEMPT FROM CEQA UNDER PUBLIC RESOURCES CODE § 21080.17

THE CITY COUNCIL OF THE TOWN OF HILLSBOROUGH HEREBY FINDS AND ORDAINS:

WHEREAS, the Town of Hillsborough, California (“Town”) is a municipal corporation, duly organized under the constitution and laws of the State of California; and WHEREAS, state law authorizes local jurisdictions to act by ordinance to provide for the creation and regulation of accessory dwelling units (“ADUs”) and junior accessory dwelling units (“JADUs”); and
WHEREAS, in recent years, the California Legislature has approved, and the Governor has signed into law, numerous bills that, among other things, amend various sections of the Government Code to impose new limits on local authority to regulate ADUs and JADUs; and WHEREAS, in 2025, the California Legislature approved, and the Governor signed into law, further amendments to state ADU law to, among other things, give clarity to existing provisions regulating quantity and size, and application and review timelines, and establish a new formal appeal process; and
WHEREAS, new updates to state ADU law took effect on January 1, 2026, and for the Town’s ADU ordinance to remain valid, it must be amended to reflect the most recent changes to state law; and
WHEREAS, Chapter 17.52 of the Hillsborough Municipal Code is where such an ordinance is maintained; and
WHEREAS, much of the proposed amendments made to Chapter 17.52’s regulatory scheme for the construction of ADUs and JADUs reflect these most recent updates to state law by aligning the Town’s code more directly with Government Code Sections 66310 through 66342; and
WHEREAS, on September 8, 2025 the City Council held a public discussion regarding the state required amendments as well as possible discretionary amendments affecting locally regulated ADUs and Town procedures; and
WHEREAS, following the public discussion, the City Council gave direction on the discretionary amendments which have been incorporated into the adopting ordinance; and WHEREAS, under advisement from the office of the City Attorney, staff made additional clerical and organizational edits to Chapter 17.52 to improve clarity, reduce ambiguity, and strengthen defensibility, addressing administrative provisions and objective standards and which do not alter the substantive effect of the previously adopted ordinance; and -246-
2 WHEREAS, ADUs are now designated by class, Class 1 and Class 2, with Class 1 being approved under Government Code section 66323 and considered by-right, and Class 2 being approved under Government Code sections 66314-66322 and locally regulated by additional objective design standards; and
WHEREAS, as neighbor notifications are not mandated by state ADU law and, as ADUs are ministerial nondiscretionary approvals, do not confer the right of the public to comment, any courtesy neighbor notification should be removed from the Hillsborough Municipal Code and implemented through department policy, as directed; and WHEREAS, Chapter 17.52 creates a more permissive local exception for statutorily regulated certificate of occupancies for ADUs and JADUs which are typically permitted only once the certificate of occupancy has been issued for the primary dwelling, and in statutorily exempt Governor proclaimed state of emergencies, by allowing for certificate of occupancies to be issued for detached ADUs which have passed all inspections and are not attached to the primary dwelling; and
WHEREAS, objective development standards and architectural requirements mandated on Class 2 ADUs are clarified and expanded to capture existing Town development standards, notwithstanding that any such standard may not require the ADU have less than 800 square feet of interior livable space; and
WHEREAS, evergreen landscape screening requirements mandated on Class 2 ADUs are clarified to also include screening between any wall that faces a public right-of-way and the public right-of-way, and that any evergreen landscape screening is also limited to fire-safety requirements and may be substituted with noncombustible fencing if necessary; and WHEREAS, recognizing that there may be a considerable existing stock of potential ADUs in the town representing a valuable housing resource for the community, Chapter 17.52 retains and clarifies legal nonconforming conditions and the establishment of existing residential livable spaces, including withing existing space of a primary dwelling and within an existing accessory structure like a guest house or domestic unit; and WHEREAS, any proposed ADU or JADU that would otherwise be allowed under Chapter

17.52 but does not conform to the objective design to development standards otherwise set forth is still allowed by the town following design review as prescribed by Chapter 2.12 of the Hillsborough Municipal Code; and
WHEREAS, all legal prerequisites to the adoption of the Ordinance have occurred.

NOW, THEREFORE, the City Council of the Town of Hillsborough does ordain as follows:

Section 1. Incorporation of Recitals. The recitals above are each incorporated by reference and adopted as findings by the City Council.

Section 2. CEQA. Under California Public Resources Code section 21080.17, the California Environmental Quality Act (“CEQA”) does not apply to the adoption of an ordinance by a city or county implementing the provisions of Chapter 13 of Division 1 of Title 7 of the -247-
3 California Government Code, which is California’s ADU law. Therefore, adoption of the Ordinance is statutorily exempt from CEQA in that it implements state ADU law.

Section 3. General Plan. The City Council hereby finds that the adoption of the Ordinance is consistent with the General Plan as a matter of law under Government Code section 66314(c).

Section 4. Code Amendment. Chapter 17.52 of the Town of Municipal Code is hereby amended and restated to read in its entirety as provided in Exhibit “A,” attached hereto and incorporated herein by reference.

Section 5. Effective Date. This Ordinance takes effect 30 days after its adoption.

Section 6. HCD Submittal. In accordance with Government Code sections 66326 and 66333.5, the City Clerk is directed to submit a copy of this Ordinance to the California Department of Housing and Community Development within 60 days after adoption.

Section 7. Publication. No less than five days prior to the adoption of this Ordinance, the City Clerk published a summary of this Ordinance in accordance with Government Code section 36933. The City Clerk will certify to the passage of this Ordinance by the City Council of the Town of Hillsborough, California, and cause a summary to be published once within fifteen (15) days after its adoption in accordance with Government Code section 36933.

Section 8. Custodian of Records. The custodian of records for this Ordinance is the City Clerk and the records comprising the administrative record are located at 1600 Floribunda Ave., Hillsborough, CA 94010.

Section 9. Severability. If any provision of this Ordinance or its application to any person or circumstance is held to be invalid by a court of competent jurisdiction, such invalidity has no effect on the other provisions or applications of the Ordinance that can be given effect without the invalid provision or application, and to this extent, the provisions of this Ordinance are severable. The City Council declares that it would have adopted this Ordinance irrespective of the invalidity of any portion thereof.

Mayor of the Town of Hillsborough
Attest: City Clerk
ORDINANCE NO. ____ of the Town of Hillsborough introduced on March 9, 2026, and adopted on ________________, by the following vote of the City Council:

AYES: Councilmembers
NOES: Councilmembers
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4 ABSENT: Councilmembers
ABSTAIN: Councilmembers
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Chapter 17.52 ACCESSORY DWELLING UNITS AND JUNIOR ACCESSORY

DWELLING UNITS

17.52.010 Definitions.

As used in this chapter, terms are defined as follows:
"Accessory dwelling unit" or "ADU" means an attached or a detached residential dwelling unit that provides complete independent living facilities for one or more persons and is located on a lot with a proposed or existing primary residence. All references in this code to "second unit" refer to an ADU. An accessory dwelling unit also includes the following:

1. An efficiency unit, as defined by Section 17958.1 of the California Health and Safety Code; and

2. A manufactured home, as defined by Section 18007 of the California Health and Safety Code. "Accessory structure" means a structure that is accessory and incidental to a dwelling located on the same lot.
"Complete independent living facilities" means permanent provisions for living, sleeping, eating, cooking, and sanitation on the same parcel as the single-family or multifamily dwelling is or will be situated. "Efficiency kitchen" means a kitchen that includes all of the following:

1. A cooking facility with appliances.

2. A food preparation counter and storage cabinets that are of a reasonable size in relation to the size of the JADU.
"Junior accessory dwelling unit" or "JADU" means a residential unit that satisfies all of the following:

1. It is no more than 500 hundred square feet of interior livable space in size.

2. It is contained entirely within an existing or proposed single-family structure. An enclosed use within the residence, such as an attached garage, is considered to be a part of and contained within the single-family structure.

3. It includes its own separate sanitation facilities or shares sanitation facilities with the existing or proposed single-family structure.

4. If the unit does not include its own separate bathroom, then it contains an interior entrance to the main living area of the existing or proposed single-family structure in addition to an exterior entrance that is separate from the main entrance to the primary dwelling.

5. It includes an efficiency kitchen, as defined above. "Livable space" means a space in a dwelling intended for human habitation, including living, sleeping, eating, cooking, or sanitation.
"Living area" means the interior habitable area of a dwelling unit, including basements and attics, but does not include a garage or any accessory structure.
"Nonconforming zoning condition" means a physical improvement on a property that does not conform with current zoning standards.
"Passageway" means a pathway that is unobstructed clear to the sky and extends from a street to one entrance of the ADU or JADU.
"Proposed dwelling" means a dwelling that is the subject of a permit application and that meets the requirements for permitting.
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EXHIBIT A
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"Public transit" means a location, including, but not limited to, a bus stop or train station, where the public may access buses, trains, subways, and other forms of transportation that charge set fares, run on fixed routes, and are available to the public.
"Tandem parking" means that two or more automobiles are parked on a driveway or in any other location on a lot, lined up behind one another.

17.52.020 General provisions.

A. Purpose. The purpose of this section is to allow and regulate ADUs and JADUs in compliance with Chapter 13 of Division 1 of Title 7 of the California Government Code.

B. Effect of Conforming. An ADU or JADU that conforms to the standards in this section will not be:

1. Deemed to be inconsistent with the town's general plan and zoning designation for the lot on which the ADU or JADU is located.

2. Deemed to exceed the allowable density for the lot on which the ADU or JADU is located.

3. Considered in the application of any local ordinance, policy, or program to limit residential growth.

4. Required to correct a nonconforming zoning condition. This does not prevent the town from enforcing compliance with applicable building standards in accordance with Health and Safety Code Section 17980.12.

C. Approvals. The following approvals apply to ADUs and JADUs created under this section:

1. Ministerial ADU and Building Permits Required. Every ADU and JADU requires an ADU permit and a building permit. The city will review and approve permit applications in accordance with subsection C.3. below.

2. Processing Fee. The city may charge a fee to reimburse it for costs incurred in processing ADU permits, including the costs of adopting or amending the town’s ADU ordinance. The ADU-permit processing fee is determined by the director of community development and approved by the city council by resolution.

3. Process and Timing.
a. Completeness.
(1) Determination in 15 days. The town will determine whether an application to create or serve an ADU or JADU is complete and will provide written notice of the determination to the applicant within 15 business days after the town receives the application submittal.
(2) Incomplete items. If the town’s determination under subsection C.3.a.(1) above is that the application is incomplete, the town’s notice must list the incomplete items and describe how the application can be made complete. (3) Cure. After receiving a notice that the application is incomplete, the applicant may cure and address the items that were deemed by the town to be incomplete.
(4) Subsequent submittals. If the applicant submits additional information to address incomplete items, within 15 business days of the subsequent submittal the town will determine in writing whether the additional information remedies all the incomplete items that the town identified in its original notice. The town -144-
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may not require the application to include an item that was not included in the original notice.
(5) Deemed complete. If the town does not make a timely determination as required by this subsection (A), the application or resubmitted application is deemed complete for the purposes of subsection D.3.c. below.
(6) Appeal of incompleteness. An applicant may appeal the town’s determination that the application is incomplete by submitting a written appeal to the city clerk.

The City Council will review the written appeal and affirm or reverse the completeness determination and provide a final written determination to the applicant within 60 business days after receipt of the appeal. b. No discretion or hearing. Ministerial permits for an ADU or JADU are considered and approved without discretionary review or a hearing.
c. Deadline to approve or deny ministerial approvals. The town must approve or deny an application to create an ADU or JADU within 60 days from the date that the town receives a complete application. If the town has not approved or denied the complete application within 60 days, the application is deemed approved unless either:
(1) The applicant requests a delay, in which case the 60-day time period is tolled for the period of the requested delay, or
(2) When an application to create an ADU or JADU is submitted with a permit application to create a new single-family or multifamily dwelling on the lot, the town may delay acting on the permit application for the ADU or JADU until the town acts on the permit application to create the new single-family or multifamily dwelling, but the application to create the ADU or JADU will still be considered ministerially without discretionary review or a hearing. d. Denial. If the town denies an application to create an ADU or JADU, the town must provide the applicant with comments that include, among other things, a list of all the defective or deficient items and a description of how the application may be remedied by the applicant. Notice of the denial and corresponding comments must be provided to the applicant within the 60-day time period established by subsection D.3.c. above. e. Appeal of denial. An applicant may appeal the town’s denial of the application by submitting a written appeal to the city clerk. The City Council will review the written appeal and affirm or reverse the denial and provide a final written determination to the applicant within 60 business days after receipt of the appeal. f. Concurrent review of demolition. A demolition permit for a detached garage that is to be replaced with an ADU is reviewed with the application for the ADU and issued at the same time.

D. Classes.

1. Class 1: Statutorily Regulated. Class 1 ADUs and JADUs are approved under Government Code Section 66323. If an ADU or JADU complies with each of the general requirements in subsection E. below, it is allowed in each of the scenarios provided in this subsection D.1. An ADU and JADU approved under subsection D.1.a. may be combined with and ADU approved under subsection D.1.b., and ADUs approved under subsection D.1.c. may be combined with ADUs approved under subsection D.1.d. -145-
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a. Converted on Lot with Single-family: One ADU as described in this subsection and one JADU on a lot with a proposed or existing single-family dwelling on it, where the ADU or JADU:
(1) Is either: within the space of a proposed single-family dwelling; within the existing space of an existing single-family dwelling; or (in the case of an ADU only) within the existing space of an accessory structure. Expansions of all existing spaces up to 150 additional square feet are allowed, and may utilize reduced ADU setbacks, if the expansion is limited to accommodating ingress and egress.
(2) Has exterior access that is independent of that for the single-family dwelling. (3) Has side and rear setbacks sufficient for fire and safety, as dictated by applicable building and fire codes.
(4) The JADU complies with the requirements of Government Code sections 66333 through 66339.
b. Limited Detached on Lot with Single-family: One detached, new-construction ADU on a lot with a proposed or existing single-family dwelling , if the detached ADU satisfies each of the following limitations:
(1) The side- and rear-yard setbacks are at least four feet. (2) The total floor area is 800 square feet of livable space or smaller. (3) The peak height above grade does not exceed the applicable height limit in subsection E.2. below.
c. Converted on Lot with Multifamily: One or more ADUs within portions of existing multifamily dwelling structures that are not used as livable space, including but not limited to storage rooms, boiler rooms, passageways, attics, basements, or garages, if each converted ADU complies with state building standards for dwellings. Under this subsection D.1.c., at least one converted ADU is allowed within an existing multifamily dwelling, up to a quantity equal to 25 percent of the existing multifamily dwelling units.
d. Limited Detached on Lot with Multifamily: No more than two detached ADUs on a lot with a proposed multifamily dwelling, or up to eight detached ADUs on a lot with an existing multifamily dwelling, if each detached ADU satisfies all of the following:
(1) The side- and rear-yard setbacks are at least four feet. If the existing multifamily dwelling has a rear or side yard setback of less than four feet, the town will not require any modification to the multifamily dwelling as a condition of approving the ADU. (2) The peak height above grade does not exceed the applicable height limit provided in subsection E.2. below
(3) If the lot has an existing multifamily dwelling, the quantity of detached ADUs does not exceed the number of primary dwelling units on the lot.

2. Class 2: Locally Regulated. Class 2 ADUs are approved under Government Code sections 66314-66322.

Except for Class 1 ADUs approved under subsection D.1. above, all ADUs are subject to the standards set forth in subsections E. and F. below.

E. General Requirements. The following requirements apply to all Class 1 and Class 2 ADUs and JADUs:

1. Zoning.
a. A Class 1 ADU approved under subsection D.1. above may be created on a lot in a residential or mixed-use zone.
b. A Class 2 ADU approved under subsection D.2. above may be created on a lot that is zoned to allow single-family dwelling residential use or multifamily dwelling residential use. -146-
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c. In accordance with Government Code section 66333(a), a JADU may only be created on a lot zoned for single-family residences.

2. Height.
a. Detached.
(1) Except as otherwise provided by subsections E.2.a.(2), E.2.a.(3), or E.2.a.(4) below, a detached ADU created on a lot with an existing or proposed single family or multifamily dwelling unit may not exceed 16 feet in height.
(2) A detached ADU may be up to 18 feet in height if it is created on a lot with an existing or proposed single family or multifamily dwelling unit that is located within one-half mile walking distance of a major transit stop or high quality transit corridor, as those terms are defined in Section 21155 of the Public Resources Code, and the ADU may be up to two additional feet in height (for a maximum of 20 feet) if necessary to accommodate a roof pitch on the ADU that is aligned with the roof pitch of the primary dwelling unit. (3) The height of a detached ADU that is at least 20 feet from side and rear property lines, and at least 25 feet from all public right-of-ways, may be up to 22 feet in height. (4) A detached ADU created on a lot with an existing or proposed multifamily dwelling that has more than one story above grade may not exceed 18 feet in height. b. Attached. An ADU that is attached to the primary dwelling may not exceed 25 feet in height or the height limitation imposed by the underlying zone that applies to the primary dwelling, whichever is lower. Notwithstanding the foregoing, ADUs subject to this subsection E.2.b. may not exceed two stories
c. For purposes of this subsection E.2., height is measured from existing legal grade or the level of the lowest floor, whichever is lower, to the peak of the structure. Existing legal grade means the legally established grade that exists at the time that an application is submitted.

3. Fire Sprinklers.
a. Fire sprinklers are required in an ADU or JADU if sprinklers are required in the primary residence. b. The construction of an ADU or JADU does not trigger a requirement for fire sprinklers to be installed in the existing primary dwelling.

4. Rental Term.
a. No ADU or JADU may be rented for a term that is shorter than 30 days. This prohibition applies regardless of when the ADU or JADU was created.
b. The renting of the primary dwelling, ADU, or JADU is not considered a business and is not subject to the provisions of Chapter 5.04.

5. No Separate Conveyance. An ADU or JADU may be rented, but except as otherwise provided in Government Code Section 66341, no ADU or JADU may be sold or otherwise conveyed separately from the lot and the primary dwelling (in the case of a single-family lot) or from the lot and all of the dwellings (in the case of a multifamily lot).

6. Septic System. If the ADU or JADU will connect to an onsite wastewater-treatment system, the owner must include with the application a percolation test completed within the last five years or, if the percolation test has been recertified, within the last 10 years.

7. Owner Occupancy.
a. ADUs. ADUs are not subject to an owner-occupancy requirement. b. JADUs.
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(1) Generally. As required by state law, JADUs are generally subject to an owner-occupancy requirement. A natural person with legal or equitable title to the property must reside on the property, in either the primary dwelling or JADU, as the person's legal domicile and permanent residence.
(2) Exceptions. The owner-occupancy requirement in this subsection E.7.b. does not apply in either of the following situations:
i. The JADU has separate sanitation facilities (i.e., does not share sanitation facilities with the existing primary dwelling unit structure).
ii. The property is entirely owned by another governmental agency, land trust, or housing organization.

7. JADU Deed Restriction. Prior to issuance of a certificate of occupancy for a JADU, a deed restriction must be recorded against the title of the property in the county recorder's office and a copy filed with the building and planning department. The deed restriction must run with the land and bind all future owners. The form of the deed restriction will be provided by the town and must provide that:
a. The JADU may not be sold separately from the primary dwelling. b. The JADU is restricted to the approved size and to other attributes allowed by this section. c. The deed restriction runs with the land and may be enforced against future property owners. d. The deed restriction may be removed if the owner eliminates the JADU, as evidenced by, for example, removal of the kitchen facilities. To remove the deed restriction, an owner may make a written request of the building and planning department, providing evidence that the JADU has in fact been eliminated. The building and planning department may then determine whether the evidence supports the claim that the JADU has been eliminated. Appeal may be taken from the building and planning department’s determination consistent with the other provisions of this code. If the JADU is not entirely physically removed, but is only eliminated by virtue of having a necessary component of an JADU removed, the remaining structure and improvements must otherwise comply with applicable provisions of this code. e. The deed restriction is enforceable by the director of building and planning or his or her designee for the benefit of the town. Failure of the property owner to comply with the deed restriction may result in legal action against the property owner, and the town is authorized to obtain any remedy available to it at law or equity, including, but not limited to, obtaining an injunction enjoining the use of the JADU in violation of the recorded restrictions or abatement of the illegal unit.

8. Rent Reporting. In order to facilitate the town's obligation to identify adequate sites for housing in accordance with Government Code Sections 65583.1 and 66330, the following requirements must be satisfied:
a. With the building permit application, the applicant must provide the town with an estimate of the projected annualized rent that will be charged for the ADU or JADU. b. Within ninety days after each January 1 following issuance of the building permit, the owner must report the actual rent charged for the ADU or JADU during the prior year. If the town does not receive the report within the ninety-day period, the owner is in violation of this code, and the town may send the owner a notice of violation and allow the owner another thirty days to submit the report. If the owner fails to submit the report within the thirty-day period, the town may enforce this provision in accordance with applicable law. c. This requirement shall not be the basis for the delay or denial of an ADU application.

9. Building and Safety.
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a. Must Comply with Building Code. Subject to subsection E.9.b. below, all ADUs and JADUs must comply with all local building and fire code requirements. b. No Change of Occupancy. Construction of an ADU does not constitute a group R occupancy change under the local building code, as described in Section 310 of the California Building Code, unless the building official makes a written finding based on substantial evidence in the record that the construction of the ADU could have a specific, adverse impact on public health and safety. Nothing in this subsection E.10.b. prevents the town from changing the occupancy code of a space that was uninhabitable space or that was only permitted for nonresidential use and was subsequently converted for residential use in accordance with this section.

10. Structures and Equipment within Setbacks. No structures or mechanical equipment may be located within the ADU setback area.

11. Certificate of Occupancy Timing.
a. Generally. No certificate of occupancy for an ADU or JADU may be issued before the certificate of occupancy is issued for the primary dwelling unit.
b. Limited Exception for State-declared Emergencies. Notwithstanding subsection E.12.a. above, a certificate of occupancy for an ADU may be issued before a certificate of occupancy for the primary dwelling if each of the following requirements are met:
(1) The county is subject to a proclamation of a state of emergency made by the California Governor on or after February 1, 2025.
(2) The primary dwelling was substantially damaged or destroyed by an event referenced in the Governor’s state of emergency proclamation.
(3) The ADU has been issued construction permits and has passed all required inspections. (4) The ADU is not attached to the primary dwelling.
c. Local Exception for detached ADUs. Notwithstanding subsection E.12.a. above, a six-month temporary certificate of occupancy for a detached ADU may be issued before a certificate of occupancy for the primary dwelling if each of the following requirements are met:
(1) The ADU has been issued construction permits and has passed all required inspections. (2) The ADU is not attached to the primary dwelling.

F. Class 2 ADU Requirements. The following requirements apply only to Class 2 ADUs approved under subsection D.2. above. This subsection F. does not apply to Class 1 ADUs or JADUs approved under subsection D.1. above.

1. Maximum Size.
a. The maximum size of a detached or attached ADU subject to this subsection F. is as follows:
(1) 850 square feet of livable interior space for a studio or one-bedroom unit; and (2) 1,000 square feet of interior livable space for an unit with two or more bedrooms. b. An attached ADU that is created on a lot with an existing primary dwelling is further limited to 50 percent of the floor area of the existing primary dwelling. -149-
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c. Application of other development standards in this subsection F., such as FAR or lot coverage, might further limit the size of the ADU, but no application of the percent-based size limit in subsection F.1.b. above or of an FAR, front setback, lot coverage limit, or open-space requirement may require the ADU have less than 800 square feet of interior livable space.

2. Setbacks.
a. Side and Rear. ADUs that are subject to this subsection F. must conform to 4foot side and rear setbacks.
b. Front. ADUs that are subject to this subsection F. must conform to 25-foot front setbacks, notwithstanding subsection F.1.c. above.
c. No setback is required for an ADU that is subject to this subsection F. if the ADU is constructed in the same location and to the same dimensions as an existing structure.

3. Lot Coverage. Notwithstanding subsection F.1.c. above, no ADU subject to this subsection F. may cause the total lot coverage of the lot to exceed 50 percent, or to exceed 40 percent in any setback area adjacent to a street line. Lot coverage is calculated in square feet as the sum of all hardscape coverage and structural coverage of a lot. Structural coverage and hardscape coverage are defined and calculated as follows:
a. Structural Coverage. Areas of a lot located beneath a structure having a roof and two or more walls, for example a dwelling, a pool house, or a garage. Structural coverage calculations and maximums are outlined as follows:

Table 17.52.020-1
Lot size (net lot area) Maximum Structural Coverage Calculation Up to 17,500 sq. ft. 22 sq. ft. for each 100 sq. ft. or portion thereof of net lot area 17,500 up to 21,780 sq. ft. 3,850 sq. ft. plus 15 sq. ft. for each 100 sq. ft. or portion thereof of net lot area in excess of 17,500 sq. ft.
21,780 up to 32,670 sq. ft. 4,495 sq. ft. plus 10 sq. ft. for each 100 sq. ft. or portion thereof of net lot area in excess of 21,780 sq. ft.
32,670 through 43,560 sq. ft. 5,585 sq. ft. plus 6 sq. ft. for each 100 sq. ft. or portion thereof of net lot area in excess of 32,670 sq. ft.

Over 43,560 sq. ft. 6,239 sq. ft. plus 5 sq. ft. for each 100 sq. ft. or portion thereof of net lot area in excess of 43,560 sq. ft.
b. Hardscape.
(1) Hardscape coverage. Areas of a lot covered by manufactured, non-plant, pervious or impervious material or located beneath a structure with a roof with no more than one wall, for example decking, a concrete slab or walkway, a gazebo.

4. Minimum Open Space. Notwithstanding subsection F.1.c. above, no ADU subject to this subsection F. may cause the total percentage of open space of the lot to fall below 50 percent.

5. Passageway. No passageway is required for an ADU.

6. Parking.
a. Generally. One off-street parking space is required for each ADU or bedroom, whichever is less.

The parking space may be provided in setback areas or as tandem parking, as defined above.. -150-
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b. Exceptions. No parking under subsection F.6.a. is required in the following situations:
(1) The ADU is located within one-half mile walking distance of public transit, as defined above.
(2) The ADU is located within an architecturally and historically significant historic district. (3) The ADU is part of the proposed or existing primary residence or an accessory structure under subsection D.1.a. above.
(4) When on-street parking permits are required but not offered to the occupant of the ADU. (5) When there is an established car share vehicle stop located within one block of the ADU. (6) When the permit application to create an ADU is submitted with an application to create a new single-family or new multifamily dwelling on the same lot, provided that the ADU or the lot satisfies any other criteria listed in subsections F.6.b.(1) through (5) above. c. No Replacement. When a garage, carport, covered parking structure, or uncovered parking space is demolished in conjunction with the construction of an ADU or converted to an ADU, those offstreet parking spaces are not required to be replaced.

7. Architectural Requirements.
a. The materials and colors of the exterior walls, roof, windows, and doors must be the same as those of the primary dwelling.
b. The exterior lighting must be limited to down-lights or as otherwise required by the building or fire code.
c. The ADU must have an independent exterior entrance, apart from that of the primary dwelling. d. All second-story windows and doors in an ADU less than 30 feet from a property line that is not a public right-of-way shall either be (for windows) clerestory with the bottom of the glass at least six feet above the finished floor, or (for windows and for doors) utilize frosted or obscure glass. e. An ADU to be constructed on a lot that has an identified historical resource is subject to the ADU exception process.
f. Outdoor showers are not permitted within setback areas and shall not be visible from adjacent properties or the public right-of-way.
g. No roof decks shall be permitted.
h. The interior horizontal dimensions of an ADU must be at least 10 feet wide in every direction, with a minimum interior wall height of seven feet.
i. Allowed stories. No ADU subject to this subsection F. may have more than one story, except that an ADU that is attached to the primary dwelling may have more than one story, but shall not exceed 25 feet in height, or the maximum height permitted for the primary dwelling in the applicable zoning district, whichever is lower.
j. No window or door of the ADU may have a direct line of sight to an adjoining residential property. Each window and door must either be located where there is no direct line of sight or screened using fencing, landscaping, or privacy glass to recent a direct line of sight. k. The ADU and primary dwelling shall use the same driveway to access the street, notwithstanding fire apparatus access standards, as regulated by Central County Fire Department.

8. Landscape Requirements. Except as required in subsection F.8.e. below, evergreen landscape screening must be planted and maintained between an ADU and adjacent parcels and between any public rightof-way and an ADU wall that faces the right-of-way. Screening shall be installed as follows:
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a. At least one 15-gallon size plant must be provided for every five linear feet of exterior ADU wall.

Alternatively, at least one 24” box size plant must be provided for every ten linear feet of exterior ADU wall.
b. For a ground-level ADU, plant specimens must be at least six feet tall when installed. As an alternative, for a ground-level ADU, a solid fence of at least six feet in height may be installed. c. For a second-story ADU, plant specimens must be at least twelve feet tall when installed. d. All landscaping must be drought tolerant.
e. Notwithstanding any other provision in this code, all landscaping must comply with applicable standards in Title 24 of the California Code of Regulations, including the California Fire Code and California Wildland Urban Interface Code, and any related Central County Fire Department (CCFD) and Town of Hillsborough regulations. If Title 24 or CCFD regulations prevent landscape screening, the screening required by subsection F.8.a. and F.8.b. and F.8.c. above must be achieved using non-combustible fencing that is consistent with fire-related regulations.

9. Historical Protections. An ADU that is on or within 600 feet of real property that is listed in the California Register of Historic Resources must be located so as to not be visible from any public rightof-way.

G. Impact Fees. The following requirements apply to all Class 1 ADUs and JADUs and Class 2 ADUs.

1. School Fees. A JADU or ADU with less than 500 square feet of interior livable space does not increase assessable space by 500 square feet for the purposes of Education Code section 17620(a)(1)(c) and is therefore not subject to school fees under Education Code section 17620.

2. Other Development Impact Fees.
a. No impact fee is required for a JADU or for an ADU that is less than 750 square feet of interior livable space. For purposes of this subsection G.2., "impact fee" means a "fee" under the Mitigation Fee Act (Government Code Section 66000(b)) and a fee under the Quimby Act (Government Code Section 66477). "Impact fee" here does not include any connection fee or capacity charge for water or sewer service.
b. Any impact fee that is required for an ADU that is 750 square feet or more of interior livable space must be charged proportionately in relation to the square footage of the primary dwelling unit (e.g. the floor area of the ADU, divided by the floor area of the primary dwelling, times the typical fee amount charged for a new dwelling).

H. Nonconforming Zoning Code Conditions, Building Code Violations, and Unpermitted Structures.

1. Generally. The town will not deny an ADU or JADU application due to a nonconforming zoning condition, building code violation, or unpermitted structure on the lot that does not present a threat to the public health and safety and that is not affected by the construction of the ADU or JADU.

2. Unpermitted ADUs and JADUs constructed before 2020.
a. Permit to Legalize. As required by state law, the town may not deny a permit to legalize an existing but unpermitted ADU or JADU that was constructed before January 1, 2020, unless denial is based on either of the following grounds:
(1) The ADU or JADU violates applicable building standards, or (2) The ADU or JADU does not comply with state ADU or JADU law or this ADU ordinance (Chapter 17.52).
b. Exceptions:
(1) Notwithstanding subsection H.2.a. above, the town may deny a permit to legalize an existing but unpermitted ADU or JADU that was constructed before January 1, 2020, if the -152-
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town makes a finding that correcting a violation is necessary to comply with the standards specified in California Health and Safety Code section 17920.3. (2) Subsection H.2.a. above does not apply to a building that is deemed to be substandard in accordance with California Health and Safety Code Section 17920.3.

3. Encouragement of ADU Establishment in Existing Residential Livable Spaces and Domestic Units.

Recognizing that there may be a considerable existing stock of potential ADUs in the town representing a valuable housing resource for the community, including guest suites, guest quarters, pool houses, carriage houses, domestic quarters, and similar spaces, the town encourages property owners to apply to establish an ADU or JADU within existing space in accordance with this chapter. a. No Penalty for Seeking Legalization. Upon receipt of an application to legalize an unpermitted ADU or JADU described in subsection H, the town shall not penalize the applicant solely for having established the unpermitted or nonconforming unit. b. Existing Detached Domestic Units – Legal Nonconforming Status. (1) A detached domestic unit that was lawfully established and existing as of January 10,1983, is deemed a legal nonconforming accessory structure.
(2) Detached domestic unit means living quarters designed, capable of being used, or intended to be used to house household help, such quarters being not structurally attached to the single-family dwelling served by the household help.
(3) Except as provided in subsection H.3.c. below, alterations to a legal nonconforming detached domestic unit that is not being permitted as an ADU shall be confined to the interior of the structure; exterior improvements shall be limited to normal upkeep and repair and to improvements that do not enlarge or alter the existing exterior dimensions of the structure.
c. Establishing an ADU Within Existing Residential Livable Space or an Existing Accessory Structure. (1) An applicant may apply to permit and legalize an ADU or JADU within existing space of a primary dwelling or withing an existing accessory structure, including an existing detached domestic unit.
(2) When an existing detached domestic unit or other existing space is proposed to be established as an ADU, the town shall not require correction of unrelated nonconforming zoning conditions, building code violations, or unpermitted structures found elsewhere on the lot that are not impacted by the ADU and do not pose a threat to public health and safety.
(3) Improvements to an existing structure in connection with establishing an ADU may include those alterations necessary to comply with applicable building standards and this chapter.

Any expansion beyond the existing structure shall be regulated by Chapter 17.52 and applicable state law
d. Disaster Reconstruction. If a natural disaster (such as a fire, earthquake, flood, landslide, etc.) damages or destroys an existing detached domestic unit or other existing accessory structure that is proposed to be established as an ADU, the structure may be reconstructed in the same location and to the same or smaller exterior dimensions as the damaged or destroyed structure, consistent with this chapter and applicable state law.
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17.52.030 ADU Exception Review.

A. Any proposed ADU or JADU that would otherwise be allowed under this chapter but does not conform to the objective design to development standards set forth in this chapter may be allowed by the town following design review as prescribed by Chapter 2.12 of this code.

B. Discretionary design review. An ADU or JADU application submitted under this section 17.52.030 will be considered, reviewed, and noticed as a "type B project" under Section 2.12.070.A.

C. Findings Required. The following findings shall be made in advance of any approval of an ADU or JADU Exception:

1. The project is consistent with the town general plan.

2. The project is consistent with this code, including the town zoning ordinance.

3. The project is consistent with the town residential design guidelines.

4. The project is consistent with all other town land use policies and plans.

5. The project has undergone the design review process outlined in Chapter 2.12 of this code.

6. The project has been publicly noticed as a "type B project” under Section 2.12.070.A of this code.

7. The project does not constitute a risk to the welfare of the town and its residents;

8. The project does not constitute a risk to the health and safety of the town and its residents. -154-
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TOWN OF HILLSBOROUGH
San Mateo County
1600 Floribunda Avenue
Hillsborough, CA 94010
16 OLD BUSINESS

CITY COUNCIL MEETING
APRIL 13, 2026

AGENDA STAFF REPORT
ITEM SUBJECT: Accept Water Rate Study and Authorize Implementation of the Recommendation
SUMMARY: The Town of Hillsborough (Town) has undertaken a water rate study to review and determine the rates necessary to fund the revenue requirement for the water fund for the next five years, beginning July 1, 2026. The preliminary draft Water Rate Cost of Service analysis and proposed rates were brought to City Council at a public study session on February 9, 2026.

The Town reviews the need for potential water increases annually or as needed to ensure that revenues are sufficient to cover the costs of the water fund. To cover the projected cost of services of the water fund, a new five-year rate series is recommended and will require Proposition 218 proceedings to adopt the proposed rates. If adopted, the first year of the rate series would be effective July 2026.

The Town awarded a Request for Proposal (RFP) contract to HF&H Consultants for rate consulting services for the water rate study. They have prepared the Water Rate Study Report that projects rates for a five-year planning period (2026-2030). The water five-year projection analyzed and established a rate plan that supports the projected revenue requirement over the five-year period.

The Town’s water rate revenues are used to fund water operations, maintenance, capital improvements, and debt service for the Town’s water system.

BACKGROUND: The Town of Hillsborough is an almost entirely residential city located in San Mateo County, California. The Town operates and maintains a potable water distribution system to serve its residents and water users. It is a complex system with varying topography and 19 separate but interconnected pressure zones. The infrastructure network includes 108 miles of water mains, 18 water tanks, 14 water pump stations and over 7,500 various assets, such as water meters, fire hydrants, and valves. The San Francisco Public Utilities Commission (SFPUC) delivers treated wholesale water to the Town from its Hetch Hetchy system. This water is delivered through ten master meter locations from the SFPUC’s 42-inch and 60-inch transmission pipelines. The Town purchases treated water from the San Francisco Water Department’s (SFWD) Hetch-Hetchy system under a long-term supply contract last renewed on July 1, 2009, and Amended December 1, 2018, with a 25-year term through June 30, 2034. From these connections, the Town pumps and delivers water to approximately 4,014 accounts, of which nearly all are single-family residential. Despite the fact that the system’s customer base is comprised primarily of single-family residential units, there is disparate levels of usage amongst customers. For example, lowest usage of zero (hcf.) to highest usage of 21,226 (hcf.) for a fiscal year between all customers. The Town’s system must be built to ensure on demand service to all customers, regardless of the level of usage. Several public and private schools and three private clubs represent the balance of the -262-
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April 13, 2026

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customer base. The Town operates and maintains its own water distribution facilities. Most the Town’s water customers are billed on a bi-monthly basis.

The current water rate series was implemented and took effect on November 14, 2022, with annual reviews conducted each year to determine if the rate increase was necessary for that year. Rates from the adopted rate series were implemented effective July 1, 2023, and were increased in accordance with the pre-approved schedule on January 1, 2024, and January 1, 2025. The new cost of service study is prepared using the latest legal, legislative and financial projections.

Approach
Rate Study Projection
A five-year financial projection was prepared to analyze and establish a rate plan that supports the projected revenue requirement. The Town’s water rate revenues are used to fund provision of potable water to the customers of the Town’s water system. HF&H performed a cost of service and rate study (the “Study”) for the Town of Hillsborough with projections for the cost of service and revenue requirements for the rate years effective July 2026 through 2030. The study indicates an overall revenue requirement increase ranging from 5% to 6% over the five-year period.

Analysis

1. Revenue Requirement: The revenue requirement projection outlines the revenue needed to cover the costs of the operations, capital improvements, debt service and reserves.

2. Purchased Water Cost: A major component of the operations and maintenance cost (“O&M”), the purchased water cost per unit is increasing between 3.0% and 8.6% annually over the next five years, as communicated by the SFPUC in February 2026. The SFPUC rates can vary within the five-year period from what was recently communicated to the water agencies. To maintain user rates, should the SFPUC rates vary from what is assumed in the rate study assumptions, a “pass through adjustment” can be implemented for the difference in the per unit charge.

3. Capital Improvements: The Town’s capital improvement plans include an average annual expense of $2.9 million over the projection period, demonstrating the Town’s priority to continue to invest in its water system, which must be sized and maintained to meet the Town’s highest levels of water demand. Improvements include ageing infrastructure that has exceeded its useful life, including water mains, storage and pumping systems, and seismic protection valves, and software improvements to the Town’s system which monitors, controls and protects infrastructure operations from natural and cybersecurity threats.

4. Revenue Volatility and Reserves: The Water Fund projection reflects the use of reserves within the five-year rate period and remains compliant with reserve policies and debt covenants.

Should water usage be restricted by a water emergency or state mandate, Revenue Stabilization Factors can be used and applied to the corresponding volume charge rates so that -263-
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the Town can maintain revenue neutrality during any stage of a water revenue shortfall.

5. Rate Structure Adjustments: The rate structure outlined in the HF&H Rate Study Report reflects the Town’s cost of service in connection with the latest legislative. legal and rate making practices. The rates cover the cost of service and there is no profit to the Town.

Process for Implementation
Proposition 218 process requires the Town to hold a public hearing on the proposed rates for the charges and to mail notice of the public hearing to property owners who are directly liable for the payment of water charges not less than 45 days before the public hearing to adopt the rates for the service fees or charges. They are subject to the protest proceeding wherein the adoption of any new or increase in any existing fees and charges cannot be adopted if the Town receives written protest to the proposed fees and charges from the record owners of a majority (50%+1) of the parcels upon which the charges are proposed for imposition who are directly liable for the payment of the proposed water charges.

It is recommended that the City Council provide direction on the recommendation for adjustments and increases to the water rates effective for July 2026 through 2030. In addition, it is requested that City Council direct staff to mail the Notice of Public Hearing on Proposed Adjustment and Increases to Town of Hillsborough 2026 through 2030 Water Rates and set the public hearing at no less than 45 days.

FISCAL IMPACT: Water costs in Hillsborough are covered by the water rate paid by residential and commercial accounts. The costs of these services are not paid for by the Town’s General Fund budget.

ENVIRONMENTAL ISSUES: In accordance with the California Environmental Quality Act (CEQA) and the CEQA Guidelines, the increases in the water service charges are exempt from CEQA pursuant to Section 15378 and Section 15273 of the CEQA Guidelines and Public Resources Code Section 21080(b0(8) because (a) the increase charges are for the purpose of meeting operational and maintenance expenses of the aforementioned services and (ii) the charges constitute the creation of a funding mechanism/other governmental fiscal activity which does not involve any commitment to any specific project that may result in potential significant physical impact on the environment.

ATTACHMENT(S):

1. HF&H Water Rate Study Report

2. Notice of Public Hearing on Proposed Adjustments and Increases to Town of Hillsborough 2026-2030 Water Rates

3. Proposition 218 Protest Procedures
PREPARED BY: Jan Cooke, Finance Director
RECOMMENDATION:

1. Accept the recommendations for water rate increases and changes as outlined in the HF&H Water Rate Study Report; and
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2. Direct staff to mail the Notice of Public Hearing on Proposed Adjustment and increase to Town of Hillsborough 2026-2030 Water Rates; and

3. Set the public hearing at no less than 45 days after the notice is mailed. -265-

TOWN OF

HILLSBOROUGH
Water Rate Study
April 10, 2026
ATTACHMENT 1
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HF&H Consultants
590 Ygnacio Valley Rd. Suite 105
Walnut Creek, CA 94596
Phone: (925) 977-6950
Web: hfh-consultants.com
April 10, 2026
Jan Cooke
Finance Director
The Town of Hillsborough
1600 Floribunda Avenue
Hillsborough, CA 94010
Sent via email: [email protected]
Subject: Water Rate Study – Draft Report
Dear Jan Cooke,
HF&H Consultants (HF&H) is pleased to submit this draft cost-of-service report for updating the Town of Hillsborough’s (Town’s) water rates for Fiscal Years (FYs) 2026-27 through 2030-

31. The previous rate study was completed in 2022. The current study makes the following recommendations.
• Revenue increases. Rate increases are recommended due to increases in the cost of purchased water from the San Francisco Public Utilities Commission (SFPUC) and the need to fund capital improvements, including ongoing repairs and replacements of aging infrastructure. Infrastructure and capital improvements must be sized to accommodate all levels of water demand, including average and above average usage.

In addition, rate increases are needed to allow the Town’s Water Fund to continue compliance with debt service requirements and to avoid operational deficits and depletion of reserves. Over the next five years, the revenue increases average approximately 5.2% per year.
• Service Charge rates. The proposed rates are adjusted to reflect a greater percentage of fixed than variable costs attributed to service charges. There are two reasons for the increased proportion of fixed costs. The Town has higher overhead costs, distributed to every account regardless of meter size. In addition, the Town plans to fund several capital projects that will provide an equal benefit to customers system wide. Thus, the costs for these projects are also distributed to each account through the service portion of the calculation fixed Service Charge. • Volume Charge rate structure modifications. The Town is planning to unify all water customers under a single rate structure. The Town is considering two alternatives: 1) A two-tiered, increasing block rate structure; and 2) A uniform rate structure. Rates under both scenarios are calculated and bill impacts have been analyzed to provide City Council with information to determine their preferred alternative.
• Revenue Stabilization Factors. The Town currently has Revenue Stabilization Factors which are applied to the Volume Charge rates and can only be implemented -267-
Jan Cooke
April 10, 2026

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during locally declared water shortages, State mandated reductions in the level of potable water usage, or other natural disaster or event that requires reductions in water usage. During times of declared water shortage and demand reduction, the Town continues to incur fixed costs even though revenue from water purchases decreases.

The Revenue Stabilization Factors are designed to allow the Town to recover its fixed costs and continue providing safe and reliable water service. The recommended update to the Revenue Stabilization Factors will align with the Volume Charge rate structure chosen by City Council.
• Pass-through Adjustment. We recommend that the Town incorporate annual passthrough adjustments of the SFPUC water purchase cost into its Volume Charge rates.

Volume Charge rates can be adjusted to track any difference between the SFPUC rates that were included in the model and the actual rates adopted each year by SFPUC.

Pursuant to California Government Code Section 53756, the Town would pass through any additional increases in the SFPUC wholesale water rates that are above or below these projected SFPUC wholesale water rates, provided that the impacted Volume Charge will not be increased in any year by more than 20%.

The rates proposed in this report reflect the current and projected cost of providing service for the next five years. If the proposed rates are adopted, the rates are the maximum allowable rates that can be charged for that year, however, a lower rate may be implemented by City Council in that year if circumstances have changed. We greatly appreciate your assistance in developing the cost-of-service analysis.

Sincerely,

HF&H CONSULTANTS, LLC
Rick Simonson
Senior Vice President
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Water Rate Study
Table of Figures & Glossary
Town of Hillsborough | April 10, 2026 | Page ii
Table of Contents
I. EXECUTIVE SUMMARY ...................................................................1 Background ........................................................................................ 1 Revenue Requirements......................................................................... 2 Current Rate Structure ......................................................................... 4 Proposed Rate Structure....................................................................... 5 Proposed Revenue Stablization Factors................................................... 7 II. INTRODUCTION...........................................................................9 Study Purpose..................................................................................... 9 Study Process ..................................................................................... 9 Report Organization...........................................................................10 III. REVENUE REQUIREMENTS........................................................12 Demand Projections ...........................................................................12 Revenue Requirement Assumptions and Projections ...............................13 Reserves ..........................................................................................18 Revenue Increases ............................................................................19 Debt Coverage ..................................................................................20 Reserve Fund Balance ........................................................................21 IV. COST-OF-SERVICE ANALYSIS....................................................22 General Approach ..............................................................................22 Cost-of-Service Allocations ................................................................. 23 V. RATE DESIGN .............................................................................38 Service Charge Design .......................................................................38 Volume Charge Design .......................................................................41 VI. CUSTOMER BILL IMPACTS.........................................................51 Bill Comparison .................................................................................51 -269-
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Table of Figures & Glossary
Town of Hillsborough | April 10, 2026 | Page iii
Figures
Figure 1-1. Total Revenue Requirement Projections 2
Figure 1-2. Projected Revenue Increases 3
Figure 1-3. Projected Fund Balance 4
Figure 1-4. Proposed Bi-Monthly Service Charge Rates 6
Figure 1-5. Current and Proposed Volume Charge Rates – Scenario 1 7 Figure 1-6. Current and Proposed Volume Charge Rates – Scenario 2 7 Figure 1-7. Proposed Revenue Stabilization Factors 8
Figure 2-1. Summary of Rate Analysis 11
Figure 3-1. Projection Assumption 13
Figure 3-2. Historical and Projected SFPUC Wholesale Rate 14 Figure 3-3. Projected Administrative and O&M Expenses 15 Figure 3-4. Projected Capital Improvement Program 16
Figure 3-5. Original Debt-Funded Capital Projects 17
Figure 3-6. Projected Debt Service Requirements 17
Figure 3-7. Total Revenue Requirement Projections 18
Figure 3-8. Rate Increase Calculations 19
Figure 3-9. Projected Revenue Increases 20
Figure 3-10. Debt Service Coverage 20
Figure 3-11. Projected Year-End Fund Balance 21
Figure 4-1. Revenue Requirements by Function (FY 2026-27) 29 Figure 4-2. Revenue Requirement by Service Function 30
Figure 4-3. Service Level Demands and Load Factors 32
Figure 4-4. Comparison of Water Use 33
Figure 4-5. Pipeline Capacity Needed for Demand Service Levels 34 Figure 4-6. Demand Related Allocation Percentages 34
Figure 4-7. Allocation of Fire Services According to Storage Requirements 35 Figure 4-8. Service Function Allocations 36
Figure 4-9. Allocations Factors 37
Figure 4-10. Cost-of-Service Revenue Summary 37
Figure 5-1. Service Charge Units of Service 39
Figure 5-2. Service Charge Unit Costs 39
Figure 5-3. Calculation of Proposed Bi-Monthly Service Charge Rates (FY 2026-27) 40 Figure 5-4. Proposed Bi-Monthly Service Charge Rates (FY 2026-27-FY 2030-31) 41 Figure 5-5. Tier Breakpoint Analysis 42
Figure 5-6. Incremental Unit Cost 43
Figure 5-7. Calculation of Proposed Volume Charge Rates 44 Figure 5-8. Proposed Volume Charge Rates 44
Figure 5-9. Calculation of the Uniform Volume Charge Rate 44 Figure 5-10. Proposed Volume Charge Rates 45
Figure 5-11. Calculation of Shortage Reductions by Stage 46 Figure 5-12. Revenue Stabilization Factors by WSCP-Defined Shortage Stage 48 Figure 5-13. Water Rates with Revenue Stabilization Factors Included - Scenario 1 49 Figure 5-14. Water Rates with Revenue Stabilization Factors Included – Scenario 2 49 Figure 6-1. Monthly Residential Customer Bill Impacts 51 Figure 6-2. Non-Residential Bill Impacts 52
Figure 6-3. Mean/Median Bill Impacts – Scenario 1 (Two-Tier Rate Structure) 53 -270-
Water Rate Study
Table of Figures & Glossary
Town of Hillsborough | April 10, 2026 | Page iv
Figure 6-4. Mean/Median Bill Impacts – Scenario 2 (Uniform Rate Structure) 53 Figure 6-5. Bi-Monthly Residential Customers – Annual Water Bill Comparison 54 Figure 6-6. Bi-Monthly Residential Customer Bills Comparison – 3/4” meter 54 Figure 6-7. Bi-Monthly Residential Customer Bills Comparison – 1” meter 55 Figure 6-8. Bi-Monthly Residential Customer Bills Comparison – 1 ½” meter 55 Figure 6-9. Bi-Monthly Residential Customer Bills Comparison – 2” meter 56 Figure 6-10. Bi-Monthly Volume Charge Comparison 56
Glossary
AWWA – American Water Works Association.

Above-Average Demand – Amount of water use above the average water use of all customers.

Average Demand – Amount of water use at or below the average water use of all customers.

BAWSCA – Bay Area Water Supply and Conservation Agency.

Breakpoint – The volume of water per billing period separating tiers in tiered rate structures.

CCF – Hundred cubic feet (see HCF below).

CIP - Capital Improvement Program.

COS - Cost of Service.

CY - Calendar Year
EMU – Equivalent Meter Unit.

Extra-Capacity – Rate-of-use in excess of average annual rate-of-use requirements.

FY - Fiscal Year.

Flat rates - Fixed charges per account that do not vary based on metered water use. Flat rates are found in unmetered water systems and in wastewater rates. Flat rates are not uniform rates (see below).

GPD - Gallons Per Day.

HCF - Hundred cubic feet of metered water; 748 gallons; a cube of water 4.6 feet on edge.

One HCF per month is about 25 gallons per day.

MG – Million Gallons
O&M - Operating and Maintenance, in reference to the costs of running facilities. -271-
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Glossary & References
Town of Hillsborough | April 10, 2026 | Page ii
PAYGo - Pay-As-You-Go, in reference to funding capital improvements from cash rather than from borrowed sources such as bonds or loans.

Revenue Stabilization Factors –Factors that are applied to Volume Charge rates to stabilize revenue to meet the Town’s water revenue requirement during periods of conservation when there are significant reductions in water usage, and hence in water revenues.

Meter Charges – One-time charges for the purchase of a meter. Meter charges are not Service Charges (see below).

SCADA – Supervisory Control and Data Acquisition.

Service Charges – Fixed charges paid per account regardless of the amount of water used.

The charge is proportionate to the capacity of the customer’s service, which is the capacity of the pipe connecting from the main to the meter, or the meter, whichever is smaller. Service Charges are not meter charges (see above). The Town’s Service Charges are called “Fixed Service Charges.”
SFPUC - San Francisco Public Utilities Commission.

Uniform rates - Constant charges per unit of consumption that do not change depending on the amount of water used. Uniform rates are not flat rates (see above).

Volume Charges – The product of rates per unit of metered water consumption multiplied by a customers metered water use during the billing period.

WSCP – Water Shortage Contingency Plan.

WSIP – Water Supply Improvement Plan, which is prepared by the SFPUC.

References

1. Principles of Water Rates, Fees, and Charges. American Water Works Association Manual M1. 2025.

2. Water Shortage Contingency Plan. Town of Hillsborough. July 2020. -272-
Water Rate Study
Acknowledgements & Limitations
Town of Hillsborough | April 10, 2026 | Page i
Acknowledgements
City Council
Sophie Cole, Mayor
Leslie Marden Ragsdale, Vice Mayor
Laurie Davies Adams, Councilmember
Marie Chuang, Councilmember
Christine Krolik, Councilmember
Town Staff
Jan Cooke, Finance Director
Richard Santiago, Assistant Finance Director
Paul Willis, Director of Public Works / City Engineer
Doug Davis, City Manager
Mandy Brown, Assistant City Manager
Best Best & Krieger LLP
Lutfi Kharuf
HF&H Consultants, LLC
Rick Simonson, Senior Vice President
Gabe Sasser, PE, Project Manager
Alex Santos, Senior Associate
La Velda Peterson, Assistant Analyst
Limitations
This document was prepared solely for the Town of Hillsborough in accordance with the contract between the Town and HF&H and is not intended for use by any other party for any other purpose.

In preparing this study, we relied on information from the Town, which we consider accurate and reliable. Our analysis is based on the best available information at the time of the study.

Rounding differences caused by stored values in electronic models may exist.

This document represents our understanding of relevant laws, regulations, and court decisions but should not be relied upon as legal advice. Questions concerning the interpretation of legal authorities referenced in this document should be referred to a qualified attorney. -273-
Water Rate Study
I. Executive Summary
Town of Hillsborough | April 10, 2026 | Page 1
I. Executive Summary

BACKGROUND
The Town operates and maintains a potable water distribution system to serve its residents and water users. It is a complex system with varying topography and 19 separate but interconnected pressure zones. The infrastructure network includes 108 miles of water mains, 18 water tanks, 14 water pump stations and over 7,500 various assets, such as water meters, fire hydrants, and valves. The San Francisco Public Utilities Commission (SFPUC) delivers treated wholesale water to the Town from its Hetch Hetchy system. This water is delivered through ten master meter locations from the SFPUC’s 42-inch and 60-inch transmission pipelines. From these connections, the Town pumps and delivers water to approximately 4,270 customers, of which nearly all are single-family residential.

The water rates in this study were developed to meet the mandates of article XIII D, section 6 of the California Constitution. To achieve this goal, HF&H used rate-making principles set forth by the American Water Works Association in Principles of Water Rates, Fees and Charges (M1 Manual) insofar as such principles are consistent with California’s constitutional limitations on rate-setting. This Manual’s cost-of-service principles endeavor to distribute costs to customer classes (also referred to as classes) and to individual customers in proportion to the way customers use the water system. Pursuant to the M1 Manual, rate studies generally contain three elements: (1) a revenue requirements analysis, which determines how much revenue is needed from rates to recover a utility’s projected costs; (2) a cost-of-service analysis, which allocates the revenue requirements to the rate components; and (3) a rate design analysis, which aligns the rate structure with the cost of service.

A cost-of-service analysis is typically only conducted periodically. It is recommended that a cost-of-service analysis be conducted at least every five years to account for any material differences in the costs of providing service and in the water usage among customer classes, which will affect their respective shares of the cost of service. In the interval between costof-service studies, revenue requirements may be updated to determine how much to increase rates annually without modifying the rate structure. The Town has updated the revenue requirement and reviewed its water rates annually since the previous adoption of the cost-ofservice study in 2022.

Since the previous cost-of-service analysis, changes in demand patterns have occurred, which affects the factors that are used to allocate costs to each customer class. The costs to which the allocation factors are applied also change. Hence, there will be differences between the previous and current cost-of-service analyses. Adjustments are made to reflect the differences and rates are set accordingly.

The cost-of-service analysis proportionately allocates the revenue that is required from rates to the components of the rate structure and to the customer classes. Costs are classified corresponding to the function they serve. Each function’s costs are further allocated to each component of the rates in proportion to the level of service required by customers. The levels of service are related to volumes of Average and Above-Average Demand, infrastructure capacity, and customer service. Ultimately, a cost-of-service analysis ensures that the rates yield charges that are proportional to the cost of providing service to each customer. -274-
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I. Executive Summary
Town of Hillsborough | April 10, 2026 | Page 2
The following discussion summarizes HF&H’s findings and recommendations.

REVENUE REQUIREMENTS
The revenue requirements were updated to reflect projected customer demands and the costs associated with meeting those demands. The five-year projections are shown in Figure 1-1.

Over the projected five-year study period, the Town’s revenue requirement is driven by increases to water purchase costs and capital improvement expenditures. The Town’s water supply source, SFPUC, intends to raise rates by 7.4% from $5.80 per hundred cubic feet (HCF)1 to $6.23 per HCF on July 1, 2026. Thereafter, SFPUC has projected increases will continue such that the wholesale water rate will be $7.38 per HCF by July 1, 2030. The Town’s capital improvement plans include an average annual expense of $2.9 million over the projection period, demonstrating the Town’s priority to continue to invest in its water system.

The bulk of project expenditures are planned to support water main replacement, as well as storage and pumping infrastructure.

Figure 1-1. Total Revenue Requirement Projections
Source: Figure 3-7.
1 HCF (Hundred Cubic Feet) = 748.052 gallons
Fiscal Years FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 Purchased Water Costs $7,110,083 $7,611,825 $8,147,925 $8,413,193 $8,599,808 $8,979,074 Admin & O&M Costs $8,434,922 $8,685,818 $8,798,013 $9,048,295 $9,299,514 $9,561,223 Debt Service $1,223,604 $1,241,939 $1,196,213 $1,167,975 $1,352,413 $1,049,907 Capital Projects $2,000,000 $2,928,735 $2,928,735 $2,928,735 $2,928,735 $2,928,735 Total Revenue Requiremen$18,768,609 $20,468,318 $21,070,885 $21,558,198 $22,180,471 $22,518,940 Year over Year Increase % 9.1% 2.9% 2.3% 2.9% 1.5%
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I. Executive Summary
Town of Hillsborough | April 10, 2026 | Page 3
The rate and revenue increases are shown in Figure 1-2. The rate increases would become effective every July 1, beginning July 1, 2026.

In FY 2026-27, after recommended increases, the total revenue increases by 6.0%. However, the percentage by which Service Charges and Volume Charge rates change will vary due to rate structure modifications. Beginning July 1, 2027, the revenue increases are applied as equal percentages across the board to all rates.

Figure 1-2. Projected Revenue Increases
Source: Figure 3-9.

As shown in Figure 1-3, the projected increases in the revenue requirements include the replenishment and maintenance of adequate reserves. The Town’s reserve policy states that the minimum Operating Reserve balance (red line) will equal 20% of annual O&M expenses.

The bond reserve of $375,000 is added to the 20% Operating Reserve. An allowance for capital project reserves is added to the minimum operating reserve to develop the total reserve target. This capital project component is recommended to provide working capital for timing of pay-as-you-go (PAYGo) construction projects. The sum of the Operating and Capital Reserve components equals the Target Balance (blue line). The projected fund balance shows the use of reserves over the first year of the rate study period. The use of reserves balances the need for charging larger rate increases to customers. The projected fund balance (solid, green line) is replenished to reach the Target Balance by the end of the proposed five-year rate series. With these proposed rate increases, debt service coverage remains strong and improves during the five-year period.

Effective Date Revenue Fiscal Year
Rate of Rate After Rate Increase in
Fiscal Year Adjustments Adjustments Adjustments Revenue Revenue at 2025 Rates $18,339,693
FY 2026-27 varies 7/1/2026 $19,432,079 6.0%
FY 2027-28 5.0% 7/1/2027 $20,402,331 5.0%
FY 2028-29 5.0% 7/1/2028 $21,425,264 5.0%
FY 2029-30 5.0% 7/1/2029 $22,497,070 5.0%
FY 2030-31 5.0% 7/1/2030 $23,625,175 5.0%
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Figure 1-3. Projected Fund Balance
Source: Model Table 1a. Summary.

CURRENT RATE STRUCTURE
The Town’s current rate structure is composed of three components: Service Charges, Volume Charges, and Revenue Stabilization Factors.

Service Charges
The Service Charges are fixed monthly rates that are graduated in proportion to the capacity of the service provided. Some of the Service Charge rates vary by customer class. The Town’s Service Charges are called “Fixed Service Charges.” For ease of discussion, we refer to them as simply “Service Charges.” 2
Volume Charges
The Volume Charges are the product of rates per unit of metered water consumption multiplied times the metered water consumption during the billing period. Water is metered in “units” of HCF. Volume Charge rates are charged to two separate customer classes, singlefamily residential customers (Residential), and non-single family customers consisting of 2 The service is the connection between the public water system and the property served. The service includes the pipes, valves, and meter set (i.e., box, lid, yoke, meter, valve); in some cases, there are multiple meters. The service is installed at the property owner’s expense.

After the meter is purchased and installed, customers pay Service Charge rates. It is the Town’s practice to charge a Service Charge for each meter. The terminology in this report refers to the capacity of the service and the capacity of the meter interchangeably. -277-
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I. Executive Summary
Town of Hillsborough | April 10, 2026 | Page 5
municipal, school, country clubs, and other customers (Non-Residential). For Residential customers, the current Volume Charge rates consist of four tiers that charge higher rates as the level of consumption increases. For the Non-Residential customer class (a small number of customers), the Volume Charge rate is a uniform rate3 per unit of metered water consumption.

Revenue Stabilization Factors
The Revenue Stabilization Factors are combined with the Volume Charges and are designed to ensure there is sufficient revenue to meet the Town’s water revenue requirement during periods of conservation when there are significant reductions in water usage, and hence in water revenues. These factors are not utilized to meet the projected revenue requirement in the rate study. If drought conditions vary from the assumptions used in the study and revenue is impacted, the factors can be implemented during the period needed to stabilize revenue.

All components of the rate structure were reviewed, including the composition of the customer classes, the structures of the Service Charges and Volume Charges, and the need for the Revenue Stabilization Factors.

Pass-Through Adjustment
The cost of SFPUC water is the single largest component of the Town’s revenue requirements.

The pass-through adjustment acts similarly to the Revenue Stabilization Factors, which was incorporated into the Proposition 218 notice in the previously adopted cost-of-service study.

PROPOSED RATE STRUCTURE
This section of the chapter summarizes our findings and recommendations related to the rate increases for the water fund.
3 This report distinguishes between uniform rates and flat rates. Uniform rates are constant charges per unit of consumption that do not change depending on the amount used. Flat rates are fixed amounts that do not vary based on metered water use. Flat rates are most commonly used in unmetered water systems and for residential wastewater rates. -278-
Water Rate Study
I. Executive Summary
Town of Hillsborough | April 10, 2026 | Page 6
Proposed Service Charge Rates
Currently, about 29% of the rate revenue is generated by the current Service Charges. For a bill of average monthly water use (i.e., 21 units of metered water use per month), and the most common meter size of 1”, the Service Charge represents slightly more than one-third of the total bill.

The current rates for the Service Charges have been set according to the capacity of the service, regardless of what class of customer is connected. The capacity provided by services (i.e., water meters) of the same size is the same regardless of how much water is used and for what purpose. We recommend the Town continue with this same structure. Adjustments in FY 2026-27 are recommended to re-align the Service Charge rates with the cost-of-service, which would shift rate revenues so that the proposed Service Charges generate 36% of the overall rate revenue, which provides adequate revenue stability when combined with the relatively fixed revenue from non-seasonal water demand.

Summary of Service Charge Rates
Figure 1-4 summarizes the current rates and proposed rates to re-align with the cost of service. The “Proposed” rates are calculated for adoption July 1 of each year.

Figure 1-4. Proposed Bi-Monthly Service Charge Rates
Source: Figure 5-4.

Proposed Volume Charge Rates
About 64% of the current water rate revenue is generated by the Volume Charges.

Summary of Volume Charge Rate Scenarios
As part of this study, a change is recommended from the existing rate structures to unify all water customers under a single rate structure. Therefore, a customer would be charged the same rates independent of the use of the parcel as a residence or for a non-residential purpose. Currently, the Town is considering two alternatives: 1. A two-tiered increasing block rate structure, and 2. A uniform rate structure.

Figure I-5 and Figure I-6 summarize the current and proposed Volume Charge rates for consideration. The proposed rate analyses were derived using calendar year FY 2024-25 water demand patterns. More detail is discussed in the Demand Projections section of Chapter III of this report.

Note: All Non-Residential customers are billed monthly
Figure 1-6. Current and Proposed Volume Charge Rates – Scenario 2 Source: Figure 5-10.

Note: All Non-Residential customers are billed monthly

PROPOSED REVENUE STABLIZATION FACTORS
The Town requested HF&H to update the Revenue Stabilization Factors that would be applied to the rates for the Volume Charge rates and implemented during declared water shortage stages in accordance with the Town’s Water Shortage Contingency Plan (WSCP), state mandated reductions in the level of water usage, or other natural disaster or event that results in a water shortage and an unforeseen drop in water demand that requires reductions in water use.

Figure 1-7 summarizes the Revenue Stabilization Factors that could be applied when the Town requires its customers to reduce water use as part of a declared water emergency. At such times, the Revenue Stabilization Factor applicable to the stage of reduction would be multiplied by the normal-year Volume Charge rates proposed in the current rate study. For example, if the water shortage of 20% was in place (Stage 2 water shortage), a Revenue Stabilization Factor of 1.090 would be applied to the normal-year water rate. The Town can choose to enact Revenue Stabilization Factors when the water emergency demand levels will fall short of the respective year of modeled demand.

Current Current Proposed Proposed Rates
Breakpoints Rates Breakpoints FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 (HCF) ($/HCF) (HCF) ($/HCF)
Bi-Monthly Residential Bi-Monthly Residential
Tier 1 0 to 22 $7.59 Tier 1 0 to 42 $9.24 $9.70 $10.19 $10.70 $11.24 Tier 2 23 to 44 $9.91 Tier 2 42+ $14.69 $15.42 $16.19 $17.00 $17.85 Tier 3 45 to 78 $15.63
Tier 4 79+ $20.96 Monthly Residential/Non-Residential
Tier 1 0 to 21 $9.24 $9.70 $10.19 $10.70 $11.24
Non-Residential uniform $10.49 Tier 2 21+ $14.69 $15.42 $16.19 $17.00 $17.85 Current Current Proposed Proposed Rates
Breakpoints Rates Breakpoints FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 (HCF) ($/HCF) (HCF) ($/HCF)
Bi-Monthly Residential All Customers uniform $11.42 $11.99 $12.59 $13.22 $13.88 Tier 1 0 to 22 $7.59
Tier 2 23 to 44 $9.91
Tier 3 45 to 78 $15.63
Tier 4 79+ $20.96
Non-Residential uniform $10.49
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I. Executive Summary
Town of Hillsborough | April 10, 2026 | Page 8
Figure 1-7. Proposed Revenue Stabilization Factors
Source: Figure 5-14.

The Revenue Stabilization Factors only apply to Volume Charge rates and not to Service Charge rates, which are independent of water demand. The Revenue Stabilization Factors would be adopted as part of the rate notification in the Proposition 218 implementation process. Once adopted, the Town could apply the Revenue Stabilization Factors as needed during conservation stages. The values shown in Figure 1-7 would be applied to both Volume Charge Rate scenarios.

The formula4 for calculating Revenue Stabilization Factors corresponding to other levels of cutback is provided in Chapter V of this study. The Revenue Stabilization Factors only apply to the tiered and uniform Volume Charge rates and not to Service Charge rates, which are independent of water demand.
4 Following Figure 5-13 of this study.

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6
Up to Up to Up to Up to Up to Greater than
10% Reduction 20% Reduction 30% Reduction 40% Reduction 50% Reduction 50% Reduction

1.040 1.090 1.155 1.240 1.361 1.459
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Water Rate Study
II. Introduction
Town of Hillsborough | April 10, 2026 | Page 9
II. Introduction

STUDY PURPOSE
The purpose of this study is to conduct a cost-of-service analysis that will determine rates that proportionally recover the cost of providing the Town’s water service. Toward that end, the cost-of-service analysis determines how much revenue should be generated by each component of the rate structure so that rate payers within each customer class are charged for their proportionate share of the cost of providing service on a parcel basis. The cost-ofservice analysis is tailored specifically to the Town’s customer classes and the rate structures that are appropriate for each class.

STUDY PROCESS
HF&H Consultants (HF&H) completed a water rate study for the Town in September 2022. At a public hearing on November 14, 2022, the City Council adopted the recommended rates from the study. The study projected the Water Enterprise’s operating and capital expense projections, for a five-year planning period, and recommended restructuring the Town’s fixed service charges and tiered volume charges for water service. The restructuring included changing the volume associated with the four-tiered volumetric rates charged to Residential customers. In addition, Revenue Stabilization Factors, which only may be applied during Citydeclared water shortages, were revised to account for changes in water consumption driven by the water shortage in place when rates were set. The Proposition 218 notice included a pass-through adjustment so that the Town could pass through the costs of greater-thananticipated SFPUC wholesale water rate increases to customers.

The Town conducted annual reviews of the adopted rate increases. The first three (of five) increases were implemented, taking effect on January 1 each year of 2023, 2024, and 2025.

To summarize, the rate increases were planned and implemented as follows:

January 1, 2023 – various rate changes; 6% revenue increase overall (implemented) January 1, 2024 – 6% (implemented)
January 1, 2025 – 5% (implemented)
Previously adopted rate increases for January 1, 2026 were not implemented and the Town requested HF&H to update the cost-of-service study for 2026 to ensure that rates continue to reflect the current cost of providing water service. A comprehensive rate study comprises three steps: 1) revenue requirement projections; 2) cost-of-service analysis; and 3) rate design. Revenue requirement projections identify how much revenue is needed from rates.

The cost-of-service analysis determines how much of the revenue should come from the fixed and variable charges. This step also confirms the proportionate amount to be paid by each customer class. The final step, rate design, establishes the structure of the fixed service charges and the variable volumetric charges for each customer class.

The cost-of-service analysis was conducted within the constraints of constitutional limitations on rates. To establish rates reflecting the proportional cost of service, HF&H followed industry -282-
Water Rate Study
II. Introduction
Town of Hillsborough | April 10, 2026 | Page 10
practices promulgated by the American Water Works Association to the extent such practices are consistent with the California Constitution.5 At the outset of the analysis, the types of customer classes were reviewed, as were the types of rate structures that are appropriate to the Town’s customer class.

REPORT ORGANIZATION
Figure 2-1 on the following page diagrams the rate-making analysis beginning with the revenue projections, followed by the cost-of-service analysis, rate design, and analysis of bill impacts. The diagram identifies the key figures in the report to guide the reader to specific parts of the analysis.

An appendix contains a copy of the rate model. A Glossary of technical terms and acronyms is provided following the Table of Contents. The major documents cited in this report are listed in the References or are on file with the Town.
5 Principles of Water Rates, Fees, and Charges. American Water Works Association Manual M1. 2025.
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II. Introduction
Town of Hillsborough | April 10, 2026 | Page 11
Figure 2-1. Summary of Rate Analysis

MULTI-YEAR REVENUE REQUIREMENT PROJECTIONS

COST-OF-SERVICE ALLOCATIONS
FY 2026-27 Revenue Requirement

RATE DESIGN
Monthly Billing Period
Five-year projections
FY 2026-27 to FY 2030-31
Fig. 3-7
Classify costs by function
Demand
Water Supply Demand
Transmission
Pumping
Storage
Distribution
Service
Water Supply Capacity
Customer Service
Customer Capacity
Fig. 4-1
Allocate demand functions to
service levels
Demand
Average Demand
Above Average Demand
Service
Accounts
Capacity
Fig. 4-8
Develop allocation percentages
for demand service levels
Average Demand
Above Average Demand
Fig. 4-6
Volume Charges - Scenario 1
Two-tiers (Bi-Monthly)
0 - 42 hcf $ 9.24/hcf
42 hcf + $ 14.63/hcf
Fig. 5-7
Volume Charges - Scenario 2
Uniform un-tiered
$ 11.42/hcf
Fig. 5-9
Service Charges - Per Account
3/4" $ 240.82
1" $ 262.53
1 1/2" $ 311.38
2" $ 376.52
3" $ 550.21
6" $ 1,288.41
8" $ 1,939.76
Fig. 5-3
Bill Impacts - Residential
Very Low
Low
Average
High
Determine fire service protection
costs met through Above Average
Demand
Fire Protection Storage
Total System Storage
Fig. 4-7
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III. Revenue Requirements
Town of Hillsborough | April 10, 2026 | Page 12
III. Revenue Requirements
The revenue requirements analysis starts by determining the FY 2026-27 revenue requirements based on the budgeted O&M and capital expenditures. Revenue requirements for each fiscal year are then projected over a five-year planning period.6 Revenue increases
needed to cover the projected revenue requirements are then determined. Over a five-year period, it is possible to derive a relatively smooth series of rate increases that minimize annual fluctuations.

DEMAND PROJECTIONS
The revenue requirements projected during the study period are based on the Town’s unique circumstances. Projected customer demand is particularly significant because it affects certain variable expenses such as the cost of purchased water as well as the revenue from water sales. Customer demand depends on the types of customers, the nature of their demands, the trends in their water use, growth, and climate, among others.

The Town consists almost entirely of single-family residences built on large parcels. There are no significant residential developments in process at the time of this writing. The Town has public schools, private schools, a golf course, small public parks, and a Caltrans rest stop. The Town has no commercial, industrial, or institutional parcels planned for new development. The service area is largely developed, and population growth is expected to be very low even considering the state mandated housing increases required under the Regional Housing Needs Allocation (“RHNA”) for the Town. For purposes of this rate study, it is assumed that there will be no growth in accounts or in water demand.

Water demand projections are an important consideration in the study, as the cost to purchase water is 37% of the annual costs to operate the Town’s water system. Assumptions of projected water use directly affect the level of revenue increase needed. Over the study period, the Town has assumed water demand projections will follow the pattern of demand exhibited in FY 2024-25, as this level of demand approximates the most recent historical sixyear average for FY 2019-20 through FY 2024-25.

Water demand projections used in this study are shown in Figure 3-1. If demand over the next five years is higher than projected, the Town may find that it does not need to implement the proposed maximum rates in any given year. The Town does not need to implement maximum rates in any year if they will generate revenues in excess of cost of service. If, on the other hand, demand continues below projected level of demand, the Town would run a 6 Demand projections are a key driver in determining both expenditures and revenues from water sales.
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III. Revenue Requirements
Town of Hillsborough | April 10, 2026 | Page 13
deficit, the consequences of which are problematic. The Town’s reserves could be depleted unless and until it increased rates that are higher than the proposed maximum rates.7

REVENUE REQUIREMENT ASSUMPTIONS AND PROJECTIONS
Expense projections combined with contributions to reserves become the revenue requirements. The Town’s operating and capital budgets were relied on for the majority of FY 2026-27 expenses in the first-year revenue requirement. The assumptions shown in Figure 3-1 were used to project revenue requirements through FY 2030-31.

Figure 3-1. Projection Assumption
SFPUC Purchased Water Costs
The Town is entirely reliant on the SFPUC for its water supply. As a member of the Bay Area Water Supply and Conservation Agency (BAWSCA), the vast majority of the Town’s water supply expenses are driven by the usage-based rate set by SFPUC. Figure 3-2 plots the SFPUC wholesale rates since FY 2013-14. In February 2026, SFPUC signaled their intent to increase the current wholesale rate of $5.80 per HCF to $6.23 per HCF beginning July 1, 2026.

Further, the SFPUC’s recent communications forecasted rates would increase to $7.38 per HCF by FY 2030-31, a cumulative 19% increase from the rates that will go into effect on July 1, 2026.

Since 1984, the SFPUC’s wholesale rates have been set in compliance with rate-making agreements. The agreements contain provisions that annually reconcile projected expenses and demands with actual expenses and demands. The difference is rolled forward into the 7 If a reduction in demand is the result of mandatory water use restrictions during a Councildeclared water shortage stage, the Town may offset revenue losses by implementing the Revenue Stabilization Factors.

Assumptions FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 General Inflation Budget 3.0% 3.0% 3.0% 3.0% 3.0%
Salaries & Benefits Budget Budget 3.9% 3.7% 3.3% 3.5%
Health Care Budget Budget 5.0% 5.0% 5.0% 5.0%
OPEB, RHS Budget Budget 2.2% 2.2% 2.2% 2.2%
Materials & Services Budget Budget 2.5% 2.5% 2.5% 2.5%
PERS Budget Budget 2.2% 5.2% 1.1% 5.0%
Interest on Earnings Budget 3.0% 3.0% 2.0% 2.0% 2.0%
Non-rate Revenues Budget 0.0% 0.0% 0.0% 0.0% 0.0%
% Change in Demand (cumulative) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% SFPUC Water Rates ($/HCF) $5.80 $6.23 $6.69 $6.91 $7.06 $7.38 SFPUC Service Charge 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%
SFPUC Water Purchases (HCF) 1,130,379 1,130,379 1,130,379 1,130,379 1,130,379 1,130,379 SFPUC Water Purchase Losses 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% SFPUC BAWSCA Bond Surcharge 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Construction Cost Inflation Budget 3.3% 3.3% 3.3% 3.3% 3.3% -286-
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III. Revenue Requirements
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ensuing year’s rates. However, it also means that the annual adjustment can either increase or decrease rates, which leads to some short-term volatility in the wholesale rates that can accentuate annual rate fluctuations.

Figure 3-2. Historical and Projected SFPUC Wholesale Rate Beginning FY 2013-14, the BAWSCA bond surcharge rate was added so that each agency could pay its proportionate share of debt issuance based on purchased water. The bond surcharge rate has been assumed to increase by 3.0% until FY 2030-31 in the revenue requirement projections.

The SFPUC also charges a fixed service charge, currently projected as 2.5% of total purchased water costs for FY 2026-27, which is not impacted by the amount of water the Town purchases.

The rising SFPUC wholesale rate, service charge rate, and current BAWSCA bond surcharge rate were built into the revenue requirement projections. The cost of SFPUC water is 37% of the annual revenue requirement in FY 2026-27 – the largest single item. The impact of these significant increases in wholesale rates on the revenue requirements over the study period cannot be overstated.

Operating Expenses
In addition to SFPUC Water Purchases, Figure 3-3 includes three other administrative and Operating and Maintenance (O&M) categories: 1) Salaries & Benefits; 2) Materials & Services; and 3) Administrative & Other Costs. Collectively, these three groups of expenses are projected to increase by an average of 2.5% per year from approximately $8.6 million in FY -287-
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2026-27 to $9.5 million in FY 2030-31. Salaries & Benefits costs are increasing by approximately 3.8% per year. No additional headcount is contemplated in the projections.

Materials & Services costs are increasing by an average of 1.3% annually, from $3.1 million to $3.3 million during the five-year period. The Town’s Administrative & Other Costs (e.g., legal, human resources, finance, city manager’s office) shown in Figure 3-3 comprise the largest share of costs within this category of operating expenses and are increasing at an average of 2.9% annually.

Figure 3-3. Projected Administrative and O&M Expenses
Source: Model Table 2. Revenue Requirements.

Contributions to Capital Reserves
Rates need to generate enough revenue to cover unfunded annual operating and capital expenses. However, rates are not set to exactly match cash expenditures because the timing of cash expenditures can fluctuate. If rates were set to exactly match expenditures, rates would also fluctuate. To avoid increasing and decreasing rates from year to year, reserves are used to cover the difference so that rate increases are smooth and gradual. In order to maintain adequate reserves to help modulate rates, the revenue requirements include contributions to reserves. The contributions to reserves represent additional revenue from rates that is needed to maintain adequate operating and capital reserves.

The Town’s current level of reserves has enabled it to maintain a strong credit rating, which reduces its financing costs.8 The Town uses its reserves to stabilize rates against annual fluctuations in capital expenditures, variances between projected and actual water demands, and unanticipated expenditures and other expenditure variances. In some years, there is surplus revenue that is available to replenish reserves. In other years, reserves are drawn down to cover the cost of service.

Rates are set to generate a constant level of revenue to maintain reserves at adequate levels.

At the same time that revenue from rates is added to reserves, reserves are drawn down to fund capital projects whose costs vary from year to year. In effect, reserves are used to buffer rates from varying levels of capital expenditures and unforeseen variances in operating expenditures. For the most part, however, the variances are due to capital projects (see Figure 3-4).
8 See Figure 3-11 and adjoining text for additional discussion of the policies and assumptions related to minimum and target balances for the reserves.

Budgeted Projected
Fiscal Years FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 SFPUC Water Purchases $7,110,083 $7,611,825 $8,147,925 $8,413,193 $8,599,808 $8,979,074 Salaries & Benefits $1,476,541 $1,680,947 $1,746,455 $1,811,035 $1,871,347 $1,936,795 Materials & Services $3,229,507 $3,151,793 $3,094,038 $3,167,014 $3,241,814 $3,318,484 Administrative & Other Costs $3,728,874 $3,853,078 $3,957,521 $4,070,246 $4,186,354 $4,305,944 Total $15,545,005 $16,297,643 $16,945,938 $17,461,488 $17,899,322 $18,540,298 % Change 5% 4% 3% 3% 4%
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Even though the Town has constructed facilities to provide water service, these facilities will depreciate and eventually need to be replaced. It is unrealistic to think that the system has already been built and paid for and that there will be no future capital costs. Tanks need to be recoated and rust and corrosion removed, pumps need to be repaired and calibrated, and generators maintained as the water system must continue to work regardless of PG&E electrical availability. When such facilities are repaired and replaced, they must maintain sufficient capacity to meet all levels of water demand. This means that the cost to operate, maintain, repair and replace water storage facilities, distribution lines, pipes, and other infrastructure is driven by the Town’s largest water users. The Town has in place a Water Master Plan and in 2014 prepared an updated thirty-year Capital Improvement Project Plan to prioritize and address long-term capital projects. Based on this Plan, the revenue requirement projections show an increase in the contribution to reserves in FY 2026-27 needed to fund the capital improvement program, which contains approximately $14.6 million in cash-funded capital projects over the next five years as shown in Figure 3-4. An average annual expenditure of $2.9 million is the amount that is contributed to reserves from revenue requirements beginning in FY 2026-27.

Figure 3-4. Projected Capital Improvement Program
Source: Model Table 5. CIP.

Debt Service
The Town has an outstanding bond obligation totaling $17.1 million as of June 30, 2025 that the Water Fund contributes to. The total annual debt service is approximately $2.6 million of which the Water Fund’s share is $1.2 million. The bonds were issued to fund the projects that are summarized in Figure 3-5. The majority of these capital projects are storage and distribution facilities that are needed to meet above-average demands. Although these projects were constructed and are in service, the debt service on these bonds will not be repaid for many years. Thus, it is not the case that the system has been built and already paid for, and with the exception of miscellaneous improvement projects, the costs are driven by the size and total capacity of the facilities funded through the debt. The projects funded through debt issuance, summarized in Figure 3-5, addressed the Town’s distribution system, storage system, and storage tanks. These assets were designed to address the highest demand scenarios to ensure service could be maintained at all times. Above average use creates the periods of maximum demand on the system for which the assets were designed.

Capital Improvement Projects FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 5-Year Total Water Main Replacement Program $1,000,000 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $0 $4,000,000 Demolish Forrestview Tanks #1 and #2 $0 $250,000 $0 $400,000 $0 $0 $650,000 Water Tank Coating Improvements $500,000 $400,000 $0 $0 $0 $0 $400,000 Clark Concar Pump Station Generator $0 $0 $200,000 $200,000 $1,200,000 $0 $1,600,000 Marlborough Pump Station & Generator $500,000 $700,000 $0 $0 $0 $0 $700,000 Earthquake Protection Valves $0 $0 $100,000 $100,000 $100,000 $0 $300,000 SCADA Improvements $0 $0 $0 $200,000 $200,000 $0 $400,000 Darrell Pump Line Rehab and Replacement $0 $0 $300,000 $1,150,000 $800,000 $0 $2,250,000 Demolish Major Hayes Tank and Piping $0 $65,000 $300,000 $0 $0 $0 $365,000 Future Capital Projections $0 $0 $0 $0 $0 $2,533,000 $2,533,000 Subtotal $2,000,000 $2,415,000 $1,900,000 $3,050,000 $3,300,000 $2,533,000 $13,198,000 Construction Cost Index 1.000 1.033 1.068 1.104 1.141 1.179 Escalated Total CIP $2,000,000 $2,495,894 $2,029,418 $3,366,873 $3,764,869 $2,986,621 $14,643,676 ÷ 5 years
Average Annual PAYGo-Funded CIP $2,928,735
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For example, the Town’s storage system accommodates three days of average daily water use, a value that is higher than communities of a similar size, due to the extraordinary water use demands of a small subset of customers. The storage system meets the needs of all users, although the ultimate sizing serves to meet the highest level of use. Currently, the Town’s system accommodates 9.0 million gallons (MG). However, the sizing for the duration of water use to accommodate average daily demand is 3.0 MG to 6.0 MG, depending on the season.

Thus, average demand only accounts for between 33-66% of the total storage needs of the system, while the remaining storage serves Above-Average Demand. If water by the highest users was less, and more similar in output to that of the rest of the Town’s customers, the overall average demand would be less, resulting in smaller tanks, reducing costs. Therefore, the investment the Town made and continues to re-pay ensures above-average and lesser levels of demand are met.

Figure 3-5. Original Debt-Funded Capital Projects
The Town also has an Energy Conservation Loan that is scheduled to be paid off after FY 2026-

27. The original loan funded Supervisory Control and Data Acquisition (SCADA) sensor upgrades, which provide water pumping efficiencies to the Town’s system. The current debt service for all existing obligations is summarized in Figure 3-6.

Figure 3-6. Projected Debt Service Requirements
The major expenses described above that comprise the revenue requirements are shown in Figure 3-7. The graph indicates that Administrative and O&M Expenses comprise the largest category of expenses, making up 42% of the overall revenue requirement. However, wholesale water purchases are the largest individual cost line item of the FY 2026-27 revenue requirement, and this expense will vary in direct proportion to demand.

Category Series 2023A ECE 2012 Total
Water Distribution System $3,317,333 $3,317,333
Water Storage System $3,071,605 $3,071,605
Tank Replacement/Upgrades $1,590,345 $908,700 $2,499,045 Miscellaneous Improvements $683,217 $683,217
$8,662,500 $908,700 $9,571,200
FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 Series 2023 A $1,157,963 $1,176,300 $1,196,213 $1,167,975 $1,186,088 $744,206 ECE Energy Conservation Loan $65,641 $65,639 $0 $0 $0 $0 Total Existing Debt Service $1,223,604 $1,241,939 $1,196,213 $1,167,975 $1,186,088 $744,206 -290-
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Figure 3-7. Total Revenue Requirement Projections

RESERVES
Reserves are required to stabilize rates and to provide for contingencies. Reserves can be drawn on in years when the Town’s Water Fund experiences above average costs and augmented during years when costs are below average. The Town’s reserves are used for operating and capital purposes. Each of these purposes has its own requirements that lead to minimum and optimum target balance. Rates should be set so that the fund balance achieves the target balance.

Operating Reserve Component
The operating component of the reserves provides working capital for month-to-month O&M expenses. With sufficient working capital, the Town can operate without cash flow constraints.

The Town’s reserve policy states that the minimum operating reserve balance will equal 20% of annual O&M expenses. As in past years, a bond reserve of $375,000 was added to this amount. This reserve policy tracks with HF&H’s recommendation of a minimum operating Fiscal Years FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 Purchased Water Costs $7,110,083 $7,611,825 $8,147,925 $8,413,193 $8,599,808 $8,979,074 Admin & O&M Costs $8,434,922 $8,685,818 $8,798,013 $9,048,295 $9,299,514 $9,561,223 Debt Service $1,223,604 $1,241,939 $1,196,213 $1,167,975 $1,352,413 $1,049,907 Capital Projects $2,000,000 $2,928,735 $2,928,735 $2,928,735 $2,928,735 $2,928,735 Total Revenue Requiremen$18,768,609 $20,468,318 $21,070,885 $21,558,198 $22,180,471 $22,518,940 Year over Year Increase % 9.1% 2.9% 2.3% 2.9% 1.5%
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reserve that is equal to at least 1.5 times the billing frequency (or three months in the Town’s case). The Town’s reserves should never drop below this minimum balance.

Capital Improvement Reserve Component
The capital improvement component of the reserves provides cash funding for the Town’s capital improvement program. The fund balance needs to be sufficient to pay contractors and purchase materials without delays caused by cash flow limitations. HF&H has assumed a fiveyear average annual amount for this reserve component. The cash-funded capital amount, $2,928,735, was derived in Figure 3-4 and accounts for planned capital expenditures between FY 2026-27 and FY 2030-31.

REVENUE INCREASES
Rates are set to generate sufficient revenue to cover annual expenses. In addition, rates are set to maintain adequate reserves. The revenue from rates does not need to match each year’s revenue requirement. For example, the annual increases in the revenue requirements shown at the bottom of Figure 3-7 are different from the revenue increases in Figure 3-8.

Annual fluctuations in revenue requirements are typically uneven because they are harder to control (for example, variations in water usage and timing of PAYGO capital payments), whereas it is desirable to have smooth annual increases in rates. The annual differences cause the fund balance to fluctuate from year to year.

Revenue increases were derived to cover the Town’s Water Fund costs and to maintain adequate reserves. Figure 3-8 summarizes the projected revenue from current rates, annual revenue requirements, annual variances, and the rate increases necessary to cover the Town’s costs.

Figure 3-8. Rate Increase Calculations
Rate increases account for rate revenue, growth, and future revenue requirements. The revenue requirement (shown in greater detail in Figure 3-7) increases primarily due to increasing water supply costs. Figure 3-9 summarizes the resulting annual increases in rates and revenues from the proposed Service and Volume Charge rates. In FY 2026-27, the percentage rate adjustment varies by charge because of the rate structure modifications, discussed in further detail in Chapter IV and Chapter V. However, beginning FY 2027-28, the rate increases are applied as equal percentages across the board to all rates.

Projected
FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 Revenue From Current Rates $18,339,693 $18,330,395 $18,330,395 $18,330,395 $18,330,395 $18,330,395 Revenue Requirement ($18,768,609) ($20,468,318) ($21,070,885) ($21,558,198) ($22,180,471) ($22,518,940) Non-Operating Revenue $56,500 $56,500 $56,500 $56,500 $56,500 $56,500 Net Revenue Requirement ($18,712,109) ($20,411,818) ($21,014,385) ($21,501,698) ($22,123,971) ($22,462,440) Revenue Surplus/(Shortfall) ($372,416) ($2,081,423) ($2,683,991) ($3,171,304) ($3,793,576) ($4,132,045) Proposed Rate Increase 0.0% 6.0% 5.0% 5.0% 5.0% 5.0%
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Figure 3-9. Projected Revenue Increases
It is assumed that the rate increases will occur July 1 of each year. Hence, the revenue from each year’s rate increase is generated for the full 12 months of the fiscal year.

The rates are derived in Chapter V. With these rate increases, the Water Fund is able to cover its annual O&M and capital expenses, maintain adequate debt service coverage, and maintain adequate reserves, as further discussed below.

DEBT COVERAGE
Figure 3-10 shows the debt service coverage provided by the revenue increases in Figure 3-9. The Town is required to maintain a minimum coverage ratio of 1.20. A higher ratio provides a greater margin of safety to bondholders and enhances the credit rating on bonds.

This is particularly true with water utilities whose revenues are vulnerable to periods of conservation, such as the Town recently experienced. The Town’s long-term rating is currently AAA with S&P, which is partially attributable to a coverage ratio that is well above the minimum required by the bonds. Again, a higher credit rating benefits rate payers by reducing the cost of borrowing.

Figure 3-10. Debt Service Coverage
Effective Date Revenue Fiscal Year
Rate of Rate After Rate Increase in
Fiscal Year Adjustments Adjustments Adjustments Revenue Revenue at 2025 Rates $18,339,693
FY 2026-27 varies 7/1/2026 $19,432,079 6.0%
FY 2027-28 5.0% 7/1/2027 $20,402,331 5.0%
FY 2028-29 5.0% 7/1/2028 $21,425,264 5.0%
FY 2029-30 5.0% 7/1/2029 $22,497,070 5.0%
FY 2030-31 5.0% 7/1/2030 $23,625,175 5.0%
Debt Coverage Ratio Calculation FY 2025-26 FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 Gross Rate Revenue
Service Charges $5,283,792 $7,036,877 $7,388,721 $7,758,157 $8,146,065 $8,553,368 Volume Charges $13,055,902 $12,395,202 $13,013,610 $13,667,107 $14,351,005 $15,071,807 Total Gross Rate Revenue $18,339,693 $19,432,079 $20,402,331 $21,425,264 $22,497,070 $23,625,175 Operating Expenses
Purchased Water $7,110,083 $7,611,825 $8,147,925 $8,413,193 $8,599,808 $8,979,074 Other Operating Expenses $8,434,922 $8,685,818 $8,798,013 $9,048,295 $9,299,514 $9,561,223 Non-Operating Revenue ($56,500) ($56,500) ($56,500) ($56,500) ($56,500) ($56,500) Net Operating Expenses $15,488,505 $16,241,143 $16,889,438 $17,404,988 $17,842,822 $18,483,798 Net Available Revenues $2,851,188 $3,190,936 $3,512,893 $4,020,276 $4,654,247 $5,141,377 Debt Service $1,223,604 $1,241,939 $1,196,213 $1,167,975 $1,186,088 $744,206 Debt Coverage Ratio 2.33 2.57 2.94 3.44 3.92 6.91
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RESERVE FUND BALANCE
Figure 3-11 shows the annual fluctuations (solid green line) in the fund balance that are caused by the differences between the revenue requirement and revenue from rates with the rate increases; the dashed green line is the projected fund balance without rate increases.

The revenue and rate increases in Figure 3-9 were derived to achieve the target reserves balance by FY 2030-31. Maintaining a fund balance close to the present level helps to protect the Town’s credit rating, which lowers the cost of financing, thereby benefiting rate payers.

Figure 3-11 contains two reserve lines. First, the Town has a minimum Operating Reserve balance (red line) to cover O&M expenses and a bond reserve. Second, the Town has a capital reserve component. Just as working capital is needed to pay salaries and ongoing O&M expenses, working capital is also needed to fund construction of cash-funded (i.e., as opposed to debt-funded) capital projects. When added to the minimum Operating Reserve this establishes the Target Reserve (blue line).

As shown in Figure 3-11, the projected year-end fund balance with rate increases initially dips below the blue line, as the Town uses reserves to fund the projected revenue requirement, which includes major capital projects. After FY 2026-27, the Town begins adding to reserves in most years, increasing the fund balance to meet the Target Reserve by the end of FY 2030-31.

Figure 3-11. Projected Year-End Fund Balance
The recommended rate increases are balanced with the use of reserves. Reserves help offset the increased costs projected, reducing the potential for larger increases to be borne by ratepayers.
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IV. Cost-of-Service Analysis

GENERAL APPROACH
Base/Extra Capacity Method
The revenue requirement analysis establishes how much revenue is required from rates. The next step in the analysis is determining the cost of service (see Figure 2-1). Cost-of-service analysis is used to derive rates that proportionally allocate the cost of service. The cost-ofservice analysis performed in this study follows a procedure described by the American Water Works Association (AWWA), which is referred to as the “base/extra capacity method.” This method allocates the revenue requirements to the components of the rate structure.

For purposes of this study, the base/extra capacity method is first used for allocating the cost of service to the fixed and variable rate components. It is also used for determining the tiered Volume Charge rates that are proportional to the cost of providing service.

Customer Classes
The cost-of-service analysis distributes the revenue requirements among customer classes in proportion to their service requirements. The Town currently has two customer classes:

Residential and Non-Residential. These classes were adopted as part of a previous cost-ofservice study in 2016 to differentiate single-family customers from non-residential customers.

The customer classes were reviewed and kept in place as part of the most recent cost-ofservice study conducted in 2022. However, the Town plans to merge all existing customer classes in this rate study. Therefore, the cost-of-service analysis distributes the revenue requirements among all customers as one class.

Rate Structure
Proposition 218 does not mandate a specific rate structure, and allows utilities to structure rates in any manner that reflects the proportional cost of service.

In the Town’s case, its water rate structure consists of a fixed Service Charge component and a variable Volume Charge component. This structure allows the Town to recover fixed costs from fixed charges that do not fluctuate based on water usage, and variable costs (including costs that have been incurred in order to meet varying levels of demand) from consumptionbased charges. There is no recommendation to change this practice.

The fixed monthly Service Charge rates are billed per meter on each account. The charge is graduated in proportion to the capacity of the service (i.e., meter-size), in order to reflect the increased potential maximum demand placed on the water system as meters increase in size.

Not all fixed costs vary based on the size of the meter. For example, customer service costs are applied uniformly to all meter sizes, because the size of the meter does not change the cost for providing customer service. Only those costs that are related to relative demand on the system are increased based on meter size.

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is used at what time. The cost-of-service analysis determines how much of the revenue requirement should be recovered from the Service Charge.

The Volume Charge rates are billed based on metered water use during the billing period. In the Town’s case, water is metered in hundred cubic feet (HCF or CCF, see the Glossary at the beginning of this report). As such, the charge will vary from bill to bill depending on the amount of water used. The Town has two types of Volume Charge rates that are charged to its two customer classes. The cost-of-service analysis also determines how much of the revenue requirement should be recovered from the Volume Charge rates for each customer class.

The Town currently charges tiered Residential and uniform Non-Residential Volume Charge rates.

This study examines two scenarios for future Volume Charge rates. One scenario is to charge all customers based on a two-tiered rate structure. The second scenario is to charge all customers based on a uniform rate structure. The design of rates associated with each scenario is further discussed in Chapter V of this report. Further, the analysis of customer bill impacts for each of these scenarios is discussed in Chapter VI.

COST-OF-SERVICE ALLOCATIONS
As the name implies, cost-of-service analysis is a process of determining how much services cost. The service that water systems provide is obviously water. In order to provide that service, infrastructure must be constructed, operated, and maintained, which must be paid for from cash or debt. The type and size of infrastructure depends on how much service customers require. Examples of water system infrastructure where above-average demand shapes design include transmission pipelines, distribution pipelines, pump stations, and storage reservoirs. Pipelines must be able to convey sufficient water volumes that customers require. The largest volume of use collectively demanded by the Town’s customers must be able to flow through the pipelines at adequate pressure and velocity to ensure service is not interrupted or compromised. Therefore, pipelines are designed to accommodate the largest volume of use. Similarly, pump stations ensure there is sufficient energy available to move water to the distribution reservoirs so that it may be conveyed through distribution pipelines to reach the customers that expect water each time a faucet is turned on. Pump stations are built to address the worst-case scenario when water use demand is at its highest to ensure water may still be moved efficiently through the system without compromising delivery of the water to each customer. Storage reservoirs accommodate daily demand as an intermediate point between water received from the Town’s metered deliveries from the SFPUC meters and the water reaching individual customers at the meter. Conveying water through the system is not instantaneous and reservoirs provide temporary storage for water to be used in the near future in the distribution system. In turn, the transmission and pumping systems supply water to re-fill the reservoir as it empties. During periods of Above-Average Demand, water use being conveyed from the reservoirs may exceed the rate at which water is replenished in the reservoir. Therefore, each reservoir is designed so that collectively there is sufficient storage capacity to meet Above-Average Demands. These are some examples of how water systems are designed to provide sufficient capacity to meet customer demands for service wherever, whenever, and for as long as demanded.
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Although each customer places unique demands on the system, water system design is based on the maximum demand for service placed on the system by all customers during the maximum demand period. The size of the infrastructure that is needed will depend on the maximum demand. Higher demands require larger, more costly infrastructure as well as increased operating and O&M costs.

In 2022 a Grand Jury Report was published that determined which Bay Area water agencies would have sufficient water storage in the event of a significant earthquake. The Town’s water system was evaluated to determine whether it had three days of water storage to meet supply needs in the event of a catastrophic event. The evaluation relied upon three days of average day use. To meet the Town’s supply needs for such an event, the average use of year-round water demand for three days, would require 9 million gallons per day. This amount of water is significant for a community of its size. This volume of water highlights how the high water use patterns of a small customer subset increases the overall system design requirements.

At the time of the report, the Town did not have sufficient storage to meet this scenario and built the Darrel Tank in order to meet the recommendations of the report. Consequently, this required the Town to invest in a larger storage system than communities of its size in order to serve all users, including high water use customers. Along with a larger tank, the Town’s SCADA system for monitoring the pumping and refilling of the storage reservoirs was required to be more intricate and more costly to meet the monitoring needs for its system. In these examples, the Town system was built to accommodate the highest water users demand patterns.

In addition to the capital investment, the Town pays more to maintain a larger system due to higher levels of water use, too. Larger tanks to accommodate supply needs require more time and materials to re-paint and re-coat tanks. In addition, the Town must attend to sedimentation and turbidity issues that result when larger volumes of water are not used.

This happens because the tank is built to provide storage for above-average periods of use.

However, during periods of lower water use, less supply is emptied from the tanks leading to settling of particles in the tank that must be cleaned out. Turbidity and nitrification issues result from stale water supply remaining in the storage vessels. Both issues affect water quality, if unaddressed. These are examples of how the system accommodating for aboveaverage water use creates supplemental maintenance costs.

The Town’s SCADA system sets thresholds for pumping and refilling based on the forecasted temperature and time of year. The Town spends more labor hours during the summer to address the setpoints of the SCADA system due to the fluctuations of the water system driven by above-average use. This is done to avoid on-demand pumping, which is a costly alternative, to supplying water during high demand periods. Between periods of high water use and lower water use, the Town works to balance its system and pays for supplemental expenses to address the system. The system, built to accommodate the highest periods of water use, causes the Town to pay more for operations during the summer to address the SCADA system setpoints and it pays more to address sedimentation and turbidity issues during lower use periods when supply far surpasses demand.

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infrastructure. This means that customers that place greater demands on the infrastructure – customers with greater service needs (i.e., higher demands) – will be apportioned a greater share of the operating and capital costs of the infrastructure required to meet that demand.

It is important to realize that once the maximum demand is used to design the infrastructure, the capacity is available at all times, not just during maximum demand periods. However, such infrastructure also serves average demand levels. As such, costs for such facilities must be allocated in proportion to usage of and demand on such facilities. The capacity is available for the potential maximum period when it occurs. During average and below-average demand periods, the same facilities are being used, but the capital cost of the facilities is determined by the highest demand only. Note that the costs are not allocated only to those who create this highest level of demand. Those who do not contribute to this highest level of demand as much are also using the same facilities. Average users are allocated a share of the costs of the facilities in proportion to their demand on such facilities, and above average costs are allocated to above average users. The goal with this methodology is two-fold, and based on the fact that sizing, maintaining, operating, repairing and replacing infrastructure sized to meet maximum demand is more expensive than infrastructure sized to meet average demand.

First, this ensures that above-average users do not subsidize average and below-average users by paying for a larger share of infrastructure than their level of demand requires.

Second, this methodology ensures that average and below-average users do not pay for facilities and capital investments that their level of usage does not require. In other words, this methodology ensures proportional allocation of the costs of service.

Analytical Procedure
The cost-of-service analysis in this study involved a series of four steps that allow for reasonable cost allocations (see Figure 2-1). Costs must first be classified according to the associated function. Functions provide the level of service required by customers. The cost of functions can be allocated in proportion to the service provided.

1. Service function cost classification – Revenue requirements need to be converted into service function cost categories, which conversion is needed for allocating costs that will be used for calculating rates. (See Figure 4-1.)

2. Demand service function allocation percentages –Average Demand and AboveAverage Demand allocation factors are needed to apportion costs related to the demand service functions and to customer classes. (See Figure 4-6, and Figure 4-9.)

3. Fire protection allocations – Fire protection demand allocation factors are needed to apportion costs from Step 2 that are also related to providing public fire protection service functions (See Figure 4-7).

4. Cost function allocations – Costs from Step 1 are allocated across four primary cost allocation categories (See Figure 4-8):
• Average Demand-related costs, representing average water use across the customer base.
• Above Average Demand-related costs, representing above average water use and demands that are placed on the system across the customer base. -298-
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• Customer service costs, associated with billing, meter reading, and account management.
• Capacity-related costs, which reflect the infrastructure required to meet systemwide needs, including fire protection services.

This sequence of steps is further explained below. The steps constitute the cost-of-service analysis, which converts the revenue requirement for FY 2026-27 in Figure 4-2 into the eventual cost of service for setting Service Charge rates and Water Use Charge rates in Figure 4-10.

Service Function Cost Classification
After determining a utility’s revenue requirements, the cost-of-service analysis begins by aligning the budget items with the associated function. For example, some cost items are related to functions that support the ability to meet Average Demand and Above Average demands while other costs are incurred to provide customer service. In other words, “function” refers to the type of operational activity or capital cost needed to provide service.

Organizing the budget by functions correlates budget items with the rate that will fund the cost.

For average and above average water use, customers expect water to be available when they want it. The service they receive ranges from average demand for essential indoor uses (Average Demand) to discretionary peak hour outdoor water use and irrigation demands (Above Average Demand). To provide this “readiness to serve,” the Town’s water system needs to have pipes, pumps, and storage reservoirs that are sized and operated to transmit and distribute water whenever it is needed. As previously mentioned, the capacity required to provide the required flows for facilities as well as the elevation differentials within the pressure zone determine how reservoirs, valves, and appurtenances are designed. Water main design is also influenced by the number of connections along a pipeline. Above-Average Demands create larger flows for which larger and more costly infrastructure is needed and for which there are more operations and maintenance costs. As previously described, the presence of storage facilities requires supplemental maintenance costs during both periods of high demand and lower, winter water use periods.

The Town’s water system is complex for a system of its size. The steep topography results in numerous pressure zones that require more storage reservoirs and pumps whose operations must be coordinated with sophisticated instrumentation and staff. Moreover, the Town’s studies indicate that the lot size in Hillsborough is more than twice as large as neighboring communities. Sparser development means that there is more infrastructure required per connection, which raises the cost per service connection. Moreover, the higher cost of service must be borne by fewer customers.

These facts increase costs for all customers. However, Hillsborough is also unique in the disparity between customer demands on the water system. Although the vast majority of -299-
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Hillsborough customers are residential on single family residential parcels, the way these customers use water is very different9
.

The service functions for each cost category determine how the capital and O&M costs are allocated. The service functions fall into two categories:

Demand service function - functions related to delivering water to customers at varying levels of demand. These costs will be recovered from the proposed Volume Charges.

Customer service function - functions related to customer service. These costs will be recovered from the proposed Service Charges.

Demand Service Function
There is a sequence of five demand service functions beginning with the origin of the water through pipelines that convey the water to pumps that lift the water for storage until customers demand it. In describing each of these demand service functions, the corresponding allocation factors are indicated. The definition of each demand service function allocation factor is provided below in the discussion under Demand Service Function Allocation Factors.

Water Supply Demand – The Town does not have its own surface water or groundwater resources; the Town is not supplied by lakes, river diversions, or wells. Instead, the Town purchases treated water from the SFPUC. Other than the cost of the master meters at the SFPUC’s turnouts, the Town has very little of its own capital cost for its water supply. The cost of its water supply is included in the cost paid to SFPUC, which is the Town’s single largest O&M expense. In addition to the cost of water, this category also includes the Town’s water quality O&M expenses related to personnel. Costs tied to the SFPUC wholesale water rates and water quality are allocated to customers in proportion to their Average Demand. Average Demand costs vary with the total quantity of water used and are independent of rates of demand.

Transmission – Pipelines 12” and larger in diameter convey water from the SFPUC’s master meters to the Town’s pumps, which lift the water to distribution reservoirs. These 12” or larger pipes are sized for Above-Average Demands so that the maximum volume of water may be conveyed throughout the year from the storage tanks to the distribution lines and distribution reservoirs. Both capital and O&M costs are allocated in proportion to Above Average Demand10.

Pump Stations – Water is pumped to distribution reservoirs at a rate equal to the maximum day demand, to serve above average conditions. If pump stations were sized to only meet 9 Further evidence is cited in the subsection, Demand Service Function Allocation Factors. 10 Allocations to Above-Average Demand require cost sharing among customers in proportion to system-wide average use and above average use. Therefore, demand service functions assigned to Above Average Demand are not recovered solely through costs allocated to above average users. This is discussed in further detail in the subsection, Load Factors. -300-
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average demand, there would not be sufficient energy to move water through the system on days to meet above-average demand and service would be compromised. Both the capital and O&M costs are allocated in proportion to Above-Average Demand.

Storage – Distribution reservoirs are located at high points in the system so that water can flow to customers by gravity as demanded. Water fills the reservoirs from pump stations at a fairly steady rate compared to the outflow to customers. These reservoirs must be sized to accommodate Above-Average Demand to ensure there is adequate water available on the days throughout the year when water use is highest. Hence, both the capital and O&M costs are allocated in proportion to Above Average Demand.

Distribution – Water flows out of reservoirs under gravity to the customer tap through distribution pipelines (less than 12” inches in diameter). The distribution system is sized for maximum flows to ensure water reaches each customer meter at the adequate pressure and flow rate once a customer turns on their tap, regardless of the time of day or overall usage throughout the system. Therefore, the capital and O&M costs are allocated in proportion to Above Average Demand.

Customer Service Function
There are three customer service functions. Each of these functions includes costs that are not related to rates of flow.

Water Supply Capacity – Costs associated with the SFPUC service charge and BAWSCA surcharge are allocated by customer capacity. These costs do not vary based on flow but are assessed to the Town based on their respective share of capacity among BAWSCA agencies.

Therefore, costs to recover the Town’s portion of costs are recovered based on customer capacity served.

Customer Service – This category includes costs that related to customer accounts, processing meter reads for billing, billing activities, and general administration. These costs are independent of rates of flow and are apportioned on the basis of the number of accounts.

Customer Capacity – The type of costs included in this category are related to the capacity of a service connection. These costs include the capacity required in the infrastructure to meet fire protection service needs, through the Town’s public fire hydrants. Fire flow demands on a system influence the design and capacity sizing of pumping, pipeline, and storage assets of a water system. The capacity is built into the system to provide a benefit to all customers in the event of a fire emergency. The portion of capacity attributable to fire protection within each demand service function is recovered through a fixed service component of all service charges calculated. The costs in this category are apportioned in proportion to the capacity of each meter.

The cost of these service functions is derived from the Town’s FY 2026-27 projection. The projection is formatted using the Town’s chart of accounts, which is different from the service function cost categories that are needed for the cost-of-service analysis. It is possible, however, to convert the budget’s chart of accounts into the service function categories. Figure 4-1 shows the classification of the budgeted operating and capital expenses and nonoperating revenues by function. -301-
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Figure 4-1. Revenue Requirements by Function (FY 2026-27) Source: Model Table 8. Allocations
Some expenses, like Purchased Water, SFPUC Service Charge, BAWSCA Surcharge, fall within a single functional category. Others were classified by the Town across multiple functional categories:

Salaries and Benefits – These costs were classified based on the function performed by personnel to operate facilities or to manage and administer the system.

Materials and Services – The classification of these costs followed the associated personnel.

Debt Service - The classification of debt service was based on the functions performed by the facilities that were debt funded. The Town has existing debt to fund capital projects. Some of the facilities funded through the existing debt service were categorized as customer service functions and assigned to customer capacity so that customers reserving a greater capacity within the system would pay proportionately more via the Fixed Service Charge.

Capital Expenses (PAYGo Projects) – Investments in the Water Enterprise infrastructure are necessary to ensure existing levels of service are maintained. This category of costs reflects only the projects to be funded through reserves and rate revenues on a PAYGO basis.

The classification of these PAYGo capital costs was based on the functions performed by the facilities budgeted in the five-year capital improvement program. Projects identified serve a range of functions, as some are assigned to customer accounts, while others were assigned to extra capacity to meet peaking demands of the system. Thus, cost recovery for these projects would occur through a combination of the Fixed Service Charges and the Volume Charge rates.

Customer Service
Water Supply Water Customer Customer Water Supply
Demand Quality Transmission Pumping Storage Distribution Accounts Capacity Capacity Total O&M Expenses
Purchased Water $7,042,262 $7,042,262
SFPUC Service Charge $192,274 $192,274
BAWSCA Surcharge $377,289 $377,289
Salaries & Benefits $439,077 $89,374 $147,019 $175,498 $702,315 $1,553,283 Materials & Services $536,524 $592,723 $847,206 $491,193 $813,672 $3,281,318 Interal Service Fund Transfer $205,000 $205,000
Overhead Allocation $3,648,078 $3,648,078
Subtotal - O&M Expenses $7,042,262 $975,601 $682,097 $994,225 $666,691 $1,515,988 $3,853,078 $0 $569,563 $16,299,504 Capital Expenses
PAYGo Projects $91,288 $1,038,397 $91,288 $1,707,763 $2,928,735 Debt Service $722,836 $430,450 $88,653 $1,241,939
Subtotal Capital Expenses $0 $0 $91,288 $1,038,397 $814,124 $430,450 $1,707,763 $88,653 $0 $4,170,675 Non-Operating Revenue
Reconnection Charges ($50,000) ($50,000)
Service Charges ($6,500) ($6,500)
Transfer to/(from) Op Reserve ($370,185) ($51,284) ($35,855) ($52,263) ($35,045) ($79,690) ($266,657) ($90,622) ($981,600) Subtotal Non-Op Revenue ($370,185) ($51,284) ($35,855) ($52,263) ($35,045) ($79,690) ($323,157) ($90,622) $0 ($1,038,100) Net Revenue Requirement $6,672,078 $924,317 $737,529 $1,980,359 $1,445,769 $1,866,749 $5,237,684 ($1,969) $569,563 $19,432,079 -302-
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Transfers (from) Reserves – The use of reserves to fund the revenue requirement was divided among the demand and service functions according to the ratio of each functions portion of the revenue requirement to the overall O&M and Capital revenue requirement.

Figure 4-2 summarizes the costs by service function, organizing them into O&M and capital categories.

Figure 4-2. Revenue Requirement by Service Function

Source: Model Table 8. Allocations.

Once the costs are organized by service function, it is possible to allocate them based on the allocation percentages that correspond to each service function. The allocation percentages are derived from the units of service associated with each service function.

FY 2026-27 Allocation
Rev. Requirement Factor
O&M Expenses
Water Supply Demand
Purchased Water $7,042,262 Average Demand
Water Quality $975,601 Average Demand
Subtotal - Water Supply Demand $8,017,863
Water Supply Capacity
SFPUC Service Charge $192,274 Customer Capacity
BAWSCA Surcharge $377,289 Customer Capacity
Subtotal - Water Supply Capacity $569,563
Transmission $682,097 Above Average Demand
Pump Stations $994,225 Above Average Demand
Storage $666,691 Above Average Demand
Distribution $1,515,988 Above Average Demand
Customer Service $3,853,078 Customer Accounts
Total O&M Expenses $16,299,504
O&M Composite
Capital Expenses (Debt and PayGo)
PAYGo projects $2,928,735 PAYGo Composite
Debt Service $1,241,939 D/S Composite
Total Capital Expenses $4,170,675
Subtotal - O&M and Capital $20,470,179
100.0% Exp Composite
Non-Operating Revenue
Reconnection Charges ($50,000) Customer Accounts
Service Charges ($6,500) Customer Accounts
Transfer to/(from) Operating Reserves ($981,600) Exp Composite Subtotal - Non-Operating Revenue ($1,038,100)
Total Revenue Requirement $19,432,079
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Demand Service Function Allocation Factors
A cost-of-service analysis categorizes costs between the demand and customer service functions. Within the demand service function, further allocations are made to varying levels of service to account for average and above average water use. With these further allocations, rates can be designed for level of demand.

The costs allocated to the customer service function are differentiated between those that are related to accounts and those that are related to capacity. Those two categories are used in deriving Service Charge rates.

As described below, there are two levels of demand used for the demand service function cost-of-service analysis.

Average Demand
This level of use includes necessary indoor water use and average seasonal peaking. The value is the average of FY 2024-25 customer billing data.

Above Average Demand
Above-Average Demand includes use beyond Average Demand, to accommodate for irrigation and seasonal water needs. The total value is based on systemwide flow data maintained by the Town based on the maximum daily water delivery from the Town’s water supply meters.

Allocation percentages were calculated for each demand service level using load factors derived from customer billing data for FY 2024-25 for Average Demand and system-wide flow delivery data for Above-Average Demand. Load factors are the ratio of higher levels of demand to the Average Demand. Figure 4-3 summarizes the units of service and load factors for each of the service levels based on FY 2024-25 data.

Load Factors
Water systems are designed to accommodate maximum demand that is specific to the community served. By meeting maximum demand, the system is also serving average demands, which place lesser burdens on the system. Load factors describe the ratio of this maximum demand to more common, average demand. The load factors represent how much higher Above-Average Demand flows are compared with average demand and these factors provide the nexus to distribute system costs to both Average Demand and Above-Average demand. Because water system assets support average and above-Average Demand, these load factors fairly and proportionately allocate costs associated with operating, maintaining, building, repairing and replacing infrastructure necessary to meet each level of demand.

In Figure 4-3, the maximum daily delivery of water volume, 5,920 HCF, is compared to average daily demand, 2,973. The Load factor for Above-Average Demand indicates that this threshold of water use is 1.99 times that of Average Demand. In terms of daily water demand, Above-Average Demand is equal to 2,947 HCF (5,920 – 2,973), or the volume of water supplied beyond Average Demand.
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This is not surprising given the wide disparity amongst Hillsborough customer usage patterns.

For example, average water use of 42 HCF per bi-monthly period is 252 HCF per year. This volume ranks in the 61st percentile of water use for Residential customers for FY 2024-25 among 3,988 residential parcels billed bi-monthly. This means that 60% of parcels used less than or equal to this average amount. However, the 90th percentile of water use was 470 HCF, the 95th percentile of water use was 588 HCF, and the 99th percentile of water use was 1,047 HCF. These statistics demonstrate the Above-Average Demand patterns of a small minority in contrast to the majority of customers, whose annual water use is less than or equal to Average Demand. In the case of customers in the 95th percentile of annual water use, their water use is 2.33 times (588 ÷ 252) that of the average water user.

Figure 4-3. Service Level Demands and Load Factors

Average Demand reflects annual volume of FY 2024-25 water sales divided by 365 days.

Above-Average Demand reflects maximum 24-hour cycle volume delivered from SFPUC during FY 2024-25.

Figure 4-4 compares average water use (252 HCF per year) to that of a parcel that uses 588 HCF per year and is considered in the 95th percentile of water users. The average water use pattern includes a maximum period of use between the four-month period of July through October, where usage is between 60 and 62 units. The 95th percentile water use pattern includes a maximum period of use over these same months where usage is between 170-179 units. The increase in demand for the 95th percentile user during the systemwide two highest summer billing periods of July to August and September to October is significantly more than the average water user. The ratio of usage by the 95th percentile user in comparison to the average user for July through August was 2.74 (170 units versus 62 units). The ratio of usage by 95th percentile user in comparison to the average user for September through October was

2.98 (179 units versus 60 units). These figures illustrates the difference between average and Above-Average Demand that are in-line with the load factors calculated in Figure 4-3.

Demand Characteristics
Average Above Average
Demand Demand
All (Total Daily Demand HCF) 2,973 5,920
Load Factor Calculation
Total Demand 2,973 5,920
÷Average Demand 2,973 2,973
Load Factors 1.00 1.99
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Figure 4-4. Comparison of Water Use
The load factors indicate how much additional capacity is required to supply higher levels of service. Above-Average Demand flows are almost two times the Average Demand. Pipeline diameters are used as an example in Figure 4-5 to underscore and visually illustrate how much more infrastructure is needed to meet peak demands at significantly greater cost to the utility. The supplemental capacity required to serve only the portion exceeding Average Demand due to higher levels of water use may be determined by the difference between the figure and the Average Demand figure. In the case of Figure 4-5, this is the difference of 5,920 HCF and 2,973 HCF. The cost differential of system assets designed to meet the Town’s Above Average Demand versus system assets designed to meet the Town’s Average Demand may be compared to identify the difference in infrastructure costs to construct and install, as well as to repair and replace. For assets such as storage tanks, pumps, and transmission lines, which must be designed to meet Above-Average Demand, the marginal difference between the Town’s Above-Average Demand impacts the cost of the infrastructure such that as the ratio between Above-Average Demand and Average Demand increases, so too does the cost to construct the infrastructure required to meet the Above-Average Demand. The Town’s SCADA system, built to accommodate uniquely high storage volumes for emergency planning, required an initial $2.5 million investment that was driven by the additional pumping and refilling setpoints required to ensure the Town always has sufficient water stored and available for delivery.
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Figure 4-5. Pipeline Capacity Needed for Demand Service Levels Not Drawn to Scale
The load factors are the source of the allocation percentages that are needed to allocate costs for costs within the revenue requirement that are required to serve Above-Average Demand.

The percentages for use in the allocation exercise are derived in Figure 4-6. The load factors from Figure 4-3 represent the ratio of water demand relative to Average Demand. The Above-Average Demand load factor for the system is 1.99, which means Above-Average Demand is nearly two times that of Average Demand, as illustrated in seasonal water use fluctuations in Figure 4-5 and a comparison of high annual water use to average annual water use. Of the total 1.99 load factor, 0.99 is in excess of Average Demand and is related to the incremental demand beyond average use, just like Figure 4-3 identified that 2,947 HCF per day is beyond the average use of 2,973 HCF per day. The portion in excess, 2,947 HCF per day, is 49.78% of the total Above-Average Demand load (i.e., 0.99/1.99 = 49.78%, or 2,947/5,920 = 49.78%). For purposes of allocating costs associated with meeting AboveAverage Demands, 49.8% is allocated to the Above-Average Demand service and the remaining 50.22% is allocated to the Average Demand service. While system capacity is essentially designed to meet peak demands, and peak users should assume cost responsibility for the capacity required to serve this peak demand, it is important to understand that the cost of facilities that are sized for peak demands is not borne by only customers that peak.

Figure 4-6. Demand Related Allocation Percentages
Load Factors derived in Figure 4-3 using FY 2024-25 water sales and meter delivery data.

Using distribution pipelines as an example, they are sized to meet Above-Average Demands.

Even though they are sized for a higher level of service, Average Demands are also Daily Demand Demand Service Levels
Allocation Basis (hcf) Load Factor Average Above Average Total % Average 2,973 1.00 1.00
Allocation % 100.00% 100.00%
Above Average 5,920 1.99 1.00 0.99
Allocation % 50.22% 49.78% 100.00%
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accommodated by these pipelines. Hence, the cost of the pipelines is not allocated 100% to the Above-Average Demand service level. The cost is apportioned across the lower service level, too. Therefore, Average Demand would be apportioned 50.22% of the distribution pipeline expense and Above-Average Demand would be apportioned 49.78% of the distribution pipeline expense. Thus, the costs of Above-Average Demand are shared by all customers and not exclusively allocated to those who use the most.

Fire Protection
The distribution system also includes hydrants for public fire protection. Thus, a portion of the assets and demand services are also attributable to fire protection. As such, a portion of the demand service functions of pumping, storage, transmission, and distribution, are allocated to fire protection to be recovered through the Customer Capacity service function. Figure 4- 7 determines the proportion of demand service costs applicable to fire protection based on the ratio of storage requirements for fire protection. to overall storage requirements of the system. The Town looked to each of its storage facilities needed to serve fire flow demands, and reviewed hydraulic models and capacity evaluations to identify the portion of such facilities needed to meet fire flow demand. Next, the Town evaluated the portion of such facilities in total as a ratio of total existing storage, and identified that 19.8% of storage capacity was required to provide fire service. Thus, storage facilities are not only designed to support Above-Average Demand, but also fire flows in the event of an emergency. This analysis is summarized in Figure 4-7.Because storage facilities support both above average demand and fire protection, the original allocation for the Above-Average Demand category was revised to include fire protection. Therefore,19.8% of the Above-Average Demand allocation was re-allocated to the capacity component in the service charge. This allocation for Above-Average Demand is shown in Figure 4-9.

Figure 4-7. Allocation of Fire Services According to Storage Requirements Source: Town of Hillsborough Hydraulic Model Development and Capacity Evaluation.

Rounding of values to nearest tenth of a percent.

Service Function Allocations
The revenue requirements in Figure 4-2 are allocated to the demand and customer service functions in Figure 4-8. The resulting allocations indicate that about 64% of the revenue requirement is attributable to the demand service function and 36% to the customer service function. As previously mentioned, the Volume Charge rates are designed to recover the costs Total Existing
Fire Storage
Pressure Zones Protection Requirement
Non-Consolidated Zones 1.08 3.02
Consolidated Darrell 0.18 1.91
Consolidated Skyfarm #3 0.18 1.46
Consolidated Marlborough 0.18 1.46
Zone 4 Consolidated Tournament 0.18 1.26
Town Wide 1.80 9.11
Portion attributable to Fire Strorage 19.8% to Customer Capacity -308-
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allocated to the demand service function and the Service Charge rates are designed to recover the customer service function costs.

Figure 4-8. Service Function Allocations
Figure 4-9 summarizes the allocation factors employed in the analysis. The Above-Average Demand allocation percentages initially derived from Figure 4-6 were modified to distribute

19.8%11 of the overall costs to the portion of the Service Charge that accounts for fire service capacity (Customer Capacity). With this adjustment to the Above-Average Demand allocation factor, this meant that the remaining 80.2% of the Above-Average Demand allocation factor not assigned to Customer Capacity was re-calculated. As a result, 50.22% of the remaining

80.2% allocation was reapportioned to Average Demand (40.3% of the overall factor in Figure 4-9) and 49.78% of the remaining 80.2% allocation was reapportioned to Above11 As determined in Figure 4-6.

FY 2026-27 Allocation Base Extra Customer Customer
Rev. Requirement Factor Demand Capacity Accounts Capacity O&M Expenses
Water Supply Demand
Purchased Water $7,042,262 Average Demand $7,042,262 $0 $0 $0 Water Quality $975,601 Average Demand $975,601 $0 $0 $0 Subtotal - Water Supply Demand $8,017,863 $8,017,863 $0 $0 $0 Water Supply Capacity
SFPUC Service Charge $192,274 Customer Capacity $0 $0 $0 $192,274 BAWSCA Surcharge $377,289 Customer Capacity $0 $0 $0 $377,289 Subtotal - Water Supply Capacity $569,563 $0 $0 $0 $569,563 Transmission $682,097 Above Average Demand $274,869 $272,456 $0 $134,772 Pump Stations $994,225 Above Average Demand $400,649 $397,131 $0 $196,444 Storage $666,691 Above Average Demand $268,661 $266,302 $0 $131,728 Distribution $1,515,988 Above Average Demand $610,908 $605,544 $0 $299,537 Customer Service $3,853,078 Customer Accounts $0 $0 $3,853,078 $0 Total O&M Expenses $16,299,504 $9,572,950 $1,541,433 $3,853,078 $1,332,043 O&M Composite 58.7% 9.5% 23.6% 8.2%
Capital Expenses (Debt and PayGo)
PAYGo projects $2,928,735 PAYGo Composite $492,023 $487,703 $1,707,763 $241,246 Debt Service $1,241,939 D/S Composite $464,748 $460,667 $0 $316,525 Total Capital Expenses $4,170,675 $956,771 $948,370 $1,707,763 $557,771 Subtotal - O&M and Capital $20,470,179 $10,529,720 $2,489,803 $5,560,841 $1,889,814 100.0% Exp Composite 51.4% 12.2% 27.2% 9.2%
Non-Operating Revenue
Reconnection Charges ($50,000) Customer Accounts $0 $0 ($50,000) $0 Service Charges ($6,500) Customer Accounts $0 $0 ($6,500) $0 Transfer to/(from) Op Reserves ($981,600) Exp Composite ($504,928) ($119,393) ($266,657) ($90,622) Subtotal - Non-Operating Revenue ($1,038,100) ($504,928) ($119,393) ($323,157) ($90,622) Total Revenue Requirement $19,432,079 $10,024,792 $2,370,410 $7,036,877 $12,395,202 $7,036,877
64% 36%
Volume Charge COS Service Charge COS
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Average Demand (39.3% of the overall factor in Figure 4-9). This ensures that the AboveAverage Demand allocation factor accounts for the proportionate use of the system to accommodate fire flow needs, and the proportionate distribution of costs based on the usage of and demand on such facilities.

Figure 4-9. Allocations Factors
Source: Model Table 8. Allocations
Figure 4-10 summarizes the shift in the Volume Charge revenues to Service Charge revenues to align with the cost of service. The exercise performed in Figure 4-10 indicates that Service Charge revenues will increase from 29% to 36%, while Volume Charge revenues will decrease from 71% to 64%. The right-hand columns summarizing the difference between the cost of service and current revenues include both the impacts of the realignment of rates through the cost allocation process and the overall revenue increases proposed.

Figure 4-10. Cost-of-Service Revenue Summary
Average Above Average Customer Customer
System-Wide Allocation Factors Demand Demand Accounts Capacity Total System-wide
Average Demand 100.0% 0.0% 0.0% 0.0% 100.0%
Above Average Demand 40.3% 39.9% 0.0% 19.8% 100.0%
O&M Composite 58.7% 9.5% 23.6% 8.2% 100.0%
Customer Accounts 0.0% 0.0% 100.0% 0.0% 100.0%
Customer Capacity 0.0% 0.0% 0.0% 100.0% 100.0%
Exp Composite 51.4% 12.2% 27.2% 9.2% 100.0%
PAYGo Composite 16.8% 16.7% 58.3% 8.2% 100.0%
D/S Composite 37.4% 37.1% 0.0% 25.5% 100.0%
Components of Rate Structure
Volume Charges
Residential $12,584,088 $11,757,458 ($826,631) -6.6%
Non-Residential $471,813 $637,744 $165,931 35.2%
$13,055,902 71% $12,395,202 64% ($660,699) -5.1%
Service/Meter Charge $5,274,493 29% $7,036,877 36% $1,762,384 33.4% Total $18,330,395 100% $19,432,079 100% $1,101,685 6.0% Current Revenue Cost Difference
(FY 2025-26 rates) of Service COS Minus Current
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V. Rate Design
The Town has historically charged water customers the combination of a fixed Service Charge and a variable Volume Charge based on metered water use. This approach and structure remains appropriate given Hillsborough’s costs of service and customer base, and HF&H recommends no changes to that structure. This chapter explains the derivation of the Volume and Service Charge rates that reflect the projected cost of service.

SERVICE CHARGE DESIGN
Service Charge rates are fixed rates charged per account that are billed each billing period to recover the cost of the customer service function. The Service Charge rates are graduated in proportion to the capacity of the service (i.e., water meter) serving a property. Service Charge rates are also independent of customer classes because the capacity of a service does not change depending on what class of customer that is connected to the water system.

The cost-of-service analysis determined how much of the revenue requirement is attributable to the customer service function. The function has two components – customer accounts and customer capacity – each of which is itemized in the cost-of-service analysis in Figure 5-12.

Costs attributable to customer accounts are allocated to customers in proportion to the number of accounts. Costs attributable to customer capacity, including fire service capacity, as detailed in Chapter V and Figure 4-6, are allocated to customers in proportion to the capacity of their services. The sum of the two components equals the Service Charge rate per connection.

Figure 5-1 lists the units of service corresponding to each of the cost components. The 4,304 accounts are used for apportioning the customer accounts cost component.

Capacity costs associated with the distribution system are apportioned among the connections in proportion to the capacity associated with each connection. Accounts are converted to Equivalent Meter Units (EMUs) to apportion the customer capacity cost component. An EMU represents the number of 3/4-inch meters to which a larger meter is equivalent. For example, a 1-inch meter provides 1.57 times as much capacity as a ¾-inch meter. The capacity multipliers are based on the manufacturer’s nominal capacity of the Town’s new meters that were installed in 2016. The 3,727 1-inch meters equal 5,857 EMUs. There are 7,892 total EMUs. In effect, the 4,304 services of assorted sizes have the equivalent capacity as 7,892 ¾-inch meters.
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Figure 5-1. Service Charge Units of Service
*Capacity multiplier assumes 3/4" meter = 1 EMU = 35 gallons per minute.

Meter capacities used in previous study, per AWWA M1, Table B-1.

Number of Services provide by Town of Hillsborough as of January 2025.

Figure 5-2 derives the unit costs for the customer accounts and customer capacity cost components. Each account is allocated $202.82 for the customer account cost component.

That amount represents the costs the Town incurs to maintain an account regardless of the capacity of the service. Each account is also allocated $38.00 per EMU. That amount represents a portion of the cost of providing distribution system capacity for each account, and increases based on the capacity of the meter.

Figure 5-2. Service Charge Unit Costs
Customer Account and Customer Capacity components derived in Figure 4-7.

Units of Service provided from Figure 5-1.

Figure 5-3 combines the customer service and capacity components into a single Service Charge for each size of service and compares proposed rates to the current rates.

Service # of Meter Capacity
Size Services Ratings (gpm) Multiplier* EMUs
a b c = b ÷ 35 a x c
3/4" 76 35 1.00 76
1" 3,727 55 1.57 5,857
1-1/2" 231 100 2.86 660
2" 268 160 4.57 1,225
3" 0 320 9.14 0
6" 1 1,000 28.57 29
8" 1 1,600 45.71 46
4,304 7,892
Customer Customer
FY 2026-27 Customer Account Capacity
Service Expenses Component Component Total
O&M Expenses $3,853,078 $1,332,043 $5,185,122
Capital Expenses $1,707,763 $557,771 $2,265,534
Non-Operating Revenue ($323,157) ($90,622) ($413,779)
Total FY 2022-23 $5,237,684 $1,799,193 $7,036,877
Units of Service 4,304 7,892
Services EMUs
Unit Cost (Bi-Monthly) $202.82 $38.00
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Figure 5-3. Calculation of Proposed Bi-Monthly Service Charge Rates (FY 2026-27) Refer to Figure 5-2 for values in columns a and b.

Refer to Figure 5-1 for values in column c.

Rounding due to stored values in the model may exist.

All meters 3” and larger would receive a rate decrease, while customers with smaller meters would see a rate increase. The allocation of the majority of the Town’s capital program to customer accounts is driving a larger increase to the fixed account component portion of the calculated meter charge. Such costs were allocated uniformly to each service for projects that benefit each account uniformly for such projects as the Water Main Replacement Program and demolition of two storage tanks that will no longer be required. As a result, a larger portion of the proposed service charge is fixed, while less of the charge is attributable to the capacity component of the service charge. For reference, under the previous cost-of-service study, the customer account unit rate was $98.40 per account and the customer capacity component was $46.41 per EMU. This meant for a 3/4-inch meter, the customer account unit rate made up 68% of the overall charge. In contrast, the proposed $202.82 per account is the equivalent of 84% of the overall service charge. A reduced capacity component creates a smaller increment in service charges across the spectrum of available meter sizes.

Figure 5-4 shows the proposed five-year schedule of Service Charge rates.

Account Total Current
Service Component Capacity Meter Charge Meter Charge $ Change Size ($/bill period) $/EMU Multiplier Total ($/bill period) ($/bill period) ($/Bill period) a b c d = b x c e = a + d
3/4" $202.82 $38.00 1.00 $38.00 $240.82 $161.18 $79.64
1" $202.82 $38.00 1.57 $59.71 $262.53 $190.70 $71.83
1 1/2" $202.82 $38.00 2.86 $108.56 $311.38 $257.12 $54.26 2" $202.82 $38.00 4.57 $173.69 $376.52 $345.68 $30.84
3" $202.82 $38.00 9.14 $347.39 $550.21 $581.83 ($31.62) 6" $202.82 $38.00 28.57 $1,085.58 $1,288.41 $1,585.49 ($297.08) 8" $202.82 $38.00 45.71 $1,736.93 $1,939.76 $2,471.07 ($531.31) Capacity Component
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Figure 5-4. Proposed Bi-Monthly Service Charge Rates (FY 2026-27-FY 2030-31) Proposed Rates for FY 2026-27 calculated in Figure 5-3. Rates calculated for FY 2027-28 – FY 2030-31 were calculated by applying the increases shown in Figure 3-8.

Values rounded to nearest cent each year.

VOLUME CHARGE DESIGN
As previously discussed, the Town’s Volume Charge rates are different for its two customer classes, Residential and Non-Residential. The Town’s Residential customers are currently charged a four-tier increasing block rate structure.12 The structure is a series of blocks of water whose unit cost increases with each block. The structure is “progressive” in the sense that water is billed sequentially by block up to the highest block. It is not the case that all of the water is billed at the rate for the highest block. All metered water use is at least billed the Tier-1 rate. Water use beyond Tier-1 is only billed the Tier-2 rate for the volume of water allocated to Tier-2, and water use beyond the volume of water allocated to Tier-2 is billed at the Tier-3 rate, and so forth. Most of the Town’s residential customers are charged on a bimonthly basis. However, the Town has a small group of parcels who are billed on a monthly basis, such that the volume applicable to each tier is half that of the tier volume established for Residential customers billed bi-monthly. In turn, all Residential customers are charged the same rate per tier of water use, regardless of the frequency of their billing.

In contrast, Non-Residential customers are currently billed via a uniform rate structure. The rate charged does not vary, regardless of the volume of water use.

As part of this study, a change is recommended from the existing rate structures to unify all water customers under a single rate structure. Therefore, a customer would be charged the same rates independent of the use of the parcel as a residence or for a non-residential purpose. Currently, the Town is considering two alternatives: 1) a two-tiered increasing block rate structure; and. 2) a uniform rate structure.

The following subsections calculate the rates associated with these alternatives. Chapter VI analyzes the bill impacts from both alternatives.
12 For simplicity, we use the term “tiered rates” synonymously with “increasing block rates.” “Inclining block rates” is commonly used for “increasing block rates.” However, because an incline can slope both up or down, it is ambiguous in this context and therefore is not used in this study.

Current Proposed Bi-Monthly Service Charge
Service Size Charge FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 3/4" $161.18 $240.82 $252.86 $265.50 $278.78 $292.72
1" $190.70 $262.53 $275.66 $289.44 $303.91 $319.11
1 1/2" $257.12 $311.38 $326.95 $343.30 $360.47 $378.49
2" $345.68 $376.52 $395.35 $415.12 $435.88 $457.67
3" $581.83 $550.21 $577.72 $606.61 $636.94 $668.79
6" $1,585.49 $1,288.41 $1,352.83 $1,420.47 $1,491.49 $1,566.06 8" $2,471.07 $1,939.76 $2,036.75 $2,138.59 $2,245.52 $2,357.80 -314-
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Scenario 1: Two-Tiered Volume Charge Rates
When increasing block rates are implemented, the number of tiers must be determined. The base/extra capacity cost-of-service analysis leads to two distinct services defined by the functions performed by facilities that are designed to provide the services. Each service has an average flow that can be used as the division (i.e., “breakpoint”) between each service, as shown in Figure 5-5.

Figure 5-5. Tier Breakpoint Analysis
Average demand reflects annual volume of FY 2024-25 water sales divided by 365 days.

Above-average demand reflects maximum 24-hour cycle volume delivered from SFPUC during FY 2024-25.

The average flows for Average Demand and Above-Average Demand yield the following breakpoint:

Tier-1/Tier-2 breakpoint – 42 HCF (524 gallons per day) per bi-monthly period.

Note, a bi-monthly period is assumed to be 60 days. The breakpoints calculated were rounded up to the nearest even integer to facilitate monthly billing for a small portion of the Town’s Residential customer base and the Town’s Non-Residential customer base. Bills for these customers utilize the same rates but the breakpoint is halved to compensate for the onemonth billing period. The proposed monthly bill subscriptions have a Tier-1/Tier-2 breakpoint of 21 HCF.

Rates Per Tier
With breakpoints that correspond to the service levels in the cost-of-service analysis, it is possible to calculate the rate per tier by dividing the cost of service per tier by the water demand in each tier. The resulting rates represent the unit cost of service for each tier.13 13 In this report, “rates” and “unit costs” are synonymous.

Flow Per Customer (HCF monthly) Average Above Avg.

All Customers Demand Demand
HCF per Day 2,973 5,920
HCF/Monthly period 89,192 177,600
Proposed Breakpoints
Monthly Bills 4,304 4,304
Average flow per Monthly Bill 21 41
Average gallons per day 524 1,022
Average flow per Bi-Monthly Bill 42 82
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Figure 5-6 shows the calculations of the incremental cost per tier. Using the Average Demand service function as an example, it can be seen how much of the revenue requirement is recovered from Tier-1. The $10,024,792 includes the costs that were directly attributable to the Average Demand service function plus the Average Demand service function’s share of costs attributable to higher levels of service. The Average Demand cost of service is 81% of the aggregated amount of $12,395,202. All of the water sold, including water in Tier-2 benefits from the Tier-1 costs and shares in paying them. Dividing the Average Demand costs by the total demand of 1,085,164 HCF in Figure 5-6 yields a Tier-1 rate of $9.24 per HCF.

The Town calculated that the average user does not exceed 42 HCF per billing cycle, or 21 HCF per month. As such, 42 HCF is used as the tier breakpoint, because this reflects the point at which the Town has incurred and continues to incur costs to serve above-average usage.

These costs include facilities that are sized to meet above-average usage, and all related operating, maintenance, replacement, and repair costs.

Bi-monthly demand that does not exceed the 42 HCF Tier-1 breakpoint is only charged the Tier-1 rate. Demand that does not exceed Tier-1 is not responsible for the additional costs incurred by the Town to meet above-average demands. These additional costs are both the initial capital cost, the subsequent rehabilitation and renewal costs, and the operations and maintenance costs for larger pipelines, additional pumps, and larger reservoirs. Bills that exceed Tier-1 pay an additional rate increment. The additional increment of demand is responsible for the costs allocated to Above-Average Demand service, $2,370,410. This increment of cost is divided by the demand that exceeds Tier-1, 434,881 HCF, resulting in an incremental Tier-2 rate of $5.45 per HCF (Figure 5-6).

Figure 5-6. Incremental Unit Cost
Refer to Figure 4-7 for Volumetric Cost of Service figures.

Demand per Tier found by applying proposed tier breakpoints to FY 2024-25 water sales data.

The incremental rates are additive. In other words, demand in Tier-1 only pays the Average Demand rate. Demand in Tier-2 pays the Average Demand rate plus the Above-Average Demand increment. Adding the increments yields the rates per tier, which are summarized in Figure 5-7. Clearly, as demand progresses beyond the first tier, the additional costs of peaking are allocated to recover the cost of the higher levels of service.

Average Above Avg.

Demand Demand Total
Volumetric Cost of Service $10,024,792 $2,370,410 $12,395,202 Demand per Tier (HCF)
Tier-1 (0-42 hcf) 650,283
Tier-2 (42+ hcf) 434,881 434,881
Total HCF per Tier 1,085,164 434,881
Additional Unit Cost for Above Avg. Demand $9.24 $5.45
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Figure 5-7. Calculation of Proposed Volume Charge Rates Unit costs calculated in Figure 5-6.

The five-year schedule of proposed Volume Charge rates for all customers is shown in Figure 5-8.

Figure 5-8. Proposed Volume Charge Rates
Proposed Rates for FY 2026-27 calculated in Figure 5-7. Rates calculated for FY 2027-28 – FY 2030-31 were calculated by applying the increases shown in Figure 3-8.

Values rounded to nearest cent each year.

Scenario 2: Uniform Volume Charge Rates
If the Town seeks to move to a uniform rate structure for all customers, the demand service costs allocation in Figure 4-7 would be distributed based on system demand. The uniform rate is derived by dividing the FY 2026-27 volumetric cost of service by the projected annual demand in Figure 5-9.

Figure 5-9. Calculation of the Uniform Volume Charge Rate Refer to Figure 4-7 for Volumetric Cost of Service figure.

Average Above Avg.

Demand Demand Total
Proposed Rates
Tier-1 (0-42 hcf) $9.24 $9.24
Tier-2 (42+ hcf) $9.24 $5.45 $14.69
Proposed Proposed Rates
Breakpoints FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 (HCF) ($/HCF)
Bi-Monthly Residential
Tier 1 0 to 42 $9.24 $9.70 $10.19 $10.70 $11.24
Tier 2 42+ $14.69 $15.42 $16.19 $17.00 $17.85
Monthly Residential/Non-Residential
Tier 1 0 to 21 $9.24 $9.70 $10.19 $10.70 $11.24
Tier 2 21+ $14.69 $15.42 $16.19 $17.00 $17.85
Uniform Volume Charge Calculation
Volumetric Cost of Service $12,395,202
Projected demand (HCF) 1,085,164
Uniform Volume Charge per HCF $11.42
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Volume Charge Rate Summary
The five-year schedule of proposed Volume Charge rates for Residential and Non-Residential customers is shown in Figure 5-10.

Figure 5-10. Proposed Volume Charge Rates
Proposed Rates for FY 2026-27 calculated in Figure 5-9. Rates calculated for FY 2027-28 – FY 2030-31 were calculated by applying the increases shown in Figure 3-8.

The proposed Volume Charge rate design is reflected as a single row for all customers. The proposed cost-of-service rate would reduce the rate that Residential customers pay for water use which falls within current Tier-3 and Tier-4 levels, while increasing the rate that Residential customers pay for water use falling within Tier-1 or Tier-2. Under this proposed rate structure, all Non-Residential customers would see an 8.9% increase to the current rate they pay. Further analysis of customer bill impacts is included in Chapter VI.

Revenue Stabilization Factors
During prolonged shortages, customers are required to conserve or even ration their water use. The magnitude of the water savings can significantly reduce water sales revenue from quantity charges.

The Town requested HF&H to update the Revenue Stabilization Factors that would be applied to the rates for the Volume Charge rates and implemented during declared water shortage stages in accordance with the Town’s Water Shortage Contingency Plan (WSCP), state mandated reductions in the level of water usage, or other natural disaster or event that results in a water shortage and an unforeseen drop in water demand that requires reductions in water use.

If the Town decides to transition to a single Volume Charge rate structure, the Town no longer needs to apply separate Revenue Stabilization Factors across different customer classes.

Instead, the Revenue Stabilization Factors will be tied directly to defined stages of water use reduction. As described in more detail under “Implementation” at this end of this chapter, the calculated factors will be applied to each Volume Charge rate, regardless of whether the Town selects Scenario 1 or Scenario 2. The higher rates will generate the revenue which was lost due to conservation and have been calculated to keep the Town revenue neutral so they can cover the portion of fixed costs which have been paid through the Volume Charge Rates.

Analysis
Based on FY 2024-25 metered consumption data, Figure 5-11 shows the calculation of each customer class’s respective shortage reduction required during each shortage stage. The annual demand for each class is separated into indoor and outdoor water use where indoor Proposed Proposed Rates
Breakpoints FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 (HCF) ($/HCF)
All Customers uniform $11.42 $11.99 $12.59 $13.22 $13.88 -318-
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water use is defined as the period from February through March multiplied by 6 to get the annualized indoor water use over 12 months. Subtracting indoor water use from the total annual water use determines the seasonal outdoor water use.

The percentage reductions required to achieve the overall reduction for a particular stage are derived so that outdoor consumption is reduced 4.0 times indoor consumption. In a Stage 1 shortage, a 3.5% reduction in indoor water use and a 14.0% reduction in outdoor water use are required to achieve an overall 10% reduction. In each stage reduction all customers are required to conserve by the same percentages, reflecting the single approach to Volume Charge rate setting as part of this study.

Figure 5-11. Calculation of Shortage Reductions by Stage Source: Model tab 11. Revenue Stabilization Factors.

The service charges are fixed and generate 36% of the total rate revenue regardless of shortages. The remaining 64% of revenue is generated by the volumetric rates. In deriving the Water Shortage Revenue Stabilization Factors, the factors will only apply to the Volume Charge rates because fluctuations in water use correlate with fluctuations in variable costs.

Each customer class has its own set of Revenue Stabilization Factors corresponding to its reduction in each stage of shortage.

The formula for the Revenue Stabilization Factors comprises conservation and variable cost components. The conservation component adjusts to account for the required reduction in water demand. A portion, not all, of the costs (e.g., power, water purchases) covered by Volume Charge rates are variable and will not be incurred when less water is used. To ensure the Revenue Stabilization Factors do not result in excess revenue collection, the variable cost component of the calculation reduces the factor to account for the portion of variable costs, which is covered by the quantity charges, and will not be incurred when demand decreases.

The Revenue Stabilization Factors are the product of the conservation component multiplied by the variable cost component. Each component is defined as follows:

Revenue Stabilization Factor = Conservation Component multiplied times Variable Cost Component, where
Conservation Component = 1/(1 - a), where
Shortage Total % Water
Stage Reduction Sales (hcf)
Stage 0 0% 1,085,164
Stage 1 10% 976,648
Stage 2 20% 868,131
Stage 3 30% 759,615
Stage 4 40% 651,098
Stage 5 50% 542,582
Stage 6¹ >50% 477,472
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a = required percentage reduction, which varies by customer class.

Variable Cost Component = (b - (c * a))/b, where
a = required percentage reduction, which varies by customer class. b = percentage of revenue from total service charges and volumetric rates for all customer classes that is attributable to volumetric rates, an amount that is 64% based on the cost-of-service analysis.
c = percentage of total revenue requirement covered by service charges and volumetric rates that varies based on fluctuations in demand, an amount that is currently 41%.14
The following example illustrates how the formula determined the 1.090 Revenue Stabilization Factor in Figure 5-12 for a Stage 2 shortage in which an overall conservation goal of 20% if required.

Conservation Component: 1/(1 - a) = 1/(1 - 0.20) = 1.250, where a = required percentage reduction is 20.0% for customers (see Figure 5-11 where a rounded 20% is shown).

Variable Cost Component: (b - (c * a))/b = (0.64 - (0.41 * 0.20))/0.64 = 0.872, where
a = 20.0% reduction for customers in a Stage 2 shortage. b = 64% of total rate revenue is generated by quantity charges; and c = 41% of revenue requirement is related to variable costs.

Revenue Stabilization Factor = 1.250 * 0.872 = 1.090, as it is shown in Figure 5-

12. The Residential Volume Charge rates in effect under non-shortage conditions would be multiplied by 1.090 to derive the quantity charge rates to be in effect during a Stage 2 water shortage. Figure 5-12 shows the Revenue Stabilization Factors that would be applied to the rates that would normally be in effect absent declared shortages. 14 The cost of SFPUC water is the largest example of a variable cost, which varies with water demand.
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Figure 5-12. Revenue Stabilization Factors by WSCP-Defined Shortage Stage Implementation
The recommended Revenue Stabilization Factors in Table 5-12 are implemented only during periods of declared water shortage emergencies. Once a mandatory shortage is declared, the City Council has discretion to enact Revenue Stabilization Adjustments corresponding to the level of shortage reduction implemented using the factors provided in Table 5-12 or calculated using the formula for a specific level of reduction. The adjustments can go in either direction from stage to stage depending on whether the level of reduction is increasing or decreasing during the shortage. At least 30 days prior to making the adjustment, notice must be provided to rate payers, which can be included in the customer’s bills. No protest process is required. These adjustments would be temporary, and rates would return to the regular schedule at the conclusion of the water shortage emergency.

The Revenue Stabilization Factors could be applied when the Town requires its customers to reduce consumption. At such times, the Revenue Stabilization Factors would be multiplied by the Volume Charge rates proposed in the current rate study. These proposed Volume Charge rates are based on FY 2024-25 demand. The specific demand projections for each year are listed in Figure 3-1. The Town can choose to enact Revenue Stabilization Factors when the water emergency demand levels will fall short of the respective year of modeled demand.

The Revenue Stabilization Factors only apply to the chosen structure of Volume Charge rates and not to Service Charge rates, which are independent of water demand. The Revenue Stabilization Factors are multiplied times the non-water shortage, normal-year Volume Charge rates proposed in this report. The Revenue Stabilization Factors would be adopted as part of the rate notification in the Proposition 218 implementation process. Once adopted, the Town could apply the Revenue Stabilization Factors as needed during conservation stages.

As a further example, Figure 5-13 and Figure 5-14 have Volume Charge rates after applying the Revenue Stabilization Factors to the rates proposed for FY 2026-27 through FY 2030-31, under both scenarios (i.e., a two-tiered rate structure and a uniform rate structure).

The tables show the proposed rates followed by the rates that correspond to each stage of conservation.

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6
Up to Up to Up to Up to Up to Greater than
10% Reduction 20% Reduction 30% Reduction 40% Reduction 50% Reduction 50% Reduction

1.040 1.090 1.155 1.240 1.361 1.459
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Figure 5-13. Water Rates with Revenue Stabilization Factors Included - Scenario 1 (Two-Tier Rate Structure)
Rates calculated by applying factors from Figure 5-12 to proposed rates from Figure 5-8.

Figure 5-14. Water Rates with Revenue Stabilization Factors Included – Scenario 2 (Uniform Rate Structure)
Rates calculated by applying factors from Figure 5-12 to proposed rates from Figure 5-10.

Note that if reductions in water use are higher or lower than the specified stages set in the WSCP due to state mandated reductions in the level of potable water usage, or other natural disaster or event that results in a water shortage and an unforeseen drop in water demand, the Revenue Stabilization Factors will be adjusted in accordance with the formula above. 2-Tiered Scenario FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 Proposed Rates ($/HCF) - Before Revenue Stabilization Factors Tier 1 $9.24 $9.70 $10.19 $10.70 $11.24
Tier 2 $14.69 $15.42 $16.19 $17.00 $17.85
Rates ($/HCF) at each Water Shortage Stage
Stage 1
Tier 1 $9.61 $10.09 $10.60 $11.13 $11.69
Tier 2 $15.28 $16.04 $16.84 $17.68 $18.57
Stage 2
Tier 1 $10.07 $10.57 $11.11 $11.66 $12.25
Tier 2 $16.01 $16.81 $17.65 $18.53 $19.46
Stage 3
Tier 1 $10.67 $11.20 $11.76 $12.35 $12.98
Tier 2 $16.96 $17.80 $18.69 $19.63 $20.61
Stage 4
Tier 1 $11.46 $12.03 $12.64 $13.27 $13.94
Tier 2 $18.22 $19.13 $20.08 $21.09 $22.14
Stage 5
Tier 1 $12.57 $13.20 $13.86 $14.56 $15.29
Tier 2 $19.99 $20.98 $22.03 $23.13 $24.29
Stage 6
Tier 1 $13.48 $14.15 $14.87 $15.61 $16.40
Tier 2 $21.43 $22.50 $23.62 $24.80 $26.04
Uniform Scenario FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31 Proposed Rates ($/HCF) - Before Revenue Stabilization Factors All Water Use $11.42 $11.99 $12.59 $13.22 $13.88
Rates ($/HCF) at each Water Shortage Stage
Stage 1 $11.88 $12.47 $13.09 $13.75 $14.44
Stage 2 $12.45 $13.07 $13.73 $14.41 $15.13
Stage 3 $13.18 $13.84 $14.54 $15.26 $16.03
Stage 4 $14.17 $14.87 $15.62 $16.40 $17.22
Stage 5 $15.54 $16.31 $17.13 $17.99 $18.89
Stage 6 $16.66 $17.49 $18.37 $19.29 $20.25
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Pass-Through Adjustment
The cost of SFPUC water is the single largest component of the Town’s revenue requirements.

Because the Town has no control over the SFPUC’s wholesale water rate, this cost is simply passed through to the Town’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 Town incorporate annual pass-through adjustments in its volumetric rates so that the Town would pass through any additional increases in the SFPUC wholesale water rates that are above or below these projected SFPUC wholesale water rates, provided that the impacted Volume Charge will not be increased in any year by more than 20%.

Each year the Town 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 Town’s Volume Charge rates for Residential and Non-Residential customers. The wholesale rates per HCF used in this study15 are as follows:

FY 2026-27 – $6.23
FY 2027-28 – $6.69
FY 2028-29 – $6.91
FY 2029-30 – $7.06
FY 2030-31 – $7.38
For example, if the updated SFPUC rate for FY 2027-28 is $6.79, the $0.10 difference should be added to the Volume Charge rates charged to Residential and Non-Residential water customers. If the updated SFPUC rate is less than the foregoing rates, the difference should be subtracted from the Town’s volumetric rates. In other words, the adjustment should be made in either direction.

The pass-through adjustment acts similarly to the Revenue Stabilization Factors, which was incorporated into the Proposition 218 notice in the previously adopted cost-of-service study.

The pass-through adjustment allows the Town to adjust volumetric rates to track any difference between the SFPUC rates that were included in the model and the actual rates adopted each year by SFPUC. The pass-through adjustment can also be made by providing 30-day notice in the customer bills without triggering the need for a Proposition 218 protest process.
15 Rates included in SFPUC presentation to BAWSCA members on February 19, 2026. -323-
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VI. Customer Bill Impacts
In the previous chapter, the Volume and Service Charge structures were compared for the current and proposed rates. A further understanding of the differences between the current structure and the two proposed structure alternatives can be gained by comparing bills based on both rate structures.

BILL COMPARISON
Bills Under Proposed and Approved Rates
There are twelve residential parcels that are billed on a monthly basis. Figure 6-1 and Figure 6-2 below illustrate the difference between the current and proposed rate structures for these customers by comparing water use from FY 2024-25. Thus, an annual bill is the sum of twelve monthly billing periods of water use, and twelve fixed charges per meter size for each meter that serves the parcel. The red highlighted value in each differential column ($ Difference) indicates the maximum decrease for the proposed rates scenario in relation to what the parcel was billed under the current structure for FY 2024-25. The green highlighted value indicates the maximum increase for the proposed rate scenario in relation to what the parcel was billed under the current structure for FY 2024-25. All names were removed for privacy.

Comparing the annual bill results and bill differential results between the Proposed Two-Tiered Rates and the Proposed Uniform Rates provides additional context. For example, the total amount for the annual bills that would be paid by all twelve parcels under the proposed twotiered rate structure, $214,261, will be greater than the total annual bills paid under the proposed uniform rates structure, $185,336. While both annual amounts are less than the annual amount under the current, four-tiered rate structure, the overall reduction for the bills paid using the uniform rate structure would be greater than under the proposed two-tiered rate structure.

Figure 6-1. Monthly Residential Customer Bill Impacts
Annual bills calculated using water sales reported from FY 2024-25.

Bills based on proposed rates reflect FY 2026-27 rates from Figure 5-8 and Figure 5-10.

Monthly Current Proposed 2-Tiered Rates Proposed Uniform Rates Residential 4-Tiered
Customer Annual Bill Annual Bill $ Difference Annual Bill $ Difference A $8,083 $7,323 ($760) $6,827 ($1,256)
B $5,120 $5,208 $88 $5,331 $211
C $34,039 $27,625 ($6,414) $23,942 ($10,097)
D $4,589 $5,405 $816 $5,526 $937
E $2,577 $2,869 $292 $3,013 $436
F $102,366 $74,262 ($28,103) $59,565 ($42,801)
G $26,166 $21,304 ($4,862) $18,506 ($7,660)
H $24,290 $18,918 ($5,373) $15,915 ($8,375)
I $23,327 $18,505 ($4,822) $15,872 ($7,455)
J $8,024 $8,941 $916 $9,431 $1,407
K $2,507 $2,786 $279 $2,910 $403
L $25,722 $21,115 ($4,607) $18,498 ($7,224)
Total $266,810 $214,261 ($52,549) $185,336 ($81,475)
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In addition, when comparing the minimum and maximum differentials, the bills under the proposed uniform rates exhibit a wider array of impacts. The largest increase for annual bills under uniform rates structure is greater than the annual bills under the proposed two-tiered rate structure. Also, the largest decrease for annual bills under uniform rates structure is greater than the annual bills under the proposed two-tiered rate structure.

A comparison of the Non-Residential annual bill results and bill differential results between the Proposed Two-Tiered Rates and the Proposed Uniform Rates in Figure 6-2 provides similar findings as those in Figure 6-1 for the Residential customers billed monthly. For example, the total amount for the annual bills that would be paid under the proposed two-tiered rate structure, $933,709, will be greater than the total annual bills paid under the proposed uniform rates structure, $806,847. However, both annual amounts are greater than the annual total for bills paid under the current uniform rate structure charged to Non-Residential customers.

Figure 6-2. Non-Residential Bill Impacts
Annual bills calculated using water sales reported from FY 2024-25.

Bills based on proposed rates reflect FY 2026-27 rates from Figure 5-8 and Figure 5-10.

Unlike Residential customers billed monthly, under either proposed rate structure, all NonResidential customers would see an annual increase to their water bills. The largest increase for any parcel under either proposed rate structure would be under the two-tiered rate structure, totaling $81,073 in additional water bills for the year. In contrast, the smallest annual increase for any parcel would be $246 under the two-tiered rate structure. Thus, for Non-Residential customers, bills under the proposed, two-tiered rate structure would exhibit a broader range of impacts in comparison to the proposed, uniform rate structure.

Current Proposed 2-Tiered Rates Proposed Uniform Rates
Non-Residential Uniform
Customer Annual Bill Annual Bill $ Difference Annual Bill $ Difference A $249,920 $330,993 $81,073 $273,454 $23,534
B $15,596 $19,821 $4,225 $16,980 $1,384
C $7,862 $8,716 $854 $9,489 $1,627
D $13,068 $16,281 $3,213 $14,227 $1,160
E $35,644 $42,815 $7,172 $38,808 $3,165
F $3,200 $3,446 $246 $3,813 $613
G $48,134 $62,436 $14,302 $52,733 $4,599
H $47,434 $59,461 $12,027 $49,014 $1,579
I $2,319 $2,675 $356 $2,854 $535
J $68,360 $93,712 $25,351 $74,422 $6,062
K $146,069 $183,281 $37,212 $182,380 $36,311
L $39,513 $53,363 $13,850 $43,017 $3,504
M $41,936 $56,708 $14,772 $45,655 $3,719
Total $719,054 $933,709 $214,655 $806,847 $87,793
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Capturing the annual impacts across all 3,988 Residential parcels billed on a bi-monthly basis in a similar table to Non-Residential customers is not feasible. Instead, Figure 6-3 and Figure 6-4 provide a statistical overview from comparing the monthly bill impacts across all 3,988 residential parcels billed in the Town’s service area in FY 2024-25. Over this span of parcels, 24,019 bills were analyzed to develop the values shown in Figure 6-3 and Figure 6-4. In a given year, each parcel billed bi-monthly will receive six bills for the year. The monthly amounts are included to give customers a sense of how bill impacts could affect their monthly expenses.

The mean increase represents the average impact across all bills compared in the data set.

A percentile represents the percentage of bills in ascending order that are equal to or less than the associated value. For example, in Figure 6-3 the 25th percentile means that of the 24,019 bills analyzed, 25%, or 6,004 bills, would have an increase less than or equal to $43.08.

The median increase could also be presented as the 50th percentile change, meaning that half of the bills have would result in an increase that is equal to or less than the named value. For example, in Figure 6-3, the median value is $91.13.

The 75th percentile means that of the 24,019 bills analyzed, this value is the 18,015th in the sequence. Thus, 18,014 bills have an increase that is equal to or less than this figure, and only 6,004 bills would have an increase equal to or larger than this value. In Figure 6-3 and Figure 6-4, the majority of bi-monthly Residential bills have an impact that is smaller than the 75th percentile increases presented below.

Figure 6-3. Mean/Median Bill Impacts – Scenario 1 (Two-Tier Rate Structure) Figure 6-4. Mean/Median Bill Impacts – Scenario 2 (Uniform Rate Structure) Figure 6-5 Compares the total annual bills of customers with 1” water meters at various usage levels. The four scenarios of water use reflect the usage patterns and bills applicable to four specific Residential parcels billed bi-monthly. In general, for each customer, more water was used in the summer months than in the winter months. However, the water use patterns are unique to the demands of the parcel and have not been modified from what was billed in FY 2024-25. As a result, customers using the same annual volume of water in FY 2024-25, but with different patterns of peaking throughout the year could have paid more or less and Bill Increases: Old vs. New Tiers
Bi-Monthly Monthly
Mean Increase $43.08 $21.54
25th Percentile Increase $77.03 $38.52
Median Increase $91.13 $45.57
75th Percentile Increase $100.53 $50.27
Bill Increases: Old vs. New Uniform
Bi-Monthly Monthly
Mean Increase $49.30 $24.65
25th Percentile Increase $87.15 $43.58
Median Increase $121.62 $60.81
75th Percentile Increase $159.11 $79.55
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consequently, would see different changes to their overall bill. As shown in Figure 6-5, only users with high water use will see a decrease in their total annual bill, as these customers will pay less under either proposed water rate structure for water that is currently billed using Tier-3 or Tier-4 rates. High water use customers who have more bills with usage occurring in Tier-3 or Tier-4, they will see a greater reduction to their bill than a customer who consistently uses less water and only demands bi-monthly water use volumes within the current Tier-1 and Tier-2 ranges.

Figure 6-5. Bi-Monthly Residential Customers – Annual Water Bill Comparison Source: FY 2024-25 water sales for bi-monthly residential customers.

In place of annual comparisons, Figure 6-6 through Figure 6-9 provide specific bill impacts by incremental water use and meter size for bi-monthly Residential customers. Each figure compares current bills and bills under the proposed rate structure alternatives using a defined meter size. The majority of bi-monthly Residential customers are served by a 1” meter. The column, “% of Bills Within Range,” indicates the quantity of bills that report water use between the water use specified in that row and the previous row in relation to the total quantity of bills for all bi-monthly Residential customers, independent of meter size. For example, in Figure 6-6, 20% represents the percentage of bills that are less than or equal to 10 HCF and greater than 0 HCF. Each “$ Change” column compares the bill under the proposed rate structure to the current bill. Therefore, the change calculated reflects the potential adjustment made to both the Volume Charge rates and the Service Charges.

Figure 6-6. Bi-Monthly Residential Customer Bills Comparison – 3/4” meter Note: Bills with usage exceeding 100 HCF in a billing period account for 8% of all Residential bills.

Annual Water Current Proposed 2-Tiers Rates Proposed Uniform Rate Water Use Use (HCF) Annual Bill Total Annual Bill Total Annual Change Annual Bill Total Annual Change Very Low 78 $1,736.22 $2,295.90 $559.68 $2,465.94 $729.72 Low Use 120 $2,092.12 $2,683.98 $591.86 $2,945.58 $853.46 Average Use 240 $3,446.72 $4,016.23 $569.51 $4,315.98 $869.26 High Use 480 $7,593.12 $7,389.23 ($203.89) $7,056.78 ($536.34) 3/4" meter
% of Bills Proposed 2-Tiered Rates Proposed Uniform Rate Within Water Use Current Bi-Monthly Bi-Monthly
Range (HCF) Total Bill Bill $ Change Bill $ Change

2.4% 0 $161.18 $240.82 $79.64 $240.82 $79.64

19.8% 10 $237.08 $333.22 $96.14 $355.02 $117.94

21.2% 20 $312.98 $425.62 $112.64 $469.22 $156.24

13.5% 30 $407.44 $518.02 $110.58 $583.42 $175.98

9.6% 40 $506.54 $610.42 $103.88 $697.62 $191.08

6.8% 50 $639.96 $746.42 $106.46 $811.82 $171.86

5.6% 60 $796.26 $893.32 $97.06 $926.02 $129.76

4.6% 70 $952.56 $1,040.22 $87.66 $1,040.22 $87.66

3.5% 80 $1,119.52 $1,187.12 $67.60 $1,154.42 $34.90

2.7% 90 $1,329.12 $1,334.02 $4.90 $1,268.62 ($60.50)

2.2% 100 $1,538.72 $1,480.92 ($57.80) $1,382.82 ($155.90) -327-
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Figure 6-7. Bi-Monthly Residential Customer Bills Comparison – 1” meter Note: Bills with usage exceeding 100 HCF in a billing period account for 8% of all Residential bills.

Figure 6-8. Bi-Monthly Residential Customer Bills Comparison – 1 ½” meter Note: Bills with usage exceeding 100 HCF in a billing period account for 8% of all Residential bills. 1" meter
% of Bills Proposed 2-Tiered Rates Proposed Uniform Rate Within Water Use Current Bi-Monthly Bi-Monthly
Range (HCF) Bill Bill $ Change Bill $ Change

2.4% 0 $190.70 $262.53 $71.83 $262.53 $71.83

19.8% 10 $266.60 $354.93 $88.33 $376.73 $110.13

21.2% 20 $342.50 $447.33 $104.83 $490.93 $148.43

13.5% 30 $436.96 $539.73 $102.77 $605.13 $168.17

9.6% 40 $536.06 $632.13 $96.07 $719.33 $183.27

6.8% 50 $669.48 $768.13 $98.65 $833.53 $164.05

5.6% 60 $825.78 $915.03 $89.25 $947.73 $121.95

4.6% 70 $982.08 $1,061.93 $79.85 $1,061.93 $79.85

3.5% 80 $1,149.04 $1,208.83 $59.79 $1,176.13 $27.09

2.7% 90 $1,358.64 $1,355.73 ($2.91) $1,290.33 ($68.31)

2.2% 100 $1,568.24 $1,502.63 ($65.61) $1,404.53 ($163.71) 1 1/2" meter
% of Bills Proposed 2-Tiered Rates Proposed Uniform Rate Within Water Use Current Bi-Monthly Bi-Monthly
Range (HCF) Bill Bill $ Change Bill $ Change

2.4% 0 $257.12 $311.38 $54.26 $311.38 $54.26

19.8% 10 $333.02 $403.78 $70.76 $425.58 $92.56

21.2% 20 $408.92 $496.18 $87.26 $539.78 $130.86

13.5% 30 $503.38 $588.58 $85.20 $653.98 $150.60

9.6% 40 $602.48 $680.98 $78.50 $768.18 $165.70

6.8% 50 $735.90 $816.98 $81.08 $882.38 $146.48

5.6% 60 $892.20 $963.88 $71.68 $996.58 $104.38

4.6% 70 $1,048.50 $1,110.78 $62.28 $1,110.78 $62.28

3.5% 80 $1,215.46 $1,257.68 $42.22 $1,224.98 $9.52

2.7% 90 $1,425.06 $1,404.58 ($20.48) $1,339.18 ($85.88)

2.2% 100 $1,634.66 $1,551.48 ($83.18) $1,453.38 ($181.28) -328-
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Figure 6-9. Bi-Monthly Residential Customer Bills Comparison – 2” meter Note: Bills with usage exceeding 100 HCF in a billing period account for 8% of all Residential bills.

Figure 6-10 compares the volume charge at each specified level of water use. This provides information for what a bi-monthly Residential customer would pay per volume of water used each billing period, independent of the meter or meters serving their parcel. Each “$ Change” column compares the solely the volume charge of each bill under the proposed rate structure to the volume charge of the current bill. Therefore, the change calculated reflects the potential adjustment made to only the Volume Charge rates. This comparison identifies that under the two-tiered rate structure, a bi-monthly Residential customer would see a reduced volume charge per bill for water use that is 90 HCF or more. In turn, under the uniform rate structure, a bi-monthly Residential customer would see a reduced volume charge per bill for water use that is 80 HCF or more.

Figure 6-10. Bi-Monthly Volume Charge Comparison
Note: Bills with usage exceeding 100 HCF in a billing period account for 8% of all Residential bills. 2" meter
% of Bills Proposed 2-Tiered Rates Proposed Uniform Rate Within Water Use Current Bi-Monthly Bi-Monthly
Range (HCF) Bill Bill $ Change Bill $ Change

2.4% 0 $345.68 $376.52 $30.84 $376.52 $30.84

19.8% 10 $421.58 $468.92 $47.34 $490.72 $69.14

21.2% 20 $497.48 $561.32 $63.84 $604.92 $107.44

13.5% 30 $591.94 $653.72 $61.78 $719.12 $127.18

9.6% 40 $691.04 $746.12 $55.08 $833.32 $142.28

6.8% 50 $824.46 $882.12 $57.66 $947.52 $123.06

5.6% 60 $980.76 $1,029.02 $48.26 $1,061.72 $80.96

4.6% 70 $1,137.06 $1,175.92 $38.86 $1,175.92 $38.86

3.5% 80 $1,304.02 $1,322.82 $18.80 $1,290.12 ($13.90)

2.7% 90 $1,513.62 $1,469.72 ($43.90) $1,404.32 ($109.30)

2.2% 100 $1,723.22 $1,616.62 ($106.60) $1,518.52 ($204.70) Proposed 2-Tiered Rates Proposed Uniform Rate
% of Water Use Current Bi-Monthly Bi-Monthly
Bills (HCF) Vol Chg Bill Vol Chg Bill $ Change Vol Chg Bill $ Change

2.4% 0 $0.00 $0.00 $0.00 $0.00 $0.00

19.8% 10 $75.90 $92.40 $16.50 $114.20 $38.30

21.2% 20 $151.80 $184.80 $33.00 $228.40 $76.60

13.5% 30 $246.26 $277.20 $30.94 $342.60 $96.34

9.6% 40 $345.36 $369.60 $24.24 $456.80 $111.44

6.8% 50 $478.78 $505.60 $26.82 $571.00 $92.22

5.6% 60 $635.08 $652.50 $17.42 $685.20 $50.12

4.6% 70 $791.38 $799.40 $8.02 $799.40 $8.02

3.5% 80 $958.34 $946.30 ($12.04) $913.60 ($44.74)

2.7% 90 $1,167.94 $1,093.20 ($74.74) $1,027.80 ($140.14)

2.2% 100 $1,377.54 $1,240.10 ($137.44) $1,142.00 ($235.54) -329-
1 NOTICE OF PUBLIC HEARING ON PROPOSED

ADJUSTMENTS AND INCREASES TO
TOWN OF HILLSBOROUGH WATER SERVICE CHARGES BEGINNING JULY 1, 2026 The Town of Hillsborough invites the public to attend a public hearing to be held on Monday, June 8, 2026, at 6:00 p.m. to consider adoption of a five-year schedule of adjustments and increases to the Town’s water rates, to be effective July 1, 2026.

The purpose of the public hearing is to consider all oral testimony and written protests to, and the adoption of, the proposed rates. If adopted, the new rates will go into effect for services provided on and after July 1, 2026, and will be adjusted each July 1 thereafter through, and including, July 1, 2030.

RATE ADJUSTMENT PROCESS
The proposed rate adjustments and increases are based on an analysis by an independent rate consultant that demonstrated the proportional cost to the Town of providing water service to each property it serves. A copy of the rate study report is available online at https://www.hillsborough.net/DocumentCenter/View/6541/ Hillsborough-2026-Water-COS-Report and is on file with the City Clerk.

ABOUT THE TOWN’S WATER SYSTEM SERVICE
The Town operates and maintains a potable water distribution system to serve its residents and water users. It is a complex system with varying topography and 19 separate but interconnected pressure zones. The infrastructure network includes 108 miles of water mains, 18 water tanks, 14 water pump stations and over 7,500 various assets, such as water meters, fire hydrants, and valves. The Town purchases its water from the San Francisco Public Utilities Commission (SFPUC). The Town pumps and delivers water to approximately 4,270 customers, nearly all of whom are single-family residential customers.

The Town is committed to providing the highest quality water at the lowest possible rates for our customers. To meet this commitment, the Town engaged HF&H Consultants, LLC (HF&H), an independent consultant, to perform a cost-of-service water rate study in order to evaluate the infrastructure, programs, and operations and maintenance costs of the Town’s water system and recommend rates necessary to recover the costs of providing water service for the next five years. The Town’s rate study report demonstrates what it costs the Town to provide water service and the appropriate rates to fairly and proportionately allocate the costs of providing water to our customers. The cost of providing water includes not only the water we purchase, but the infrastructure that treats and delivers the water, as well as the costs to fund the Town’s conservation, efficiency, and demand management programs to ensure that there is safe and reliable water to meet the demands of all of our water customers twentyfour hours a day, seven days a week. The Town’s water utility is a self-supporting enterprise, such that charges for water service must be adequate to fund the utility’s operating and maintenance costs, debt service obligations, and ongoing capital improvement needs.

WHY DO RATES NEED TO CHANGE?
The proposed rates are needed to keep revenues aligned with long-term funding needs, including:
• Recovering current and long-term projected costs of operating and maintaining the water system, including 23% increases in the costs of the wholesale water the Town purchases from the SFPUC over the next five years;
• Funding $14.6 million in capital improvement projects over the next five years to repair and update the Town’s aging water system;
• Maintaining the operational and financial stability of the water utility; ATTACHMENT 2
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2 • Complying with State mandated drinking water regulatory requirements; • Meeting and complying with annual debt service requirements; and • Aligning the rates with the projected cost of service for each level of service provided.

PROPOSED WATER RATES
a) Residential and Non-Residential Rate Structures.

The proposed rates are calculated to recover the costs of providing water services and to proportionately allocate those costs on a parcel basis among the various customer categories. The water rate structure has two customer categories—Residential and Non-Residential— and two components—a Service Charge and a Volume Charge.

The proposed Service Charge is a fixed charge calculated to recover a portion of the Town’s fixed costs of operating and maintaining the water system and delivering water. The proposed rates for the Service Charge are established on the basis of the size of the meter (in inches) serving a property to recover the incremental costs of sizing facilities to sufficiently deliver water to properties served by larger meters. The Volume Charge is a variable charge imposed per unit of delivered water with one unit equal to one hundred cubic feet (HCF), or 748 gallons, and is calculated to recover a portion of the Town’s fixed costs incurred as a result of variable water usage, and the Town’s variable costs of providing water service.

The Town has determined that the proposed water rates set forth in Table 1a, Table 1b, and Table 2 below would not exceed the estimated reasonable proportional cost of providing service to each parcel at each level of service. The below rates are proposed to take effect July 1 of each year, commencing July 1, 2026.

Table 1a. Current and Proposed Service Charge Bi-Monthly Rates Table 1b. Current and Proposed Service Charge Monthly Rates Current Proposed
Service Size Charge 7/1/2026 7/1/2027 7/1/2028 7/1/2029 7/1/2030 3/4" $161.18 $240.82 $252.86 $265.50 $278.78 $292.72
1" $190.70 $262.53 $275.66 $289.44 $303.91 $319.11
1 1/2" $257.12 $311.38 $326.95 $343.30 $360.47 $378.49
2" $345.68 $376.52 $395.35 $415.12 $435.88 $457.67
3" $581.83 $550.21 $577.72 $606.61 $636.94 $668.79
6" $1,585.49 $1,288.41 $1,352.83 $1,420.47 $1,491.49 $1,566.06 8" $2,471.07 $1,939.76 $2,036.75 $2,138.59 $2,245.52 $2,357.80 Current Proposed
Service Size Charge 7/1/2026 7/1/2027 7/1/2028 7/1/2029 7/1/2030 3/4" $80.59 $120.41 $126.43 $132.75 $139.39 $146.36
1" $95.35 $131.26 $137.83 $144.72 $151.96 $159.56
1 1/2" $128.56 $155.69 $163.48 $171.65 $180.24 $189.25
2" $172.84 $188.26 $197.68 $207.56 $217.94 $228.84
3" $290.92 $275.10 $288.86 $303.31 $318.47 $334.40
6" $792.75 $644.20 $676.42 $710.24 $745.75 $783.03
8" $1,235.54 $969.88 $1,018.38 $1,069.30 $1,122.76 $1,178.90 -331-
3 Table 2. Current and Proposed Volume Charge Rates
b) Rate Adjustments During Water Shortages.

The proposed Revenue Stabilization Factors would be applied to the Volume Charge rates and implemented during locally declared water shortages, state mandated reductions in the level of potable water usage, or other natural disaster or event that requires reductions in water usage. The City Council may implement the Revenue Stabilization Factors as necessary, depending on the level of potable water use cutbacks required, to ensure that the water utility recovers sufficient revenues to meet its expenditures and debt obligations. The rates for the Volume Charge would be multiplied by the applicable Revenue Stabilization Factor to derive the Volume Charge rates to be in effect during the water shortage for each Customer Class.

The maximum Revenue Stabilization Factors are set forth in Table 3 below. The actual Revenue Stabilization Factor to be applied at any time may be lower than the maximum Revenue Stabilization Factor set forth below, and will depend on the level of reduction in water usage necessary at such time, and will be calculated in accordance with the methodology set forth in the rate study report, provided that the actual Revenue Stabilization Factor will not exceed the maximum Revenue Stabilization Factors set forth in Table 3.

Table 4 includes an example of how the Rates Stabilization Factors would impact the Volume Charge, if applied at the maximum amount to the rates for FY 2026-27 through FY 2030-31.

Current Current Proposed
Breakpoints Rates Breakpoints 7/1/2026 7/1/2027 7/1/2028 7/1/2029 7/1/2030 (HCF) ($/HCF) (HCF) ($/HCF)
Bi-Monthly Residential
0 to 22 $7.59 Tier 1 0 to 42 $9.24 $9.70 $10.19 $10.70 $11.24 23 to 44 $9.91 Tier 2 42+ $14.69 $15.42 $16.19 $17.00 $17.85 45 to 78 $15.63
79+ $20.96 Monthly Residential/Non-Residential
Tier 1 0 to 21 $9.24 $9.70 $10.19 $10.70 $11.24
uniform $10.49 Tier 2 21+ $14.69 $15.42 $16.19 $17.00 $17.85 -332-
4 Table 3. Maximum Revenue Stabilization Factors
Table 4. Example of 2023 Rates with Maximum Revenue Stabilization Factors *Rounding may occur in the rates derived from the multiplication of the Revenue Stabilization Factors to the applicable rates for each incremental percentage of reduction in water usage. c) Pass-Through Adjustment
The proposed rates for the Volume Charge are based on the SFPUC projected increases in its wholesale water rates on July 1 of each year from the current cost of $6.23 per HCF in 2026, $6.69 per HCF in 2027, $6.91 per HCF in 2028, $7.06 per HCF in 2029, and $7.38 per HCF in 2030. Pursuant to California Government Code Section 53756, the Town is proposing to pass through any additional increases in the SFPUC wholesale water rates that are above or below these projected SFPUC wholesale water rates, provided that the impacted Volume Charge will not be increased in any year by more than 20%. A pass through will be implemented by increasing or decreasing the Town’s proposed Volume Charge rates by the amount of the SFPUC wholesale water rate increase or decrease in cents per HCF in excess or below the projected SFPUC wholesale rate. For example, if the SFPUC raises it wholesale water rate to $6.79 per CCF on July 1, 2027 (instead of the projected $6.69 per HCF), the Town may increase its water usage charge by an additional $0.10 per HCF on or after July 1, 2027.

Similarly, the Town is proposing to pass through any savings in the SFPUC wholesale water rates that are below the projected wholesale water rates.

Prior to implementing a pass-through increase of the SFPUC wholesale water rates, the Town will send written notification to all customers at least 30 days prior to the effective date.

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6
Up to Up to Up to Up to Up to Greater than
10% Reduction 20% Reduction 30% Reduction 40% Reduction 50% Reduction 50% Reduction

1.040 1.090 1.155 1.240 1.361 1.459
FY 2026-27 FY 2027-28 FY 2028-29 FY 2029-30 FY 2030-31
Proposed Rates ($/HCF) - Before Revenue Stabilization Factors Tier 1 $9.24 $9.70 $10.19 $10.70 $11.24
Tier 2 $14.69 $15.42 $16.19 $17.00 $17.85
Rates ($/HCF) at each Water Shortage Stage
Stage 1
Tier 1 $9.61 $10.09 $10.60 $11.13 $11.69
Tier 2 $15.28 $16.04 $16.84 $17.68 $18.57
Stage 2
Tier 1 $10.07 $10.57 $11.11 $11.66 $12.25
Tier 2 $16.01 $16.81 $17.65 $18.53 $19.46
Stage 3
Tier 1 $10.67 $11.20 $11.76 $12.35 $12.98
Tier 2 $16.96 $17.80 $18.69 $19.63 $20.61
Stage 4
Tier 1 $11.46 $12.03 $12.64 $13.27 $13.94
Tier 2 $18.22 $19.13 $20.08 $21.09 $22.14
Stage 5
Tier 1 $12.57 $13.20 $13.86 $14.56 $15.29
Tier 2 $19.99 $20.98 $22.03 $23.13 $24.29
Stage 6
Tier 1 $13.48 $14.15 $14.87 $15.61 $16.40
Tier 2 $21.43 $22.50 $23.62 $24.80 $26.04
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5 YOUR OPPORTUNITY TO GET INVOLVED
After reading the information in this letter, you may wish to provide input to the City Council. Below are three ways that you can get involved.

PUBLIC HEARING, OBJECTIONS, AND PROTESTS
Attend the Public Hearing:

Any interested member of the public may attend the public hearing, which will be held at:

Monday, June 8, 2026 at 6:00 p.m.
1600 Floribunda Avenue – Council Chambers
Hillsborough, CA 94010
At the public hearing, you will have an opportunity to provide oral or written testimony to the City Council, and may also submit a written protest as described below. Please note that submitting oral testimony at the City Council meeting will not count as a written protest unless accompanied by written protest that meets the requirements described below. The City Council will consider all oral and written testimony and timely written protests, and determine whether a majority protest exists prior to deliberating on the proposed rate adjustments.

Submit a Written Protest:

In addition to, or instead of, participating in the public hearing, any record owner of a parcel upon which the water service charges are proposed to be imposed and any tenant directly liable for the payment of water service charges (i.e., a customer of record who is not a property owner) may submit a written protest to the proposed rate adjustments and increases to the Town’s service charges; however, only one protest will be counted per identified parcel. To be valid, a written protest must: (1) state that the identified property owner or tenant is opposed to the proposed water rate adjustments; (2) provide the location of the identified parcel (by street address, assessor’s parcel number, or customer account number); and (3) include the name and signature of the property owner or tenant submitting the protest. Written protests may be submitted to the City Clerk by mail or in person at 1600 Floribunda Avenue, Hillsborough, CA 94010, or during the public hearing (date, time, and location noted above).

The City Clerk must receive written protests delivered by mail no later than 4:00 p.m. on the date of the Public Hearing. If submitted during the public hearing, the written protest must be received prior to the close of the public testimony portion of the public hearing. Any protest submitted via e-mail or other electronic means will not be accepted as a valid written protest. Please indicate on the outside of any envelope mailed to the Town Attn:

Water Rate Hearing.

Submit a Written Objection
Finally, and separate from the written protest procedure, parties that wish to preserve the right to legally challenge the proposed water rate adjustments must submit a written objection by 4:00 p.m. on June 1, 2026. This is an exhaustion of administrative remedies requirement and is a separate legal requirement from the written protest.

In order to be valid, your written objection must:

1. Include a clear statement that it is an objection to the proposed water rates.

2. Provide the name of the record owner or customer of record;

3. Identify the affected parcel by assessor’s parcel number or service address;

4. Include an explanation of why you believe the rates are illegal. The explanation must be in sufficient detail to allow the Town to determine whether any changes to the proposed rates are necessary. A statement that the -334-
6 rates are too high is insufficient to constitute a valid legal objection. Similarly, a statement that the rates are illegal because they violate Proposition 218, without additional information that allows the Town to understand whether any changes to the rates are necessary, is insufficient to constitute a valid legal objection.

5. Include the signature of the record owner or customer of record with respect to the identified parcel.

To be valid, all written objections must include the information listed above and be received by the City Clerk by 4:00 p.m. on June 1, 2026, by mail or in person at 1600 Floribunda Ave., Hillsborough, CA 94010.

Failure to submit a timely objection that meets the requirements described above will bar any right to challenge the water service charges through a legal proceeding.

Prior to the close of the public hearing, the City Council will consider and respond in writing to any timely, valid written objections. The Town’s responses will explain the substantive basis for retaining or altering the proposed water rates in response to the written objection, and, if applicable, the grounds for not making any amendments in response to the objection. The City Council will accept and consider all written protests and will hear and consider all oral comments to the proposed rate adjustments and increases at the public hearing. Oral comments at the public hearing will not qualify as formal protests unless accompanied by a written protest. Upon the conclusion of the public hearing, the City Council will consider adoption of the proposed rate adjustments and increases as described in this notice. If written protests against the proposed rates are not presented by a majority of the property owners or tenants of the identified parcels subject to the proposed rate increases and the City Council will be authorized to adopt the rate increases.

The documents supporting the rate adjustments and increases are available for review online at https://www.hillsborough.net/DocumentCenter/View/6541/Hillsborough-2026-Water-COS-Report and at the City Clerk’s office between 8:00 a.m. and 5:00 p.m., Monday through Thursday, and between 8:00 a.m. and 12:00 p.m. on Fridays.

The proposed water rates are subject to Government Code section 53759. You are hereby notified that any judicial action or proceeding to attack, review, set aside, void, validate, or annul the City Council’s adoption of the proposed water rates must be commenced within 120 days of the effective date or of the date of the final passage, adoption, or approval of the ordinance or resolution adopting the water rates, whichever is later. -335-
Town of Hillsborough
Proposition 218 Noticing, Tabulation, and Protest Procedures The following procedures set forth the process for the completion, filing and tabulation of written protests for the Notice of Public Hearing on Proposed Adjustments and Increases to Town of Hillsborough Water Rates. These procedures are intended to assist the Town in complying with the process requirements set forth in Proposition 218 (The 218 Process).

The City Clerk’s office (City Clerk) will be responsible for the 218 Process for the Town and may be assisted by Town staff or outside professionals. These procedures will be kept on file in the office of the City Clerk.

A. Completion of Written Protest

1. Which properties are subject to the 218 Process?
Properties that are within the service area of the Town of Hillsborough are subject to the 218 Process.

These properties will be designated as the Town’s “Service Area” within these Procedures.

Protests received from properties within the Service Area will be tabulated in accordance with Proposition 218 and the procedures outlined herein.

2. Who may file Written Protest?
The owner of the assessor’s parcel subject to the rate increase may file a written protest. As used in these Procedures, the term “Owner” includes the owner’s authorized representative. If the owner of the parcel is a partnership, joint tenancy, or tenancy in common, a Protest may be filed by any of the general partners, joint tenants, or tenants in common.

3. Contents of the Written Protest
Only Protests submitted in accordance with the Town’s “Notice of Public Hearing on Proposed Adjustments and Increases to Town of Hillsborough Water Rates” will be tabulated. To be valid, the written protest must include the following information:
:(1) state that the identified property owner or tenant is opposed to the proposed water rate adjustments. (2) provide the location of the identified parcel (by street address, assessor’s parcel number, or customer account number); and
(3) include the name and signature of the property owner or tenant submitting the protest.

4. Valid Protest?
Only written protests with all required information stated above will be considered valid and included in the final tabulation. Protests by telephone, fax, or e-mail will not be accepted.

B. Return of the Protest

1. Where to file the Protest?
Written protests may be submitted to the City Clerk by mail at Town of Hillsborough, 1600 Floribunda Ave., Hillsborough, CA 94010.

ATTACHMENT 3
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Protests may be delivered in person to the City Clerk’s Office during the Town’s business hours. During the Public Hearing on the proposed rate increase, protests shall be provided to the City Clerk in the Council Chambers at Town Hall prior to the close of the Public Hearing.

2. When to return the Protest?
All protests must be received by the City Clerk by the close of the Public Hearing. The City Clerk must receive a written protest by mail no later than 4:00 p.m. on the date of the Public Hearing, or if provided to the city clerk in person, not later than the close of the public comment portion of the Public Hearing on the proposed rate increase.

3. Withdrawal of Protest
After filing a Protest to the Town, the person who signed the Protest may withdraw the Protest by submitting a written request in person to the City Clerk at 1600 Floribunda Ave., Hillsborough, CA 94010. The City Clerk will retain all withdrawn Protests and will clearly indicate on the face of such Protests that they have been withdrawn.

C. Tabulation of Protests

1. Which Protests will be tabulated?
Only Protests from within the Service Area and filed in accordance with these procedures will be tabulated.

Protests received after the close of the Public Hearing will not be counted.

Protests that do not have all the required information will not be counted.

Protests withdrawn in accordance with these procedures will not be counted.

If more than one Protest is filed by the same owner for the same parcel, only one protest will be counted.

If more than one owner or tenant directly liable for payment returns a Protest for the same parcel, only one protest will be counted.

2. When and where the Protests will be tabulated?
Protests will be tabulated periodically, throughout the noticing period, in the office of City Clerk, 1600 Floribunda Ave, Hillsborough, CA 94010.

The final tabulation of protests will be performed following the close of the Public Hearing. Following the last public speaker, and after the close of the public comment portion of the public hearing, the Mayor will announce that the City Clerk will tabulate the written protests.

The City Clerk reviews protest(s) received during the public hearing to confirm all required information is included to be counted as a valid protest.

3. How will the Protests be tabulated?
Each assessor’s parcel is allowed a single protest.

4. Confidentiality
Protests will be kept confidential until the public hearing. After the close of the public hearing, members of the public may inspect the protests.
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5. Results of the tabulation
The results of the tabulation will be announced following the completion of the tabulation and entered in the minutes of the City Council meeting.

D. Resolution of Disputes

1. Property Ownership
In the event of a dispute regarding whether the signer of a Protest is the owner of the parcel to which the Protest applies, the Town will make such determination from the last equalized assessment roll and any evidence of ownership submitted to the Town prior to the conclusion of the public hearing.

E. General Information
The names and addresses of the owners of real property within the Town’s Service Area were obtained from the equalized secured property tax assessment roll.

Notices will be mailed to all affected property owners, as they are shown on the equalized secured property tax assessment roll, at least 45 days prior to the Public Hearing. For the duration of the proceedings, the Town will retain any Notice packet that is returned to them as “undeliverable” by the U.S. Postal Service.

All Protests are public records. Actual written protests will be kept secured with the City Clerk until after the Public Hearing. After the Public Hearing, the written protests will be available for review by the public.

Proposed rates will not be adopted if more than 50% of affected property owners submit written requests. -338-

TOWN OF HILLSBOROUGH
San Mateo County
1600 Floribunda Avenue
Hillsborough, CA 94010
17 OLD BUSINESS

CITY COUNCIL MEETING
APRIL 13, 2026

AGENDA STAFF REPORT
ITEM SUBJECT: Wildfire Preparedness: Receive Work Plan for Town-wide Home Hardening Program
SUMMARY: This agenda item provides a proposed work plan to address wildfire preparedness and resilience specific to private property home hardening in the context of recent changes to state law and recently adopted updated CAL FIRE Fire Hazard Severity Zone (FHSZ) mapping.

Home Hardening as defined by the 2025 Title 24 California Wildland-Urban Interface Code:

A method of utilizing construction features, building materials, and maintenance practices intended to increase a building and structure’s resistance to ignition from fire exposure, including direct flame contact, radiant heat and embers.

BACKGROUND: For decades, the Town has developed wildfire exposure mitigation policy.

Some past and ongoing policy measures include:
• Establishment of CCFD Joint Powers Authority Fire District • CCFD Private Property Vegetation Management Program
• Class A Fire Rated Roof Requirements Town-wide
• Chimney Spark Arrestors Requirements Town-wide
• Open Space Vegetation Management Maintenance Project
• Adoption of CAL FIRE Very High FHSZ Designations
• Independent Parcel-Level Fire Severity Assessment
• Hillsborough Neighborhood Network Emergency-Preparedness Programing • Firewise Community Designation and Partnership
• Firewise Chipping Program
• Adoption of Wildland-Urban Interface (WUI) Ordinance
• Adoption of WUI Zone
In February 2025, CAL FIRE released new FHSZ maps based on updated fire science modeling techniques, which included three hazard levels (Moderate, High, and Very High). The Town adopted the updated map in May 2025, replacing previously adopted designations and zones.

Also is 2025, the California Building Standards Commission consolidated previously distributed WUI home hardening provisions into a standalone Part 7, “California Wildland-Urban Interface Code” (CWUIC), providing a single reference point for all FHSZ and designated WUI area construction and site-maintenance regulation – including Title 24, Part 2, Chapter 7a. These provisions became effective statewide in January 2026 and were codified by the Town as part of its triennial Title 24 code adoption.
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Agenda Staff Report – Hillsborough City Council
April 13, 2026

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Hillsborough City CouncilApril 13, 2026

Hillsborough City Council
April 13, 2026