Watsonville City Council
May 26, 2026

7 affected customers. Upon approval by City Council, the updated utility rates will become effective on July 1, 2026; and the rate schedule includes annual adjustments thereafter on each July 1 through July 1, 2030, subject to a 30-day prior notice to each customer for each annual adjustment.

CALIFORNIA ENVIRONMENTAL QUALITY ACT (CEQA) DETERMINATION:

The proposed action to approve updated utility rates is not a project subject to the California Environmental Quality Act (CEQA), as it involves the establishment of utility rates and charges to fund ongoing operations, maintenance, and capital improvements for existing utility services.

STRATEGIC PLAN:

This action is consistent with the following strategic plan goals:

Community Engagement & Well-being
Efficient and Well-performing Government
Fiscal Health
Infrastructure & Environment
FINANCIAL IMPACT:

The proposed financial plan and associated rate increases will enable the City’s three Enterprise Utilities to meet their current and future fiscal obligations, to properly operate and maintain critical infrastructure, to fund capital projects and meet future debt service obligations, and to comply with new regulations.

There is no impact to the General Fund.

ALTERNATIVE ACTION:

Council could elect not to adopt the proposed rate increases, or could choose to request changes to any element of the study including the rate structure and revenue requirements. However, if protests are not received by a majority of affected customers by the end of the hearing, alternative action is not recommended. The proposed rates have been thoughtfully prepared to ensure the financial viability of each of the enterprise funds given the large capital investments required, balanced with minimizing the impact to customer rates as much as feasible.

The impact of modifications to the proposed rate increases would include, at the minimum, delays in the Proposition 218 process schedule and depending on the changes, loss of potential revenues and deferred initiation of capital projects. Potential delays could also negatively impact the water and wastewater fund credit ratings, as those are dependent on an adequate rate structure to support planned capital spending. Most impactful is the increased risk of continued deterioration and failure of critical components of the wastewater treatment facility which would be significantly more costly financially and environmentally than the impact of the proposed rate increases.

8 ATTACHMENTS AND/OR REFERENCES (IF ANY):
1) Water, Wastewater, and Solid Waste Rate Study Report by Raftelis Financial Consultants. 2) Objection No. 1
3) Objection No. 2
4) Written Response to Written Objections

Water, Wastewater, and Solid Waste Rate Study
Report / April 7, 2026

CITY OF

WATSONVILLE
Attachment 1

Attachment 1

611 Wilshire Blvd, Suite 900, Los Angeles, CA 90017
www.raftelis.com
April 7, 2026
Ms. Danielle Green
Interim Director of Public Works & Utilities
City of Watsonville
250 Main Street
Watsonville, CA 95076
Subject: Water, Wastewater, and Solid Waste Rate Study
Dear Ms. Green,
Raftelis is pleased to provide this Water, Wastewater, and Solid Waste Rate Study Report to the City of Watsonville. The overall purpose of the study is to develop proposed five-year schedules of water, wastewater, and solid waste rates for Fiscal Year (FY) 2027 through FY 2031 that are fair, cost-justified, and aligned with California’s Proposition 218.

The major goals of the study are to:
» Develop long-range financial plans for the City’s Water, Wastewater, and Solid Waste Enterprises to provide financial sufficiency, recover operating costs, fund long-term capital needs, and maintain prudent reserves. » Update water, wastewater, and solid waste cost of service analyses to develop a strong nexus between proposed rates and the cost to provide service to customers. » Derive cost-based water, wastewater, and solid waste rates.

This report details the development of the proposed financial plans, cost of service analyses, and rates. An executive summary offers key results, recommendations, and estimated customer impacts. It has been a pleasure working with you, and we thank you and other City staff for the support provided to Raftelis during this study.

Sincerely,

Kevin Kostiuk Jeremy Tamargo
Senior Manager Manager
Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY
Table of Contents

1. EXECUTIVE SUMMARY................................................................................................................... 1

1.1. Study Overview ................................................................................................................................. 1

1.2. Water Rate Study .............................................................................................................................. 1

1.2.1. Water Enterprise Proposed Financial Plan ....................................................................................... 1

1.2.2. Proposed Water Rates ...................................................................................................................... 4

1.3. Wastewater Rate Study..................................................................................................................... 6

1.3.1. Wastewater Enterprise Proposed Financial Plan.............................................................................. 6

1.3.2. Proposed Wastewater Rates............................................................................................................. 9

1.4. Solid Waste Rate Study................................................................................................................... 10

1.4.1. Proposed Solid Waste Enterprise Financial Plan ........................................................................... 10

1.4.2. Proposed Solid Waste Rates .......................................................................................................... 13 Customer Bill Impacts......................................................................................................................................... 16

2. INTRODUCTION ............................................................................................................................. 18

2.1. Agency Overview............................................................................................................................. 18

2.2. Study Overview ............................................................................................................................... 19

2.3. Rate Setting Methodology ............................................................................................................... 20

3. KEY ASSUMPTIONS........................................................................................................................ 1

3.1. Customer Account Growth ................................................................................................................ 1

3.2. Annual Inflationary Escalation Factors.............................................................................................. 2

3.3. Planned Debt Assumptions ............................................................................................................... 3

4. WATER RATE STUDY ..................................................................................................................... 5

4.1. Water Enterprise Revenue Requirements ........................................................................................ 5

4.1.1. Revenue from Current Water Rates.................................................................................................. 5

4.1.2. Water Enterprise O&M Expenses ................................................................................................... 11

4.1.3. Water Enterprise Capital Improvement Plan................................................................................... 14

4.1.4. Water Enterprise Debt Service........................................................................................................ 18

4.1.5. Water Enterprise Financial Policies ................................................................................................ 18

4.2. Water Enterprise Status Quo Financial Plan................................................................................... 19

4.3. Water Enterprise Proposed Financial Plan ..................................................................................... 21

4.4. Water Cost of Service Analysis....................................................................................................... 24

4.4.1. Methodology .................................................................................................................................... 24

4.4.2. Water Rate Revenue Requirement ................................................................................................. 25

4.4.3. Water System Peaking Factors....................................................................................................... 25

4.4.4. Functionalization and Allocation of Expenses................................................................................. 27 Attachment 1

CITY OF WATSONVILLE

4.4.5. Water Enterprise O&M Expense Allocation .................................................................................... 30

4.4.6. Water Enterprise Capital Allocation ................................................................................................ 32

4.4.7. Preliminary Water Cost of Service Allocation ................................................................................. 34

4.4.8. Allocation of Fire Protection Costs .................................................................................................. 35

4.4.9. Peaking Units of Service ................................................................................................................. 36

4.4.10. Adjusted Water Cost of SErvice...................................................................................................... 38

4.4.11. Water Cost Allocation to Customer Classes ................................................................................... 39

4.5. Proposed Water Rates .................................................................................................................... 40

4.5.1. Meter Size Availability Fees (Test Year FY 2027) .......................................................................... 40

4.5.2. Fire Service Availability Fees (Test Year FY 2027) ........................................................................ 44

4.5.3. Water Volume Rates (Test Year FY 2027) ..................................................................................... 45

4.5.4. Proposed Five-year Water Rate Schedule...................................................................................... 52

5. WASTEWATER RATE STUDY ...................................................................................................... 54

5.1. Wastewater Enterprise Revenue Requirements............................................................................. 54

5.1.1. Revenue From Current Wastewater Rates..................................................................................... 55

5.1.2. Other Revenue Sources.................................................................................................................. 57

5.1.3. O&M Expenses................................................................................................................................ 57

5.1.4. Capital Improvement Program ........................................................................................................ 58

5.1.5. Wastewater Debt Service................................................................................................................ 60

5.1.6. Wastewater Enterprise Financial Policies....................................................................................... 61

5.1.7. Debt Coverage ................................................................................................................................ 62

5.2. Wastewater Enterprise Status Quo Financial Plan......................................................................... 62

5.3. Wastewater Enterprise Proposed Financial Plan............................................................................ 65 Consolidated Financial Plan Summary .............................................................................................................. 69

5.4. Cost of Service Analysis.................................................................................................................. 69

5.4.1. Methodology .................................................................................................................................... 69

5.4.2. Revenue Requirement for Rate Recovery ...................................................................................... 70

5.4.3. Customer Classes ........................................................................................................................... 71

5.4.4. Mass Balance Analysis and System Flows..................................................................................... 71

5.4.5. Cost Allocation Methodology........................................................................................................... 71

5.4.6. Development of Unit Costs.............................................................................................................. 72

5.4.7. Allocation of Costs to Customer Classes........................................................................................ 73

5.4.8. Comparison of Current and Proposed Cost of Service................................................................... 73

5.5. Rate Design..................................................................................................................................... 74

5.5.1. Rate Design Objectives................................................................................................................... 74

5.5.2. Rate Structure.................................................................................................................................. 74 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY

5.5.3. DERIVATION OF PROPOSED WASTEWATER RATES............................................................... 75

5.5.4. Typical Customer Bill Impacts ......................................................................................................... 76

5.5.5. 5.3 PROPOSED WASTEWATER RATE SCHEDULE.................................................................... 77

6. SOLID WASTE RATE STUDY ....................................................................................................... 78

6.1. Solid Waste Enterprise Revenue Requirements............................................................................. 78

6.1.1. Revenue from Current Solid Waste Rates...................................................................................... 78

6.1.2. Solid Waste EnTerprise O&M Expenses ........................................................................................ 85

6.1.3. Solid Waste Enterprise Capital Improvement Plan......................................................................... 87

6.1.4. Solid Waste Enterprise Debt Service.............................................................................................. 89

6.1.5. Solid Waste Enterprise Financial Policies....................................................................................... 89

6.2. Solid Waste Enterprise Proposed Financial Plan ........................................................................... 91

6.3. Solid Waste Cost of Service Analysis ............................................................................................. 93

6.3.1. Methodology .................................................................................................................................... 94

6.3.2. Solid Waste Rate Revenue Requirement ....................................................................................... 94

6.3.3. Solid Waste Enterprise Cost Allocation Basis................................................................................. 95 Solid Waste Cost of Service Allocation .............................................................................................................. 97

6.3.4. Solid Waste Units of Service........................................................................................................... 97

6.3.5. Solid Waste Cost of Service Units Costs ...................................................................................... 100

6.3.6. Solid Waste Cost Allocation to Customer Classes ....................................................................... 100

6.4. Proposed Solid Waste Rates ........................................................................................................ 101

6.4.1. Proposed Solid Waste Rate Structure Modifications .................................................................... 101

6.4.2. Solid waste Rates (Test Year FY 2027)........................................................................................ 101

6.4.3. Proposed Five-Year Solid Waste Rate Schedule ......................................................................... 106

7. CUSTOMER BILL IMPACTS........................................................................................................ 109

7.1. Monthly Bill Impacts....................................................................................................................... 109

7.2. Monthly Bill Comparison with Neighboring Communities ............................................................. 110 Attachment 1

CITY OF WATSONVILLE
List of Tables
Table 1-1: Proposed Water Enterprise Revenue Adjustments.....................................................................................2 Table 1-2: Proposed Schedule of Meter Size Availability Fees....................................................................................5 Table 1-3: Proposed Schedule of Fire Service Availability Fees..................................................................................5 Table 1-4: Proposed Schedule of Water Consumption Charge Rates .........................................................................6 Table 1-5: Proposed Wastewater Enterprise Revenue Adjustments ...........................................................................6 Table 1-6: Proposed Schedule of Wastewater Rates...................................................................................................9 Table 1-7: Proposed Solid Waste Enterprise Revenue Adjustments .........................................................................10 Table 1-8: Proposed Schedule of Solid Waste Rates for Weekly Pickup Services....................................................14 Table 1-9: Proposed Schedule of Solid Waste Rates for Temporary Services..........................................................15 Table 3-1: Water Customer Account Growth Projections.............................................................................................1 Table 3-2: Wastewater Customer Account Growth Projections ...................................................................................2 Table 3-3: Solid Waste Customer Account Growth Projections ...................................................................................2 Table 3-4: Expense Inflation Factors ............................................................................................................................2 Table 3-5: Revenue Inflation Factors............................................................................................................................3 Table 3-6: Planned Debt Assumptions - Water ............................................................................................................3 Table 3-7: Planned Debt Assumptions - Wastewater...................................................................................................4 Table 3-4-1: Current Meter Size Availability Fees (Inside City Limits) .........................................................................7 Table 4-2: Current Meter Size Availability Fees (Outside City Limits)..........................................................................7 Table 4-3: Current Fire Service Availability Fees .........................................................................................................7 Table 4-4: Current Water Consumption Charge Rates ................................................................................................8 Table 4-5: Inside City Water Meter Counts...................................................................................................................8 Table 4-6: Outside City Water Meter Counts................................................................................................................9 Table 4-7: Private Fire Line Counts ..............................................................................................................................9 Table 4-8: Annual Water Use under Current Rate Structure......................................................................................10 Table 4-9: PVWMA Wholesale Water Sales Assumptions.........................................................................................10 Table 4-10: Water Enterprise Rate Revenue from Current Rates..............................................................................11 Table 4-11: Water Enterprise Miscellaneous Revenue ..............................................................................................11 Table 4-14: Water Enterprise O&M Expenses............................................................................................................13 Table 4-15: Detailed Water Enterprise Capital Improvement Plan (FY 2025-FY 2031).............................................15 Table 4-16: Detailed Water Enterprise Capital Improvement Plan (FY 2032-FY 2036).............................................16 Table 4-17: Water Enterprise CIP Funding Summary ................................................................................................17 Table 4-18: Water Enterprise Proposed Debt Service ...............................................................................................18 Table 4-19: Water Enterprise Debt Service Summary ...............................................................................................18 Table 4-20: Water Enterprise Financial Policies.........................................................................................................19 Table 4-21: Water Enterprise Reserve Targets ..........................................................................................................19 Table 4-22: Status Quo Water Enterprise Financial Plan Proforma ...........................................................................20 Table 4-23: Proposed Water Enterprise Revenue Adjustments.................................................................................21 Table 4-24: Proposed Water Enterprise Financial Plan Proforma..............................................................................22 Table 4-25: FY 2027 Water Rate Revenue Requirement...........................................................................................25 Table 4-26: Water System Peaking Factor Allocations ..............................................................................................27 Table 4-27: Allocation of Functional Categories to Water Cost Causation Components ...........................................29 Table 4-28: Summary of Water Enterprise O&M Expenses by Functional Category.................................................30 Table 4-29: Allocation of Water Enterprise O&M Expenses to Cost Causation Components ...................................31 Table 4-30: Summary of Water Enterprise Capital Assets by Functional Category...................................................32 Table 4-31: Allocation of Functionalized Water Capital Assets to Cost Causation Components...............................33 Table 4-32: Preliminary Water Cost of Service Allocation (FY 2027).........................................................................35 Table 4-33: Equivalent Fire Demand ..........................................................................................................................36 Table 4-34: Fire Protection Allocation Basis...............................................................................................................36 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY
Table 4-35: Peaking Units by Customer Class ...........................................................................................................37 Table 4-36: Peaking Units for Fire Protection.............................................................................................................37 Table 4-37: Allocation of Peaking Units to Public and Private Fire Protection ...........................................................38 Table 4-38: Summary of Total Peaking Units .............................................................................................................38 Table 4-39: Adjusted Water Cost of Service Allocation (FY 2027).............................................................................39 Table 4-40: Recovery of Water Cost Causation Components by Charge Type.........................................................40 Table 4-41: Cost to Serve by Water Customer Class.................................................................................................40 Table 4-42: Units of Service for Meter Size Availability Fees (Test Year FY 2027) ...................................................42 Table 4-43: Allocation of Water Services to Inside City and Outside City Water Meters ...........................................43 Table 4-44: Meter Size Availability Fee Unit Charge Calculation (Test Year FY 2027) .............................................43 Table 4-45: Meter Size Availability Fee Calculation (Test Year FY 2027) .................................................................44 Table 4-46: Fire Service Availability Fee Unit Charge Calculation (Test Year FY 2027) ...........................................45 Table 4-47: Fire Service Availability Fee Calculation (Test Year FY 2027) ...............................................................45 Table 4-48: Allocation of Unit Rates to Customer Classes.........................................................................................46 Table 4-49: Water Supply Unit Rate (Test Year FY 2027) .........................................................................................46 Table 4-50: Base Delivery Unit Rate (Test Year FY 2027).........................................................................................46 Table 4-51: Peaking Unit Costs (Test Year FY 2027) ................................................................................................47 Table 4-52: Peaking Unit Rates (Test Year FY 2027) ................................................................................................47 Table 4-53: Preliminary Conservation Unit Rate (Test Year FY 2027).......................................................................48 Table 4-54: Residential Conservation Unit Rates by Tier (Test Year FY 2027).........................................................48 Table 4-55: Conservation Unit Rates by Customer Class and Tier (Test Year FY 2027)..........................................49 Table 4-56: Preliminary Revenue Offset Unit Rate (Test Year FY 2027)...................................................................49 Table 4-57: Residential Revenue Offset Unit Rates by Tier (Test Year FY 2027) .....................................................50 Table 4-58: Revenue Offset Unit Rates by Customer Class and Tier (Test Year FY 2027) ......................................50 Table 4-59: Proposed Water Consumption Charge Rate Calculation (Test Year FY 2027) ......................................51 Table 4-60: Proposed Schedule of Meter Size Availability Fees................................................................................52 Table 4-61: Proposed Schedule of Fire Service Availability Fees..............................................................................53 Table 4-62: Proposed Schedule of Water Consumption Charge Rates .....................................................................53 Table 5-1. Current Wastewater Rates ........................................................................................................................55 Table 5-2. Accounts and Inflow Projections................................................................................................................56 Table 5-3. Sewer Rate Revenue Under Current Rates (No Adjustment)...................................................................57 Table 5-4. Other Revenue Sources (FY 2027 Test Year) ..........................................................................................57 Table 5-5. Projected O&M Expenses by Department (FY 2026–FY 2031)................................................................58 Table 5-6. Planned Wastewater Capital Improvement Projects (FY 2026–FY 2031) ................................................59 Table 5-7. Capital Improvement Program Summary by Funding Source (FY 2026–FY 2031)..................................60 Table 5-8. Debt Service Schedule ..............................................................................................................................61 Table 5-9: Wastewater Enterprise Financial Policies .................................................................................................61 Table 5-10: Wastewater Enterprise Reserve Targets ................................................................................................61 Table 5-11. Fund Balance and Reserve Targets (FY 2026–FY 2031).......................................................................62 Table 5-12. Debt Coverage Summary ........................................................................................................................62 Table 5-13. Status Quo Financial Plan - Wastewater.................................................................................................64 Table 5-14. Proposed Revenue Adjustment Schedule...............................................................................................65 Table 5-15. Proposed Financial Plan - Wastewater ...................................................................................................68 Table 5-16. Consolidated Wastewater Financial Plan Summary (FY 2026–FY 2031)...............................................69 Table 5-17. Test Year Revenue Requirement (FY 2027)...........................................................................................70 Table 5-18. Wastewater Plant Mass Balance—FY 2025 Base Year..........................................................................71 Table 5-19. O&M Cost Allocation by Component and Department (FY 2027)...........................................................72 Table 5-20. Capital Cost Allocation by Component....................................................................................................72 Table 5-21. Unit Cost Development (FY 2027)...........................................................................................................73 Table 5-22. Cost of Service Allocation by Customer Class (FY 2027).......................................................................73 Attachment 1

CITY OF WATSONVILLE
Table 5-23. Current vs. Proposed Cost of Service Comparison.................................................................................74 Table 5-24. Derivation of FY 2027 Wastewater Rates by Customer Class................................................................76 Table 5-25. Residential Monthly Bill Impact (per Dwelling Unit).................................................................................76 Table 5-26. Commercial Monthly Bill Impact (FY 2027) .............................................................................................76 Table 5-27. Industrial Customer Monthly Bill Impacts (FY 2027) ...............................................................................76 Table 5-28. Proposed Wastewater Rate Schedule: FY 2027 through FY 2031.........................................................77 Table 6-1: Current Solid Waste Rates for Weekly Pickup Services ...........................................................................79 Table 6-2: Current Solid Waste Rates for Temporary Services .................................................................................80 Table 6-3: Projected Solid Waste Weekly Pickups.....................................................................................................82 Table 6-4: Projected Solid Waste Temporary Services ..............................................................................................83 Table 6-5: Projected Solid Waste Enterprise Rate Revenue......................................................................................84 Table 6-6: Projected Solid Waste Enterprise Miscellaneous Revenue ......................................................................85 Table 6-7: Inflationary Assumptions for Solid Waste Enterprise O&M Expenses ......................................................85 Table 6-8: Solid Waste Enterprise O&M Expenses ....................................................................................................86 Table 6-9: Detailed Solid Waste Enterprise Capital Improvement Plan (FY 2025-FY 2031) .....................................88 Table 6-10: Solid Waste Enterprise Existing Debt Service.........................................................................................89 Table 6-11: Solid Waste Enterprise Financial Policies ...............................................................................................90 Table 6-12: Solid Waste Enterprise Reserve Targets ................................................................................................90 Table 6-13: Proposed Solid Waste Enterprise Revenue Adjustments .......................................................................91 Table 6-14: Proposed Solid Waste Enterprise Financial Plan Proforma....................................................................92 Table 6-15: FY 2027 Solid Waste Rate Revenue Requirement .................................................................................95 Table 6-16: Solid Waste Cost of Service Allocation Basis (Test Year FY 2027)........................................................96 Table 6-17: Allocation of Solid Waste Enterprise Revenue Requirement (Test Year FY 2027) ................................97 Table 6-18: Cubic Yard and Compactor Conversions ................................................................................................97 Table 6-19: Solid Waste Weekly Pickup Service Units of Service (Test Year FY 2027)............................................98 Table 6-20: Solid Waste Temporary Service Units of Service (Test Year FY 2027)..................................................99 Table 6-21: Summary of Solid Waste Units of Service (Test Year FY 2027)...........................................................100 Table 6-22: Solid Waste Unit Cost Calculation (Test Year FY 2027).......................................................................100 Table 6-23: Cost to Serve by Solid Waste Customer Class .....................................................................................101 Table 6-24: Solid Waste Weekly Pickup Service Rates Calculation (Test Year FY 2027).......................................103 Table 6-25: Solid Waste Temporary Service Rates Calculation (Test Year FY 2027).............................................104 Table 6-26: Proposed Schedule of Solid Waste Rates for Weekly Pickup Services................................................107 Table 6-27: Proposed Schedule of Solid Waste Rates for Temporary Services......................................................108 Table 7-1: Monthly Bills through FY 2031 for Low Volume Single Family Residential Customers ..........................109 Table 7-2: Monthly Bills through FY 2026 for Typical Single Family Residential Customers...................................109 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY
List of Figures
Figure 1: Water Enterprise CIP Summary ....................................................................................................................2 Figure 2: Water Enterprise Status Quo Versus Proposed Financial Plan ....................................................................3 Figure 3: Proposed Water Enterprise Financial Plan – Projected Reserve Ending Balance .......................................3 Figure 4: Proposed Water Financial Plan – Debt Coverage.........................................................................................4 Figure 5: Wastewater Enterprise Capital Improvement Plan........................................................................................7 Figure 6: Wastewater Enterprise Status Quo Versus Proposed Financial Plan...........................................................8 Figure 7: Proposed Wastewater Enterprise Financial Plan – Projected Reserve Ending Balance..............................8 Figure 8: Solid Waste Enterprise CIP Summary.........................................................................................................11 Figure 9: Solid Waste Enterprise Status Quo Versus Proposed Financial Plan ........................................................11 Figure 10: Proposed Solid Waste Enterprise Financial Plan – Projected Reserve Ending Balance..........................12 Figure 11: Single Family Residential – Projected Monthly Bills..................................................................................16 Figure 12: Single Family Residential Monthly Bill Comparison with Neighboring Communities ................................17 Figure 13: Utility Enterprise Fund Structure................................................................................................................19 Figure 15: Water Enterprise CIP Summary ................................................................................................................17 Figure 16: Water Enterprise Status Quo Versus Proposed Financial Plan ................................................................23 Figure 17: Proposed Water Enterprise Financial Plan – Projected Reserve Ending Balance ...................................23 Figure 18: Proposed Water Financial Plan – Debt Coverage.....................................................................................24 Figure 18: Wastewater Enterprise Capital Improvement Plan....................................................................................66 Figure 19: Wastewater Enterprise Status Quo Versus Proposed Financial Plan.......................................................67 Figure 20: Proposed Wastewater Enterprise Financial Plan – Projected Reserve Ending Balance..........................67 Figure 21: Solid Waste Enterprise CIP Summary.......................................................................................................89 Figure 22: Solid Waste Enterprise Status Quo Versus Proposed Financial Plan ......................................................93 Figure 23: Proposed Solid Waste Enterprise Financial Plan – Projected Reserve Ending Balance..........................93 Figure 24: Single Family Residential Monthly Bill Impacts .......................................................................................110 Figure 25: Single Family Residential Monthly Bill Comparison with Neighboring Communities ..............................111 Attachment 1

CITY OF WATSONVILLE
List of Abbreviations
AF: Acre-feet
AFY: Acre-feet per year
AWWA: American Water Works Association
BOD: Biological oxygen demand
CCF: One hundred cubic feet
CIP: Capital Improvement Plan
City: City of Watsonville
COS: Cost of Service
Cu yd: Cubic yard
CWSRF Loan: Clean Water State Revolving Fund Loan
EMU: Equivalent Meter Unit
FY: Fiscal year
Gal: Gallon
GPCD: Gallons per capita per day
GPM: Gallons per minute
IBank Loan: California Infrastructure and Economic Development Bank Loan Manual M1: American Water Works Association’s Principles of Water Rates, Fees, and Charges: Manual of Water Supply Practices - M1 Seventh Edition
Max Day: Maximum day water demand
Max Hour: Maximum hour water demand
MG: One million gallons
MFR: Multi-Family Residential
O&M: Operations and Maintenance
OCLD: Original Cost Less Depreciation
PVWMA: Pajaro Valley Water Management Agency
R&R: Repair and replacement
SFR: Single Family Residential
SRF: State Revolving Fund
SS: Suspended solids
Study Period: the rate-setting period for this study which extends through fiscal year 2026 WEF: Water Environment Federation
Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY
This page intentionally left blank to facilitate two-sided printing.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 1

1.Executive Summary

1.1.Study Overview
Public water, wastewater, and solid waste utilities in California typically perform a cost of service analysis every five to ten years to make sure that customers are appropriately charged commensurate with the cost to provide service. The City last conducted a water, wastewater, and solid waste rate study in 2021, which established proposed rates over a five-year period through Fiscal Year (FY) 20260F 1 .

The City engaged Raftelis to conduct updated water, wastewater, and solid waste rate studies to establish a proposed five-year schedule of rates for FY 2027 to FY 2031. Note that proposed rates cannot be implemented until formally adopted by City Council after a public hearing and subject to the procedural and substantive requirements of Proposition 218.

This study was conducted using industry-standard principles outlined by the American Water Works Association’s Principles of Water Rates, Fees, and Charges: Manual of Water Supply Practices - M1, Seventh Edition and the Water Environment Federation’s Financing and Charges for Wastewater Systems, Fifth Edition. The major objectives of this study are to:
» Develop a long-range financial plan that sufficiently funds the City’s water, wastewater, and solid waste operations and maintenance expenses, debt service payments, and capital expenditures while adequately funding reserves and achieving debt coverage requirements. » Conduct cost of service analyses that establish a clear nexus between the costs incurred by the Enterprises to serve water, wastewater, and solid waste customers and the costs attributable to user classes on the systems.
» Develop a five-year schedule of water, wastewater, and solid waste rates that are fair, cost-justified, and aligned with the substantive requirements of Proposition 218.

1.2.Water Rate Study

1.2.1.WATER ENTERPRISE PROPOSED FINANCIAL PLAN
Raftelis conducted a cash flow analysis to evaluate whether existing water rates adequately fund the Water Enterprise’s total expenses over the five-year rate setting period and 10-year financial planning horizon. 10-year projections of annual revenues, O&M expenses, debt service payments, and capital expenditures through FY 2036 were developed by Raftelis with the assistance of City staff.

Raftelis projects that without rate increases the Water Enterprise would draw down reserves below the target reserve policy by FY 2029 and would produce a negative cash position by FY 2031. The Enterprise would also fail to have sufficient debt capacity with which to borrow externally for significant, necessary capital projects. The cash flow analysis demonstrates a clear need for revenue adjustments (i.e. gross water rate revenue increases relative to existing rate revenues). Raftelis worked with City staff and the City’s Municipal Advisor to develop the following proposed revenue adjustments over the five-year study period (see Table 1-1). 1 The fiscal year begins on July 1 and runs through the following June 30. FY 2026 is July 1, 2025 through June 30, 2026.

Attachment 1

2 CITY OF WATSONVILLE
Table 1-1: Proposed Water Enterprise Revenue Adjustments Fiscal Year Effective Date Revenue
Adjustment
FY 2027 July 1, 2026 5%
FY 2028 July 1, 2027 5%
FY 2029 July 1, 2028 5%
FY 2030 July 1, 2029 5%
FY 2031 July 1, 2030 5%
Key factors influencing the need for proposed water revenue adjustments include:
» Cost inflation: Operating costs continue to increase year over year due to inflationary pressures across all departments and expenditure types including power, chemicals, personnel, and infrastructure, among others.
» Aging infrastructure: Ongoing rehabilitation and replacement of existing water infrastructure like water wells, booster pump stations, water main replacements; and regulatory driven projects like treatment facilities for Chromium 6.
» Planned capital expenditures: CIP project expenditures from the current year through FY 2031, including substantial repair and replacement (R&R) capital projects as well as the Chromium 6 Treatment Plant, total $85 million, or approximately $14.2 million per year on average.

Figure 1 shows the Water Enterprise’s ten-year Capital Improvement Plan (CIP) by anticipated funding source.

Although the rate study period only extends through FY 2031, City staff has planned capital expenditures through FY 2036 for continued repair and replacement needs beyond FY 2031. The most significant CIP project costs over the next ten years are associated with constructing a new Chromium 6 Treatment Plant ($25.9 million through FY 2029), ongoing water main replacement projects ($19.2 million through FY 2035), and additional water main replacement projects ($9.8 million through FY 2035). Revenue bonds are planned to be utilized to finance these large CIP projects, with two assumed issues: $21 million in FY 2028 and $15 million in FY 2030.

Figure 1: Water Enterprise CIP Summary
Figure 2 compares the status quo (i.e., current rates) and proposed financial plans. Revenues under the proposed financial plan and status quo financial plan are represented by the dark blue and red dashed lines, respectively. $25.6 M
$11.2 M
$21.5 M
$7.9 M
$15.1 M
$3.6 M
$7.7 M
$3.9 M $4.8 M
$15.1 M
$7.4 M
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034 FY 2035 FY 2036 Millions CAPITAL IMPROVEMENT PLAN (CIP)
Debt Funded Cash Funded
Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 3
Revenue requirements including O&M expenses, debt service, pay-as-you-go (i.e., cash-funded) CIP, and contributions to or from cash reserves are represented by the various stacked bars. Green bars represent drawdown of reserves when negative and buildup of reserves when positive. Proposed revenue adjustments result in annual gross rate increases to recover projected costs and achieve minimum debt coverage requirements on planned external financing.

Figure 2: Water Enterprise Status Quo Versus Proposed Financial Plan Figure 3 shows the Water Enterprise’s projected ending cash reserve balances under the proposed financial plan.

The light blue bars indicate the projected ending balance. The operating reserve target and total reserve target (operating plus capital) are represented by the red and blue dashed lines, respectively. Total annual CIP expenditures are represented by the shaded green area behind the columns.

Figure 3: Proposed Water Enterprise Financial Plan – Projected Reserve Ending Balance Figure 4 shows projected debt coverage (blue line) relative to the debt coverage requirement (red line) over the study period. Debt coverage is not applicable until FY 2028 when the first planned debt issuance occurs and debt Attachment 1

4 CITY OF WATSONVILLE
service payments begin. Failure to achieve minimum debt service coverage may result in a technical default, which without foreseeable remedial action such as implementing rate increases, could result in a downgrade of credit rating, higher costs in future debt issuance, or even denial of credit. As part of the financial planning process, Raftelis, City staff, and the City’s Municipal Advisor calculate projected coverage on existing and planned borrowings so that projected debt coverage is maintained above minimum.

Figure 4: Proposed Water Financial Plan – Debt Coverage

1.2.2.PROPOSED WATER RATES
Water customers are billed monthly for two primary charges: 1) Meter Size Availability Fees and 2) Water Consumption Charges per hundred cubic feet (CCF1F
2 ) of water delivered. The Meter Size Availability Fee is a fixed monthly charge that varies based on water meter size and geography (inside versus outside City limits). Water Consumption Charges vary based on customer class. Residential customers are subject to a three-tiered Water Consumption Charge rate structure. All other customer classes are subject to a uniform Water Consumption Charge rate structure. Additionally, customers with private fire lines are subject to a fixed monthly Fire Service Availability Fee based on the size of the fire line.

Raftelis conducted a water cost of service analysis to objectively allocate costs to customer classes based on the costs incurred by the Water Enterprise and each class’s unique service requirements. This analysis provides the basis for proposed rates. Table 1-2 through Table 1-4 show proposed Meter Size Availability Fees, Fire Service Availability Fees, and Water Consumption Charge rates from FY 2027 through FY 2031. Proposed FY 2027 rates (which would become effective July 1, 2026) directly incorporate the results of the water cost of service analysis plus the proposed five percent revenue adjustment in FY 2027. All rates are then uniformly increased by five percent each subsequent year through FY 2031 based on the proposed water revenue adjustment schedule. 2 One CCF is equal to approximately 748 gallons.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 5
Table 1-2: Proposed Schedule of Meter Size Availability Fees Monthly Meter Size Availability Fee Current Proposed
FY 2027
Proposed
FY 2028
Proposed
FY 2029
Proposed
FY 2030
Proposed
FY 2031
Inside City Limits
5/8" $29.93 $32.16 $33.77 $35.46 $37.23 $39.09
3/4" $29.93 $32.16 $33.77 $35.46 $37.23 $39.09
1" $59.43 $65.01 $68.26 $71.67 $75.26 $79.02

1.5" $108.61 $119.75 $125.74 $132.02 $138.63 $145.56
2" $167.61 $185.45 $194.72 $204.46 $214.68 $225.42
3" $324.96 $360.64 $378.67 $397.61 $417.49 $438.36
4" $501.98 $557.73 $585.62 $614.90 $645.64 $677.92
6" $993.70 $1,105.20 $1,160.46 $1,218.48 $1,279.41 $1,343.38 8" $1,583.78 $1,762.16 $1,850.27 $1,942.78 $2,039.92 $2,141.92 Outside City Limits
5/8" $35.15 $38.92 $40.87 $42.91 $45.05 $47.31
3/4" $35.15 $38.92 $40.87 $42.91 $45.05 $47.31
1" $72.48 $81.92 $86.02 $90.32 $94.83 $99.57

1.5" $134.71 $153.58 $161.26 $169.32 $177.79 $186.68
2" $209.39 $239.57 $251.55 $264.13 $277.33 $291.20
3" $408.51 $468.88 $492.32 $516.94 $542.79 $569.93
4" $632.52 $726.86 $763.20 $801.36 $841.43 $883.50
6" $1,254.80 $1,443.46 $1,515.63 $1,591.41 $1,670.99 $1,754.53 8" $2,001.52 $2,303.37 $2,418.54 $2,539.47 $2,666.44 $2,799.76 Table 1-3: Proposed Schedule of Fire Service Availability Fees Monthly Fire Service Availability Fee Current Proposed
FY 2027
Proposed
FY 2028
Proposed
FY 2029
Proposed
FY 2030
Proposed
FY 2031
2" and smaller $18.23 $18.42 $19.34 $20.31 $21.32 $22.39 4" $39.06 $40.31 $42.33 $44.44 $46.66 $49.00
6" $86.38 $90.04 $94.54 $99.27 $104.23 $109.44
8" $168.00 $175.82 $184.61 $193.84 $203.53 $213.71
10" $290.77 $304.84 $320.08 $336.09 $352.89 $370.53
Attachment 1

6 CITY OF WATSONVILLE
Table 1-4: Proposed Schedule of Water Consumption Charge Rates Water Consumption Charge Rates
(per CCF) Current ProposedFY 2027
Proposed
FY 2028
Proposed
FY 2029
Proposed
FY 2030
Proposed
FY 2031
Residential Tiered Rates
Tier 1 (1-6 CCF) $4.11 $4.32 $4.54 $4.76 $5.00 $5.25
Tier 2 (7-12 CCF) $5.38 $5.50 $5.78 $6.06 $6.37 $6.69
Tier 3 ( >12 CCF) $8.33 $7.58 $7.96 $8.36 $8.77 $9.21
Non-Residential Uniform Rates
Non-Residential $4.91 $5.08 $5.33 $5.60 $5.88 $6.17
Industrial $3.91 $4.20 $4.41 $4.63 $4.86 $5.11
Irrigation $7.02 $6.89 $7.23 $7.60 $7.98 $8.37

1.3.Wastewater Rate Study

1.3.1.WASTEWATER ENTERPRISE PROPOSED FINANCIAL PLAN
Raftelis conducted a cash flow analysis to evaluate whether existing wastewater rates adequately fund the Wastewater Enterprise’s total expenses over the five-year rate setting period and 10-year financial planning horizon. 10-year projections of annual revenues, O&M expenses, debt service payments, and capital expenditures through FY 2036 were developed by Raftelis with the assistance of City staff.

Without increases to existing rate revenues, rates are insufficient to recover even the Wastewater Enterprise’s projected O&M expenses and existing debt (before any cash or debt funded CIP). Substantial capital needs over the next ten years require increased rate revenues to provide sufficient debt capacity and cash reserves to fund critical CIP projects. Raftelis worked closely with City staff and the City’s Municipal Advisor to determine appropriate wastewater revenue adjustments that balanced external borrowing costs with impacts to current ratepayers. Raftelis and City staff recommend the following revenue adjustments be implemented annually over the next five fiscal years: 16 percent in FY 2027, 12 percent in FY 2028 and 6 percent annually in FY 2029 through FY 2031 (see Table 1-5).

Table 1-5: Proposed Wastewater Enterprise Revenue Adjustments Fiscal Year Effective Date Revenue
Adjustment
FY 2027 July 1, 2026 16%
FY 2028 July 1, 2027 12%
FY 2029 July 1, 2028 6%
FY 2030 July 1, 2029 6%
FY 2031 July 1, 2030 6%
Key factors influencing the need for proposed wastewater revenue adjustments include:
» Cost inflation: Operating costs continue to increase year over year due to inflationary pressures across all departments and expenditure types including power, chemicals, personnel, and infrastructure, among others.
» Aging infrastructure: Ongoing rehabilitation and replacement of existing wastewater infrastructure like collection mains, sewer pump stations, and treatment facilities upgrades and improvements Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 7
» Planned capital expenditures: CIP project expenditures through FY 2030-31 $86.6 million total or approximately $14.4 million per year on average.

Figure 5 shows the Wastewater Enterprise’s five-year Capital Improvement Plan (CIP) by anticipated funding source. The wastewater system (CIP) from FY 2026 through FY 2031 reflects a substantial investment in treatment plant upgrades, collection system maintenance, and critical infrastructure modernization. The single largest project over the plan period is the Replace Headworks and Influent Pump Station (Project 14410), which totals approximately $40 million across five fiscal years, with peak spending of $15.6 million in FY 2028 and $13.8 million in FY 2029, representing the centerpiece of the capital program. The Main Switchgear and Energy Recovery Electrical System Improvements represent another major near-term investment, with $15.0 million budgeted in FY 2026 and an additional $6.1 million in FY 2027, reflecting urgent electrical infrastructure needs at the treatment facility. The Cogen Replacement/Energy Savings Project—a new project—adds $20.4 million in FY 2027, underscoring the system's commitment to long-term energy efficiency and operational resiliency. When complete, the Energy Savings Project will result in less reliance on Pacific Gas and Electric (PG&E) and estimated savings of greater than $800,000 per year in reduced purchased power costs.

Recurring investments in the collection system include Sanitary Sewer Lift Stations and Sanitary Sewer Main Replacement/Repairs, which together escalate incrementally at approximately 2% per year and collectively total roughly $1.9 million over the plan period. Additional near-term expenditures include the Replace Sewer Pump Station 10 – Miles Lane ($1.3 million in FY 2025 carryover), Nature Center ($292,000), System Evaluation and Capacity Assurance Plan ($282,000), and Sewer Pump Station Controls/PLC/SCADA Upgrades ($141,000), each addressing targeted operational and regulatory needs. Several new projects—including Digester Cleaning and Piping Improvements, Dewatering System Improvements, Biosolids PFAS Treatment, Old Headworks Demolition, and Primary Treatment Improvements—currently show no budgeted expenditures within the plan period but reflect anticipated future capital needs that may require funding as the program advances.

A low interest State Revolving Fund (SRF) loan (Replace Headworks and Influent Pump Station) and new revenue bonds (Cogen Replacement/Energy Savings Project) are assumed to finance these two generational wastewater capital projects. The sizing of borrowing is estimated at $37 million for the Headworks SRF loan and $20 million in external borrowing for the Energy Savings Project. Note that a portion of treatment-related CIP are cost-shared with three outside sanitary districts based on the allocation of capacity at the City’s wastewater treatment plant.

Figure 5: Wastewater Enterprise Capital Improvement Plan Attachment 1

8 CITY OF WATSONVILLE
Figure 6 compares the current and proposed financial plans. Revenues under the proposed financial plan and status quo financial plan are represented by the dark blue and red dashed lines, respectively. Revenue requirements including O&M expenses, debt service, cash funded CIP, and reserve funding are represented by the various stacked bars. Green bars represent drawdown of reserves when negative and buildup of reserves when positive.

Current wastewater revenues under the status quo fail to sufficiently recover O&M expenses by FY 2028. Proposed revenue adjustments are projected to generate $28.6 million in additional rate revenue over the study period compared to current rates.

Figure 6: Wastewater Enterprise Status Quo Versus Proposed Financial Plan Figure 7 shows the Wastewater Enterprise’s projected ending cash reserve balances under the proposed financial plan. The light blue bars indicate the projected ending balance. The operating reserve target and total reserve target (operating plus capital) are represented by the red and blue dashed lines, respectively. Total annual CIP expenditures are represented by the shaded green area. Under the proposed financial plan, reserves achieve the total reserve target in all years of the rate implementation period of FY 2027 through FY 2031.

Figure 7: Proposed Wastewater Enterprise Financial Plan – Projected Reserve Ending Balance Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 9

1.3.2.PROPOSED WASTEWATER RATES
Wastewater customers are billed monthly based on a rate structure that varies by customer class. Residential customers are subject to a fixed charge per dwelling unit. Commercial customers are subject to a fixed charge plus a variable charge per CCF of metered water use. Commercial customers classified as eating / food preparation establishments and bakeries are subject to a higher variable charge rate due to the relatively higher strength2F 3 of
wastewater generated by these establishments. Industrial customers are charged through three components: per million gallons of wastewater flows, per 1,000 pounds of biological oxygen demand (BOD), and per 1,000 pounds of suspended solids (SS) based on the actual measurement of each industrial customer’s wastewater discharge.

Raftelis conducted a wastewater cost of service analysis to objectively allocate costs to user classes based on the costs incurred by the Wastewater Enterprise and each class’s unique service characteristics. This analysis provides the basis for proposed rates. The proposed five-year schedule of wastewater rates for FY 2027 to FY 2031 is shown in Table 1-6.

Proposed FY 2027 rates (which would become effective July 1, 2026) directly incorporate the results of the wastewater cost of service analysis plus the proposed sixteen percent revenue adjustment in FY 2027. All rates are then uniformly increased each subsequent year through FY 2031 based on the proposed wastewater revenue adjustment schedule.

Table 1-6: Proposed Schedule of Wastewater Rates
Wastewater Rates Current Proposed
FY 2027
Proposed
FY 2028
Proposed
FY 2029
Proposed
FY 2030
Proposed
FY 2031
Residential Fixed Charge
Single & Multiple Family Residential Monthly
Charge (per dwelling unit) $61.51 $70.42 $78.87 $83.60 $88.62 $93.94 Commercial Fixed Charge
Minimum Monthly Fee $33.93 $35.04 $39.24 $41.60 $44.10 $46.74 Commercial Charges per Unit of Water
Consumed (CCF)
High-Strength: Eating and food preparation
establishments; bakeries $7.90 $8.50 $9.52 $10.09 $10.70 $11.34 Low-Strength: Laundries; other commercial $4.56 $5.31 $5.95 $6.30 $6.68 $7.08 Industrial Charges
Flow (per million gallons) $3,194.97 $4,359.89 $4,883.08 $5,176.06 $5,486.63 $5,815.82 Biological Oxygen Demand (per 1,000
pounds)
$318.28 $528.20 $591.58 $627.08 $664.70 $704.59
Suspended Solids (per 1,000 pounds) $765.91 $592.23 $663.30 $703.10 $745.28 $790.00 3 Wastewater strength refers to the concentration of organic and particulate matter in wastewater.

Attachment 1

10 CITY OF WATSONVILLE

1.4.Solid Waste Rate Study

1.4.1.PROPOSED SOLID WASTE ENTERPRISE FINANCIAL PLAN
Raftelis conducted a cash flow analysis to evaluate whether existing solid waste rates adequately fund the Solid Waste Enterprise’s total expenses over the five-year rate setting period and 10-year financial planning horizon. 10- year projections of annual revenues, O&M expenses, debt service payments, and capital expenditures through FY 2036 were developed by Raftelis with the assistance of City staff.

Without increases over the rate setting period Raftelis projects that the Enterprise would draw down reserves below target by FY 2032 and turn to a negative cash position in FY 2034. With modest increases, cash reserves are maintained above target during this rate cycle, allowing for modest increases projected into the next five-year rate cycle. Without increases in FY 2027 through FY 2031 reserves would be draw down rapidly and unsustainably.

This drawdown would then require significant increases in FY 2032 through 2036 to correct the imbalance.

Raftelis worked closely with City staff to determine appropriate solid waste revenue adjustments. Raftelis and City staff recommend that 2 percent revenue adjustments be implemented annually over the five years of the study period (see Table 1-7).

Table 1-7: Proposed Solid Waste Enterprise Revenue Adjustments Fiscal Year Effective Date Revenue
Adjustment
FY 2027 July 1, 2026 2%
FY 2028 July 1, 2027 2%
FY 2029 July 1, 2028 2%
FY 2030 July 1, 2029 2%
FY 2031 July 1, 2030 2%
Figure 8 shows the Solid Waste Enterprise’s five-year Capital Improvement Plan (CIP) by anticipated funding source. Although the study period only extends through FY 2031, annual capital expenditures through FY 2036 were considered in this study to account for long-term capital needs.

The CIP from FY 2026 through FY 2031 and encompasses a broad range of solid waste and landfill-related investments. The largest single expenditure is the Container Area/Stormwater Improvements at MSC—a new project totaling approximately $2.6 million, with most of the spending ($2.1 million) concentrated in FY 2028. Collection Vehicles represent the most recurring and significant fleet investment, with expenditures planned in almost every fiscal year and totaling roughly $6.6 million. Street Sweeper replacements ($400,000 in FY 2026 and $624,000 in FY 2028) and Public Drop Off Facility Improvements ($439,000 in FY 2026 and $816,000 in FY 2027) represent notable near-term capital commitments. Ongoing landfill operations drive steady annual expenditures through Landfill Gas Wells Maintenance, Landfill Property Improvements, and Landfill Closure, each escalating incrementally at approximately 2% per year and collectively totaling approximately $1.9 million over the plan period. Fleet replacements—including the Fuel Trailer ($250,000 in FY 2026), Green Waste Chipper ($200,000 in FY 2026), Roll-Off Truck (approximately $736,000 across FY 2027 and FY 2030), and Container Truck (approximately $676,000 across FY 2026, FY 2028, and FY 2030)—reflect ongoing equipment lifecycle costs, while smaller projects such as Landfill Cell IV Opening, Nature Center Building, and MSC Kitchen Repairs address targeted facility and operational needs.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 11
Figure 8: Solid Waste Enterprise CIP Summary
Figure 9 compares the current and proposed financial plans. Revenues under the proposed financial plan and status quo financial plan are represented by the blue and red dashed lines, respectively. Revenue requirements including O&M expenses, debt service, pay-as-you-go CIP, and reserve funding are represented by the various stacked bars.

Green bars represent drawdown of reserves when negative and buildup of reserves when positive. Current revenues under the status quo fail to sufficiently recover total costs. Proposed revenue adjustments are projected to generate $6.3 million in additional rate revenue over the study period relative to current rates.

Figure 9: Solid Waste Enterprise Status Quo Versus Proposed Financial Plan Figure 10 shows the Solid Waste Enterprise’s projected ending cash reserve balances under the proposed financial plan. The light blue bars indicate the projected ending balance. The operating reserve target and total reserve target (operating plus capital) are represented by the red and blue dashed lines, respectively. Under the proposed financial plan, reserves meet the total reserve target for all years of the rate implementation period from FY 2027 through FY 2031.

Attachment 1

12 CITY OF WATSONVILLE
Figure 10: Proposed Solid Waste Enterprise Financial Plan – Projected Reserve Ending Balance Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 13

1.4.2.PROPOSED SOLID WASTE RATES
Most Solid Waste Enterprise operations are associated with weekly pickup services provided to customers.

However, the Solid Waste Enterprise does also provide one-time temporary services. Customers receiving weekly pickup services are billed monthly. Customers receiving temporary services are charged per service. Raftelis conducted a solid waste cost of service analysis to objectively allocate costs to customers based on the costs incurred by the Solid Waste Enterprise and each user class’s specific service requirements. This analysis provides the basis for proposed rates.

Table 1-8 and Table 1-9 show proposed monthly charges for weekly pickup services and one-time charges for temporary services from FY 2027 through FY 2031. Proposed FY 2027 rates (effective July 1, 2026) directly incorporate the results of the solid waste cost of service analysis plus the proposed 2 percent revenue adjustment in FY 2027. All rates are then uniformly increased by 2 percent each subsequent year through FY 2031 based on the proposed solid waste revenue adjustment schedule.

Attachment 1

14 CITY OF WATSONVILLE
Table 1-8: Proposed Schedule of Solid Waste Rates for Weekly Pickup Services Monthly Charge per Weekly Pickup Current Proposed
FY 2027
Proposed
FY 2028
Proposed
FY 2029
Proposed
FY 2030
Proposed
FY 2031
Cart Service
32 gal $45.41 $46.16 $47.08 $48.02 $48.99 $49.97
68 gal $76.21 $77.63 $79.18 $80.77 $82.38 $84.03
95 gal $99.32 $101.24 $103.26 $105.33 $107.44 $109.59
Container Service
1 cu yd $190.84 $194.77 $198.67 $202.64 $206.69 $210.83

1.5 cu yd $277.23 $283.06 $288.72 $294.50 $300.39 $306.39 2 cu yd $363.64 $371.35 $378.78 $386.35 $394.08 $401.96 3 cu yd $536.45 $547.94 $558.90 $570.08 $581.48 $593.11 4 cu yd $709.24 $724.53 $739.02 $753.80 $768.88 $784.25 6 cu yd $1,054.85 $1,077.71 $1,099.26 $1,121.25 $1,143.67 $1,166.55 8 cu yd $1,400.47 $1,430.88 $1,459.50 $1,488.69 $1,518.46 $1,548.83 Drop Box Service
20 cu yd $3,474.10 $3,549.94 $3,620.94 $3,693.36 $3,767.22 $3,842.57 25 cu yd $4,338.12 $4,432.88 $4,521.54 $4,611.97 $4,704.21 $4,798.29 30 cu yd $5,202.14 $5,315.82 $5,422.14 $5,530.58 $5,641.19 $5,754.01 35 cu yd $6,066.16 $6,198.76 $6,322.74 $6,449.19 $6,578.17 $6,709.74 40 cu yd $6,930.18 $7,081.70 $7,223.33 $7,367.80 $7,515.16 $7,665.46 Compactor Drop Box Service
3 cu yd $1,573.26 $1,607.47 $1,639.62 $1,672.41 $1,705.86 $1,739.98 4 cu yd $2,091.68 $2,137.23 $2,179.97 $2,223.57 $2,268.05 $2,313.41 10 cu yd $5,202.14 $5,315.82 $5,422.14 $5,530.58 $5,641.19 $5,754.01 15 cu yd $7,794.20 $7,964.64 $8,123.93 $8,286.41 $8,452.14 $8,621.18 20 cu yd $10,386.24 $10,613.45 $10,825.72 $11,042.23 $11,263.08 $11,488.34 22 cu yd $11,423.07 $11,672.98 $11,906.44 $12,144.57 $12,387.46 $12,635.21 25 cu yd $12,978.30 $13,262.27 $13,527.52 $13,798.07 $14,074.03 $14,355.51 30 cu yd $15,570.35 $15,911.09 $16,229.31 $16,553.90 $16,884.98 $17,222.68 35 cu yd $18,162.41 $18,559.91 $18,931.11 $19,309.73 $19,695.92 $20,089.84 40 cu yd $20,754.45 $21,208.73 $21,632.90 $22,065.56 $22,506.87 $22,957.01 Solid Waste (Organics) Collections
68 gal $76.21 $77.63 $79.18 $80.77 $82.38 $84.03
1 cu yd $190.84 $194.77 $198.67 $202.64 $206.69 $210.83 2 cu yd $363.64 $371.35 $378.78 $386.35 $394.08 $401.96 3 cu yd $536.45 $547.94 $558.90 $570.08 $581.48 $593.11 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 15
Table 1-9: Proposed Schedule of Solid Waste Rates for Temporary Services Charge per Temporary Service Current Proposed
FY 2027
Proposed
FY 2028
Proposed
FY 2029
Proposed
FY 2030
Proposed
FY 2031
Temporary Use Containers
1 cu yd $47.72 $48.70 $49.67 $50.67 $51.68 $52.71

1.5 cu yd $69.32 $70.77 $72.19 $73.63 $75.10 $76.60
2 cu yd $90.92 $92.84 $94.70 $96.59 $98.52 $100.49
3 cu yd $134.12 $136.99 $139.73 $142.52 $145.37 $148.28 4 cu yd $177.32 $181.14 $184.76 $188.46 $192.23 $196.07 6 cu yd $263.73 $269.43 $274.82 $280.31 $285.92 $291.64 8 cu yd $350.12 $357.72 $364.87 $372.17 $379.62 $387.21 On-Call Drop Box Service
20 cu yd (<1/2 full) $436.52 $446.02 $454.94 $464.04 $473.32 $482.79 20 cu yd $868.53 $887.49 $905.24 $923.34 $941.81 $960.65 25 cu yd $1,084.53 $1,108.22 $1,130.38 $1,152.99 $1,176.05 $1,199.57 30 cu yd $1,300.54 $1,328.96 $1,355.54 $1,382.65 $1,410.30 $1,438.51 35 cu yd $1,516.54 $1,549.69 $1,580.68 $1,612.30 $1,644.54 $1,677.43 40 cu yd $1,732.55 $1,770.43 $1,805.84 $1,841.96 $1,878.79 $1,916.37 50 cu yd $2,164.56 $2,211.90 $2,256.14 $2,301.26 $2,347.29 $2,394.23 On-call Compactor Drop Box Service
3 yd Compactor $393.32 $401.87 $409.91 $418.11 $426.47 $435.00 4 yd Compactor $522.93 $534.31 $545.00 $555.90 $567.01 $578.35 10 yd Compactor $1,300.54 $1,328.96 $1,355.54 $1,382.65 $1,410.30 $1,438.51 12 yd Compactor $1,559.74 $1,593.84 $1,625.72 $1,658.23 $1,691.40 $1,725.22 15 yd Compactor $1,948.55 $1,991.16 $2,030.98 $2,071.60 $2,113.03 $2,155.30 20 yd Compactor $2,596.57 $2,653.37 $2,706.44 $2,760.57 $2,815.78 $2,872.09 22 yd Compactor $2,855.77 $2,918.25 $2,976.62 $3,036.15 $3,096.87 $3,158.81 25 yd Compactor $3,244.58 $3,315.57 $3,381.88 $3,449.52 $3,518.51 $3,588.88 30 yd Compactor $3,892.60 $3,977.78 $4,057.34 $4,138.48 $4,221.25 $4,305.68 40 yd Compactor $5,188.62 $5,302.19 $5,408.23 $5,516.40 $5,626.73 $5,739.26 Temporary Special Use Containers* (Wood Waste, Yard Trimmings, & Scrap Metal) 4 cu yd $177.32 $181.14 $184.76 $188.46 $192.23 $196.07 6 cu yd $263.73 $269.43 $274.82 $280.31 $285.92 $291.64 20 cu yd $868.53 $887.49 $905.24 $923.34 $941.81 $960.65 25 cu yd $1,084.53 $1,108.22 $1,130.38 $1,152.99 $1,176.05 $1,199.57 30 cu yd $1,300.54 $1,328.96 $1,355.54 $1,382.65 $1,410.30 $1,438.51 35 cu yd $1,516.54 $1,549.69 $1,580.68 $1,612.30 $1,644.54 $1,677.43 40 cu yd $1,732.55 $1,770.43 $1,805.84 $1,841.96 $1,878.79 $1,916.37 Temporary Recycling
3 cu yd $134.12 $136.99 $139.73 $142.52 $145.37 $148.28 6 cu yd $263.73 $269.43 $274.82 $280.31 $285.92 $291.64 15 cu yd $652.53 $666.75 $680.09 $693.69 $707.56 $721.71 30 cu yd $1,300.54 $1,328.96 $1,355.54 $1,382.65 $1,410.30 $1,438.51 Attachment 1

16 CITY OF WATSONVILLE
Customer Bill Impacts
Figure 11 includes sample monthly bill impacts for single family residential customers. All combined monthly bills shown include water, wastewater, and solid waste service (combined service). Sample combined service bills are shown for two representative customers:
1) Low Volume Single Family Residential Customer:
» Representative of a smaller household with lower service volumes » Water service: 5/8-inch water meter using 6 CCF per month (median water use for residential customers) » Wastewater service: fixed monthly charge for one dwelling unit » Solid waste service: 32-gallon weekly cart service (smallest cart size) 2) Typical Single Family Residential Customer:
» Representative of an average household with moderate service levels » Water service: 5/8-inch water meter using 8 CCF per month (average water use for residential customers) » Wastewater service: fixed monthly charge for one dwelling unit » Solid waste service: 68-gallon weekly cart service (medium cart size) Figure 11: Single Family Residential – Projected Monthly Bills Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 17
Figure 12 shows a comparison of typical single family residential combined service monthly water, wastewater, and solid waste bills in the City of Watsonville with four neighboring communities. All bills are calculated based on the most common water meter size, monthly water use of 8 CCF, and solid waste service comparable to the City’s 68-gallon weekly cart service. Estimated monthly bills based on the City’s current and proposed FY 2027 rates are significantly lower than current monthly bills of all four neighboring communities surveyed. Monthly bills for other neighboring communities are based on rates currently in effect as of FY 2026.

Figure 12: Single Family Residential Monthly Bill Comparison with Neighboring Communities Note: Estimated bills reflect current rates for neighboring communities.

Attachment 1

18 CITY OF WATSONVILLE

2.Introduction

2.1.Agency Overview
The City of Watsonville (City) operates three independent and self-supporting utility enterprises, which are run by the Water, Wastewater, and Solid Waste Divisions. Each enterprise is managed and operated by the City’s Public Works & Utilities Department and is funded primarily with rates and charges paid monthly by customers (i.e., ratepayers).

The Water Division is responsible for providing safe, reliable, and affordable drinking water to 66,000 residential, commercial, industrial, and institutional customers within the City as well as to parts of unincorporated areas of Santa Cruz County. Staff operates and maintains 190 miles of pipelines, 14 wells, 8 reservoirs and the Corralitos Filtration Plant treatment plant. The City’s primary water supply source is local groundwater from the Pajaro Valley Groundwater Basin produced by the City’s wells. The Water Division will require substantial capital expenditures over the next decade to continue operating within the State of California’s Chromium 6 treatment guidelines as well as replacing aging infrastructure like water mains (pipelines), water wells, and water meter replacements among other reinvestments.

The Wastewater Division is responsible for providing wastewater treatment services to the City and three surrounding sanitary districts (Freedom County Sanitation District, Pajaro County Sanitation District, and Salsipuedes Sanitary District). Wastewater is highly treated to either secondary treatment standards and discharged to the Monterey Bay National Marine Sanctuary or is treated to the tertiary level and is distributed for direct food crop irrigation as recycled water. In addition to the City’s wastewater treatment plant, City staff also maintains over 150 miles of wastewater collection pipelines as well as 33 sewer and storm water pump stations.

The Solid Waste Division collects and disposes of the City’s refuse, recycling, and green waste. Staff also operates the highly-used public drop-off facility at 320 Harvest Drive and completes over 10,000 miles of street sweeping per year. The Solid Waste Division recently closed the City’s landfill when capacity was reached. Solid waste is now transported about 15 miles from the City and disposed of at the Monterey County Regional Waste Management District’s Monterey Peninsula Landfill in the City of Marina.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 19
Figure 13: Utility Enterprise Fund Structure

2.2.Study Overview
Public water, wastewater, and solid waste utilities in California typically perform a cost of service (COS) analysis every five to ten years to ensure that customers are appropriately charged for service commensurate with the cost to provide the service. The City last conducted water, wastewater, and solid waste rate studies in 2021, which established proposed rates over a five-year period from Fiscal Year (FY) 2022 through FY 2026, the current fiscal year.

The City engaged Raftelis to conduct new water, wastewater, and solid waste rate studies to establish proposed five-year schedules of rates for FY 2027 through FY 2031. Underlying data including cost information, forecasting estimates, financial assumptions, and rate results of the study are documented in this report. Note that proposed rates cannot be implemented until formally adopted by City Council after a public hearing in accordance with the procedural and substantive requirements of Proposition 218.

Study Objectives
The major objectives of this study are to:
» Develop a long-range financial plan that sufficiently funds the City’s water, wastewater, and solid waste operations and maintenance (O&M) expenses, debt service payments, and capital expenditures while adequately funding reserves and achieving debt coverage requirements. » Conduct COS analyses that establish a clear nexus between the costs incurred by the Enterprises to serve water, wastewater, and solid waste customers and the costs attributable to user classes on the systems. » Review the City’s existing water, wastewater, and solid waste rate structures to ensure that proposed rates are aligned with the characteristics of the systems and achieve the financial and policy objectives of the City.
» Develop a five-year schedule of water, wastewater, and solid waste rates that are fair, cost-justified, and aligned with the substantive requirements of Proposition 218.

Attachment 1

20 CITY OF WATSONVILLE

2.3.Rate Setting Methodology
This study was conducted using industry-standard principles outlined by the American Water Works Association’s (AWWA) Manual M1 and the Water Environment Federation’s (WEF) Financing and Charges for Wastewater Systems. The process and approach Raftelis utilized in the study to determine rates are informed by the City’s policy objectives, the current system of rates and user classifications, industry standard frameworks, and the legal requirements in California (namely, Proposition 218). The resulting financial plans, cost of service analyses, and rate design process follows five key steps to determine charges that derive cost-justified rates, provide full cost recovery, fulfill the City’s objectives, and align with industry standards. The overall process outlined below generally applies to the each of the water, wastewater, and solid waste rate studies presented in this report.

1. Financial Plan: The first study step is to develop a multi-year financial plan that projects each enterprises’ revenues, expenses, capital project financing, annual debt service, and reserve funding. The financial plan is used to determine revenue adjustments needed to recover adequate revenues to fund expenses, provide for a prudent level of cash reserves, and meet any debt obligations.

2. Revenue Requirement Determination: After completing the financial plan, the rate-making process begins with the determination of the revenue requirement for the test year, also known as the cost-of service year.

The test year for this study is FY 2027. The revenue requirement should sufficiently fund each enterprises’ operating costs, annual debt service (including coverage requirements), capital expenditures, and reserve funding needs, net of any other sources of revenues. The revenue requirement is recovered through the City’s schedule of water, wastewater, and solid waste rates.

3. Cost of Service (COS) Analysis: The annual cost of providing service (i.e., the revenue requirement) is then distributed to customer classes commensurate with their use of and burden on the system. A cost of service analysis involves the following steps:
» Functionalize costs – The different components of the revenue requirement are categorized into functions. For example, for water such functions may include supply, storage, distribution, and customer service, among other functions.
» Allocate to cost causation components – The functionalized costs are then allocated to water cost causation components such as supply, base delivery, or extra capacity, among others. » Develop unit costs – Unit costs for each cost causation component are determined using representative units of service (e.g., total annual water demand). » Distribute cost components – The cost components are allocated to each customer class and tier using the unit costs in proportion to their respective demand and burden on the system.

A water cost of service analysis considers both the average water demand and peak demand. Peaking, or extra-capacity, costs are incurred during periods of peak consumption, most often coinciding with summer water use (peak day) and time of day (peak hour). There are additional capacity-related costs associated with designing, constructing, operating, maintaining, and replacing facilities to meet peak demands.

Patterns of use impose additional costs on a water utility and are used to determine the cost burden on peaking-related facilities. Similarly, a wastewater cost of service analysis considers the flow and associated strengths of wastewater from different user classes; and a solid waste cost of service analysis considers the volume of solid waste generated and the frequency of collection for each customer class.

4. Rate Design: After allocating the revenue requirement to each customer class, the rate design and calculation process begins. Rates do more than simply recover costs; within the legal framework and Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 21
industry standards, properly designed rates support and optimize the City’s policy objectives. Rates also act as a public information tool in communicating policy objectives to customers. This process also includes a bill impact analysis.

5. Rate Study Preparation and Rate Adoption: The final step in a rate study is to develop the written document memorializing the rate study in conjunction with the rate adoption process. The report serves as a key part of the administrative record for rate adoption. The report documents the study results and presents the methodologies, rationale, justifications, and calculations used to determine the proposed rates.

A thorough and methodological administrative record serves two important functions: maintaining defensibility in a stringent legal environment and communicating the rationale for revenue adjustments and proposed rates to customers and key stakeholders.

Attachment 1

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 1

3.Key Assumptions
The key assumptions outlined in this section of the report represent the global assumptions utilized in the study to project the number of customer accounts, revenues, and expenses for future years. City staff provided data on customer accounts, usage, and actual revenues and expenses for FY 2025 and budgeted revenues and expenses for FY 2026 and FY 2027. The remaining years of the Study, from FY 2028 to FY 2031, were projected based on this information and the key assumptions shown in this section.

3.1.Customer Account Growth
Table 3-1, Table 3-2, and Table 3-3 show the customer account growth projections for each enterprise utility based on input from City staff. Customer account growth (water, wastewater and solid waste) is projected at 0.52% per year throughout the planning horizon, consistent with modest, but steady growth in the City's service area. Both water demand and wastewater flow is projected to remain constant (i.e., 0% growth), reflecting stable per-capita usage patterns and the absence of any significant, new large-volume users. These conservative growth values were used as a prudent fiscal practice to ensure that adequate revenues are collected to fund the City’s utilities for water, wastewater, and solid waste.

Table 3-1: Water Customer Account Growth Projections

A B C D E F G
Line Customer Account
Growth FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031
1 Water Demand Growth 0.0% 0.0% 0.0% 0.0% 0.0 % 0.0%
2 Water Account Growth 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
Attachment 1

2 CITY OF WATSONVILLE
Table 3-2: Wastewater Customer Account Growth Projections

A B C D E F G
Line Customer Account Growth FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 1 Wastewater Flow Growth 0.0% 0.0% 0.0% 0.0% 0.0 % 0.0% 2 Wastewater Account Growth 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% Table 3-3: Solid Waste Customer Account Growth Projections

A B C D E F G
Line Customer Account Growth FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 1 Account Growth 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
2 Temporary Services Growth 0.0% 0.0% 0.0% 0.0% 0.0 % 0.0%

3.2.Annual Inflationary Escalation Factors
Table 3-4 shows the inflation factors utilized to project future expenses for the three utilities, which are used to project future operating and capital project expenses for the study period. These factors were determined with input from City staff and reference industry standard escalations and commonly used price indices.

Table 3-4: Expense Inflation Factors

A B C D E F G
Line Annual Expense
Inflation Factors FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 1 Non-inflated 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
2 General 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
3 Capital 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
4 Salary 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
5 Benefits 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
6 Utilities 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
7 Chemicals 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
8 Inter-Dept. charges 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
9 Water Supply 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%
Table 3-5 shows the inflation factors utilized to project future revenues for the three utilities over the study period.

These factors were determined with input from City staff and reference industry standard escalations and commonly used price indices.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 3
Table 3-5: Revenue Inflation Factors

A B C D E F G
Line Annual Expense
Inflation Factors FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 1 Other Revenues 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
2 Non-inflated 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
3 Non-recurring -100.0% -100.0% -100.0% -100.0% -100.0% -100.0%

3.3.Planned Debt Assumptions
Table 3-6 and Table 3-7 show the debt assumptions utilized to project future expenses for the water and wastewater utilities, respectively, which are used to project future debt payments over the course of the study period. These factors were determined with input from City staff and current market conditions at the time of the study. Planned debt assumptions for the wastewater private placement loan were provided by City staff based on assumed terms for the Energy Services Company (ESCO) financing agreement for the cogeneration capital improvement project.

Table 3-6: Planned Debt Assumptions - Water

A B C D E F G
Line Proposed Debt
Assumptions - Water FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 1 SRF Loan
2 Interest Rate 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%
3 Term 20 20 20 20 20 20
4 Issuance Costs 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
5 Private Placement
6 Interest Rate 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
7 Term 30 30 30 30 30 30
8 Issuance Costs 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%
Attachment 1

4 CITY OF WATSONVILLE
Table 3-7: Planned Debt Assumptions - Wastewater

A B C D E F G
Line Proposed Debt
Assumptions - Wastewater FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 1 SRF Loan
2 Interest Rate 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%
3 Term 30 30 30 30 30 30
4 Issuance Costs 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
5 Private Placement
6 Interest Rate 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%
7 Term 20 20 20 20 20 20
8 Issuance Costs 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%
Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 5

4.Water Rate Study
Raftelis developed a water rate model in Microsoft Excel to project financial calculations over the five-year ratesetting period through FY 2031 (i.e., the “study period”). The City’s fiscal year spans from July 1 through June 30.

Projections in future years were generally made based on actual data from FY 2025 and the revised budget for FY 2026 and FY 2027 using key assumptions outlined below. Assumptions were discussed with and reviewed by City staff to ensure that any unique characteristics of the City’s water system are accurately addressed. Note that most table values shown throughout this report are rounded to the last digit shown; and therefore, may not sum precisely to the totals shown.

The City provides service to residential, commercial, industrial, and institutional customers assuring delivery of the highest quality of potable water serving Watsonville and parts of unincorporated areas of Santa Cruz County. The City's regional water system consists of 190 miles of pipelines, 14 wells, 8 reservoirs and the Corralitos Filtration Plant treatment plant that delivers clean, safe water to our service population of 66,000 customers.

As a municipally operated enterprise, the Water Utility Division recovers its costs through customer rates and fees established in accordance with California's Proposition 218. The Division serves a diverse customer base that reflects Watsonville's predominantly working-class, agricultural community, and it supports both residential neighborhoods and the region's significant food processing and agricultural industries. Capital investment, system maintenance, and regulatory compliance remain among the Division's primary operational priorities as it works to ensure continued delivery of clean, reliable water service to its growing service area.

4.1.Water Enterprise Revenue Requirements
Section 4.1 includes estimates and projections of annual revenues, O&M expenses, debt service payments, capital expenditures, and reserve funding targets through FY 2031 for the Water Enterprise (Fund 720). These projections are necessary to determine annual water rate revenues required over the study period to achieve sufficient cash flow to maintain adequate reserves and debt coverage.

The financial plan is the foundation of the rate study. It establishes the total cost of providing water service over the planning horizon, identifies all available revenue sources, and quantifies the revenue adjustments needed to maintain the utility's financial integrity. The financial plan must demonstrate that proposed rates are set at a level sufficient—but not greater than necessary—to fund the water utility's ongoing obligations. The planning horizon spans from FY 2026 through FY 2036. FY 2025 reflects actual expenditures and revenues. FY 2026 reflects the adopted budget. The revised budget for FY 2027 is the test year, meaning it is the year that cost allocations and new rates are being established. FY 2028 through FY 2036 are projections used to assess the long-term financial sustainability of the utility and to identify the multi-year rate adjustments needed to maintain adequate reserves and debt coverage.

4.1.1. REVENUE FROM CURRENT WATER RATES
Current Water Rates
The City’s current water rates were implemented in July 2025. These rates are shown in Table 4-1 through Table 4-4. Water customers are billed monthly for two primary charges: 1) Meter Size Availability Fees and 2) Water Consumption Charges per hundred cubic feet (CCF) of water delivered.

Attachment 1

6 CITY OF WATSONVILLE
The Meter Size Availability Fee is a fixed monthly charge that varies based on water meter size. Additionally, customers with private fire lines are subject to a fixed monthly Fire Service Availability Fee based on the size of the fire line. Customers outside city limits are subject to higher Meter Size Availability Fees based on the difference in the costs to serve outside city customers.

Water Consumption Charges vary based on customer class and tier. Residential customers are subject to a threetiered Water Consumption Charge rate structure. For residential customers: the first 6 CCF per dwelling unit used each month is charged at the lowest rate (Tier 1), the next 6 CCF at a higher rate (Tier 2), and any additional use at the highest rate (Tier 3). All other customer classes are subject to a uniform Water Consumption Charge rate structure that varies by class.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 7
Table 4-1: Current Meter Size Availability Fees (Inside City Limits) Monthly Meter Size Availability Fee
(Inside City Limits)
Effective
July 2025
5/8" $29.93
3/4" $29.93
1" $59.43

1.5" $108.61
2" $167.61
3" $324.96
4" $501.98
6" $993.70
8" $1,583.78
Table 4-2: Current Meter Size Availability Fees (Outside City Limits) Monthly Meter Size Availability Fee
(Outside City Limits)
Effective
July 2025
5/8" $35.15
3/4" $35.15
1" $72.48

1.5" $134.71
2" $209.39
3" $408.51
4" $632.52
6" $1,254.80
8" $2,001.52
Table 4-3: Current Fire Service Availability Fees
Monthly Fire Service Availability Fee
(Inside City Limits)
Effective
July 2025
2" and smaller $18.23
4" $39.06
6" $86.38
8" $168.00
10" $290.77
Attachment 1

8 CITY OF WATSONVILLE
Table 4-4: Current Water Consumption Charge Rates
Water Consumption Charge Rates
(per CCF)
Effective
July 2025
Residential Tiered Rates
Tier 1 (1-6 CCF/month) $4.11
Tier 2 (7-12 CCF /month) $5.38
Tier 3 (Over 12 CCF /month) $8.33
Non-Residential Uniform Rates
Non-Residential $4.91
Industrial $3.91
Irrigation $7.02
Projected Water Service Connections
Water connection growth projections are necessary to help to estimate water demand and rate revenues over the study period. City staff provided Raftelis with the number of water meters and fire lines by size for FY 2025.

Raftelis then applied a 0.52 percent annual account growth rate3F 4 to all connection types to project the number of
water meters and fire lines in each year over the study period (see Table 4-5 to Table 4-7).

Table 4-5: Inside City Water Meter Counts
Inside City Water Meters Actual
FY 2025
Projected
FY 2026
Projected
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
5/8" 8,287 8,323 8,366 8,410 8,454 8,498 8,542
3/4" 545 319 321 322 324 326 327
1" 1,733 1,806 1,815 1,825 1,834 1,844 1,854

1.5" 245 246 247 249 250 251 252
2" 261 261 262 264 265 266 268
3" 36 54 54 55 55 55 55
4" 28 30 30 30 30 31 31
6" 6 6 6 6 6 6 6
8" 1 1 1 1 1 1 1
Total Water Meters 11,143 11,046 11,104 11,161 11,219 11,278 11,337 4 Estimated by Raftelis based on 15-year water service area population growth estimates from 2020 through 2035 from the City’s recent update to its Water Master Plan.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 9
Table 4-6: Outside City Water Meter Counts
Outside City Water Meters Actual
FY 2025
Projected
FY 2026
Projected
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
5/8" 2,727 2,734 2,748 2,763 2,777 2,791 2,806
3/4" 211 128 129 129 130 131 131
1" 577 589 592 595 598 601 604

1.5" 44 40 40 40 41 41 41
2" 52 53 53 54 54 54 54
3" 11 9 9 9 9 9 9
4" 7 8 8 8 8 8 8
6" 1 1 1 1 1 1 1
8" 0 0 0 0 0 0 0
Total Water Meters 3,631 3,562 3,581 3,599 3,618 3,637 3,656 Table 4-7: Private Fire Line Counts
Inside City Private Fire Lines Actual
FY 2025
Projected
FY 2026
Projected
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
2" and smaller 42 42 57 57 58 58 58
4" 125 125 135 136 136 137 138
6" 140 141 149 150 151 151 152
8" 78 78 83 83 84 84 85
10" 6 6 7 7 7 7 7
Total 390 392 431 433 435 438 440
Projected Water Demand
City staff provided Raftelis with actual annual water use by customer class and tier for FY 2024. Beginning in FY 2025, annual water use for each customer class and tier was projected. No change in demand per account is assumed over the study period as no substantial changes in customer water use patterns over the study period can be anticipated at present. Therefore, annual usage increases are due solely to the projected 0.52 percent increase in customer accounts. Projected annual water use by customer class and tier over the study period is shown in Table 4-8. Total water use is shown in both hundred cubic feet (CCF) and acre-feet (AF). Residential water use by tier is based on the current tier allotments per dwelling unit.

Attachment 1

10 CITY OF WATSONVILLE
Table 4-8: Annual Water Use under Current Rate Structure Water Use
(CCF)
Actual
FY 2024
Projected
FY 2025
Projected
FY 2026
Projected
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
Residential
Tier 1 1,029,919 1,035,281 1,040,670 1,046,088 1,051,534 1,057,008 1,062,510 1,068,042 Tier 2 342,204 343,985 345,776 347,576 349,386 351,205 353,033 354,871 Tier 3 177,094 178,016 178,943 179,874 180,811 181,752 182,698 183,649 Subtotal 1,549,217 1,557,282 1,565,389 1,573,538 1,581,730 1,589,964 1,598,241 1,606,561 Non-Residential
Non-Residential 424,737 426,948 429,171 431,405 433,651 435,908 438,178 440,459 Industrial 257,010 258,348 259,693 261,045 262,404 263,770 265,143 266,523 Irrigation 143,804 144,553 145,305 146,062 146,822 147,586 148,355 149,127 Subtotal 825,551 829,849 834,169 838,511 842,877 847,264 851,675 856,109 TOTAL (CCF) 2,374,768 2,387,131 2,399,558 2,412,050 2,424,606 2,437,229 2,449,916 2,462,670 Total (AF) 5,452 5,480 5,509 5,537 5,566 5,595 5,624 5,654 The City also sells wholesale water to the Pajaro Valley Water Management Agency (PVWMA) at a unique rate per AF (currently $680.17 per AF as of FY 2027). Raftelis projects that wholesale water sales to PVWMA will remain level at 878 AF each year over the study period.

Table 4-9: PVWMA Wholesale Water Sales Assumptions
PVWMA Wholesale
Water Sales
Actual
FY 2025
Projected
FY 2026
Projected
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Wholesale Water Rate
(per Acre-Foot) $646.89 $672.77 $680.17 $680.17 $680.17 $680.17 Wholesale Water Use
(Acre-Feet) 753 878 878 878 878 878
Projected Water Enterprise Revenue Under Current Rates
The Water Enterprise’s revenue sources consist of water rates, miscellaneous fees, interest earnings on cash reserves, and other non-rate revenues. The rate revenue projections shown in this section assume that current water rates are effective throughout the study period and represent estimated revenues in the absence of any water rate increases. This status quo scenario provides a baseline from which Raftelis evaluated the need for revenue adjustments (i.e., gross rate revenue increases).

Raftelis projected annual water rate revenues from Meter Size Availability Fees, Fire Service Availability Fees, and Water Consumption Charges over the study period based on current water rates (from Error! Reference source not f ound. to Table 4-4), projected number of water meters/private fire lines (from Table 4-5 to Table 4-7), and projected annual water use (from Table 4-8). Raftelis also projected PVWMA wholesale water sales revenue based on information shown in Table 4-9. Table 4-10 shows projected water rate revenues under current rates over the study period, calculated as follows:

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 11
Meter Size Availability Fee revenue = [current monthly charge] × [number of meters] × [12 bills per year] Fire Service Availability Fee revenue = [current monthly charge] × [number of fire lines] × [12 bills per year] Water Consumption Charge revenue = [current rate per CCF] × [annual water use in CCF] PVWMA Wholesale revenue = [current rate per AF] × [annual wholesale water sales in AF] Table 4-10: Water Enterprise Rate Revenue from Current Rates Rate Revenue Actual
FY 2025
Projected
FY 2026
Projected
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
Retail
Inside City Meter Size
Availability Fees $5,595,959 $5,719,238 $5,749,011 $5,778,940 $5,809,024 $5,839,265 $5,869,663 Outside City Water Size
Availability Fees $2,048,712 $2,037,212 $2,047,817 $2,058,478 $2,069,194 $2,079,966 $2,090,794 Fire Service Availability
Fees $388,474 $421,947 $424,143 $426,351 $428,571 $430,802 $433,045 Water Consumption
Charges $11,594,225 $11,770,692 $11,831,969 $11,893,565 $11,955,481 $12,017,719 $12,080,282 Subtotal $19,627,369 $19,949,088 $20,052,940 $20,157,333 $20,262,270 $20,367,752 $20,473,784 Wholesale
PVWMA Wholesale $487,024 $590,712 $597,210 $597,210 $597,210 $597,210 $597,210 Subtotal $487,024 $590,712 $597,210 $597,210 $597,210 $597,210 $597,210 Total $20,114,393 $20,539,800 $20,650,150 $20,754,543 $20,859,479 $20,964,962 $21,070,994 Table 4-11 shows all non-rate Water Enterprise revenues. All non-rate revenues in FY 2027 are based on the City’s FY 2027 revised budget and are held constant over the study period at the FY 2027 revised budget amount.

Table 4-11: Water Enterprise Miscellaneous Revenue
Miscellaneous
Revenue
Actual
FY 2025
Projected
FY 2026
Projected
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
Construction
Deposits $93,842 $67,000 $67,000 $67,000 $67,000 $67,000 $67,000 Water Use
Reduction Fees $124,605 $17,000 $17,000 $17,000 $17,000 $17,000 $17,000 Water Reserve
Fees $296,687 $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 Interest Earnings $1,201,886 $750,000 $550,000 $550,000 $550,000 $550,000 $550,000 Other Revenue $0 $4,500,000 $0 $0 $0 $0 $0
Total $1,717,019 $5,384,000 $684,000 $684,000 $684,000 $684,000 $684,000

4.1.2.WATER ENTERPRISE O&M EXPENSES
Water Enterprise operations and maintenance (O&M) expenses are annual recurring expenses necessary to operate and maintain the water system. Water Enterprise expenses excluded from O&M expenses in this study include Attachment 1

12 CITY OF WATSONVILLE
debt service payments, Capital Improvement Plan (CIP) expenditures, and non-cash expenses (such as depreciation).

Raftelis projected all O&M expenses over the study period based on the City’s FY 2027 revised budget and annual inflationary assumptions shown in Table 3-4 above. Each line item O&M expense from the FY 2027 revised budget was assigned to one of the seven inflationary categories shown in Table 3-4.

Table 4-12 shows a summary of all Water Enterprise O&M expenses over the study period. It is projected that O&M expenses will increase by approximately 3.3 percent per year on average over the rate-setting period. All O&M expenses in FY 2027 are from the City’s FY 2027 revised budget. PVWMA Augmentation Charges5 are included within “Water Operations.” All other O&M projections for FY 2028-FY 2031 were calculated by increasing FY 2027 revised budget amounts by the assumed annual inflationary increases in Table 3-4. 5 The PVMWA assesses an Augmentation Charge per AF of groundwater pumped from the groundwater basin to fund its efforts to reduce groundwater overdraft and prevent seawater intrusion into the groundwater basin.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 13
Table 4-12: Water Enterprise O&M Expenses
O&M Expenses Actual
FY 2025
Revised Budget
FY 2026
Budget
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
Water Operations (596)
Personnel $1,111,942 $1,554,450 $1,456,855 $1,509,487 $1,564,144 $1,620,910 $1,679,870 Operations $10,492,332 $11,976,896 $11,541,036 $11,922,362 $12,320,516 $12,736,270 $13,170,429 Subtotal $11,604,274 $13,531,346 $12,997,891 $13,431,848 $13,884,660 $14,357,179 $14,850,299 Customer Service (597)
Personnel $1,007,509 $1,052,511 $1,103,745 $1,143,363 $1,184,495 $1,227,202 $1,271,550 Operations $191,772 $305,600 $286,201 $292,885 $299,674 $306,567 $313,562 Subtotal $1,199,281 $1,358,111 $1,389,946 $1,436,248 $1,484,169 $1,533,770 $1,585,112 Services (598)
Personnel $1,953,184 $2,247,306 $2,406,505 $2,494,920 $2,586,798 $2,682,284 $2,781,529 Operations $673,031 $937,440 $955,124 $987,738 $1,021,528 $1,056,540 $1,092,820 Subtotal $2,626,215 $3,184,746 $3,361,629 $3,482,658 $3,608,326 $3,738,824 $3,874,349 Billing (600)
Personnel $996,661 $1,129,970 $1,184,262 $1,228,265 $1,274,012 $1,321,577 $1,371,036 Operations ($576,345) ($546,640) ($574,113) ($612,567) ($653,236) ($696,239) ($741,703) Subtotal $420,316 $583,330 $610,149 $615,699 $620,777 $625,338 $629,332 Total $15,850,086 $18,657,533 $18,359,615 $18,966,452 $19,597,932 $20,255,111 $20,939,092 Attachment 1

14 CITY OF WATSONVILLE

4.1.3.WATER ENTERPRISE CAPITAL IMPROVEMENT PLAN
The City has planned approximately $59.4 million in Water Enterprise capital expenditures between FY 2027 and FY 2031. This amounts to $11.9 million per year on average over the study period. Detailed CIP project costs are shown through FY 2031 in Table 4-13. City staff provided all CIP project cost estimates in current dollars. Raftelis then inflated all costs by 2 percent per year beginning in FY 2027 based on long-term changes in the EngineeringNews Record Construction Cost Index.

The most significant CIP project costs over the study period are associated with water main replacement ($34.4 million through FY 2035) and Chromium 6 treatment plant construction ($25.9 million through FY 2029). Capital expenditures associated with Chromium 6 treatment are necessary for the City to comply with Chromium 6 drinking water safety guidelines introduced by the State of California in 2014.

Although the study period only extends through FY 2031, annual capital expenditures through FY 2036 were considered in this study due to the continued level of repair and replacement expenditures anticipated beyond FY 2031. Annual average CIP project costs in FY 2032-FY 2036 amount to $7.8 million per year. Financial plan projections through FY 2031 must therefore account for the need to maintain cash reserves and debt capacity through FY 2031 to provide sufficient funding for CIP projects through FY 2036. Detailed CIP project costs are shown for FY 2032-FY 2036 in Table 4-14. The most significant CIP project costs beyond FY 2032 are associated with Freedom Reservoir site improvements ($8.3 million between FY 2032-FY 2036) and ongoing main replacement projects ($19.2 million between FY 2032-FY 2036).

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 15
Table 4-13: Detailed Water Enterprise Capital Improvement Plan (FY 2025-FY 2031) Water Enterprise CIP Projects Actual
FY 2025
Revised
Budget
FY 2026
Budget
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
Water Document Management $0 $126,000 $0 $0 $0 $0 $0
Water Operations Service Vehicle $0 $122,184 $71,400 $72,828 $74,285 $75,770 $77,286 Water Services Automotive Equipment $0 $175,542 $153,000 $0 $0 $0 $165,612 Water Services Heavy Equipment Replacement $0 $320,000 $0 $0 $0 $0 $0 Customer Service Vehicle $0 $195,542 $71,400 $41,616 $0 $0 $0 Water Meter Reading System Upgrade (Flex Net Units) $0 $26,172 $0 $0 $0 $0 $0 Meter Test Bench $0 $150,000 $0 $0 $0 $0 $0
Utility Payment Kiosk $0 $80,000 $0 $0 $0 $0 $0
Water Meter Replacement $0 $744,262 $358,714 $384,183 $411,460 $440,674 $471,962 Customer Service Portal $0 $80,000 $0 $0 $0 $0 $0
Nature Center Building $0 $300,000 $0 $0 $0 $0 $0
PW Utility Billing Office Reconfiguration $0 $95,972 $0 $0 $0 $0 $0 Water Main Replacement (Water Services In-House) $0 $2,203,387 $1,530,000 $2,080,800 $2,122,416 $2,164,864 $2,208,162 New Reservoir at Airport Booster Station $0 $4,991,100 $0 $0 $0 $0 $0 Additional Water Main Replacement (Union Beach Lincoln) $0 $5,451,716 $0 $0 $0 $0 $0 Water Well #4 $0 $4,000,000 $0 $0 $0 $0 $0
Freedom Reservoir Site Improvements - Replace Hypalon
Covers $0 $50,668 $2,040,000 $0 $0 $0 $0
Freedom Blvd: Green Valley to Airport (Water Main
Portion) $0 $166,486 $765,000 $0 $0 $0 $0
Chromium 6 Treatment Plants $0 $1,600,000 $4,080,000 $17,686,800 $2,546,899 $0 $0 PFOS Well 7 & 10 Replacement $0 $0 $0 $1,040,400 $2,122,416 $4,329,729 $0 Airport, Hames, Amesti and Rider Tank Coating Projects $0 $1,200,000 $1,530,000 $0 $0 $0 $0 MSC New Building Design $0 $1,486,372 $0 $0 $0 $0 $0
Eureka Canyon Fish Ladder Repair $0 $45,000 $0 $0 $0 $0 $0 Poppy Hill Booster Pump Station Improvements $0 $968,423 $0 $0 $0 $0 $0 Freedom Reservoir Site Improvements - Pump Station
Replacement $0 $0 $0 $0 $0 $7,577,025 $0
Electrical Instrumentation Upgrade $0 $250,000 $228,480 $237,211 $241,955 $246,795 $251,730 Miscellaneous Electrical Maintenance/Repair Projects $0 $260,000 $0 $0 $0 $312,121 $0 Klassen Lane PRV Station $0 $498,267 $0 $0 $0 $0 $0
Attachment 1

16 CITY OF WATSONVILLE
Water Enterprise CIP Projects Actual
FY 2025
Revised
Budget
FY 2026
Budget
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
Water Services Heavy Equipment Replacement $0 $0 $408,000 $0 $371,423 $0 $386,428 FY 2025 Spending $13,358,277 $0 $0 $0 $0 $0 $0
Total $13,358,277 $25,587,093 $11,235,994 $21,543,838 $7,890,854 $15,146,978 $3,561,180 Table 4-14: Detailed Water Enterprise Capital Improvement Plan (FY 2032-FY 2036) Water Enterprise CIP Projects Budget
FY 2032
Projected
FY 2033
Projected
FY 2034
Projected
FY 2035
Projected
FY 2036
Water Services Automotive Equipment $168,924 $0 $0 $0 $0 Water Meter Replacement $581,962 $593,602 $605,474 $617,583 $0 Water Main Replacement (Water Services In-House) $1,689,244 $1,723,029 $1,757,489 $1,792,639 $0 Additional Water Main Replacement $4,504,650 $0 $585,830 $4,780,370 $0 Freedom Reservoir Site Improvements - Replace Well 5 $0 $0 $1,171,659 $7,170,555 $0 Electrical Instrumentation Upgrade $256,765 $261,900 $267,138 $272,481 $0 Water Services Heavy Equipment Replacement $394,157 $402,040 $410,081 $418,282 $0 Well 8 Improvements $140,020 $918,949 $0 $0 $0
Out Year Placeholder $0 $0 $0 $0 $7,357,574
Total $7,735,722 $3,899,519 $4,797,671 $15,051,911 $7,357,574 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 17
CIP projects are primarily funded by rates and cash reserves (referred to as “pay-as-you-go”) or by issuing debt.

Potential grant funding for CIP projects through FY 2036 is uncertain and is not considered in this study. Due to the continued level of CIP expenditures through FY 2036, the City expects to issue new debt over the next ten years to finance a substantial portion of planned Water Enterprise CIP projects. Raftelis worked with City staff and the City’s Municipal Advisor to determine the assumed mix of new debt and cash funding for Water Enterprise CIP expenditures over the next ten years (see Table 4-15 and Figure 14).

All new debt issuance assumptions shown are for preliminary planning purposes only and are subject to refinement or change. Revenue bonds are assumed to be issued to finance the Chromium 6 treatment plants ($21 million in FY 2028), various CIP projects ($15 million in FY 2030), and Freedom Reservoir site improvements ($7 million in FY 2035). Estimates of annual debt service associated with new debt issues are shown in Section 4.1.4. All other CIP expenditures are assumed to be pay-as-you-go funded.

Table 4-15: Water Enterprise CIP Funding Summary
Fiscal
Year Grant Funded Debt Funded Pay-as-you-go Total CIP Notes FY 2026 $4,500,000 $0 $21,087,093 $25,587,093 Debt funding for Chromium 6 Treatment Plants
FY 2027 $0 $0 $11,235,994 $11,235,994
FY 2028 $0 $21,000,000 $543,838 $21,543,838 Debt funding for Chromium 6 Treatment Plants
FY 2029 $0 $0 $7,890,854 $7,890,854
FY 2030 $0 $15,000,000 $146,978 $15,146,978 Debt Funding for various CIP projects
FY 2031 $0 $0 $3,561,180 $3,561,180
FY 2032 $0 $0 $7,735,722 $7,735,722
FY 2033 $0 $0 $3,899,519 $3,899,519
FY 2034 $0 $0 $4,797,671 $4,797,671
FY 2035 $0 $7,000,000 $8,051,911 $15,051,911 Debt funding for Freedom Reservoir Site Improvements
FY 2036 $0 $0 $7,357,574 $7,357,574
Figure 14: Water Enterprise CIP Summary

Attachment 1

18 CITY OF WATSONVILLE

4.1.4.WATER ENTERPRISE DEBT SERVICE
The Water Enterprise has no existing debt service.

Raftelis estimated annual proposed debt service associated with assumed new debt issues to fund ten years of CIP expenditures (from Table 4-15) based on the following assumptions:
» Debt instrument: revenue bond
» Term: 30 years
» Annual interest rate: 5.5 percent
» Issuance costs (as a percent of total debt proceeds): 1.5 percent » Annual debt service payments are amortized over the life of the loan beginning in the year of issue (i.e., level principal plus interest payments each year)
All proposed debt service payments shown represent preliminary estimates, and all debt assumptions are intended to be sufficiently conservative to avoid underestimating future debt service. Proposed debt service estimates are only shown for new debt issues through the end of the study period in FY 2031.

Table 4-16: Water Enterprise Proposed Debt Service
Proposed Debt Service FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2028 Proposed Debt $0 $0 $0 $1,466,917 $1,466,917 $1,466,917 $1,466,917 FY 2030 Proposed Debt $0 $0 $0 $0 $0 $1,047,798 $1,047,798 Total $0 $0 $0 $1,466,917 $1,466,917 $2,514,715 $2,514,715 Table 4-17 shows a summary of total debt service payments each year over the study period, including both existing and proposed debt service. As there is no existing debt service, total debt service within the Water Enterprise is comprised only of proposed future issuances. Assumed debt financing for the Chromium 6 treatment plants and water main replacement projects is projected to result in annual debt service payments of $2.5 million by the end of the study period.

Table 4-17: Water Enterprise Debt Service Summary
Water Existing Debt FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Existing Debt Service $0 $0 $0 $0 $0 $0 $0
Proposed Debt service $0 $0 $0 $1,466,917 $1,466,917 $2,514,715 $2,514,715 Total $0 $0 $0 $1,466,917 $1,466,917 $2,514,715 $2,514,715

4.1.5.WATER ENTERPRISE FINANCIAL POLICIES
Debt Coverage
Debt coverage indicates whether an agency is able to meet annual debt service payments and is defined as the ratio of net operating revenues (total revenues less operating expenses) to annual debt service. Prior Water Enterprise debt was subject to a required debt coverage ratio of 1.25. Although the Water Enterprise currently has no debt service coverage requirement on its existing debt, maintaining sufficient debt coverage may benefit the Water Enterprise by providing lower cost debt financing options over the next ten years.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 19
Reserve Targets
Adequate cash reserves are required to meet operating, capital, and debt service requirements. No changes are proposed to the Water Enterprise’s existing reserve policies. Operating reserves provide funds to meet ongoing cash flow requirements related to operating expenses. The current operating reserve target is equal to 25 percent of annual O&M expenses or three months of working capital. Capital reserves are maintained to provide available funds for CIP project costs. The current capital reserve target is equal to 2 percent of the replacement cost of the Water Enterprise capital assets. Table 4-18 summarizes the Water Enterprise’s key financial policies relevant to this rate study. Table 4-19 shows projected operating and capital reserve targets over the study period based on the reserve policies outlined.

Table 4-18: Water Enterprise Financial Policies
Financial Policy Target/Requirement
Debt Coverage
Required Debt Coverage Ratio 1.2
Reserve Targets
Operating Reserve Target 25% of annual Water Enterprise O&M expenses Capital Reserve Target 2% of replacement cost of Water Enterprise capital assets Table 4-19: Water Enterprise Reserve Targets
Reserve FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Operating Reserve6F
6 $4,664,383 $4,589,904 $4,741,613 $4,899,483 $5,063,778 $5,234,773 Capital Reserve7F
7 $2,106,320 $2,148,446 $2,191,415 $2,235,243 $2,279,948 $2,325,547 Total $6,770,703 $6,738,350 $6,933,028 $7,134,726 $7,343,726 $7,560,320

4.2.Water Enterprise Status Quo Financial Plan
To evaluate the Water Enterprise’s need for revenue adjustments (i.e., increases to gross rate revenues), Raftelis first developed a status quo financial plan. The status quo financial plan assumes that current rates remain unchanged over the study period. Table 4-20 combines projected revenues (from Table 4-10 and Table 4-11), O&M expenses (from Table 4-12), CIP expenditures (from Table 4-15), debt service (from Table 4-17), and reserve targets (from Table 4-19) to generate cash flow projections under the status quo for the Water Enterprise.

The key results shown in the status quo financial plan proforma include projected Water Enterprise reserve balances and projected debt coverage each year over the study period. In the absence of any revenue adjustments, the Water Enterprise is projected to generate insufficient revenue to maintain reserve balances above target levels after FY 2028. Projected debt coverage is shown beginning in FY 2028 when proposed debt service payments begin. Projected debt coverage fails to meet typical debt coverage requirements associated with revenue bonds after FY 2029 absent revenue adjustments.
6 Equal to 25 percent of annual projected Water Enterprise O&M expenses (from Table 4-12). 7 Equal to 2 percent of current replacement cost of Water Enterprise capital assets ($101,226,441) in FY 2024, and escalated by 2 percent each subsequent year to account for capital cost inflation (consistent with inflationary assumptions used to escalate CIP project costs).

Attachment 1

20 CITY OF WATSONVILLE
Table 4-20: Status Quo Water Enterprise Financial Plan Proforma Line Description FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 1 Revenue
2 Retail Water Sales Revenue from Current Rates $19,949,088 $20,052,940 $20,157,333 $20,262,270 $20,367,752 $20,473,784 3 Revenue Adjustments $0 $0 $0 $0 $0 $0
4 Wholesale Water Sales $590,712 $597,210 $597,210 $597,210 $597,210 $597,210 5 Other Revenue $5,384,000 $684,000 $684,000 $684,000 $684,000 $684,000 6 Total Revenue $25,923,800 $21,334,150 $21,438,543 $21,543,479 $21,648,962 $21,754,994 7 8 O&M Expenses
9 Water Operations $13,531,346 $12,997,891 $13,431,848 $13,884,660 $14,357,179 $14,850,299 10 Customer Service $1,358,111 $1,389,946 $1,436,248 $1,484,169 $1,533,770 $1,585,112 11 Services $3,184,746 $3,361,629 $3,482,658 $3,608,326 $3,738,824 $3,874,349 12 Billing $583,330 $610,149 $615,699 $620,777 $625,338 $629,332 13 Total O&M Expenses $18,657,533 $18,359,615 $18,966,452 $19,597,932 $20,255,111 $20,939,092 14 15 Net Revenues [Line 6 – Line 13] $7,266,267 $2,974,535 $2,472,090 $1,945,547 $1,393,851 $815,901 16 17 Debt Service
18 Existing Debt Service $0 $0 $0 $0 $0 $0
19 Proposed Debt Service $0 $0 $1,466,917 $1,466,917 $2,514,715 $2,514,715 20 Total Debt Service $0 $0 $1,466,917 $1,466,917 $2,514,715 $2,514,715 21 22 CIP Expenditures
23 Grant Funded $4,500,000 $0 $0 $0 $0 $0
24 Debt Funded $0 $0 $21,000,000 $0 $15,000,000 $0
25 Pay-as-you-go $21,087,093 $11,235,994 $543,838 $7,890,854 $146,978 $3,561,180 26 Total CIP Expenditures $25,587,093 $11,235,994 $21,543,838 $7,890,854 $15,146,978 $3,561,180 27 28 Net Cash Change [Line 15 – Line 20 – Line 25] ($13,820,826) ($8,261,459) $461,335 ($7,412,224) ($1,267,842) ($5,259,993) 29 30 Beginning Fund Balance $31,657,498 $17,836,673 $9,575,213 $10,036,548 $2,624,324 $1,356,482 31 Ending Fund Balance [Line 28 + Line 30] $17,836,673 $9,575,213 $10,036,548 $2,624,324 $1,356,482 ($3,903,511) 32 33 Operating Reserve Target $4,664,383 $4,589,904 $4,741,613 $4,899,483 $5,063,778 $5,234,773 34 Total Reserve Target $6,770,703 $6,738,350 $6,933,028 $7,134,726 $7,343,726 $7,560,320 35 36 Projected Debt Coverage [Line 15 ÷ Line 20] #N/A #N/A 1.69 1.33 0.55 0.32 37 Required Debt Coverage 1.20 1.20 1.20 1.20 1.20 1.20 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 21

4.3.Water Enterprise Proposed Financial Plan
As shown in Section 4.2 above, Raftelis projects that with no rate increases over the five-year study period, the Water Enterprise’s reserves will fall below the target reserve policy and fail to meet minimum debt coverage in all years beginning in FY 2029. This demonstrates a clear need for revenue adjustments (i.e. gross water rate revenue increases relative to existing rate revenues).

Raftelis projects that five percent annual revenue adjustments each year over the study period are sufficient to meet target reserve levels and minimum debt coverage requirements (see Table 4-21). Revenue adjustments represent annual percent increases in total rate revenue relative to rate revenue generated by the prior year’s water rates. The first revenue adjustment is proposed to be implemented in July 2026.

Table 4-21: Proposed Water Enterprise Revenue Adjustments Fiscal Year Effective Date Revenue
Adjustment
FY 2027 July 1, 2026 5%
FY 2028 July 1, 2027 5%
FY 2029 July 1, 2028 5%
FY 2030 July 1, 2029 5%
FY 2031 July 1, 2030 5%
Proposed financial plan results are shown in Table 4-22, and were calculated in the same manner as described for the status quo financial plan proforma in Section 4.2. Revenue adjustments (Line 3) represent additional rate revenues collected each year as a result of proposed revenue adjustments in Table 4-21. With the addition of proposed revenue adjustments, Raftelis projects that Water Enterprise reserve balances at the end of study period will be $16.3 million higher relative to the status quo.

Additionally, debt coverage is significantly increased under the proposed financial plan. Ensuring sufficient debt capacity beyond FY 2031 will be critical under the assumed CIP financing plan to ensure there is sufficient capacity to fund future Freedom Reservoir site improvements that are assumed to be debt financed.

Attachment 1

22 CITY OF WATSONVILLE
Table 4-22: Proposed Water Enterprise Financial Plan Proforma Line Description FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 1 Revenue
2 Retail Water Sales Revenue from Current Rates $19,949,088 $20,052,940 $20,157,333 $20,262,270 $20,367,752 $20,473,784 3 Revenue Adjustments $0 $1,002,647 $2,066,127 $3,193,840 $4,389,378 $5,656,529 4 Wholesale Water Sales $590,712 $597,210 $597,210 $597,210 $597,210 $597,210 5 Other Revenue $5,384,000 $684,000 $684,000 $684,000 $684,000 $684,000 6 Total Revenue $25,923,800 $22,336,797 $23,504,670 $24,737,319 $26,038,340 $27,411,523 7 8 O&M Expenses
9 Water Operations $13,531,346 $12,997,891 $13,431,848 $13,884,660 $14,357,179 $14,850,299 10 Customer Service $1,358,111 $1,389,946 $1,436,248 $1,484,169 $1,533,770 $1,585,112 11 Services $3,184,746 $3,361,629 $3,482,658 $3,608,326 $3,738,824 $3,874,349 12 Billing $583,330 $610,149 $615,699 $620,777 $625,338 $629,332 13 Total O&M Expenses $18,657,533 $18,359,615 $18,966,452 $19,597,932 $20,255,111 $20,939,092 14 15 Net Revenues [Line 6 – Line 13] $7,266,267 $3,977,182 $4,538,217 $5,139,387 $5,783,229 $6,472,430 16 17 Debt Service
18 Existing Debt Service $0 $0 $0 $0 $0 $0
19 Proposed Debt Service $0 $0 $1,466,917 $1,466,917 $2,514,715 $2,514,715 20 Total Debt Service $0 $0 $1,466,917 $1,466,917 $2,514,715 $2,514,715 21 22 CIP Expenditures
23 Grant Funded $4,500,000 $0 $0 $0 $0 $0
24 Debt Funded $0 $0 $21,000,000 $0 $15,000,000 $0
25 Pay-as-you-go $21,087,093 $11,235,994 $543,838 $7,890,854 $146,978 $3,561,180 26 Total CIP Expenditures $25,587,093 $11,235,994 $21,543,838 $7,890,854 $15,146,978 $3,561,180 27 28 Net Cash Change [Line 15 – Line 20 -Line 25] ($13,820,826) ($7,258,812) $2,527,462 ($4,218,384) $3,121,536 $396,536 29 30 Beginning Fund Balance $31,657,498 $17,836,673 $10,577,860 $13,105,322 $8,886,938 $12,008,474 31 Ending Fund Balance [Line 28 + Line 30] $17,836,673 $10,577,860 $13,105,322 $8,886,938 $12,008,474 $12,405,010 32 33 Operating Reserve Target $4,664,383 $4,589,904 $4,741,613 $4,899,483 $5,063,778 $5,234,773 34 Total Reserve Target $6,770,703 $6,738,350 $6,933,028 $7,134,726 $7,343,726 $7,560,320 35 36 Projected Debt Coverage [Line 15 ÷ Line 20] #N/A #N/A 3.09 3.50 2.30 2.57 37 Required Debt Coverage 1.20 1.20 1.20 1.20 1.20 1.20 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 23
Figure 15 compares the status quo and proposed financial plans. Revenues under the proposed financial plan and status quo financial plan are represented by the blue and red dashed lines, respectively. Revenue requirements including O&M expenses, debt service, pay-as-you-go CIP, and reserve funding are represented by the various stacked bars. Green bars represent drawdown of reserves when negative and buildup of reserves when positive.

Proposed revenue adjustments result in annual revenue increases to meet projected expenses relative to the status quo, and cumulatively impact projected debt coverage and reserve balances through FY 2031.

Figure 15: Water Enterprise Status Quo Versus Proposed Financial Plan Figure 16 shows the Water Enterprise’s projected ending balance under the proposed financial plan. The light blue bars indicate the ending balance. The operating reserve target and total (operating plus capital) reserve target are represented by the red and blue dashed lines, respectively. Total annual CIP expenditures are represented by the shaded green area.

Figure 16: Proposed Water Enterprise Financial Plan – Projected Reserve Ending Balance Attachment 1

24 CITY OF WATSONVILLE
Figure 17 shows projected debt coverage (blue line) relative to the debt coverage requirement (red line) over the study period. Debt coverage is not tracked until FY 2028 when the first proposed debt issuance occurs and debt service payments are proposed to begin. Failure to meet debt service coverage results in a technical default, which without foreseeable remedial action such as implementing rate increases, could result in a downgrade of credit rating, higher costs in future debt issuance, or even denial of credit.

Figure 17: Proposed Water Financial Plan – Debt Coverage

4.4.Water Cost of Service Analysis
Section 4.4 details the cost of service (COS) analysis performed for the Water Enterprise. The COS analysis allocates the overall rate revenue requirement to customer classes based on their proportional use of and burden on the water system. This provides the basis for the development of proposed water rates through FY 2031 in subsequent report sections.

4.4.1.METHODOLOGY
The first step in a COS analysis is to determine the revenue required from water rates. The total revenue requirement results from the financial plan in Section 4.3. The framework and methodology utilized to develop the COS analysis and to apportion the revenue requirement to each customer class and tier is informed by the processes outlined in the AWWA’s Manual M1.

COS analyses are tailored to account for unique characteristics of each water system. However, there are four distinct steps in every COS analysis to apportion costs to customers in an objective, reasonable, and fair manner:

1. Cost functionalization: O&M expenses and capital assets are categorized by their function in the system.

Sample functions may include water supply, treatment, distribution, transmission, customer service, etc.

1. Cost causation component allocation: Functionalized costs are then allocated to cost causation components based on their burden on the system. The cost causation components include water supply, base delivery, extra-capacity, meters, and customer, among others. The revenue requirement is allocated Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 25
accordingly to the cost causation components and results in the total share of the revenue requirement attributable to each cost component.

2. Unit cost development: The revenue requirement for each cost causation component is divided by the appropriate units of service to determine the unit cost of each. Example units of service include total water demand in CCF per year, customer bills, and equivalent meters.

3. Revenue requirement distribution: The unit costs are utilized to distribute the revenue requirement for each cost causation component to customer classes based on each customer class’s individual service units.

4.4.2.WATER RATE REVENUE REQUIREMENT
Table 4-23 shows the rate revenue requirement for FY 2027 (also referred to as the test year). The revenue requirement is divided into operating, capital, and revenue offset (non-rate revenue) components (Columns C-E), which are later allocated based on O&M expenses and capital assets. The revenue requirements (Lines 2-4) are equal to FY 2027 O&M expenses, debt service, and pay-as-you-go (i.e., cash-funded) CIP. The revenue offsets (Lines 8-9) include wholesale water sales and all non-rate revenue. These revenues are applied as offsets to the final rate revenue requirement. All revenue requirement and revenue offset values shown are from Section 4.1 The cash adjustment (Line 13) is equal to the estimated contribution of rate revenues to or from reserves in FY 2027 after accounting for all revenue requirements and revenue offsets All values are from the proposed financial plan operating cash flow (Table 4-22)8F). The final COS water rate revenue requirement (Line 16) is calculated as follows:

Total revenue required from rates (Line 16) = Revenue requirements (Line 5) - Revenue offsets (Line 10) - Adjustments (Line 14) Table 4-23: FY 2027 Water Rate Revenue Requirement
[A] [B] [C] [D] [E] [F]
Line Description
Operating
Revenue
Requirement
Capital
Revenue
Requirement
Revenue
Offsets Total
1 Revenue Requirements
2 O&M Expenses $18,359,615 $0 $0 $18,359,615
3 Debt Service $0 $0 $0 $0
4 Pay-as-you-go CIP $0 $11,235,994 $0 $11,235,994
5 Total Revenue Requirements $18,359,615 $11,235,994 $0 $29,595,609 6 7 Less Revenue Offsets
8 Wholesale Water Sales $0 $0 $597,210 $590,712
9 Other Miscellaneous Revenue $0 $0 $684,000 $684,000
10 Total Revenue Offsets $0 $0 $1,281,210 $1,281,210
11 12 Less Adjustments
13 Cash from (to) Reserves $0 $7,258,812 $0 $7,258,812
14 Total Adjustments $0 $7,258,812 $0 $0
15 16 Water Rate Revenue Requirement $18,359,615 $3,977,182 ($1,281,210) $21,055,587

4.4.3.WATER SYSTEM PEAKING FACTORS
A significant portion of a water system is designed to accommodate customers’ peak demands, which is sometimes referred to as extra capacity (i.e., in excess of average demands). Customers exhibiting higher daily and hourly peaks Attachment 1

26 CITY OF WATSONVILLE
place additional burden on the system, as the City must construct larger infrastructure to accommodate these extra capacity costs. For example, reservoirs and storage tanks must be constructed to accommodate peak day demands, to supply emergency storage for fire flow, and to minimize pumping requirements during on-peak energy (Southern California Edison) hours. As a specific example within the City, the Hames Tank is a 0.5 MG tank that stores supply.

In the winter, it takes several days to turn over (empty and necessitate need for refill) the tank, but in the summer, it turns over daily due to increased seasonal demand (extra capacity needs).8If demands were consistent in the system year round, and there was no seasonal demand variation, the City might be able to size the tank smaller.

Different customer classes demonstrate unique demand patterns which utilize capacity of facilities like those exemplified by the Hames Tank. Extra-capacity costs are divided into maximum day (Max Day) and maximum hour (Max Hour) demand as shown in Table 4-24. The Max Day demand is the maximum amount of water used in a single day over a full year. The Max Hour demand is the maximum use in an hour on the Max Day. As examples, storage and treatment components of the water system are generally designed to handle Max Day requirements on the system; similarly a distribution system is designed for Max Hour demands. For example, the City is required to construct capacity to meet four hours of peak hourly demand with source capacity, storage capacity, and/or emergency source connections by California Regulations Related (CRR).9Identifying the facilities and costs to operate different types of facilities allows for apportionment across cost causation components, which include apportionment of the portion of a facility (e.g., storage tank) that serves average daily demand (and therefore Base Delivery) and the portion to serve peak demands (Max Day in this example). This exercise is conducted for each individual asset in the system’s fixed asset database as well as each individual operating and maintenance expense line item within each budget department. The result is the identification of all costs, and the respective share, to Base Delivery, Max Day, and Max Hour.

Table 4-24 shows system-wide peaking factors for the City’s water system based on water production data provided by City staff for calendar year (CY) 2024. System-wide peaking factors are used to derive the cost component allocation bases for Base Delivery, Max Day, and Max Hour costs. Base Delivery use is considered average daily demand over one year, which has been normalized to a factor of 1.00 (Column C, Line 1). The Max Day peaking factor (Column C, Line 2) indicates that the Max Day demand is 1.39 times greater than the average daily demand.

Similarly, the Max Hour peaking factor (Column C, Line 3) shows that the Max Hour 9F 10 demand is 2.09 times
greater than average demand. The allocation bases (Columns D-F) are calculated using the equations outlined below. Columns are represented in these equations as letters, and lines are represented as numbers. For example, Column D, Line 2 is shown as D2.

The Max Day allocations are calculated as follows:
» Base Delivery: C1 / C2 x 100% = D2
» Max Day: (C2 - C1) / C2 x 100% = E2
The Max Hour allocations are calculated as follows:
» Base Delivery: C1 / C3 x 100% = D3
» Max Day: (C2 - C1) / C3 x 100% = E3
» Max Hour: (C3 - C2) / C3 x 100% = F3
8 2023 Water Master Plan pages 5-8 and 5-9.
9 Water Master Plan 2023 Page 6-1: Title 22, Chapter 16, Article 2. Permit Requirements. §64554 New and Existing Source Capacity 10 Max Hour demand is estimated from the values used in the previous study.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 27
Table 4-24: Water System Peaking Factor Allocations
[A] [B] [C] [D] [E] [F] [G]
Line Description Factor Base Max Day Max Hour Total
1 Base 1.00 100.0% 0.0% 0.0% 100.0%
2 Max Day 1.39 72.0% 28.0% 0.0% 100.0%
3 Max Hour 2.09 47.9% 18.7% 33.4% 100.0%

4.4.4.FUNCTIONALIZATION AND ALLOCATION OF EXPENSES
After determining the revenue requirement and system-wide peaking allocation basis, the next step of the water COS analysis is to allocate O&M expenses and capital assets to the following functional categories:
» Customer: costs of meter reading, billing, and other customer service functions » Meters: costs of meter maintenance/repair and a share of extra capacity-related costs » Water Services/Distribution: field service costs related to delivering treated water to customers from storage facilities to the meter
» Water Services/Customer: customer service costs related to delivering treated water to customers from storage facilities to the meter
» Water Supply: water supply costs relating to the PVWMA Water Augmentation Charges and water production
» Storage: costs related to water storage tanks and reservoirs » Treatment: costs associated with treating water to drinking water standards » Transmission: costs associated with the pump stations and transporting water » Conservation: costs associated with water conservation, outreach, and efficiency programs » General/Admin: costs associated with general administration of the Water Enterprise (i.e., indirect costs) » Engineering: operating costs not directly attributable to the above functions are allocated based on the overall cost functionalization of the capital asset base The functionalization of costs allows for the allocation of costs to cost causation components. Some cost causation components correspond directly to a functional category listed above. The cost causation components include:
» Customer: directly associated with the Customer functional category » Meters: directly associated with the Meters functional category » Water Services: directly associated with the Water Services/Distribution and Water Services/Customer functional category
» Fire Protection: costs associated with providing water for private fire protection purposes » Water Supply: directly associated with the Water Supply functional category » Base Delivery: costs associated with providing water under average water demand conditions » Peaking (Max Day and Max Hour): extra-capacity costs associated with providing water during peak demand conditions
» Conservation: directly associated with the Conservation functional category » General: directly associated with the General/Admin functional category » Revenue Offsets: miscellaneous revenues applied as offsets to the rate revenue requirement Table 4-25 shows the basis for allocating each functional category to the various cost causation components. This provides the basis for allocating O&M and capital expenses in the following subsections. Most functional Attachment 1

28 CITY OF WATSONVILLE
categories are allocated entirely to the corresponding cost causation component. The allocation basis for functional categories not allocated entirely to a single cost causation component is as follows:
» Functional categories allocated based on Max Day demand: Storage and treatment infrastructure is designed to accommodate maximum day water demand. Therefore, all Storage and Treatment costs are allocated to the Base Delivery and Max Day cost causation components based on the Max Day allocation from Table 4-24.
» Functional categories allocated based on Max Hour demand: Distribution and transmission infrastructure is designed to accommodate maximum hour water demand; therefore, all Transmission costs are allocated to the Base Delivery, Max Day, and Max Hour cost causation components based on the Max Hour allocation from Table 4-24.
» Water Services: The Water Services functional allocation is divided into field services and administrative support services. Water Services/Distribution is allocated entirely to Water Services, while Water Services/Customer is allocated 40% to Customer, with the remainder going into Water Services. This apportionment is based on City staff’s best estimate of how costs are incurred and the services performed. » Engineering: Engineering costs are allocated based on the final capital allocation (calculated subsequently in Table 4-29, Line 12). The functional breakdown of the Water Enterprise’s capital assets is used here as a proxy to allocate O&M costs that cannot be directly attributed to a specific functional category.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 29
Table 4-25: Allocation of Functional Categories to Water Cost Causation Components [A] [B] [C] [D] [E] [F] [G] [H] [I] [J] [K] [L] [M]
Line Functional
Category Customer Meter WaterServices
Fire
Protection
Water
Supply
Base
Delivery Max Day Max Hour Conservation General Total
1 Customer 100.0% 100.0%
2 Meters 100.0% 100.0%
3 Water Services/
Distribution 100.0% 100.0%
4 Water Supply 100.0% 100.0%
5 Storage 72.0% 28.0% 100.0%
6 Treatment 72.0% 28.0% 100.0%
7 Transmission 47.9% 18.7% 33.4% 100.0%
8 Conservation 100.0% 100.0%
9 Engineering 0.0% 0.0% 0.0% 0.0% 8.6% 51.0% 19.9% 9.2% 0.0% 11.4% 100.0% 10 General/Admin 100.0% 100.0%
11 Water Services/
Customer 40.0% 60.0% 100.0%
Attachment 1

30 CITY OF WATSONVILLE

4.4.5.WATER ENTERPRISE O&M EXPENSE ALLOCATION
The next step of the COS analysis is to develop an allocation basis for the operating revenue requirement based on the functionalization of the Water Enterprise’s O&M expenses. Raftelis assigned O&M expenses on a line item basis to the most closely associated functional category. Table 4-26 shows a summary of FY 2027 O&M expenses by functional category. This intermediate step is necessary to allocate total O&M expenses to individual cost causation components.

Table 4-26: Summary of Water Enterprise O&M Expenses by Functional Category [A] [B] [C] [D]
Line Functional Category FY 2027
O&M Expenses Percent of Total
1 Customer $896,350 4.88%
2 Meters $0 0.00%
3 Water Services/Distribution $3,361,629 18.31%
4 Water Supply $2,316,573 12.62%
5 Storage $0 0.00%
6 Treatment $110,000 0.60%
7 Transmission $120,000 0.65%
8 Conservation $50,000 0.27%
9 Engineering $5,171,885 28.17%
10 General/Admin $5,229,433 28.48%
11 Water Services/Customer $1,103,745 6.01%
12 Total $18,359,615 100.00%
Table 4-27 shows the allocation of FY 2027 O&M expenses by functional category to each cost causation component. The percentage allocation of each functional category (Lines 1-11) to the various cost causation components (Columns C-L) was determined in Table 4-25. Total O&M expenses associated with each functional category (Column M) was determined in Table 4-26. The total dollar amount allocated to each cost causation component (Line 12) is determined by multiplying the total expense associated with each functional category by the corresponding percentage allocation and summing across all functional categories.

For example, 100 percent (Column C, Line 1) of Customer costs (Column M, Line 1) are allocated to the Customer cost causation factor total (Column C, Line 14). The same calculation is performed for the remaining functional categories (i.e., Column C × Column M in Lines 2-11). The subtotals of Column C × Column M in Lines 1-11 are summed to determine the total dollar amount allocated to the Customer cost causation factor (Column C, Line 12). The same calculations are repeated for the remaining cost causation components (Columns D-L) to determine the allocation of O&M expenses to each cost causation component (Line 12). The total operating revenue requirement (Column M, Line 12) equals the operating revenue requirement from Table 4-23, Column C, Line 16. The O&M allocation percentages (Line 14) represent the proportion of total O&M expenses allocated to each cost causation component (Line 12).

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 31
Table 4-27: Allocation of Water Enterprise O&M Expenses to Cost Causation Components [A] [B] [C] [D] [E] [F] [G] [H] [I] [J] [K] [L] [M]
Line Functional
Category Customer Meter WaterServices
Fire
Protection
Water
Supply
Base
Delivery Max Day Max Hour Conservation General
FY 2027
O&M
Expenses
1 Customer 100.0% $896,350
2 Meters 100.0% $0
3 Water Services/
Distribution 100.0% $3,361,629
4 Water Supply 100.0% $2,316,573
5 Storage 72.0% 28.0% $0
6 Treatment 72.0% 28.0% $110,000
7 Transmission 47.9% 18.7% 33.4% $120,000
8 Conservation 100.0% $50,000
9 Engineering 0.0% 0.0% 0.0% 0.0% 8.6% 51.0% 19.9% 9.2% 0.0% 11.4% $5,171,885 10 General/Admin 100.0% $5,229,433
11 Water
Services/Customer 40.0% 60.0% $1,103,745
12 Total $1,337,848 $2,131 $4,023,876 $0 $2,759,047 $2,771,964 $1,080,256 $517,875 $50,000 $5,816,619 $18,359,615 13 14 O&M Allocation 7.3% 0.0% 21.9% 0.0% 15.0% 15.1% 5.9% 2.8% 0.3% 31.7% 100.0% Attachment 1

32 CITY OF WATSONVILLE

4.4.6.WATER ENTERPRISE CAPITAL ALLOCATION
Capital assets are utilized in COS analyses to allocate the capital revenue requirement to the various cost causation components. The distribution of short-term CIP project costs can be heavily weighted to specific cost causation components based on the type of projects. Use of short-term plans to allocate capital costs may cause rates to fluctuate and result in customer confusion. The overall water asset base, however, is considerably stable in the long-term; therefore, it is more representative of long-term capital investment in the City’s water system. Thus, functionalized capital assets are used to allocate capital costs.

City staff provided Raftelis with a detailed Water Enterprise asset listing that included the original cost of each individual asset. Raftelis calculated the replacement cost (RC) of each asset based on net book value using the Engineering News-Record’s 20-City Average Cost Construction Index (CCI) to account for capital cost inflation.

As part of the capital asset analysis, Raftelis assigned each individual asset to a functional category. Total water asset value (RC) by functional category is shown in Table 4-28.

Table 4-28: Summary of Water Enterprise Capital Assets by Functional Category [A] [B] [C] [D]
Line Functional Category Asset Value (RC) Percent of Total 1 Customer $0 0.0%
2 Meters $38,057 0.0%
3 Water Services/Distribution $0 0.0%
4 Supply $7,903,172 8.6%
5 Storage $2,740,980 3.0%
6 Treatment $45,675,659 49.4%
7 Transmission $25,531,029 27.6%
8 Conservation $0 0.0%
9 General/Admin $10,487,923 11.4%
10 Water Services/Customer $0 0.0%
11 Total Asset Value (RC) $92,376,820 100.0%
Table 4-29 shows the allocation of capital assets by functional category to each cost causation component. The percentage allocation of each functional category (Lines 1-10) to the various cost causation components (Columns C-L) was determined in Table 4-25. Total asset value associated with each functional category (Column M) was determined in Table 4-28. The total dollar amount allocated to each cost causation component (Line 11) is determined by multiplying the total asset value associated with each functional category by the corresponding percentage allocation and summing across all functional categories. This is consistent with the methodology used to determine the allocation of O&M expenses to cost causation components in Table 4-27 (described in detail in Section 4.4.5). The final capital allocation percentages (Line 13) represent the proportion of total capital assets allocated to each cost causation component (Line 11).

The capital allocation percentages (Line 13) are used to allocate the total capital revenue requirement. The total capital revenue requirement (Column M, Line 15) equals the capital revenue requirement from Table 4-23, Column D, Line 16. This total is allocated to each cost causation component (Columns C-L, Line 15) based on the final capital allocation percentages (Columns C-L, Line 13).

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 33
Table 4-29: Allocation of Functionalized Water Capital Assets to Cost Causation Components [A] [B] [C] [D] [E] [F] [G] [H] [I] [J] [K] [L] [M]
Line Functional
Category
Customer Meter Water
Services
Fire
Protection
Water
Supply
Base
Delivery
Max Day Max Hour ConservationGeneral Asset Value
(RC)
1 Customer 100.0% $0
2 Meters 100.0% $38,057
3 Water Services/
Distribution 100.0% $0
4 Water Supply 72.0% 28.0% $7,903,172
5 Storage 72.0% 28.0% $2,740,980
6 Treatment 47.9% 18.7% 33.4% $45,675,659
7 Transmission 100.0% $25,531,029
8 Conservation 0.0% 0.0% 0.0% 0.0% 8.6% 51.0% 19.9% 9.2% 0.0% 11.4% $0 9 General/Admin 100.0% $10,487,923
10 Water
Services/Customer 40.0% 60.0% $0
11 Total $0 $38,057 $0 $0 $7,903,172 $47,070,421 $18,343,705 $8,533,542 $0 $10,487,923 $92,376,820 12 13 Capital Allocation 0.0% 0.0% 0.0% 0.0% 8.6% 51.0% 19.9% 9.2% 0.0% 11.4% 100.0% 14 15 Capital Revenue
Requirement $0 $1,639 $0 $0 $340,262 $2,026,565 $789,768 $367,402 $0 $451,546 $3,977,182 Attachment 1

34 CITY OF WATSONVILLE

4.4.7.PRELIMINARY WATER COST OF SERVICE ALLOCATION
Table 4-30 shows the preliminary allocation of the total FY 2027 water rate revenue requirement to the various cost causation components. The preliminary COS allocations (Column G) are subject to further adjustments based on additional reallocations developed in the following subsections. The results shown in Table 4-30 are calculated as follows based on intermediate results developed in the preceding subsections:

1. Operating Revenue Requirement (Column C): The total operating revenue requirement consists solely of the Water Enterprise’s O&M expenses. The allocation of the total operating revenue requirement to each cost causation component was previously determined in Table 4-27, Columns C-L, Line 12.

2. Capital Revenue Requirement (Column D): The total capital revenue requirement consists of debt service, pay-as-you-go CIP, and reserve funding. The allocation of the total capital revenue requirement to each cost causation component was previously determined in Table 4-29, Columns C-L, Line 15.

3. Revenue Offsets (Column E): Revenue offsets (from Table 4-23, Column E, Line 16) are allocated fully to the Revenue Offsets cost causation component (Column E, Line 11), with the exception of $17,000 in revenue offsets from water use reduction fees which are allocated to the Conservation cost causation component (Column E, Line 9). Note that the Revenue Offsets cost causation component was not included within the operation or capital revenue requirement allocation, as it pertains exclusively to miscellaneous revenues used to offset the total revenue required from rates.

4. Reallocation of General Costs (Column F): The total General cost allocation equals the operating revenue requirement (Column C, Line 10) and capital revenue requirement (Column D, Line 10) allocated to the General cost causation component. The total General revenue requirement (Column F, Line 10) is fully reallocated to all other cost causation components on a pro rata basis 10F 11 (Column F, Lines 1-9) excluding
the Revenue Offsets cost causation component (to which General costs do not pertain). Note that the reallocation results in a shifting of costs between cost causation components but does not change the total rate revenue requirement.

5. Preliminary Cost of Service Allocation (Column G): The preliminary COS allocation to each cost causation component (Column G, Lines 1-11) equals the sum of Columns C-F. Note that the total COS allocation (Column G, Line 12) equals the total FY 2027 rate revenue requirement (from Table 4-23, Column F, Line 16).
11 The operating (Column C) and capital (Column D) revenue requirements are summed for each cost causation component shown in Lines 1-9. The percentage of the sum falling within each cost causation component (Lines 1-9) is multiplied by total reallocated General costs (Column F, Line 10) to determine the share of General costs reallocated to each cost causation component (Column F, Lines 1-9).

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 35
Table 4-30: Preliminary Water Cost of Service Allocation (FY 2027) [A] [B] [C] [D] [E] [F] [G]
Line Cost Causation
Component
Operating
Revenue
Requirement
Capital Revenue
Requirement
Revenue
Offsets
Reallocation of
General Costs
Preliminary COS
Allocation
1 Customer $1,337,848 $0 $0 $522,430 $1,860,278
2 Meter $2,131 $1,639 $0 $1,472 $5,241
3 Water Services $4,023,876 $0 $0 $1,571,324 $5,595,200 4 Fire Protection $0 $0 $0 $0 $0
5 Supply $2,759,047 $340,262 $0 $1,210,280 $4,309,589
6 Base Delivery $2,771,964 $2,026,565 $0 $1,873,826 $6,672,356 7 Max Day $1,080,256 $789,768 $0 $730,245 $2,600,268
8 Max Hour $517,875 $367,402 $0 $345,701 $1,230,978
9 Conservation $50,000 $0 -$17,000 $12,887 $45,887
10 General $5,816,619 $451,546 $0 -$6,268,164 $0
11 Revenue Offsets N/A N/A -$1,264,210 N/A -$1,264,210
12 Total $18,359,615 $3,977,182 -$1,281,210 $0 $21,055,587

4.4.8.ALLOCATION OF FIRE PROTECTION COSTS
Water systems provide two types of fire protection: public fire protection from fire hydrants for firefighting and fire protection from fire lines for private structures with sprinkler systems for fire suppression. Raftelis performed a fire demand analysis to determine the share of fire protection costs allocated to fire hydrants (public fire) versus private fire lines (private fire).

Table 4-31 shows the calculation of equivalent fire demand associated with fire hydrants and private fire lines. City staff provided Raftelis with a count of fire hydrants connected to its water system. The number of private fire lines in FY 2027 was previously shown in Table 4-7. Each connection size has a fire flow demand factor similar to the hydraulic capacity factor of a water meter. The diameter of the connection (in inches) is raised to the power of 2.63 to determine the fire demand factor (Column C). 11F
12 The fire demand factor (Column C) is multiplied by the number of connections by size (Column D) to calculate equivalent fire demand (Column E). Total equivalent fire demand is shown for fire hydrants and private fire lines in Lines 3 and 11 respectively. 12 Per the Hazen-Williams equation and AWWA Manual M1.

Attachment 1

36 CITY OF WATSONVILLE
Table 4-31: Equivalent Fire Demand
[A] [B] [C] [D] [E]
Line Connection Size Fire Demand
Factor Unit Count Equivalent Fire Demand
1 Public Fire Hydrants
2 6-inch 111.31 1,263 140,586
3 Subtotal 1,263 140,586
4 5 Private Fire Lines
6 2" and smaller 6.19 57 355
7 4" 38.32 136 5,200
8 6" 111.31 150 16,672
9 8" 237.21 83 19,791
10 10" 426.58 7 3,002
11 Subtotal 433 45,019
12 13 Total 1,696 185,604
Table 4-32 shows the number of equivalent fire demand units associated with fire hydrants and private fire lines (from Table 4-31). The proportional share of equivalent fire demand (Column D) provides the basis for which fire protection costs are allocated in subsequent steps of the COS analysis.

Table 4-32: Fire Protection Allocation Basis
[A] [B] [C] [D]
Line Connection Size Equivalent
Fire Demand
% of Equivalent
Fire Demand
1 Public Fire Hydrants 140,586 75.7%
2 Private Fire Lines 45,019 24.3%
3 Total 185,604 100.0%

4.4.9.PEAKING UNITS OF SERVICE
Peaking units of service are developed to calculate unit peaking costs (Max Day and Max Hour) for select customer classes and provide a basis to reallocate peaking costs associated with fire protection in subsequent steps of the COS analysis. Fire hydrants and private fire lines contribute to system capacity-related costs (i.e., peaking costs); therefore, they are reallocated a portion of Max Day and Max Hour costs.

Table 4-33 shows the calculation of peaking units of service for non-fire related water service. Peaking units are used to attribute peaking costs to specific customer classes based on actual water use patterns. Raftelis estimates Max Day (Column E) and Max Hour (Column H) factors based on actual FY 2024 water use and system-wide peaking factors (from Table 4-24). Actual FY 2024 water use in Column C (from Table 4-8)12F is divided by 365 days to determine average daily water use (Column D). Average daily use in Column D is then multiplied by the Max Day factor (Column E) to determine Max Day demand (Column F). Max Day requirements (Column G) are determined by subtracting average daily water use (Column D) from Max Day demand (Column F). Max Hour requirements (Column J) are similarly calculated. Max Hour demand (Column I) equals average daily water use (Column D) multiplied by the Max Hour factor (Column H). Max Hour requirements (Column J) equal Max Hour demand (Column I) less Max Day demand (Column F).

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 37
In the previous study, industrial users were excluded from peaking costs, on the basis that industrial customers do not tend to use more water than average during system-wide peak water use in the summer. Industrial users’ peak demands are non-coincidental, meaning the class peak occurs off the peak of all other classes and the system.

Industrial users are therefore omitted maximum day peak costs, however, in this Study they are apportioned a proportional share of maximum hour costs.

Table 4-33: Peaking Units by Customer Class
[A] [B] [C] [D] [E] [F] [G] [H] [I] [J]
Line Customer
Class
FY 2027
Water
Use
(CCF)
Average
Daily
Water
Use
(CCF)
Max
Day
Factor
Max Day
Demand
(CCF/Day)
Max Day
Requirements
(CCF/Day)
Max
Hour
Factor
Max Hour
Demand
(CCF/Day)
Max Hour
Requirements
(CCF/Day)
1 Residential
Tier 1 1,046,088 2,864 1.11 3,176 312 1.67 4,771 1,595
2 Residential
Tier 2 347,576 952 1.73 1,650 699 2.60 2,479 828
3 Residential
Tier 3 179,874 492 2.44 1,202 709 3.66 1,805 603
4 NonResidential 431,405 1,181 1.46 1,730 548 2.20 2,598 868 5 Industrial 261,045 715 1.00 715 0 1.50 1,074 359
6 Irrigation 146,062 400 2.43 971 571 3.65 1,458 487
7 Total 2,412,050 6,604 2,839 4,741
Table 4-34 shows the methodology13F
13 used to calculate peaking units of service associated with fire protection based on assumptions regarding the duration and water flow rate in gallons per minute (gpm) associated with a fire in the City’s water service area:

Max Day Requirements (CCF/day) = Duration of Fire (hrs) × Water Use Rate (gpm) × 60 mins/hr ÷ 748.05 gallons/CCF Max Hour Requirements (CCF/day) = [Water Use Rate (gpm) × 60 mins/hr × 24 hrs/day ÷ 748.05 gallons/CCF] – Max Day Requirements (CCF/day)
Table 4-34: Peaking Units for Fire Protection
[A] [B] [C]
Line Description Value
1 Duration of Fire (Hours) 4.0
2 Water Use Rate (gallons per minute) 4,000
3 Max Day Requirements (CCF/Day) 1,283
4 Max Hour Requirements (CCF/Day) 6,417
Table 4-35 shows the distribution of fire protection-related Max Day and Max Hour requirements (from Table 4-34) to public hydrants versus private fire lines based on proportional equivalent fire demand (from Table 4-32).
13 Per the AWWA Manual M1.

Attachment 1

38 CITY OF WATSONVILLE
Table 4-35: Allocation of Peaking Units to Public and Private Fire Protection [A] [B] [C]
Line Description Value
1 Max Day Requirements (CCF/Day) 1,283
2 Allocation to Public Fire Protection (75.7%) 972
3 Allocation to Private Fire Protection (24.3%) 311
4 5 Max Hour Requirements (CCF/Day) 6,417
6 Allocation to Public Fire Protection (75.7%) 4,860
7 Allocation to Private Fire Protection (24.3%) 1,556
Peaking units of service (from Table 4-33 and Table 4-35) are summarized below in Table 4-36. The percentage of Max Day and Max Hour Requirements attributed to each customer class is shown in Columns D and F, respectively.

Table 4-36: Summary of Total Peaking Units
[A] [B] [C] [D] [E] [F]
Line Customer Class
Max Day
Requirements
(HCF/Day)
% of Max Day
Requirements
Max Hour
Requirements
(HCF/Day)
% of Max Hour
Requirements
1 Residential Tier 1 312 7.57% 1,595 14.29%
2 Residential Tier 2 699 16.95% 828 7.43%
3 Residential Tier 3 709 17.20% 603 5.41%
4 Non-Residential 548 13.30% 868 7.78%
5 Industrial 0 0.00% 359 3.22%
6 Irrigation 571 13.85% 487 4.37%
7 Public Fire 972 23.58% 4,860 43.56%
8 Private Fire 311 7.55% 1,556 13.95%
9 Total 4,122 100.00% 11,157 100.00%

4.4.10.ADJUSTED WATER COST OF SERVICE
Table 4-37 shows the adjusted allocation of the water rate revenue requirement to the various cost causation components. The adjusted COS allocations (Column F) incorporates adjustments to the preliminary COS allocations developed in Section 4.4.7 and provides the underlying basis for FY 2027 rate calculations shown subsequently in Section 4.5. The results shown in Table 4-37 are calculated as follows based on intermediate results developed in the preceding subsections:

1. Preliminary Cost of Service Allocation (Column C): The preliminary COS allocations were previously developed in Section 4.4.7. (see Table 4-30, Column G, Lines 1-12). The General cost causation component is excluded because all General costs were previously reallocated to other cost causation components.

2. Reallocation of Public Fire Protection Costs (Column D): Fire protection costs associated with public fire hydrants are reallocated to the Meters cost causation component to recover these extra-capacity costs from all metered connections. Preliminary Max Day (Column C, Line 7) and Max Hour costs (Column C, Line 8) associated with fire hydrants are reallocated from Max Day (Column D, Line 7) and Max Hour (Column D, Line 8) to Meters (Column D, Line 2) based on the percentage of peaking units associated Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 39
with public fire protection (Table 4-36, Column D and F, Line 6). Note that the reallocation results in a shifting of costs between cost causation components but does not change the total rate revenue requirement.

3. Reallocation of Private Fire Protection Costs (Column E): Preliminary peaking costs (Column C, Lines 7-8) associated with private fire protection are reallocated from Max Day (Column E, Line 7) and Max Hour (Column E, Line 8) to Fire Protection (Column E, Line 4) based on the percentage of peaking units associated with private fire lines (Table 4-36, Column D and F, Line 8). Note that the reallocation results in a shifting of costs between cost causation components but does not change the total rate revenue requirement.

4. Adjusted Cost of Service Allocation (Column F): The final COS allocation (Column F) equals the sum of Columns C to E. This represents the final adjusted allocation of the total water revenue requirement (from Table 4-23, Column F, Line 16) to the various cost causation components.

Table 4-37: Adjusted Water Cost of Service Allocation (FY 2027) [A] [B] [C] [D] [E] [F]
Line Cost Causation
Component
Preliminary
COS Allocation
Reallocation of
Public Fire
Protection
Costs
Reallocation of
Private Fire
Protection
Costs
Adjusted COS
Allocation
1 Customer $1,860,278 $1,860,278
2 Meter $5,241 $1,149,394 $1,154,635
3 Water Services $5,595,200 $5,595,200
4 Fire Protection $0 $368,061 $368,061
5 Water Supply $4,309,589 $4,309,589
6 Base Delivery $6,672,356 $6,672,356
7 Max Day $2,600,268 ($613,164) ($196,348) $1,790,756
8 Max Hour $1,230,978 ($536,230) ($171,713) $523,035
9 Conservation $45,887 $45,887
10 Revenue Offsets ($1,264,210) ($1,264,210)
11 Total $21,055,587 $0 $0 $21,055,587

4.4.11.WATER COST ALLOCATION TO CUSTOMER CLASSES
The final cost of service allocation determines how much revenue must be generated from water rates. Each cost causation component is allocated for recovery by Meter Size Availability Fees, Fire Service Availability Fees, or Water Consumption Charges (see Table 4-38). The basis for specific exclusions is described in further detail in Section 4.5.

Attachment 1

40 CITY OF WATSONVILLE
Table 4-38: Recovery of Water Cost Causation Components by Charge Type [A] [B] [C]
Line Cost Causation
Component Associated Charge
1 Customer Meter Size Availability Fee; Fire Service Availability Fee 2 Meter Meter Size Availability Fee; Fire Service Availability Fee 3 Water Services Meter Size Availability Fee
4 Fire Protection Fire Service Availability Fee
5 Water Supply Water Consumption Charges
6 Base Delivery Water Consumption Charges
7 Max Day Water Consumption Charges
8 Max Hour Water Consumption Charges
9 Conservation Water Consumption Charges
10 Revenue Offsets Water Consumption Charges
Table 4-39 shows projected FY 2027 rate revenues by charge based on current rates (Current COS) and the updated COS analysis presented in this section (Proposed COS). All proposed COS projections for FY 2027 are for illustrative purposes to demonstrate the distributional impacts of the updated COS allocations on each customer class. Note that the results shown are based on detailed calculations that are dependent on rate design considerations addressed subsequently in Section 4.5.

Table 4-39: Cost to Serve by Water Customer Class
[A] [B] [C] [D] [E] [F]
Line Charge/Customer Class
Current COS
FY 2027
($)
Proposed COS
FY 2027
($)
Current COS
FY 2027
(%)
Proposed COS
FY 2027
(%)
1 Meter Size Availability Fees $7,796,828 $8,536,280 38.9% 40.5% 2 Fire Size Availability Fees $424,143 $441,894 2.1% 2.1% 3 Residential Water Consumption Charges $7,667,733 $7,788,126 38.2% 37.0% 4 Non-Residential Water Consumption
Charges $2,118,198 $2,188,016 10.6% 10.4%
5 Industrial Water Consumption Charges $1,020,685 $1,096,258 5.1% 5.2% 6 Irrigation Water Consumption Charges $1,025,352 $1,005,013 5.1% 4.8% 7 Total $20,052,940 $21,055,587 100.0% 100.0%

4.5.Proposed Water Rates
Section 4.5 shows detailed calculations of proposed water rates through FY 2031. All proposed rates are first calculated directly from the results of the COS analysis (in Section 4.4) for FY 2027 (i.e., the “test year”).

4.5.1.METER SIZE AVAILABILITY FEES (TEST YEAR FY 2027)
Table 4-40 shows the calculation of equivalent meter units (EMUs), which is necessary to differentiate proposed Meter Size Availability Fees by meter size. Meter capacity ratios (Column D) are first calculated by dividing AWWA meter capacity (Column C) by 20 gallons per minute (gpm). Meter capacity ratios (Column D) are multiplied by the number of water meters at each meter size in Column E (from Table 4-5 and Table 4-6) to Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 41
determine EMUs (Column F). EMUs represent the potential demand on the water system relative to a base meter size of 5/8-inch.

Although the AWWA’s Manual M1 rates 3/4-inch meters at 30 gpm, Raftelis applies the 5/8-inch meter capacity value of 20 gpm to 3/4-inch meters. This is because the City’s 3/4-inch meters are generally older residential water meters that were installed before the City used 5/8-inch meters. Because customers with 3/4-inch water meters could theoretically be served by 5/8-inch meters based on current water use patterns, Raftelis recommends that Meter Size Availability Fees for 5/8-inch and 3/4-inch water meters remain undifferentiated. Additionally, all private fire lines have a dedicated water meter, which can vary in size between customers. Therefore, Raftelis applied the 5/8-inch meter capacity of 20 gpm to all private fire lines (from Table 4-7), which tend to have smaller meters.

Attachment 1

42 CITY OF WATSONVILLE
Table 4-40: Units of Service for Meter Size Availability Fees (Test Year FY 2027) [A] [B] [C] [D] [E] [F]
Line Meter Size
Meter Capacity
(gallons per
minute)
Meter
Capacity
Ratio
Number of
Meters
Number of
EMUs
1 Water Meters (Inside City)
2 5/8" 20 1.00 8,366 8,366
3 3/4" 20 1.00 321 321
4 1" 50 2.50 1,815 4,539
5 1.5" 100 5.00 247 1,236
6 2" 160 8.00 262 2,099
7 3" 320 16.00 54 868
8 4" 500 25.00 30 754
9 6" 1,000 50.00 6 302
10 8" 1,600 80.00 1 80
11 Subtotal 11,104 18,565
12 13 Water Meters (Outside City)
14 5/8" 20 1.00 2,748 2,748
15 3/4" 20 1.00 129 129
16 1" 50 2.50 592 1,480
17 1.5" 100 5.00 40 201
18 2" 160 8.00 53 426
19 3" 320 16.00 9 145
20 4" 500 25.00 8 201
21 6" 1,000 50.00 1 50
22 8" 1,600 80.00 0 0
23 Subtotal 3,581 5,380
24 25 Private Fire Lines
26 Inside City 20 1 383 383
11 Outside City 20 1 50 50
12 Subtotal 433 433
13 14 Total 15,117 24,379
Meter Size Availability Fees are designed to recover costs associated with the Customer, Meter, and Water Services cost causation components. Raftelis recommends that the City continue to differentiate Meter Size Availability Fees between Inside City and Outside City customers based on the Water Services cost causation component. The Water Services cost causation component primarily includes distribution-related costs for which Outside City customers are disproportionately responsible due to greater distances associated with water delivery.

To equitably allocate Water Services costs between Inside City and Outside City customers, Raftelis calculated the percentage of water distribution mains inside versus outside city limits (see Table 4-41). The total Water Services cost causation component was then allocated to Inside City and Outside City customers based on the proportional share of distribution mains.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 43
Table 4-41: Allocation of Water Services to Inside City and Outside City Water Meters Description Inside City Outside City Total
Miles of Distribution Mains 123.05 49.1 172.15
% of Distribution Mains 71.5% 28.5% 100.0%
Water Services COS Allocation $3,999,357 $1,595,843 $5,595,200 Table 4-42 shows the calculation of unit charges for the Customer, Meter, and Water Services cost causation components as follows:

𝑈𝑛𝑖𝑡 𝐶ℎ𝑎𝑟𝑔𝑒 = 𝐶𝑂𝑆 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛 ÷ 𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑆𝑒𝑟𝑣𝑖𝑐𝑒 ÷ 12 𝑀𝑜𝑛𝑡ℎ𝑙𝑦 𝐵𝑖𝑙𝑙𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 Customer costs do not vary based on meter size. Therefore, Customer units of service are equal to total number of water meters (including private fire lines) in FY 2027 (from Table 4-40). Meter and Water Services costs do vary based on meter size. Larger meters impose larger demand; are more expensive to install, maintain, and replace than smaller meters; and have greater capacity potential within the water system. Therefore, Meter and Water Services units of service are equal to total EMUs in FY 2027 (from Table 4-40). Note that different unit charges for the Water Services cost causation component are calculated for Inside City and Outside City customers. This provides a basis for differentiated Inside City and Outside City Meter Size Availability Fees.

Table 4-42: Meter Size Availability Fee Unit Charge Calculation (Test Year FY 2027) Cost Causation Component COS Allocation Units of Service Unit Charge Customer $1,860,278 15,117 Meters $10.255 per Bill
Meter $1,154,635 24,379 EMUs $3.947 per EMU
Water Services (Inside City) $3,999,357 18,565 EMUs $17.952 per EMU Water Services (Outside City) $1,595,843 5,380 EMUs $19.472 per EMU Table 4-43 shows the detailed calculation of monthly Meter Size Availability Fees for the test year FY 2027 based on Customer, Meter, and Water Services unit charges. Customer costs do not vary by meter size. Therefore, the Customer unit charge (from Table 4-42) is applied uniformly to all Meter Size Availability Fees (Column D).

Because Meter costs vary by meter size based on hydraulic capacity, AWWA capacity ratios in Column C (from Table 4-40, Columns D) are used to differentiate Meter unit charges by meter size. Meter charges (Column E) are calculated by multiplying the Meter unit charge (from Table 4-42) by the AWWA capacity ratio (Column C).

Water Services charges also vary based on meter size; therefore, they are calculated using the same method as described above for Meter charges. FY 2027 COS Meter Size Availability Fees (Column G) equal the sum of Columns D-F, and are compared to current monthly charges in Columns H-J.

Attachment 1

44 CITY OF WATSONVILLE
Table 4-43: Meter Size Availability Fee Calculation (Test Year FY 2027) [A] [B] [C] [D] [E] [F] [G] [H] [I] [J]
Line Meter Size
Meter
Capacity
Ratio
Customer Meter Water
Services
COS
Monthly
Charge
Current
Monthly
Charge
Difference
($)
Difference
(%)
1 Inside City
2 5/8" 1.00 $10.255 $3.947 $17.952 $32.16 $29.93 $2.23 7.5% 3 3/4" 1.00 $10.255 $3.947 $17.952 $32.16 $29.93 $2.23 7.5% 4 1" 2.50 $10.255 $9.867 $44.880 $65.01 $59.43 $5.58 9.4% 5 1.5" 5.00 $10.255 $19.734 $89.760 $119.75 $108.61 $11.14 10.3% 6 2" 8.00 $10.255 $31.575 $143.615 $185.45 $167.61 $17.84 10.6% 7 3" 16.00 $10.255 $63.150 $287.230 $360.64 $324.96 $35.68 11.0% 8 4" 25.00 $10.255 $98.672 $448.798 $557.73 $501.98 $55.75 11.1% 9 6" 50.00 $10.255 $197.343 $897.595 $1,105.20 $993.70 $111.50 11.2% 10 8" 80.00 $10.255 $315.749 $1,436.152 $1,762.16 $1,583.78 $178.38 11.3% 11 12 Outside City
13 5/8" 1.00 $10.255 $3.947 $24.717 $38.92 $35.15 $3.77 10.7% 14 3/4" 1.00 $10.255 $3.947 $24.717 $38.92 $35.15 $3.77 10.7% 15 1" 2.50 $10.255 $9.867 $61.793 $81.92 $72.48 $9.44 13.0% 16 1.5" 5.00 $10.255 $19.734 $123.585 $153.58 $134.71 $18.87 14.0% 17 2" 8.00 $10.255 $31.575 $197.737 $239.57 $209.39 $30.18 14.4% 18 3" 16.00 $10.255 $63.150 $395.473 $468.88 $408.51 $60.37 14.8% 19 4" 25.00 $10.255 $98.672 $617.927 $726.86 $632.52 $94.34 14.9% 21 6" 50.00 $10.255 $197.343 $1,235.854 $1,443.46 $1,254.80 $188.66 15.0% 22 8” 80.00 $10.255 $315.749 $1,977.366 $2,303.37 $2,001.52 $301.85 15.1%

4.5.2.FIRE SERVICE AVAILABILITY FEES (TEST YEAR FY 2027) Fire Service Availability Fees are designed to recover costs associated with the Customer, Meter, and Fire Protection cost causation components. Customer and Meter unit charges were previously calculated in Table 4-42, but are shown again below in Table 4-44. The Fire Protection unit charge is calculated using the same method as previously described for Customer, Meter, and Water Services unit charges:

𝑈𝑛𝑖𝑡 𝐶ℎ𝑎𝑟𝑔𝑒 = 𝐶𝑂𝑆 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛 ÷ 𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑆𝑒𝑟𝑣𝑖𝑐𝑒 ÷ 12 𝑀𝑜𝑛𝑡ℎ𝑙𝑦 𝐵𝑖𝑙𝑙𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 Fire Protection units of service are equal to equivalent fire demand units associated with private fire lines (from Table 4-31). Fire Protection demand equivalents are used to allocate Fire Protection costs by connection size because larger connections are more expensive to install, maintain, and replace than smaller fire lines, and also have greater capacity potential on the water system.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 45
Table 4-44: Fire Service Availability Fee Unit Charge Calculation (Test Year FY 2027) Cost Causation Component COS Allocation Units of Service Unit Charge Customer $1,860,278 15,117 Meters $10.255 per Bill
Meter $1,154,635 24,379 EMUs $3.947 per EMU
Fire Protection $368,061 45,019 Equivalent Fire
Demand Units
$0.681 per Equivalent
Fire Demand Unit
Table 4-45 shows the detailed calculation of monthly Fire Service Availability Fees for the test year FY 2027 based on Customer, Meter, and Fire Protection unit charges. All fire lines are subject to the same Customer and Meter unit charges (from Table 4-44), which are applied uniformly to all connection sizes (Column D-E). Because Fire Protection costs vary by connection size based on capacity, fire demand factors in Column C (from Table 4-31, Columns C) are used to differentiate Fire Protection unit charges by connection size. The Fire Protection charges (Column F) are calculated by multiplying the Fire Protection unit charge (from Table 4-44) by the fire demand factors (Column C). FY 2027 COS monthly Fire Service Availability Charges (Column G) equal the sum of Columns D-F and are compared to current monthly charges in Columns H-J.

Table 4-45: Fire Service Availability Fee Calculation (Test Year FY 2027) [A] [B] [C] [D] [E] [F] [G] [H] [I] [J]
Line Meter Size
Fire
Demand
Factor
Customer Meter Fire
Protection
COS
Monthly
Charge
Current
Monthly
Charge
Difference
($)
Difference
(%)
1 Inside City
2 2" and smaller 6.19 $10.25 $3.95 $4.22 $18.42 $18.23 $0.19 1.0% 3 4" 38.32 $10.25 $3.95 $26.11 $40.31 $39.06 $1.25 3.2% 4 6" 111.31 $10.25 $3.95 $75.84 $90.04 $86.38 $3.66 4.2% 5 8" 237.21 $10.25 $3.95 $161.61 $175.82 $168.00 $7.82 4.7% 6 10" 426.58 $10.25 $3.95 $290.63 $304.84 $290.77 $14.07 4.8%

4.5.3.WATER VOLUME RATES (TEST YEAR FY 2027)
Water Consumption Charge rates are designed to recover the portion of the rate revenue requirement allocated to the following cost causation components: Water Supply, Base Delivery, Peaking (Max Day and Max Hour), Conservation, and Revenue Offsets. However, the costs associated with each cost causation component listed above are not uniformly applied to each customer class and tier. Customer classes and tiers are only subject to unit rates for each cost causation component if the service they receive contributes to the Water Enterprise incurring costs associated with that specific cost causation component. Table 4-46 shows the unit rate components (Columns C-G) applicable to each customer class/tier (Lines 1-6).

Attachment 1

46 CITY OF WATSONVILLE
Table 4-46: Allocation of Unit Rates to Customer Classes [A] [B] [C] [D] [E] [F] [G]
Line Customer Class/Tier Water Supply Base
Delivery Peaking Conservation Revenue Offset
1 Residential Tier 1 ✓ ✓ ✓ ✓
2 Residential Tier 2 ✓ ✓ ✓ ✓
3 Residential Tier 3 ✓ ✓ ✓ ✓
4 Non-Residential ✓ ✓ ✓ ✓ ✓
5 Industrial ✓ ✓ ✓14 ✓ ✓
6 Irrigation ✓ ✓ ✓ ✓ ✓
Water Supply Unit Rate
Water Supply unit rates are applied uniformly to all customer classes and tiers because each unit of water used contributes equally to the City incurring Water Supply-related costs. Table 4-47 shows the calculation of Water Supply unit rates. The revenue requirement associated with the Water Supply cost causation component (from Table 4-37, Column F, Line 5) is divided by total water use (from Table 4-8) to determine the Water Supply unit rate.

Table 4-47: Water Supply Unit Rate (Test Year FY 2027)
Description Water Supply
COS Allocation $368,061
Billing Units 2,412,050 CCF
Unit Rate $1.787 per CCF
Base Delivery Unit Rate
Base Delivery unit rates are applied uniformly to all customer classes and tiers as these are costs for providing water during average daily demand conditions. Table 4-48 shows the calculation of Base Delivery unit rates. The revenue requirement associated with the Base Delivery cost causation component (from Table 4-37, Column F, Line 6) is divided by total water use (from Table 4-8) to determine the Base Delivery unit rate.

Table 4-48: Base Delivery Unit Rate (Test Year FY 2027) Description Base Delivery
COS Allocation $6,672,356
Billing Units 2,412,050 CCF
Unit Rate $2.766 per CCF
Peaking Unit Rate
Peaking unit rates vary by customer class and tier based on peak water use characteristics. Before unit rates can be differentiated by customer class and tier, Table 4-49 shows the calculation of Max Day and Max Hour unit costs. 14 Industrial users peak demands are non-coincidental meaning the class peak occurs off the peak of all other classes and the system. Industrial users are therefore omitted maximum day peak costs, however, they are apportioned a proportional share of maximum hour costs.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 47
The revenue requirement associated with the Max Day and Max Hour cost causation components (from Table 4-37, Column F, Lines 7-8) is divided by total Max Day and Max Hour requirements not associated with fire protection (from Table 4-36, Columns C and E, Lines 1-5) to determine the Max Day and Max Hour unit costs.

Table 4-49: Peaking Unit Costs (Test Year FY 2027)
Description Max Day Max Hour
COS Allocation $1,790,756 $523,035
Billing Units 2,839 CCF/Day 4,741 CCF/Day
Unit Cost $630.787 per CCF/Day $110.328 per CCF/Day
Table 4-50 shows the development of Peaking unit rates for each customer class and tier. Total Max Day and Max Hour unit costs are allocated to each customer class and tier based on Max Day and Max Hour requirements, respectively. Max Day requirements in Column C (from Table 4-36, Column C) are multiplied by the Max Day unit cost (from Table 4-49) to determine allocated Max Day costs (Column D). Max Hour requirements in Column E (from Table 4-36, Column E) are multiplied by the Max Hour unit cost (from Table 4-49) to determine allocated Max Hour costs (Column F). Total allocated Peaking costs (Column G) equal the sum of allocated Max Day costs (Column D) and allocated Max Hour costs (Column F). The Peaking unit rate (Column I) is calculated by dividing total allocated peaking costs (Column G) by projected FY 2027 water use in Column H (Table 4-33) for residential customers and Table 4-8 for all other customer classes). Industrial customers are not subject to a maximum day unit rate because they do not contribute to maximum day peaking relative to the rest of the system.

However, they are subject to maximum hour unit rates as their operations do not operate 24 hours a day at an average level of use and so it is appropriate to apportion to the class their fair share of maximum hour costs, proportional to their demand on the system.

Table 4-50: Peaking Unit Rates (Test Year FY 2027)
[A] [B] [C] [D] [E] [F] [G] [H] [I]
Line Customer Class/
Tier
Max Day
Requirements
(CCF/Day)
Allocated
Max Day
Costs
Max Hour
Requirements
(CCF/Day)
Allocated
Max Hour
Costs
Total
Allocated
Peaking
Costs
FY 2027
Water Use
(CCF)
Peaking
Unit Rate
($/CCF)
1 Residential Tier 1 312 $196,841 1,595 $175,924 $372,765 1,046,088 $0.36 2 Residential Tier 2 699 $440,626 828 $91,402 $532,028 347,576 $1.53 3 Residential Tier 3 709 $447,323 603 $66,558 $513,881 179,874 $2.86 4 Non-Residential 548 $345,951 868 $95,801 $441,752 431,405 $1.02 5 Industrial 0 $0 359 $39,587 $39,587 261,045 $0.15
6 Irrigation 571 $360,014 487 $53,763 $413,778 146,062 $2.83 Conservation Unit Rate
Conservation costs are allocated equally to all customer classes in proportion to water use. Residential Conservation unit rates are differentiated by tier, however. Table 4-51 shows the preliminary calculation of Conservation unit rates before differentiation by residential tier. The revenue requirement associated with the Conservation cost causation component (from Table 4-37, Column F, Line 9) is divided by total water use (from Table 4-8) to determine the uniform Conservation unit rate.

Attachment 1

48 CITY OF WATSONVILLE
Table 4-51: Preliminary Conservation Unit Rate (Test Year FY 2027) Description Conservation
COS Allocation $45,887
Billing Units 2,412,050 CCF
Unit Rate $0.019 per CCF
Conservation costs are applied to all customer classes, but are differentiated by residential tier. This is necessary because conservation efforts are generally aimed at curtailing excessive water use represented by Tier 3 only. Tier 1 and Tier 2 represent efficient indoor and outdoor water use that conservation and efficiency efforts typically do not aim to address. Therefore, Raftelis recommends that no Conservation costs are allocated to Tier 1 or Tier 2.

Table 4-52 shows the calculation of Conservation unit rates for the residential tiers. Because Conservation costs are allocated to all customer classes proportionally, the residential customer class must recover its fair share of Conservation costs based on total residential water use.

Total residential water use in Line 5 (from Table 4-33) is multiplied by the uniform Conservation unit rate in Line 7 (from Table 4-51) to determine the total Conservation revenue requirement for residential customers (Line 9).

Tier 1 and Tier 2 water use (Lines 2-3) is subtracted from total residential water use (Line 5) to determine the adjusted units of service (Line 11) subject to the Conservation component. The adjusted unit rate (Line 13) equals the residential Conservation revenue requirement (Line 9) divided by the adjusted units of service (Line 11). This represents the Conservation unit rate to be applied to Tier 3 (Line 17). Tier 1 and tier 2 are excluded from Conservation cost recovery (Lines 15-16).

Table 4-52: Residential Conservation Unit Rates by Tier (Test Year FY 2027) [A] [B] [C] [D]
Line Description FY 2027 Notes
1 Residential Water Use (CCF)
2 Tier 1 1,046,088
3 Tier 2 347,576
4 Tier 3 179,874
5 Total Residential Water Use (CCF) 1,573,538
6 7 Conservation Unit Cost (per CCF) $0.019
8 9 Residential Conservation Revenue Requirement $29,935 = Line 5 × Line 7 10 11 Adjusted Units of Service (CCF) 179,874 = Tier 3 Water Use only (Line 4) 12 13 Adjusted Unit Rate (per CCF) $0.166 = Line 9 ÷ Line 11 14 15 Tier 1 Conservation Unit Rate (per CCF) $0.000
16 Tier 2 Conservation Unit Rate (per CCF) $0.000
17 Tier 3 Conservation Unit Rate (per CCF) $0.166 = Line 13 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 49
Table 4-53 summarizes Conservation unit rates by customer class and tier based on Table 4-52 for residential customers and Table 4-51 for all other customer classes.

Table 4-53: Conservation Unit Rates by Customer Class and Tier (Test Year FY 2027) Customer Class/Tier
Conservation
Unit Rate
(per CCF)
Residential Tier 1 $0.000
Residential Tier 2 $0.000
Residential Tier 3 $0.166
Non-Residential $0.019
Industrial $0.019
Irrigation $0.019
Revenue Offset Unit Rate
Revenue Offsets are allocated equally to all customer classes in proportion to water use. Residential Revenue Offsets are differentiated by tier, however. Table 4-54 shows the preliminary calculation of the Revenue Offset unit rate before differentiation by residential tier. The revenue requirement associated with Revenue Offsets (from Table 4-37, Column F, Line 10) is divided by total water use (from Table 4-8) to determine the uniform Revenue Offset unit rate.

Table 4-54: Preliminary Revenue Offset Unit Rate (Test Year FY 2027) Description Revenue Offset
COS Allocation ($1,264,210)
Billing Units 2,412,050 CCF
Unit Rate ($0.524) per CCF
Revenue Offsets are applied to all customer classes but are differentiated by residential tier. Raftelis recommends that Revenue Offsets be applied only to Tier 1 and Tier 2 residential rates to provide for affordability for efficient water use and to incentivize efficiency and conservation. Table 4-55 shows the calculation of Revenue Offset unit rates for the residential tiers. Because Revenue Offsets are allocated to all customer classes proportionally, the residential customer class is apportioned Revenue Offsets based on total residential water use.

Total residential water use in Line 5 (from Table 4-33) is multiplied by the uniform Revenue Offset unit rate in Line 7 (from Table 4-54) to determine total Revenue Offsets allocated to residential customers (Line 9). Tier 3 water use (Lines 4) is subtracted from total residential water use (Line 5) to determine the adjusted units of service (Line 11) for residential Revenue Offsets. The adjusted unit rate (Line 13) equals the residential Revenue Offset revenue requirement (Line 9) divided by the adjusted units of service (Line 11). This represents the Revenue Offset unit rate to be applied to Tier 1 and Tier 2 (Lines 15-16). Tier 3 does not receive any Revenue Offset.

Attachment 1

50 CITY OF WATSONVILLE
Table 4-55: Residential Revenue Offset Unit Rates by Tier (Test Year FY 2027) [A] [B] [C] [D]
Line Description FY 2027 Notes
1 Residential Water Use (CCF)
2 Tier 1 1,046,088
3 Tier 2 347,576
4 Tier 3 179,874
5 Total Residential Water Use (CCF) 1,573,538
6 7 Revenue Offset Unit Cost (per CCF) ($0.524)
8 9 Residential Revenue Offset Revenue Requirement ($824,727) = Line 5 × Line 7 10 11 Adjusted Units of Service (CCF) 1,393,664 = Tier 1-2 Water Use only (Line 2-3) 12 13 Adjusted Unit Rate (per CCF) ($0.592) = Line 9 ÷ Line 11 14 15 Tier 1 Revenue Offset Unit Rate (per CCF) ($0.592) = Line 13 16 Tier 2 Revenue Offset Unit Rate (per CCF) ($0.592) = Line 13 17 Tier 3 Revenue Offset Unit Rate (per CCF) $0.000
Table 4-56 summarizes Revenue Offset unit rates by customer class and tier based on Table 4-55 for residential customers and Table 4-54 for all other customer classes.

Table 4-56: Revenue Offset Unit Rates by Customer Class and Tier (Test Year FY 2027) Customer Class/Tier
Revenue Offset
Unit Rate
(per CCF)
Residential Tier 1 ($0.592)
Residential Tier 2 ($0.592)
Residential Tier 3 $0.000
Non-Residential ($0.524)
Industrial ($0.524)
Irrigation ($0.524)
Water Consumption Charge Rate Calculation (Test Year FY 2027) Table 4-57 shows the calculation of Water Consumption Charge rates for the test year FY 2027. Unit rates are applied to each customer class and in accordance with Table 4-46. The COS rate (Column H) is calculated by summing the following unit rates (Columns C-G):
» Water Supply Unit Rates (from Table 4-47)
» Base Delivery Unit Rates (from Table 4-48)
» Peaking Unit Rates (from Table 4-50)
» Conservation Unit Rates (from Table 4-53)
» Revenue Offset Unit Rates (from Table 4-56)
Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 51
Table 4-57: Proposed Water Consumption Charge Rate Calculation (Test Year FY 2027) [A] [B] [C] [D] [E] [F] [G] [H] [I] [J] [K]
Line Customer Class
Water
Supply
Unit Rate
Base
Delivery
Unit Rate
Peaking
Unit Rate
Conservation
Unit Rate
Revenue
Offset Unit
Rate
COS Rate
(per CCF)
Current
Rate
(per CCF)
Difference
($)
Difference
(%)
1 Residential Tier 1 $1.787 $2.766 $0.356 $0.000 ($0.592) $4.32 $4.11 $0.21 5.1% 2 Residential Tier 2 $1.787 $2.766 $1.531 $0.000 ($0.592) $5.50 $5.38 $0.12 2.2% 3 Residential Tier 3 $1.787 $2.766 $2.857 $0.166 $0.000 $7.58 $8.33 ($0.75) -9.0% 4 Non-Residential $1.787 $2.766 $1.024 $0.019 ($0.524) $5.08 $4.91 $0.17 3.5% 5 Industrial $1.787 $2.766 $0.152 $0.019 ($0.524) $4.20 $3.91 $0.29 7.4% 6 Irrigation $1.787 $2.766 $2.833 $0.019 ($0.524) $6.89 $7.02 ($0.13) -1.9% Attachment 1

52 CITY OF WATSONVILLE

4.5.4. PROPOSED FIVE-YEAR WATER RATE SCHEDULE
Table 4-58 to Table 4-60 show the proposed five-year schedule of water rates for FY 2027 to FY 2031. Proposed FY 2028 water rates were calculated by increasing FY 2027 COS Meter Size Availability Fees (from Table 4-43), Fire Service Availability Fees (from Table 4-45), and Water Consumptions Charge rates (from Table 4-57) by the proposed FY 2028 revenue adjustment of five percent (from Table 4-21). All proposed rates in subsequent years are then increased by five percent per year based on the schedule of proposed revenue adjustments (from Table 4-21).

All proposed rates are rounded up to the nearest cent to ensure adequate revenue recovery. Current water rates (from Error! Reference source not found. to Table 4-4) are also shown.

Table 4-58: Proposed Schedule of Meter Size Availability Fees Monthly Meter Size Availability Fee Current Proposed
July 2027
Proposed
July 2028
Proposed
July 2029
Proposed
July 2030
Proposed
July 2031
Inside City Limits
5/8" $29.93 $32.16 $33.77 $35.46 $37.23 $39.09
3/4" $29.93 $32.16 $33.77 $35.46 $37.23 $39.09
1" $59.43 $65.01 $68.26 $71.67 $75.26 $79.02

1.5" $108.61 $119.75 $125.74 $132.02 $138.63 $145.56
2" $167.61 $185.45 $194.72 $204.46 $214.68 $225.42
3" $324.96 $360.64 $378.67 $397.61 $417.49 $438.36
4" $501.98 $557.73 $585.62 $614.90 $645.64 $677.92
6" $993.70 $1,105.20 $1,160.46 $1,218.48 $1,279.41 $1,343.38 8" $1,583.78 $1,762.16 $1,850.27 $1,942.78 $2,039.92 $2,141.92 Outside City Limits
5/8" $35.15 $38.92 $40.87 $42.91 $45.05 $47.31
3/4" $35.15 $38.92 $40.87 $42.91 $45.05 $47.31
1" $72.48 $81.92 $86.02 $90.32 $94.83 $99.57

1.5" $134.71 $153.58 $161.26 $169.32 $177.79 $186.68
2" $209.39 $239.57 $251.55 $264.13 $277.33 $291.20
3" $408.51 $468.88 $492.32 $516.94 $542.79 $569.93
4" $632.52 $726.86 $763.20 $801.36 $841.43 $883.50
6" $1,254.80 $1,443.46 $1,515.63 $1,591.41 $1,670.99 $1,754.53 8" $2,001.52 $2,303.37 $2,418.54 $2,539.47 $2,666.44 $2,799.76 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 53
Table 4-59: Proposed Schedule of Fire Service Availability Fees Monthly Fire Service Availability Fee Current Proposed
July 2027
Proposed
July 2028
Proposed
July 2029
Proposed
July 2030
Proposed
July 2031
Inside City Limits
2" and smaller $18.23 $18.42 $19.34 $20.31 $21.32 $22.39 4" $39.06 $40.31 $42.33 $44.44 $46.66 $49.00
6" $86.38 $90.04 $94.54 $99.27 $104.23 $109.44
8" $168.00 $175.82 $184.61 $193.84 $203.53 $213.71
10" $290.77 $304.84 $320.08 $336.09 $352.89 $370.53
Table 4-60: Proposed Schedule of Water Consumption Charge Rates Water Consumption Charge Rates
(per CCF) Current ProposedJuly 2027
Proposed
July 2028
Proposed
July 2029
Proposed
July 2030
Proposed
July 2031
Residential Tiered Rates
Tier 1 (1-6 CCF) $4.11 $4.32 $4.54 $4.76 $5.00 $5.25
Tier 2 (7-12 CCF) $5.38 $5.50 $5.78 $6.06 $6.37 $6.69
Tier 3 (>12 CCF) $8.33 $7.58 $7.96 $8.36 $8.77 $9.21
Non-Residential Uniform Rates
Non-Residential $4.91 $5.08 $5.33 $5.60 $5.88 $6.17
Industrial $3.91 $4.20 $4.41 $4.63 $4.86 $5.11
Irrigation $7.02 $6.89 $7.23 $7.60 $7.98 $8.37
Attachment 1

54 CITY OF WATSONVILLE

5.Wastewater Rate Study
Raftelis developed a wastewater rate model in Microsoft Excel to project financial calculations over the five-year rate-setting period through FY 2031 (i.e., the study period). The City’s fiscal year spans from July 1 through June 30. Projections in future years were generally made based on actual data from FY 2025 and the revised budget for FY 2026 and FY 2027 using key assumptions outlined in this section. Assumptions were discussed with and reviewed by City staff to ensure that any unique characteristics of the City’s wastewater system are accurately addressed. Note that most table values shown throughout this report are rounded to the last digit shown; and therefore, may not sum precisely to the totals shown.

The City of Watsonville owns and operates a wastewater collection system and treatment facility serving residential, commercial, and industrial customers within the City as well as customers served by three outside districts: Freedom County Sanitation District, Pajaro County Sanitation District, and Salsipuedes Sanitary District.

The treatment facility also provides recycled water operations (Department 532) and accepts septic waste loads.

The Pajaro Valley Water Management Agency (PVWMA) contributes operationally to the system, and those contributions are accounted for as revenue offsets in the financial plan.

The wastewater system is organized into the following operational departments, each of which is analyzed separately in the financial plan and COS allocation: Department 530 – Wastewater Treatment (primary treatment, secondary treatment, solids handling, and plant operations); Department 531 – Sewer Maintenance (collection system inspection, cleaning, and repair); Department 532 – Recycling Operations (recycled water production and management); and Departments 540, 541, 543, 544, 546 – Support Functions (utilities administration, laboratory services, environmental and sustainability, engineering, and field services).

The outside districts pay their proportionate share of treatment capacity costs through separate agreements. These contributions are credited as revenue offsets in the financial plan and are excluded from the COS analysis for City customers, ensuring that City ratepayers do not subsidize service provided to outside district customers.

5.1.Wastewater Enterprise Revenue Requirements
Section 5.1 includes estimates and projections of annual revenues, O&M expenses, debt service payments, capital expenditures, and reserve funding targets through FY 2031 for the Wastewater Fund. These projections are necessary to determine annual water rate revenues required over the study period to achieve sufficient cash flow to maintain adequate reserves and debt coverage.

The financial plan is the foundation of the rate study. It establishes the total cost of providing wastewater service over the planning horizon, identifies all available revenue sources, and quantifies the revenue adjustments needed to maintain the utility's financial integrity. The financial plan must demonstrate that proposed rates are set at a level sufficient—but not greater than necessary—to fund the wastewater utility's ongoing obligations. The planning horizon spans from FY 2026 through FY 2036. FY 2024 and FY 2025 reflect actual expenditures and revenues. FY 2026 reflects the adopted budget. The revised budget for FY 2027 is the test year, meaning it is the year for which new rates are being established and cost allocations performed. FY 2028 through FY 2036 are projections used to assess the long-term financial sustainability of the utility and to identify the multi-year rate adjustments needed to maintain adequate reserves and debt coverage.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 55

5.1.1.REVENUE FROM CURRENT WASTEWATER RATES
Current Wastewater Rates
Table 5-1 shows the wastewater rates currently in effect in FY 2026, which were developed during the prior rate study in 2021. The current wastewater rate structure includes separate rate schedules for residential, commercial, and industrial customers. Residential customers—both single-family and multi-family—pay a flat monthly fixed charge of $61.51 per dwelling unit. Commercial accounts are subject to a minimum monthly fee of $33.93, plus volumetric charges applied to each hundred cubic feet (CCF) of water consumed. Commercial customers are categorized by wastewater strength: high-strength users are charged $7.90 per CCF, while low-strength users are charged $4.56 per CCF.

Industrial customers are billed under a separate strength-based schedule that reflects the measured characteristics of their discharge. Charges are assessed on three components: flow at $3,194.97 per million gallons (MG), biochemical oxygen demand (BOD) at $318.28 per 1,000 pounds, and total suspended solids (TSS) at $765.91 per 1,000 pounds. This tiered approach allows the agency to more accurately recover costs associated with treating higher-strength or higher-volume industrial waste streams.

Table 5-1. Current Wastewater Rates
Customer Class Current Rates
Residential Monthly Fixed Charge
Residential (SFR & MFR) $61.51
Commercial Minimum Monthly Fee
All Commercial Accounts $33.93
Commercial Charges per CCF of Water
Commercial High Strength ($/CCF) $7.90
Commercial Low Strength ($/CCF) $4.56
Industrial Charges
Flow ($/MG) $3,194.97
BOD ($/1,000 LB) $318.28
TSS ($/1,000 LB) $765.91
Attachment 1

56 CITY OF WATSONVILLE
Projected Wastewater Service Connections (Residential) and Flows (Non-Residential Users)
Table 5-2 shows the number of wastewater accounts and inflow projections by customer class for the study period.

The projection table forecasts billing units across residential, commercial, and industrial customer classes from FY 2026 through FY 2031. Residential accounts are split into two categories: primary connections—representing single-family and multi-family accounts—and additional connections. Primary connections grow modestly from 9,744 to 10,000 over the study period, while additional connections increase from 5,314 to 5,454, both reflecting a consistent annual growth rate of 0.5%. Commercial accounts subject to the minimum monthly fee also grow incrementally, from 1,042 to 1,069 accounts. Commercial volumetric billing units—measured in hundred cubic feet (HCF) of water use—are projected to grow slightly each year, with high-strength commercial usage rising from 34,532 to 35,441 HCF and low-strength commercial usage increasing from 219,023 to 224,784 HCF.

Industrial billing units remain flat across all six fiscal years, with flow held constant at 250 million gallons (MG), BOD at 2,605 thousand pounds, and TSS at 1,123 thousand pounds. This assumption reflects a conservative planning approach that does not anticipate new industrial growth. Taken together, the projections suggest a slowly growing service area driven primarily by residential development, with commercial growth tracking at a similar pace and industrial demand held steady throughout the forecast horizon.

Table 5-2. Accounts and Inflow Projections
Customer Class FY
2026
FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
Single & Multiple Family Residential (main connect.) 9,744 9,795 9,846 9,897 9,948 10,000 Residential Additional Connections 5,314 5,342 5,369 5,397 5,426 5,454 Minimum Monthly Fee For Commercial Accounts 1,042 1,047 1,053 1,058 1,064 1,069 Commercial Charges Per 1 HCF Water Use
Commercial - High 34,532 34,712 34,893 35,075 35,257 35,441 Commercial - Low 219,023 220,163 221,309 222,461 223,619 224,784 Industrial (per MG unit) 250 250 250 250 250 250
BOD (1,000lb) 2,605 2,605 2,605 2,605 2,605 2,605
TSS (1,000lb) 1,123 1,123 1,123 1,123 1,123 1,123
Projected Wastewater Enterprise Revenue Under Current Rates Before determining the need for rate adjustments, the financial plan calculates the revenue the City collects with its existing rates and rate schedule. This revenue at current-rates baseline is compared to projected funding needs to quantify the revenue gap, if any exists. Total sewer rate revenue projections, at current rates, are shown in Table 5-3. The modest growth in sewer service charge revenue under existing rates reflects the 0.5% annual new connection growth estimate.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 57
Table 5-3. Sewer Rate Revenue Under Current Rates (No Adjustment) Fiscal Year Sewer Service Charges Industrial Charges Total Rate Revenue FY 2025 (Actual) $11,916,522 $2,313,421 $14,229,943
FY 2026 (Budget) $12,810,423 $2,486,906 $15,297,329
FY 2027 (Test Year) $12,877,112 $2,486,906 $15,364,018
FY 2028 $12,944,148 $2,486,906 $15,431,055
FY 2029 $13,011,534 $2,486,906 $15,498,440
FY 2030 $13,079,270 $2,486,906 $15,566,176
FY 2031 $13,147,359 $2,486,906 $15,634,265

5.1.2.OTHER REVENUE SOURCES
As summarized in Table 5-4, in addition to sewer service charge revenues and industrial charge revenues, the City's wastewater utility receives several other revenue streams that partially offset the cost of providing service. These revenues reduce the amount that must be recovered from City ratepayers through the rate schedule.

Table 5-4. Other Revenue Sources (FY 2027 Test Year)
Revenue Source FY 2027 Amount Description
Septic Load Charges $800,000 Fees charged for septic waste accepted at the treatment plant Freedom County SD – O&M Share $32,128 Freedom County SD operating cost contribution Freedom County SD – CIP Share $433,706 Freedom County SD capital cost contribution Pajaro County SD – O&M Share $125,347 Pajaro County SD operating cost contribution Pajaro County SD – CIP Share $596,346 Pajaro County SD capital cost contribution Salsipuedes SD – O&M Share $11,153 Salsipuedes SD operating cost contribution Salsipuedes SD – CIP Share $119,269 Salsipuedes SD capital cost contribution Connection Fees – General City $32,005 Capacity fee revenue from new connections Interest Earnings $96,536 Investment earnings on fund balances PVWMA Operational Charges $2,982,730 Pajaro Valley WMA contribution to recycling operations Total Other Revenue $5,229,220

5.1.3.O&M EXPENSES
The City's wastewater Enterprise O&M expenses encompass all costs associated with operating and maintaining the wastewater collection system, treatment plant, recycling facility, and supporting administrative functions.

Expenses are derived from the City's FY 2026 adopted budget and FY 2037 revised budget; and projected forward using the inflation rates described in Section 2.

As shown below in Table 5-5, total O&M expenses are projected to grow from approximately $19.8 million in FY 2026 to approximately $20.1 million in the test year (FY 2027), representing a 1.9% increase. The relatively modest year-over-year growth between FY 2026 and FY 2027 reflects the stabilization of recycling operations costs following a one-time increases in FY 2026. Over the full planning horizon, O&M expenses are projected to grow at an average annual rate of approximately 3.7%, driven primarily by the cost increases of chemicals, utilities (power), and personnel.

Department 530—Wastewater Treatment is the largest operational cost center, accounting for approximately 75% of total O&M in the test year. Personnel costs include regular salaries, overtime, standby pay, and fringe benefits for treatment plant operators, source control staff, and plant management. Operations costs include electricity and gas, chemicals, outside contract services, cost allocation plan charges, land lease costs, insurance, and interdepartmental charges.

Attachment 1

58 CITY OF WATSONVILLE
Department 531—Sewer Maintenance covers the costs of operating and maintaining the City's collection system, including routine cleaning, televising, and repair of sewer mains, laterals, and lift stations. The collection system maintenance program is essential for minimizing inflow and infiltration (I&I), preventing sanitary sewer overflows (SSOs), and extending the life of collection system assets.

Department 532—Recycling Operations include the costs of producing recycled water for beneficial reuse.

Electricity, chemicals, and equipment repair and maintenance are the primary cost drivers. The PVWMA operational charges recovered through the recycling program are credited as a revenue offset, making this program cost-neutral to City ratepayers.

Support Departments (540, 541, 543, 544, 546) provide essential administrative, analytical, regulatory compliance, design, and operational support to the wastewater utility.

Table 5-5. Projected O&M Expenses by Department (FY 2026–FY 2031) Dept Department FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 530 Wastewater
Treatment $14,639,847 $15,154,437 $16,095,219 $15,926,358 $16,582,955 $17,268,417 531 Sewer Maintenance $1,453,656 $1,513,125 $1,573,480 $1,636,385 $1,701,953 $1,770,305 532 Recycling
Operations $3,319,592 $2,982,730 $3,103,711 $3,229,833 $3,361,324 $3,498,420 540 Utilities
Administration $115,788 $154,945 $129,217 $101,198 $70,744 $37,702 541 Laboratory $36,444 $44,835 $32,875 $19,891 $5,819 ($9,409) 543 Environmental &
Sustainability $35,648 $36,301 $24,782 $12,288 ($1,243) ($15,876) 544 Engineering
Division $39,631 $92,647 $83,370 $73,212 $62,116 $50,023 546 Field Services $116,125 $154,687 $149,835 $144,362 $138,227 $131,384 Total O&M $19,756,731 $20,133,707 $21,192,489 $21,143,527 $21,921,894 $22,730,965

5.1.4.CAPITAL IMPROVEMENT PROGRAM
As shown in Table 5-6, the City faces significant capital reinvestment needs over the planning horizon, driven primarily by aging infrastructure at the wastewater treatment facility. The CIP includes projects essential for maintaining regulatory compliance, ensuring reliable treatment capacity, improving energy efficiency, and extending the useful life of major system assets. Major projects include: replacement of the headworks and influent pump station (Project 14410), estimated at approximately $40 million across FY 2026–FY 2030; main switchgear and energy recovery electrical system improvements (Project 14797), approximately $21 million spanning FY 2026–FY 2027; cogeneration replacement/energy savings project ($20.4 million in FY 2027); and ongoing sanitary sewer main replacement and lift station improvements.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 59
Table 5-6. Planned Wastewater Capital Improvement Projects (FY 2026–FY 2031) CIP Project Name Project # FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Division Automotive Equipment
Replacement 15069 $65,000 $0 $67,626 $0 $70,358 $0
Replace Collections Vactor new $0 $0 $0 $0 $0 $0
Wastewater Document Management 15199 $76,000 $0 $0 $0 $0 $0 Sanitary Sewer Lift Stations 14621 $295,392 $102,000 $104,040 $106,121 $108,243 $110,408 Sanitary Sewer Main Replacement/Repairs 14409 $259,784 $204,000 $208,080 $212,242 $216,486 $220,816 Nature Center 14794 $291,767 $0 $0 $0 $0 $0
Replace Sewer Pump Station 10 - Miles Lane 14798 $1,349,461 $0 $0 $0 $0 $0 Sewer Pump Station Controls/PLC/SCADA
Upgrades 14799 $140,735 $0 $0 $0 $0 $0
System Evaluation and Capacity Assurance
Plan 15108 $281,759 $0 $0 $0 $0 $0
Main Switchgear and Energy Recovery
Electrical System Improvements (Phase 1) 14797 $0 $5,100,000 $0 $0 $0 $0 Main Switchgear and Energy Recovery
Electrical System Improvements (Phase 2) — $15,000,000 $1,020,000 $0 $0 $0 $0 Replace Headworks and Influent Pump
Station 14410 $1,036,836 $2,040,000 $15,606,000 $13,795,704 $7,577,025 $0 Levy Embankment Stabilization Project 14795 $0 $0 $0 $0 $0 $0 Digester Cleaning and Piping Improvements new $0 $0 $0 $530,604 $0 $0 Sub Basin 7 Sanitary Sewer Infrastructure
Repairs Martinelli to Beach 15036 $0 $0 $0 $0 $0 $0
Blackburn/Center Street Sewer Installation 15106 $0 $0 $0 $0 $0 $0 WWTF Fencing Improvements 15233 $0 $0 $0 $0 $0 $0
Sewer Pump Station Improvements - Pajaro
Dunes 15115 $0 $0 $0 $0 $0 $0
WWTP Infrastructure Repairs/Replacement 14328 $0 $0 $0 $0 $0 $0 Pump Station 14 Improvements new $0 $0 $0 $0 $0 $0
Cogen Replacement/Energy Savings Project new $0 $20,400,000 $0 $0 $0 $0 Dewatering System Improvements new $0 $0 $0 $0 $0 $0
Biosolids PFAS Treatment new $0 $0 $0 $0 $0 $0
Old Headworks Demolition Project new $0 $0 $0 $0 $0 $0
Primary Treatment Improvements new $0 $0 $0 $0 $0 $0
Total CIP $18,796,734 $28,866,000 $15,985,746 $14,644,671 $7,972,112 $331,224 Attachment 1

60 CITY OF WATSONVILLE
As summarized below in Table 5-7, the Capital Improvement Program (CIP) totals approximately $86.6 million over the six-year period from FY 2026 through FY 2031, with spending concentrated heavily in the first three fiscal years. Grant funding provides $17 million in early support—$15 million in FY 2026 and $2 million in FY 2027— helping to offset the cost of the program's largest capital projects during peak construction years. Debt financing serves as a significant funding mechanism throughout the program, contributing $2.6 million in FY 2026, $25.7 million in FY 2027, and $12.7 million in FY 2029, reflecting the agency's reliance on borrowed capital to fund major infrastructure investments such as the Headworks and Influent Pump Station replacement and the Cogen Replacement/Energy Savings Project.

Cash funding from outside districts provides supplemental support in FY 2026 through FY 2028, covering $1.1 million, $1.1 million, and $16.0 million respectively, while a small additional debt draw of $107,500 occurs in FY 2029. City cash reserves are not drawn upon until FY 2029, after which they become the sole funding source through the end of the program, covering $1.9 million in FY 2029, $8.0 million in FY 2030, and $331,224 in FY 2031. This funding structure reflects a strategy that leverages grants and debt financing during peak expenditure years before transitioning to City reserves as annual capital needs taper off toward the end of the study period.

Table 5-7. Capital Improvement Program Summary by Funding Source (FY 2026–FY 2031) Funding Source FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Grant Funded $15,000,000 $2,000,000 $0 $0 $0 $0
Cash Funded (Outside Districts) $1,149,321 $1,149,321 $0 $107,500 $0 $0 Debt Funded $2,647,413 $25,716,679 $15,985,746 $12,650,162 $0 $0 Cash Funded (City) $0 $0 $0 $1,887,008 $7,972,113 $331,224 Total CIP $18,796,734 $28,866,000 $15,985,746 $14,644,670 $7,972,113 $331,224

5.1.5.WASTEWATER DEBT SERVICE
As summarized below in Table 5-8, the City currently carries three existing debt obligations totaling approximately $446,197 in FY 2026. The two California Clean Water State Revolving Fund (SRF) loans—D1501001 (Manana Lane) and D1601017 (Airport Freedom)—carry consistent annual debt service payments of $88,130 and $264,185, respectively, extending through FY 2031 and beyond. The Master Equipment Lease Purchase Agreement contributes $93,882 in FY 2026 before retiring completely, reducing total existing debt service to approximately $352,315 annually from FY 2027 through FY 2031.

Two new debt obligations are proposed to fund the City's most significant capital projects. A private placement issuance of $20 million (net proceeds of $20.3 million) at 4.3% interest over a 20-year term begins repayment in FY 2027, generating annual debt service of $1,527,306 through the remainder of the study period. A second new SRF loan of $37 million at 2.5% interest over 30 years is proposed to fund the Replace Headworks and Influent Pump Station project, with repayment deferred until FY 2031, at which point annual debt service rises to $1,865,701.

Combined, the two proposed debt obligations increase total annual debt service from $446,197 in FY 2026 to $3,745,321 by FY 2031—a roughly eight-fold increase—underscoring the significant long-term financial commitment associated with the agency's near-term capital program.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 61
Table 5-8. Debt Service Schedule
Debt Obligation Type FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Existing Debt
CA Clean Water SRF D1501001
(Manana Lane) Existing $88,130 $88,130 $88,131 $88,130 $88,130 $88,130 CA Clean Water SRF D1601017
(Airport Freedom) Existing $264,185 $264,185 $264,185 $264,185 $264,184 $264,184 Master Equipment Lease Purchase
Agreement Existing $93,882 $0 $0 $0 $0 $0
Subtotal — Existing Debt Service $446,197 $352,315 $352,316 $352,315 $352,314 $352,314 Proposed Debt
SRF Loan (Replace Headworks &
Influent Pump Station) New $0 $0 $0 $0 $0 $1,865,701
Private Placement (Main
Switchgear/Cogen) New $0 $1,527,306 $1,527,306 $1,527,306 $1,527,306 $1,527,306 Subtotal — Proposed Debt Service $0 $1,527,306 $1,527,306 $1,527,306 $1,527,306 $3,393,007 TOTAL DEBT SERVICE $446,197 $1,879,621 $1,879,622 $1,879,621 $1,879,620 $3,745,321

5.1.6. WASTEWATER ENTERPRISE FINANCIAL POLICIES
Debt Coverage
Maintaining adequate financial reserves is a fundamental principle of sound utility management and a requirement of the City's debt covenants. The financial plan targets two reserve components: an operating reserve of approximately three months (25%) of annual O&M expenditures, and a capital reserve of 2% of existing assets.

The combined reserve target in FY 2027 is approximately $10.7 million. The projected ending fund balances exceed the target reserve for all years of the five year rate implementation period.

Reserve Targets
Table 5-9: Wastewater Enterprise Financial Policies
Financial Policy Target/Requirement
Debt Coverage
Required Debt Coverage Ratio 1.2
Reserve Targets
Operating Reserve Target 25% of annual Wastewater Enterprise O&M expenses Capital Reserve Target 2% of replacement cost of Wastewater Enterprise capital assets Table 5-10: Wastewater Enterprise Reserve Targets
Reserve FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Operating Reserve6F
15 $4,939,183 $5,033,427 $5,298,122 $5,285,882 $5,480,474 $5,682,741 Capital Reserve7F
16 $5,567,684 $5,679,038 $5,792,618 $5,908,471 $6,026,640 $6,147,173 Total $10,506,867 $10,712,465 $11,090,741 $11,194,352 $11,507,114 $11,829,914 15 Equal to 25 percent of annual projected Wastewater Enterprise O&M expenses (from Table 5-5). 16 Equal to 2 percent of current replacement cost of Wastewater Enterprise capital assets ($92,118,594) in FY 2024, and escalated by 2 percent each subsequent year to account for capital cost inflation (consistent with inflationary assumptions used to escalate CIP project costs).

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62 CITY OF WATSONVILLE
Table 5-11. Fund Balance and Reserve Targets (FY 2026–FY 2031) FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031
Beginning Fund Balance $14,991,556 $11,310,404 $12,954,474 $15,756,796 $16,579,678 $11,918,592 Net Cash Change ($3,681,153) $1,644,070 $2,802,322 $822,883 ($4,661,086) $2,151,773 Ending Fund Balance $11,310,404 $12,954,474 $15,756,796 $16,579,678 $11,918,592 $14,070,366 Operating Reserve Target $4,939,183 $5,033,427 $5,298,122 $5,285,882 $5,480,474 $5,682,741 Capital Reserve Target $5,567,684 $5,679,038 $5,792,618 $5,908,471 $6,026,640 $6,147,173 Total Reserve Target $10,506,867 $10,712,465 $11,090,741 $11,194,352 $11,507,114 $11,829,914 Days Cash on Hand 209 235 271 286 198 226

5.1.7. DEBT COVERAGE
The debt service coverage ratio (DSCR) measures a utility's ability to meet its annual debt obligations from net revenues. It is calculated by dividing net revenues available for debt service—typically defined as operating revenues less operating expenses, excluding depreciation—by the total annual debt service (principal and interest payments due in a given year). A DSCR of 1.0 indicates revenues exactly cover debt obligations, while most bond covenants and lenders require a minimum ratio of 1.20 to 1.25, providing a margin of financial safety. Utilities with consistently strong DSCRs demonstrate fiscal discipline and are generally viewed more favorably by rating agencies and investors, which can reduce borrowing costs over time. The City's existing loan covenants and proposed private placement terms require a minimum debt service coverage ratio (DSCR) of 1.20x.

The five-year maximum annual debt service (MADS) coverage ratio evaluates a utility's capacity to service its highest projected debt obligation within a five-year planning horizon. Rather than measuring coverage against the current year's debt service, this metric divides net revenues by the single largest annual debt service payment anticipated over the next five years. Because new debt issuances—such as revenue bonds funding capital improvement programs—often result in a step-up in annual obligations, the MADS coverage ratio provides a forward-looking stress test. Lenders and bond covenants frequently require this ratio to meet or exceed 1.20, ensuring the utility can sustain its peak debt burden even before that year arrives. This metric is particularly relevant for utilities with significant near-term capital needs, as it compels proactive rate planning to avoid coverage shortfalls at debt service peaks. The City’s proposed SRF loan for the Headworks project require the MADS coverage ratio of 1.20x.

As summarized below in Table 5-12, the proposed rate schedule maintains the required coverage ratios throughout the planning horizon. In the test year (FY 2027), the projected DSCR is 2.49x. The maximum annual debt service (MADS) coverage is projected at 1.25x in FY 2027 and improves steadily thereafter.

Table 5-12. Debt Coverage Summary
FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Required Min.

Debt Coverage Ratio 2.49 2.49 2.50 2.76 1.66 1.20
MADS Coverage 1.25 1.25 1.25 1.39 1.66 1.20

5.2.Wastewater Enterprise Status Quo Financial Plan
To evaluate the Wastewater Enterprise’s need for revenue adjustments (i.e., increases to gross rate revenues), Raftelis first developed a status quo financial plan as summarized in Table 5-13. The status quo financial plan assumes that current rates remain unchanged over the study period.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 63
The wastewater utility projects total revenue of approximately $20.9 million in FY 2026, declining modestly to $19.8 million in FY 2028 before recovering to $20.4 million by FY 2031. This revenue reflects sewer rate revenue from current rates supplemented by other revenue sources, with no additional revenue from rate adjustments assumed across the entire planning period. Total O&M expenses, by contrast, grow steadily from $19.8 million in FY 2026 to $22.7 million in FY 2031—an increase of approximately 15%—driven primarily by rising wastewater treatment costs. As a result, net revenues turn negative beginning in FY 2028 and worsen progressively through FY 2031, reaching ($2.3 million), signaling that current rates are insufficient to cover operating costs over the long term.

Capital investment is heavily front-loaded, with total capital project expenditures of $18.8 million in FY 2026 and $28.9 million in FY 2027—the latter reflecting a significant $25.7 million in debt-funded projects. Grant funding of $15.0 million in FY 2026 and $2.0 million in FY 2027 offsets a portion of early capital costs, while proposed debt service of $1.5 million per year begins in FY 2027 and escalates to $3.4 million annually starting in FY 2031 as additional borrowing comes online. Capital expenditures taper sharply after FY 2029, dropping to $331,224 by FY 2031, reflecting completion of the major infrastructure investment cycle. Combined with growing O&M costs, total debt service obligations place increasing strain on the utility's cash position throughout the planning period.

The wastewater utility begins FY 2026 with a fund balance of $14.9 million, providing an initial buffer against near-term cash deficits. A transfer from the Rate Stabilization Fund of ($3.2 million) in FY 2026—reflecting a draw on reserves—is partially offset by transfers back of $1.8 million in FY 2027 and $1.4 million in FY 2028. Despite this, the fund balance declines steadily each year, falling to $3.7 million by FY 2029 and turning negative at ($8.2 million) in FY 2030—well below the total reserve target of $11.5 million for that year. By FY 2031, the ending fund balance reaches ($14.6 million), underscoring the need for rate adjustments to restore fiscal sustainability and maintain adequate reserves throughout the planning period.

Attachment 1

64 CITY OF WATSONVILLE
Table 5-13. Status Quo Financial Plan - Wastewater
Line Item FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Budget Budget Projection Projection Projection Projection Revenue
Sewer Rate Revenue — Current Rates $15,297,329 $15,364,018 $15,431,055 $15,498,440 $15,566,176 $15,634,265 Additional Revenue from Rate Adjustments $0 $0 $0 $0 $0 $0 Other Revenue $5,566,082 $5,229,220 $4,389,331 $4,496,832 $4,389,331 $4,767,322 Total Revenue $20,863,411 $20,593,238 $19,820,386 $19,995,272 $19,955,508 $20,401,587 O&M Expenses
Wastewater Treatment $14,639,847 $15,154,437 $16,095,219 $15,926,358 $16,582,955 $17,268,417 Sewer Maintenance $1,453,656 $1,513,125 $1,573,480 $1,636,385 $1,701,953 $1,770,305 Recycling Operations $3,319,592 $2,982,730 $3,103,711 $3,229,833 $3,361,324 $3,498,420 Utilities Administration $115,788 $154,945 $129,217 $101,198 $70,744 $37,702 Laboratory $36,444 $44,835 $32,875 $19,891 $5,819 ($9,409) Environmental & Sustainability $35,648 $36,301 $24,782 $12,288 ($1,243) ($15,876) Engineering Division $39,631 $92,647 $83,370 $73,212 $62,116 $50,023 Field Services $116,125 $154,687 $149,835 $144,362 $138,227 $131,384 Total O&M Expenses $19,756,731 $20,133,707 $21,192,489 $21,143,527 $21,921,894 $22,730,965 Net Revenues $1,106,679 $459,531 ($1,372,103) ($1,148,255) ($1,966,386) ($2,329,378) Transfer from (to) Rate Stabilization Fund ($3,192,314) $1,755,239 $1,437,075 $0 $0 $0 Debt Service
Existing Debt Service $446,197 $352,315 $352,316 $352,315 $352,314 $352,314 Proposed Debt Service $0 $1,527,306 $1,527,306 $1,527,306 $1,527,306 $3,393,007 Total Debt Service $446,197 $1,879,621 $1,879,622 $1,879,621 $1,879,621 $3,745,321 Capital Projects
Grant Funded $15,000,000 $2,000,000 $0 $0 $0 $0
Debt Funded $2,647,413 $25,716,679 $15,985,746 $12,650,162 $0 $0 Cash Funded $1,149,321 $1,149,321 $0 $1,994,508 $7,972,113 $331,224 Total Capital Projects $18,796,734 $28,866,000 $15,985,746 $14,644,670 $7,972,113 $331,224 Net Cash Change ($3,681,153) ($814,173) ($1,814,650) ($5,022,385) ($11,818,120) ($6,405,923) Fund Balance
Beginning Fund Balance $14,991,556 $11,310,404 $10,496,231 $8,681,581 $3,659,196 ($8,158,924) Ending Fund Balance $11,310,404 $10,496,231 $8,681,581 $3,659,196 ($8,158,924) ($14,564,847) Operating Reserve Target $4,939,183 $5,033,427 $5,298,122 $5,285,882 $5,480,474 $5,682,741 Total Reserve Target $10,506,867 $10,712,465 $11,090,741 $11,194,352 $11,507,114 $11,829,914 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 65

5.3.Wastewater Enterprise Proposed Financial Plan
The financial plan demonstrates that the City's current rates are insufficient to fund the full cost of wastewater service over the planning horizon. The revenue gap results from a combination of rising O&M costs driven by inflation and personnel cost pressures, significant capital investment needs associated with aging treatment plant infrastructure, and new debt service obligations beginning in FY 2027. The proposed multi-year rate adjustment schedule in Table 5-14 is designed to close this gap incrementally, avoiding the rate shock of a single large adjustment while providing the utility with the revenue certainty needed to plan capital projects, maintain financial reserves, and service debt obligations. Because this rate study proposes adjustments for multiple years, all years through FY 2031 are included in the Proposition 218 notice, providing property owners with full transparency regarding the rate trajectory.

Table 5-14. Proposed Revenue Adjustment Schedule
FY Effective Date Annual Rate
Adjustment
Cumulative Sewer
Rate Revenue
Additional Revenue
vs. Current Rates
FY 2026 July 1, 2025 (Current) — $15,297,329 —
FY 2027 July 1, 2026 16.0% $17,822,261 $2,458,243
FY 2028 July 1, 2027 12.0% $20,048,026 $4,616,972
FY 2029 July 1, 2028 6.0% $21,343,708 $5,845,268
FY 2030 July 1, 2029 6.0% $22,723,210 $7,157,034
FY 2031 July 1, 2030 6.0% $24,191,962 $8,557,696
Key factors influencing the need for proposed wastewater revenue adjustments include:
» Cost inflation: Operating costs continue to increase year over year due to inflationary pressures across all departments and expenditure types including power, chemicals, personnel, and infrastructure, among others.
» Aging infrastructure: Ongoing rehabilitation and replacement of existing wastewater infrastructure like collection mains, sewer pump stations, and treatment facilities upgrades and improvements » Planned capital expenditures: CIP project expenditures through FY 2030-31 $86.6 million total or approximately $14.4 million per year on average.

Figure 18 shows the Wastewater Enterprise’s five-year Capital Improvement Plan (CIP) by anticipated funding source. The wastewater system (CIP) from FY 2026 through FY 2031 reflects a substantial investment in treatment plant upgrades, collection system maintenance, and critical infrastructure modernization. The single largest project over the plan period is the Replace Headworks and Influent Pump Station (Project 14410), which totals approximately $40 million across five fiscal years, with peak spending of $15.6 million in FY 2028 and $13.8 million in FY 2029, representing the centerpiece of the capital program. The Main Switchgear and Energy Recovery Electrical System Improvements represent another major near-term investment, with $15.0 million budgeted in FY 2026 and an additional $6.1 million in FY 2027, reflecting urgent electrical infrastructure needs at the treatment facility. The Cogen Replacement/Energy Savings Project—a new project—adds $20.4 million in FY 2027, underscoring the system's commitment to long-term energy efficiency and operational resiliency. When Attachment 1

66 CITY OF WATSONVILLE
complete, the Energy Savings Project will result in less reliance on Pacific Gas and Electric (PG&E) and estimated savings of greater than $800,000 per year in reduced purchased power costs.

Recurring investments in the collection system include Sanitary Sewer Lift Stations and Sanitary Sewer Main Replacement/Repairs, which together escalate incrementally at approximately 2% per year and collectively total roughly $1.9 million over the plan period. Additional near-term expenditures include the Replace Sewer Pump Station 10 – Miles Lane ($1.3 million in FY 2025 carryover), Nature Center ($292,000), System Evaluation and Capacity Assurance Plan ($282,000), and Sewer Pump Station Controls/PLC/SCADA Upgrades ($141,000), each addressing targeted operational and regulatory needs. Several new projects—including Digester Cleaning and Piping Improvements, Dewatering System Improvements, Biosolids PFAS Treatment, Old Headworks Demolition, and Primary Treatment Improvements—currently show no budgeted expenditures within the plan period but reflect anticipated future capital needs that may require funding as the program advances.

A low interest State Revolving Fund (SRF) loan (Replace Headworks and Influent Pump Station) and new revenue bonds (Cogen Replacement/Energy Savings Project) are assumed to finance these two generational wastewater capital projects. The sizing of borrowing is estimated at $37 million for the Headworks SRF loan and $20 million in external borrowing for the Energy Savings Project. Note that a portion of treatment-related CIP are cost-shared with three outside sanitary districts based on the allocation of capacity at the City’s wastewater treatment plant.

Figure 18: Wastewater Enterprise Capital Improvement Plan Figure 19 compares the current and proposed financial plans. Revenues under the proposed financial plan and status quo financial plan are represented by the dark blue and red dashed lines, respectively. Revenue requirements including O&M expenses, debt service, cash funded CIP, and reserve funding are represented by the various stacked bars. Green bars represent drawdown of reserves when negative and buildup of reserves when positive.

Current wastewater revenues under the status quo fail to sufficiently recover O&M expenses by FY 2028. Proposed revenue adjustments are projected to generate $28.6 million in additional rate revenue over the study period compared to current rates.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 67
Figure 19: Wastewater Enterprise Status Quo Versus Proposed Financial Plan Figure 7 shows the Wastewater Enterprise’s projected ending cash reserve balances under the proposed financial plan. The light blue bars indicate the projected ending balance. The operating reserve target and total reserve target (operating plus capital) are represented by the red and blue dashed lines, respectively. Total annual CIP expenditures are represented by the shaded green area. Under the proposed financial plan, reserves achieve the total reserve target in all years of the rate implementation period of FY 2027 through FY 2031.

Figure 20: Proposed Wastewater Enterprise Financial Plan – Projected Reserve Ending Balance The following Table 5-15 presents the proposed financial plan for wastewater based on the proposed revenue adjustment schedule in Table 5-14.

Attachment 1

68 CITY OF WATSONVILLE
Table 5-15. Proposed Financial Plan - Wastewater
Line Item FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Budget Budget Projection Projection Projection Projection Revenue
Sewer Rate Revenue — Current Rates $15,297,329 $15,364,018 $15,431,055 $15,498,440 $15,566,176 $15,634,265 Additional Revenue from Rate Adjustments $0 $2,458,243 $4,616,972 $5,845,268 $7,157,034 $8,557,696 Other Revenue $5,566,082 $5,229,220 $4,389,331 $4,496,832 $4,389,331 $4,767,322 Total Revenue $20,863,411 $23,051,481 $24,437,357 $25,840,539 $27,112,542 $28,959,284 O&M Expenses
Wastewater Treatment $14,639,847 $15,154,437 $16,095,219 $15,926,358 $16,582,955 $17,268,417 Sewer Maintenance $1,453,656 $1,513,125 $1,573,480 $1,636,385 $1,701,953 $1,770,305 Recycling Operations $3,319,592 $2,982,730 $3,103,711 $3,229,833 $3,361,324 $3,498,420 Utilities Administration $115,788 $154,945 $129,217 $101,198 $70,744 $37,702 Laboratory $36,444 $44,835 $32,875 $19,891 $5,819 ($9,409) Environmental & Sustainability $35,648 $36,301 $24,782 $12,288 ($1,243) ($15,876) Engineering Division $39,631 $92,647 $83,370 $73,212 $62,116 $50,023 Field Services $116,125 $154,687 $149,835 $144,362 $138,227 $131,384 Total O&M Expenses $19,756,731 $20,133,707 $21,192,489 $21,143,527 $21,921,894 $22,730,965 Net Revenues $1,106,679 $2,917,774 $3,244,869 $4,697,013 $5,190,648 $6,228,319 Transfer from (to) Rate Stabilization Fund ($3,192,314) $1,755,239 $1,437,075 $0 $0 $0 Debt Service
Existing Debt Service $446,197 $352,315 $352,316 $352,315 $352,314 $352,314 Proposed Debt Service $0 $1,527,306 $1,527,306 $1,527,306 $1,527,306 $3,393,007 Total Debt Service $446,197 $1,879,621 $1,879,622 $1,879,621 $1,879,621 $3,745,321 Capital Projects
Grant Funded $15,000,000 $2,000,000 $0 $0 $0 $0
Debt Funded $2,647,413 $25,716,679 $15,985,746 $12,650,162 $0 $0 Cash Funded $1,149,321 $1,149,321 $0 $1,994,508 $7,972,113 $331,224 Total Capital Projects $18,796,734 $28,866,000 $15,985,746 $14,644,670 $7,972,113 $331,224 Net Cash Change ($3,681,153) $1,644,070 $2,802,322 $822,883 ($4,661,086) $2,151,773 Fund Balance
Beginning Fund Balance $14,991,556 $11,310,404 $12,954,474 $15,756,796 $16,579,678 $11,918,592 Ending Fund Balance $11,310,404 $12,954,474 $15,756,796 $16,579,678 $11,918,592 $14,070,366 Operating Reserve Target $4,939,183 $5,033,427 $5,298,122 $5,285,882 $5,480,474 $5,682,741 Total Reserve Target $10,506,867 $10,712,465 $11,090,741 $11,194,352 $11,507,114 $11,829,914 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 69

CONSOLIDATED FINANCIAL PLAN SUMMARY
The following Table 5-16 presents the consolidated financial plan. It demonstrates that under the proposed rate schedule, the City's wastewater utility will remain financially solvent, maintain adequate reserves, and meet all debt service obligations throughout the planning horizon.

Table 5-16. Consolidated Wastewater Financial Plan Summary (FY 2026–FY 2031) Line Item FY 2026
Budget
FY 2027 Test
Year FY 2028 FY 2029 FY 2030 FY 2031

REVENUE
Sewer Rate Revenue
(Current Rates) $15,297,329 $15,364,018 $15,431,055 $15,498,440 $15,566,176 $15,634,265 Additional Revenue from
Adjustments $0 $2,458,243 $4,616,972 $5,845,268 $7,157,034 $8,557,696 Total Sewer Rate
Revenue $15,297,329 $17,822,261 $20,048,026 $21,343,708 $22,723,210 $24,191,962 Other Revenue $5,566,082 $5,229,220 $4,389,331 $4,496,832 $4,389,331 $4,767,322 Total Revenue $20,863,411 $23,051,481 $24,437,357 $25,840,539 $27,112,542 $28,959,284 O&M EXPENSES $19,756,731 $20,133,707 $21,192,489 $21,143,527 $21,921,894 $22,730,965 Net Operating Revenue $1,106,679 $2,917,774 $3,244,869 $4,697,013 $5,190,648 $6,228,319 Transfer from/(to) Rate
Stabilization Fund ($3,192,314) $1,755,239 $1,437,075 $0 $0 $0

DEBT SERVICE
Existing Debt Service $446,197 $352,315 $352,316 $352,315 $352,314 $352,314 Proposed Debt Service $0 $1,527,306 $1,527,306 $1,527,306 $1,527,306 $3,393,007 Total Debt Service $446,197 $1,879,621 $1,879,622 $1,879,621 $1,879,621 $3,745,321

CAPITAL PROJECTS
Cash Funded Capital $1,149,321 $1,149,321 $0 $1,994,508 $7,972,113 $331,224 Total Capital Projects (All
Sources) $18,796,734 $28,866,000 $15,985,746 $14,644,670 $7,972,113 $331,224 Net Cash Change ($3,681,153) $1,644,070 $2,802,322 $822,883 ($4,661,086) $2,151,773 Beginning Fund Balance $14,991,556 $11,310,404 $12,954,474 $15,756,796 $16,579,678 $11,918,592 Ending Fund Balance $11,310,404 $12,954,474 $15,756,796 $16,579,678 $11,918,592 $14,070,366

5.4.Cost of Service Analysis

5.4.1.METHODOLOGY
The first step in a COS analysis is to determine the revenue required from wastewater rates. The total revenue requirement results from the financial plan in Section 4.3. The framework and methodology used to develop the COS analysis and to apportion the revenue requirement to each customer class is informed by the processes outlined in the Water Environment Federation's (WEF) Manual of Practice No. 27 (MOP 27).

COS analyses are tailored to account for the unique characteristics of each wastewater system. However, there are four distinct steps in every COS analysis to apportion costs to customers in an objective, reasonable, and fair manner:

1. Cost functionalization: Operation and maintenance (O&M) expenses and capital assets are categorized by their function in the system. Sample functions may include collection, conveyance, treatment, solids handling, and customer service, among others.

2. Cost causation component allocation: Functionalized costs are allocated to cost causation components based on the demands each places on the system. The cost causation components include flow volume, biochemical oxygen demand (BOD), total suspended solids (TSS), and fixed customer costs. The revenue Attachment 1

70 CITY OF WATSONVILLE
requirement is allocated accordingly to these components, resulting in the total share of the revenue requirement attributable to each.

3. Unit cost development: The revenue requirement for each cost causation component is divided by the appropriate units of service to determine the unit cost of each. Example units of service include total annual flow volume in gallons per day (GPD), pounds of BOD per day, pounds of TSS per day, and number of accounts.

4. Revenue requirement distribution: Unit costs are applied to each customer class's measured or estimated flow, BOD, TSS, and account count to distribute the revenue requirement across customer classes based on each class's proportional demand on the system.

5.4.2.REVENUE REQUIREMENT FOR RATE RECOVERY
The test year revenue requirement in Table 5-17 represents the total cost of wastewater service that must be recovered through rates after subtracting all non-rate revenue sources. The gross revenue requirement of $23,162,650 includes O&M expenses of $20,133,707, debt service of $1,879,621, and cash-funded capital expenditures of $1,149,321. Non-rate revenues of $5,229,220 and net fund balance and stabilization adjustments of ($111,169) reduce the net revenue requirement to $17,822,261.

Table 5-17. Test Year Revenue Requirement (FY 2027)
Description Operating Capital Total
Revenue Requirements
O&M Expenses $20,133,707 $0 $20,133,707
Debt Service $0 $1,879,621 $1,879,621
Cash Funded CIP $0 $1,149,321 $1,149,321
Total Revenue Requirements $20,133,707 $3,028,942 $23,162,650 Less Revenue Offsets
SEPTIC LOAD CHARGES $800,000 $0 $800,000
FREEDOM SHARE - OPERATIONS COS $32,128 $0 $32,128
PAJARO SHARE - OPERATION COSTS $125,347 $0 $125,347
SALSIPUEDES SHARE - OPERATION $11,153 $0 $11,153
CONNECTION FEES-GENERAL CITY $32,005 $0 $32,005
INTEREST EARNINGS $96,536 $0 $96,536
FREEDOM SHARE - OPERATIONS COS $433,706 $0 $433,706
PAJARO SHARE - OPERATION COSTS $596,346 $0 $596,346
SALSIPUEDES SHARE - OPERATION $119,269 $0 $119,269
PVWMA OPERATIONAL CHARGES $2,982,730 $0 $2,982,730
Total Less Revenue Offsets $5,229,220 $0 $5,229,220
Less Adjustments
Cash Balance $0 ($1,644,070) ($1,644,070)
Mid-Year Increase $0 $0 $0
Transfer from (to) Rate Stabilization Fund $1,755,239 $0 1,755,239 Total Less Adjustments $1,755,239 ($1,644,070) $111,169 Total Revenue to be Recovered from Rates $13,149,248 $4,673,013 $17,822,261 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 71

5.4.3.CUSTOMER CLASSES
The City's wastewater system serves four distinct customer classes, each with different flow characteristics and pollutant loading profiles. Residential customers include single-family residences and multi-family dwelling units.

Commercial High Strength customers include food service establishments—primarily restaurants and bakeries— that discharge wastewater with significantly elevated BOD and TSS concentrations. Commercial Low Strength customers encompass all other commercial customers, including laundries, retail establishments, and offices.

Industrial customers are the seven food processing operations that are metered for actual flow, BOD, and TSS discharge through the City's industrial pretreatment program.

5.4.4.MASS BALANCE ANALYSIS AND SYSTEM FLOWS
The mass balance analysis in Table 5-18 quantifies the volume and pollutant loading contributed to the treatment plant by each customer class using FY 2025 plant influent data. Total plant influent in FY 2025 was 1,835.2 million gallons (MG), with total BOD loading of 4,976.0 thousand pounds, and total TSS loading of 4,810.6 thousand pounds. City of Watsonville customers contributed 1,432.6 MG of flow, 4,516.9 thousand pounds of BOD, and 4,028.5 thousand pounds of TSS. Inflow and infiltration, estimated at 5% of total plant flow, is allocated to all customer classes proportional to their share of total flow.

Table 5-18. Wastewater Plant Mass Balance—FY 2025 Base Year Customer / Source Flow
(mgd)
BOD
(mg/L)
TSS
(mg/L)
Flow
(MG)
BOD
(1,000 lbs)
TSS (1,000
lbs)
City of Watsonville Customers
Residential (SFR & MFR) 2.8 148 272 1,011.4 1,245.1 2,293.7 Commercial High Strength
(Restaurants/Bakeries) 0.1 1,200 600 23.4 234.0 117.0
Commercial Low Strength
(Laundries/Other) 0.4 350 400 148.2 432.9 494.8
Industrial (City measures
flow/BOD/SS) 0.7 1,250 539 249.7 2,604.8 1,123.1
Subtotal — City of Watsonville 3.9 378 337 1,432.6 4,516.9 4,028.5 Outside District Customers
Freedom County Sanitation
District 0.4 148 272 130.0 160.0 295.0
Pajaro County Sanitation District 0.4 148 272 133.5 164.3 303.0 Salsipuedes Sanitary District 0.1 148 272 47.4 58.3 107.5 Subtotal — Outside Districts 0.9 148 272 310.8 382.6 705.5 Inflow & Infiltration 0.3 100 100 91.8 76.6 76.6
Total Plant Influent 5.0 324.9 314.1 1,835.2 4,976.0 4,810.6

5.4.5. COST ALLOCATION METHODOLOGY
The $17,822,261 net revenue requirement is allocated to four cost components—flow, BOD, TSS, and fixed— based on the engineering relationship between each expenditure and its primary cost driver. Flow-related costs include collection system infrastructure, influent pumping, and preliminary treatment. BOD-related costs include biological treatment processes sized in proportion to organic loading. TSS-related costs include clarification, solids Attachment 1

72 CITY OF WATSONVILLE
thickening, dewatering, and biosolids management. Fixed (customer-related) costs include administration, billing, and system access costs incurred regardless of actual usage.

As summarized below in Table 5-19, all personnel costs are allocated 100% to the fixed component, reflecting the City's lean staffing structure where minimum regulatory and operational requirements do not materially change with flow or loading levels. Treatment operations costs in Department 530 are allocated 18.8% BOD, 18.8% TSS,

37.5% flow, and 25.0% fixed. Sewer maintenance operations costs are allocated 75.0% flow and 25.0% fixed.

Recycling operations costs are allocated 20.0% BOD, 20.0% TSS, and 60.0% flow. All support department costs are allocated 100% to the fixed component.

Table 5-19. O&M Cost Allocation by Component and Department (FY 2027) Department BOD TSS Flow Fixed Total
530 – Wastewater Treatment $2,265,595 $2,265,595 $4,531,191 $6,092,056 $15,154,437 531 – Sewer Maintenance $0 $0 $378,305 $1,134,820 $1,513,125 532 – Recycling Operations $530,427 $530,427 $1,591,282 $330,594 $2,982,730 540 – Utilities Administration (Net) $0 $0 $0 $154,945 $154,945 541 – Laboratory (Net) $0 $0 $0 $44,835 $44,835
543 – Environmental & Sustainability (Net) $0 $0 $0 $36,301 $36,301 544 – Engineering Division (Net) $0 $0 $0 $92,647 $92,647 546 – Field Services (Net) $0 $0 $0 $154,687 $154,687
Total O&M $2,796,023 $2,796,023 $6,500,777 $8,040,885 $20,133,707 O&M Percentage 13.6% 13.6% 29.5% 43.4% 100.0%
Table 5-20 presents the allocation of capital costs across three asset classes—Wastewater Treatment Plant (530), Sewer Collection System (531), and Administration & Lab (540/541)—using four cost components: BOD, TSS, Flow, and Fixed. The Wastewater Treatment Plant carries the largest replacement cost at $190.1 million and is allocated across all four components, with Flow representing the largest share at 37.5%, followed by Fixed at

25.0% and BOD and TSS each at 18.8%. The Sewer Collection System, with a replacement cost of $87.6 million, is allocated primarily to Flow (80.0%) and Fixed (20.0%), reflecting the fact that collection infrastructure is driven predominantly by hydraulic capacity rather than wastewater strength characteristics. Administration & Lab, at $668,931, is allocated entirely to the Fixed component, consistent with its role as an overhead function not directly tied to flow or constituent loading.

In aggregate, the total capital cost allocation across all asset classes totals $278.4 million in replacement value. The blended allocation weights across the entire capital program are 12.8% BOD, 12.8% TSS, 50.8% Flow, and 23.6% Fixed. This distribution reflects the system's primary cost driver as hydraulic capacity—consistent with the significant investment in collection infrastructure and treatment plant flow conveyance—while still recognizing the role of wastewater strength and fixed overhead costs in the overall cost of service.

Table 5-20. Capital Cost Allocation by Component
Asset Class BOD TSS Flow Fixed Replacement Cost
530 – Wastewater Treatment Plant 18.8% 18.8% 37.5% 25.0% $190,134,235 531 – Sewer Collection System 0.0% 0.0% 80.0% 20.0% $87,581,033 540/541 – Admin & Lab 0.0% 0.0% 0.0% 100.0% $668,931
Total Capital Allocation 12.8% 12.8% 50.8% 23.6% $278,384,198

5.4.6.DEVELOPMENT OF UNIT COSTS
As shown below in Table 5-21, unit costs are calculated by dividing the total revenue requirement allocated to each cost component by the total units of service contributed by City customers. These unit costs serve as the basis for Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 73
both the COS allocation to customer classes and, for industrial customers, the direct rate charges for flow, BOD, and TSS.

Table 5-21. Unit Cost Development (FY 2027)
Cost
Component
O&M Revenue
Requirement
Capital Revenue
Requirement
Total Revenue
Requirement
Units of
Service
Unit
Definition Unit Cost
Flow $3,873,163 $2,372,984 $6,246,147 1,432.6 MG $4,359.88/MG BOD $1,787,357 $598,431 $2,385,787 4,516.9 1,000 lbs $528.20/1,000 lbs
TSS $1,787,357 $598,431 $2,385,787 4,028.5 1,000 lbs $592.22/1,000 lbs
Fixed $5,701,373 $1,103,167 $6,804,540 16,185 # Accounts $420.41/account Total $13,149,248 $4,673,013 $17,822,261 — — —

5.4.7. ALLOCATION OF COSTS TO CUSTOMER CLASSES
Applying the unit costs (shown in Table 5-21) to each customer class's measured flow, BOD loading, TSS loading, and account count yields the total cost of service attributable to each class, as summarized below in Table 5-22.

The residential class accounts for 71.8% of the COS, reflecting both the large number of residential accounts (15,136, representing 93.5% of total City accounts) and the residential class's significant flow and TSS contributions. The industrial class accounts for 17.6% of the COS, driven primarily by its disproportionately high BOD loading relative to account count.

Table 5-22. Cost of Service Allocation by Customer Class (FY 2027) Customer Class BOD TSS Flow Fixed Total % of Total
Residential (SFR & MFR) $657,660 $1,358,364 $4,409,581 $6,363,527 $12,789,132 71.8% Commercial High Strength $123,609 $69,296 $101,883 $50,870 $345,658 1.9% Commercial Low Strength $228,665 $293,008 $646,195 $387,200 $1,555,067 8.7% Industrial $1,375,853 $665,120 $1,088,488 $2,943 $3,132,404 17.6% Total $2,385,787 $2,385,787 $6,246,147 $6,804,540 $17,822,261 100.0%

5.4.8.COMPARISON OF CURRENT AND PROPOSED COST OF SERVICE Table 5-23 presents a comparison of current and proposed cost of service allocations across the four customer classes served by the City. In FY 2026, the City's total current revenue is $15,364,018, with residential customers (SFR & MFR) contributing the overwhelming majority at $11,172,472—or 72.7% of total revenue. Commercial high-strength and low-strength accounts represent 2.1% and 9.0% of current revenue, respectively, while industrial customers account for 16.2%, or $2,489,752. The proposed FY 2027 cost of service increases total revenue requirements to $17,822,261—a $2,458,243 or 16.0% increase overall—reflecting the City's growing operational, debt service, and capital funding needs.

Under the proposed rates, the proportional share of cost responsibility shifts across customer classes. Residential customers see a slight decrease in their cost share—from 72.7% to 71.8%—despite absorbing the largest absolute dollar increase of $1,616,660, or 14.5%. Industrial customers experience the most notable shift in cost share, rising from 16.2% to 17.6%, with a $642,652 or 25.8% increase, reflecting the cost-of-service analysis attributing a greater proportion of treatment costs to industrial discharge characteristics based on the industrial customers measured flows and loadings. Commercial low-strength accounts see a modest decrease in cost share from 9.0% to 8.7%, while commercial high-strength accounts remain relatively stable at 1.9%. Taken together, the table demonstrates that the proposed rates more precisely align each customer class's financial contribution with its proportional demand on the wastewater system.

Attachment 1

74 CITY OF WATSONVILLE
Table 5-23. Current vs. Proposed Cost of Service Comparison Customer Class Current Revenue
(FY 2026)
Current
Share
Proposed COS
(FY 2027)
Proposed
Share
Change
($)
Change
(%)
Residential (SFR &
MFR) $11,172,472 72.7% $12,789,132 71.8% $1,616,660 +14.5% Commercial High
Strength $323,419 2.1% $345,658 1.9% $22,239 +6.9%
Commercial Low
Strength $1,378,375 9.0% $1,555,067 8.7% $176,692 +12.8% Industrial $2,489,752 16.2% $3,132,404 17.6% $642,652 +25.8% Total $15,364,018 100.0% $17,822,261 100.0% $2,458,243 +16.0%

5.5.Rate Design

5.5.1. RATE DESIGN OBJECTIVES
Rate design is the process of translating COS allocations into a schedule of rates and charges that can be practically administered and billed. A well-designed rate structure recovers the correct amount of revenue from each customer class consistent with the COS analysis, signals cost causation to customers by structuring charges in proportion to the factors that drive costs, is administratively practical using billing data the City already collects, is transparent and understandable, and complies with Proposition 218 by ensuring no customer or class pays more than the cost of service attributable to their usage.

5.5.2. RATE STRUCTURE
The City's wastewater rate structure employs a differentiated schedule designed to align charges with the characteristics of each customer class.
• Residential Monthly Fixed Charge: Residential customers are billed a flat monthly charge per connected dwelling unit. This structure is appropriate because: (1) residential wastewater flows are relatively uniform across accounts, making per-account billing a reasonable surrogate for actual usage; (2) the high proportion of fixed costs in the residential COS allocation supports a fixed-charge billing approach; and (3) the City does not have wastewater meters for residential customers, making a volumetric billing approach impractical. The monthly fixed charge is set to recover the full residential COS allocation from the projected number of residential accounts.
• Commercial Minimum Monthly Fee: All commercial accounts are billed a minimum monthly fee that recovers the fixed (customer-related) costs attributable to commercial accounts. This fee covers the cost of maintaining system access, processing bills, and administering commercial accounts, independent of actual water use. The minimum fee applies regardless of whether an account uses wastewater service in a given month, as the costs of system access are incurred continuously. • Commercial Volumetric Charge (per CCF of water use): In addition to the minimum monthly fee, commercial accounts pay a volumetric charge per hundred cubic feet (CCF) of metered water use. Water use serves as the billing surrogate for wastewater discharge because the City does not meter commercial wastewater flows directly.
• Commercial customers are divided into two categories based on wastewater strength:

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 75
• High-Strength Commercial (Restaurants/Bakeries): Charged at a higher per-CCF rate reflecting elevated BOD and TSS concentrations characteristic of food service operations. • Low-Strength Commercial (Laundries/Other): Charged at a lower per-CCF rate reflecting the more dilute wastewater typical of general commercial operations.

The commercial rate structure satisfies Proposition 218 by differentiating charges based on the actual cost of treating different types of commercial wastewater. Charging all commercial customers the same volumetric rate would require low-strength customers to subsidize the higher treatment cost of high-strength dischargers, which would violate the proportionality requirement.

Industrial Rates (Flow, BOD, TSS): Industrial customers are billed based on actual metered discharge data from the City's industrial pretreatment program. Charges are assessed separately for flow (per million gallons, $/MG), BOD (per 1,000 pounds, $/1,000 lbs), and TSS (per 1,000 pounds, $/1,000 lbs).

5.5.3.DERIVATION OF PROPOSED WASTEWATER RATES
The proposed FY 2027 wastewater rates are derived through the cost-of-service analysis that allocates the City's total revenue requirement across customer classes in proportion to their respective contributions to system costs.

The revenue requirement—encompassing operation and maintenance expenses, debt service obligations, and capital reserve funding—is first functionalized across cost components (Flow, BOD, TSS, and Fixed) based on the engineering characteristics of each asset class, as summarized in the capital cost allocation table. These functionalized costs are then allocated to each customer class using the mass balance data, which quantifies each class's proportional share of flow volume, BOD loading, and TSS loading delivered to the treatment plant. Once the total allocated cost for each customer class is established, the proposed unit rate is calculated by dividing the class revenue requirement by the corresponding units of service—such as number of accounts, CCF of water use, or measured industrial discharge quantities. This methodology ensures that each customer class pays rates that reflect the actual cost of providing wastewater service, consistent with the proportionality requirements of California's Proposition 218.

As summarized below in
Table 5-24, the proposed FY 2027 rates reflect cost-of-service-based adjustments across all customer classes relative to current rates. Residential customers will see a monthly fixed charge increase of $8.91—from $61.51 to $70.42— representing a 14.5% increase, driven by the $12.8 million revenue requirement allocated to the residential class.

Commercial accounts are subject to modest increases across both the minimum monthly fee and volumetric charges. The commercial minimum monthly fee rises 3.3%, from $33.93 to $35.04, while per-CCF charges increase

7.6% for high-strength accounts (from $7.90 to $8.50) and 16.4% for low-strength accounts (from $4.56 to $5.31), with the latter reflecting a larger proportional cost allocation to low-strength commercial users relative to current rates.

Industrial rates reflect the most significant adjustments, driven by the cost-of-service allocation across flow, BOD, and TSS components. The flow charge increases 36.5%—from $3,194.97 to $4,359.89 per million gallons—and the BOD charge rises 66.0%, from $318.28 to $528.20 per 1,000 pounds, indicating that strength-based treatment costs have grown substantially since rates were last set. Notably, the TSS charge decreases 22.7%—from $765.91 to $592.23 per 1,000 pounds—suggesting that the cost allocated to solids removal has declined relative to other Attachment 1

76 CITY OF WATSONVILLE
treatment cost components. Taken together, the proposed rates more accurately align each customer class's charges with the true cost of treating their respective wastewater contributions.

Table 5-24. Derivation of FY 2027 Wastewater Rates by Customer Class Description Revenue
Requirement
Units of
Service
Proposed FY
2027 Rate
Current
Rate
Difference
($)
Difference
(%)
Residential Monthly Fixed
Charge
Residential (SFR & MFR) $12,789,132 15,136 $70.42 $61.51 $8.91 14.5% Commercial Minimum Monthly
Fee
All Commercial Accounts $441,013 1,049 $35.04 $33.93 $1.11 3.3% Commercial Charges per CCF
of Water
Commercial High Strength
($/CCF) $294,788 34,712 $8.50 $7.90 $0.60 7.6%
Commercial Low Strength
($/CCF) $1,167,867 220,163 $5.31 $4.56 $0.75 16.4%
Industrial Charges
Flow ($/MG) $1,088,488 250 $4,359.89 $3,194.97 $1,164.92 36.5% BOD ($/1,000 LB) $1,375,853 2,605 $528.20 $318.28 $209.92 66.0% TSS ($/1,000 LB) $665,120 1,123 $592.23 $765.91 ($173.68) -22.7%

5.5.4. TYPICAL CUSTOMER BILL IMPACTS
The following tables present typical bill impacts for each customer class, helping customers understand how the proposed rates will affect their wastewater bills.

Table 5-25. Residential Monthly Bill Impact (per Dwelling Unit) Current Monthly Bill Proposed Monthly Bill Change ($) Change (%) Single-Family or Multi-Family Residential $61.51 $70.42 +$8.91 +14.5% Table 5-26. Commercial Monthly Bill Impact (FY 2027)
Customer Type Avg. Monthly
Water Use (CCF)
Minimum
Fee
Volumetric
Charge
Total
Current Bill
Total
Proposed Bill
Change
(%)
High Strength – Typical
(Restaurant) 24 $35.04 $204.00 $222.79 $239.04 +7.3%
Low Strength – Typical
(Other Comm.) 20 $35.04 $106.20 $124.77 $141.24 +13.2%
Volumetric charges calculated as: High Strength 24 CCF x $8.50 = $204.00; Low Strength 20 CCF x $5.31 = $106.20. Total proposed bill equals minimum fee plus volumetric charge.

Table 5-27. Industrial Customer Monthly Bill Impacts (FY 2027) Industrial
Customer
Monthly
Flow (MG)
Monthly BOD
(1,000 lbs)
Monthly TSS
(1,000 lbs)
Current
Monthly Bill
Proposed
Monthly Bill
Change
($)
Change
(%)
Customer #1 1.38 22.35 3.14 $13,931 $19,687 +$5,755 +41.3% Customer #2 4.91 90.65 21.17 $60,744 $81,812 +$21,068 +34.7% Customer #3 0.41 4.40 0.63 $3,205 $4,502 +$1,298 +40.5% Customer #4 9.17 62.15 24.17 $67,581 $87,106 +$19,526 +28.9% Customer #5 0.30 12.03 3.19 $7,237 $9,561 +$2,325 +32.1% Customer #6 3.57 20.13 34.20 $44,022 $46,473 +$2,450 +5.6% Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 77
Customer #7 1.37 0.97 2.62 $6,683 $8,027 +$1,343 +20.1% Note: Customer #6 experiences the smallest increase (+5.6%) due to its TSS-heavy load profile. The BOD-heavy customers experience the largest increases, reflecting the updated BOD unit cost.

5.5.5.5.3 PROPOSED WASTEWATER RATE SCHEDULE
Table 5-28 presents the complete proposed rate schedule for inclusion in the Proposition 218 notice for FY 2027 through FY 2031.

Table 5-28. Proposed Wastewater Rate Schedule: FY 2027 through FY 2031.

Rate Component FY 2027 FY 2028 FY 2029 FY 2030 FY 2031

RESIDENTIAL
Monthly Service Charge (per connection) $70.42 $78.87 $83.60 $88.62 $93.94

COMMERCIAL
Minimum Monthly Fee (per account) $35.04 $39.24 $41.60 $44.10 $46.74 High Strength (per CCF of water use) $8.50 $9.52 $10.09 $10.70 $11.34 Low Strength (per CCF of water use) $5.31 $5.95 $6.30 $6.68 $7.08

INDUSTRIAL
Flow (per MG) $4,359.89 $4,883.07 $5,175.25 $5,485.77 $5,814.92 BOD (per 1,000 lbs) $528.20 $591.58 $626.98 $664.60 $704.48 TSS (per 1,000 lbs) $592.23 $663.30 $703.10 $745.28 $790.00 Attachment 1

78 CITY OF WATSONVILLE

6.Solid Waste Rate Study
Raftelis developed a solid waste rate model in Microsoft Excel to project financial calculations over the five-year rate-setting period through FY 2031 (i.e., the “study period”). The City’s fiscal year spans from July 1 through June

30. Projections in future years were generally made based on budget data for FY 2026 and the revised budget for FY 2027 using key assumptions outlined below. Assumptions were discussed with and reviewed by City staff to ensure that any unique characteristics of the Solid Waste Enterprise are accurately addressed. Note that most table values shown throughout this report are rounded to the last digit shown and may not sum precisely to the totals shown.

6.1.Solid Waste Enterprise Revenue Requirements
Section 6.1 includes estimates and projections of annual revenues, O&M expenses, debt service payments, capital expenditures, and reserve funding targets through FY 2031 for the Solid Waste Enterprise (Fund 740 and Fund 741). These projections are necessary to determine annual solid waste rate revenues required over the study period to achieve sufficient cash flow and maintain adequate reserves as well as debt coverage.

6.1.1.REVENUE FROM CURRENT SOLID WASTE RATES
Current Solid Waste Rates
The Solid Waste Enterprise provides garbage, compactor, recycling, and yard waste services for residential and commercial customers. The majority of Solid Waste Enterprise operations is associated with weekly pickup services. However, the Solid Waste Enterprise does also provide one-time temporary services. The City’s current solid waste rates have been in effect since July 2025 and are shown in Table 6-1 (for weekly pickup services) and Table 6-2 (for temporary services). Customers receiving weekly pickup services are billed monthly.

Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 79
Table 6-1: Current Solid Waste Rates for Weekly Pickup Services Current Solid Waste Rates - Monthly Charge per Weekly Pickup Effective July 2025
Cart Service
32 gal $45.41
68 gal $76.21
95 gal $99.32
Container Service
1 cu yd $190.84

1.5 cu yd $277.23
2 cu yd $363.64
3 cu yd $536.45
4 cu yd $709.24
6 cu yd $1,054.85
8 cu yd $1,400.47
Drop Box Service
20 cu yd $3,474.10
25 cu yd $4,338.12
30 cu yd $5,202.14
35 cu yd $6,066.16
40 cu yd $6,930.18
Compactor Drop Box Service
3 cu yd $1,573.26
4 cu yd $2,091.68
10 cu yd $5,202.14
15 cu yd $7,794.20
20 cu yd $10,386.24
22 cu yd $11,423.07
25 cu yd $12,978.30
30 cu yd $15,570.35
35 cu yd $18,162.41
40 cu yd $20,754.45
Solid Waste (Organics) Collections
68 gal $76.21
1 cu yd $190.84
2 cu yd $363.64
3 cu yd $536.45
Attachment 1

80 CITY OF WATSONVILLE
Table 6-2: Current Solid Waste Rates for Temporary Services Current Solid Waste Rates - Charge per Temporary Service Effective July 2025
Temporary Use Containers
1 cu yd $47.72

1.5 cu yd $69.32
2 cu yd $90.92
3 cu yd $134.12
4 cu yd $177.32
6 cu yd $263.73
8 cu yd $350.12
Drop Box Service
20 cu yd (<1/2 full) $436.52
20 cu yd $868.53
25 cu yd $1,084.53
30 cu yd $1,300.54
35 cu yd $1,516.54
40 cu yd $1,732.55
50 cu yd $2,164.56
Compactor Drop Box Service
3 yd Compactor $393.32
4 yd Compactor $522.93
10 yd Compactor $1,300.54
12 yd Compactor $1,559.74
15 yd Compactor $1,948.55
20 yd Compactor $2,596.57
22 yd Compactor $2,855.77
25 yd Compactor $3,244.58
30 yd Compactor $3,892.60
40 yd Compactor $5,188.62
Temporary Special Use Containers* (Wood Waste, Yard Trimmings, & Scrap Metal) 4 cu yd $177.32
6 cu yd $263.73
20 cu yd $868.53
25 cu yd $1,084.53
30 cu yd $1,300.54
35 cu yd $1,516.54
40 cu yd $1,732.55
Temporary Recycling
3 cu yd $134.12
6 cu yd $263.73
15 cu yd $652.53
30 cu yd $1,300.54
Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 81
Projected Solid Waste Billing Units
Solid waste customer account growth projections are necessary to estimate rate revenues over the study period.

City staff provided Raftelis with the number of weekly pickups by service type and size for FY 2026. Raftelis applied a 0.52 percent annual account growth rate to all weekly pickup services in FY 2026 to project the number of weekly pickups each year over the study period (see Table 6-3). This is consistent with account growth assumptions used in the water rate study in Section 4 and wastewater rate study in Section 5.14F 17 City staff provided
the number of temporary services by service type and size for FY 2025. No growth in temporary services is assumed over the study period as the amount of temporary solid waste service does not increase reliably with population growth in the same manner as weekly pickup service. 17 Estimated by Raftelis based on 15-year water service area population growth estimates through 2035 from the City’s recent update to its Water Master Plan.

Attachment 1

82 CITY OF WATSONVILLE
Table 6-3: Projected Solid Waste Weekly Pickups
Number of Weekly
Pickups
Actual
FY 2025
Projected
FY 2026
Projected
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
Cart Service
32 gal 5,575 5,604 5,633 5,662 5,692 5,722 5,751
68 gal 4,661 4,686 4,710 4,735 4,760 4,784 4,809
95 gal 1,152 1,158 1,164 1,170 1,176 1,182 1,188
Container Service
1 cu yd 46 46 46 46 47 47 47

1.5 cu yd 12 12 12 12 12 12 12
2 cu yd 166 167 168 169 170 171 171
3 cu yd 207 208 209 210 211 212 213
4 cu yd 265 266 267 269 270 272 273
6 cu yd 205 206 207 208 209 210 211
8 cu yd 72 72 72 73 73 74 74
Drop Box Service
20 cu yd 1 1 1 1 1 1 1
25 cu yd 2 2 2 2 2 2 2
30 cu yd 3 3 3 3 3 3 3
35 cu yd 0 0 0 0 0 0 0
40 cu yd 2 2 2 2 2 2 2
Compactor Drop Box Service
3 cu yd 6 6 6 6 6 6 6
4 cu yd 2 2 2 2 2 2 2
10 cu yd 0 0 0 0 0 0 0
15 cu yd 0 0 0 0 0 0 0
20 cu yd 0 0 0 0 0 0 0
22 cu yd 0 0 0 0 0 0 0
25 cu yd 0 0 0 0 0 0 0
30 cu yd 0 0 0 0 0 0 0
35 cu yd 0 0 0 0 0 0 0
40 cu yd 0 0 0 0 0 0 0
Solid Waste (Organics)
68 gal 3 3 3 3 3 3 3
1 cu yd 10 10 10 10 10 10 10
2 cu yd 24 24 24 24 24 25 25
3 cu yd 3 3 3 3 3 3 3
Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 83
Table 6-4: Projected Solid Waste Temporary Services
Number of Services Actual
FY 2025
Projected
FY 2026
Projected
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
Temporary Use Containers
1 cu yd 14 14 14 14 14 14 14

1.5 cu yd 1 1 1 1 1 1 1
2 cu yd 53 53 53 53 53 53 53
3 cu yd 45 45 45 45 45 45 45
4 cu yd 119 119 119 119 119 119 119
6 cu yd 100 100 100 100 100 100 100
8 cu yd 34 34 34 34 34 34 34
On-Call Drop Box Service
20 cu yd (<1/2 full) 23 23 23 23 23 23 23
20 cu yd 218 218 218 218 218 218 218
25 cu yd 64 64 64 64 64 64 64
30 cu yd 439 439 439 439 439 439 439
35 cu yd 91 91 91 91 91 91 91
40 cu yd 266 266 266 266 266 266 266
50 cu yd 0 0 0 0 0 0 0
On-call Compactor Drop Box Service
3 yd Compactor 0 0 0 0 0 0 0
4 yd Compactor 0 0 0 0 0 0 0
10 yd Compactor 0 0 0 0 0 0 0
12 yd Compactor 0 0 0 0 0 0 0
15 yd Compactor 27 27 27 27 27 27 27
20 yd Compactor 70 70 70 70 70 70 70
22 yd Compactor 0 0 0 0 0 0 0
25 yd Compactor 0 0 0 0 0 0 0
30 yd Compactor 45 45 45 45 45 45 45
40 yd Compactor 73 73 73 73 73 73 73
Temporary Special Use Containers* (Wood Waste, Yard Trimmings, & Scrap Metal) 4 cu yd 0 0 0 0 0 0 0
6 cu yd 0 0 0 0 0 0 0
20 cu yd 0 0 0 0 0 0 0
25 cu yd 0 0 0 0 0 0 0
30 cu yd 0 0 0 0 0 0 0
35 cu yd 0 0 0 0 0 0 0
40 cu yd 0 0 0 0 0 0 0
Temporary Recycling
3 cu yd 0 0 0 0 0 0 0
6 cu yd 0 0 0 0 0 0 0
15 cu yd 0 0 0 0 0 0 0
30 cu yd 0 0 0 0 0 0 0
Attachment 1

84 CITY OF WATSONVILLE
Projected Solid Waste Enterprise Revenue Under Current Rates The Solid Waste Enterprise’s revenue sources consist of solid waste rates, interest earnings on cash reserves, and other miscellaneous revenues. The rate revenue projections shown in this section assume that current solid waste rates are effective throughout the study period and represent estimated revenues in the absence of any solid waste rate increases. This status quo scenario provides a baseline from which Raftelis evaluated the need for revenue adjustments (i.e., gross rate revenue increases).

Raftelis projected annual solid waste rate revenues from weekly pickup and temporary services over the study period based on current rates (from Table 6-1 and Table 6-2) and projected number of billing units (from Table 6-3 and Table 6-4). Table 6-5 shows projected solid waste rate revenues under current rates over the study period, calculated as follows:

Weekly pickup service revenue = [ current monthly charge] × [number of weekly pickups] × [12 bills per year] Temporary service revenue = [ current charge] × [number of number of temporary services] Table 6-5: Projected Solid Waste Enterprise Rate Revenue Rate Revenue Actual
FY 2025
Budget
FY 2026
Projected
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
Weekly Pickups
Services
Cart Service $8,260,582 $8,719,323 $8,764,715 $8,810,343 $8,856,208 $8,902,312 $8,948,656 Container Service $7,869,057 $8,294,468 $8,337,648 $8,381,052 $8,424,683 $8,468,541 $8,512,627 Drop Box Service $475,624 $499,405 $502,005 $504,619 $507,246 $509,886 $512,541 Compactor Drop
Box Service
$155,690 $163,475 $164,326 $165,182 $166,041 $166,906 $167,775 Solid Waste
(Organics)
$142,558 $149,685 $150,464 $151,247 $152,035 $152,826 $153,622 Subtotal $16,903,512 $17,826,356 $17,919,158 $18,012,443 $18,106,213 $18,200,471 $18,295,221 Temporary
Services
Temporary Use
Containers
$67,589 $70,970 $70,970 $70,970 $70,970 $70,970 $70,970 On-call Drop Box
Service
$1,370,087 $1,438,590 $1,438,590 $1,438,590 $1,438,590 $1,438,590 $1,438,590 On-call Compactor
Drop Box Service
$750,769 $788,307 $788,307 $788,307 $788,307 $788,307 $788,307 Temporary Special
Use Containers
$0 $0 $0 $0 $0 $0 $0
Temporary
Recycling
$0 $0 $0 $0 $0 $0 $0
Subtotal $2,188,445 $2,297,867 $2,297,867 $2,297,867 $2,297,867 $2,297,867 $2,297,867 Total $19,091,957 $20,124,223 $20,217,025 $20,310,309 $20,404,080 $20,498,338 $20,593,087 Table 6-6 shows all non-rate Solid Waste Enterprise revenues. All non-rate revenues in FY 2027 are based on the City’s FY 2027 revised budget. Interest earnings are held constant over the study period at the FY 2027 revised budget amount. All other non-rate revenues are held constant over the study period at the FY 2027 revised budget amount.

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WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 85
Table 6-6: Projected Solid Waste Enterprise Miscellaneous Revenue Miscellaneous
Revenue
Actual
FY 2025
Budget
FY 2026
Projected
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
Drop Off Facility $270,087 $230,000 $230,000 $230,000 $230,000 $230,000 $230,000 Interest Earnings $869,342 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 Other Revenue $287,582 $0 $0 $0 $0 $0 $0
Grants $23,285 $0 $0 $0 $0 $0 $0
Operating Transfers In $0 $0 $0 $0 $0 $0 $0
Total $1,450,297 $250,000 $250,000 $250,000 $250,000 $250,000 $250,000

6.1.2.SOLID WASTE ENTERPRISE O&M EXPENSES
Solid Waste Enterprise operations and maintenance (O&M) expenses are annual recurring expenses necessary to operate and maintain the solid waste collection and disposal system. Solid Waste Enterprise expenses excluded from O&M expenses in this study include debt service payments, Capital Improvement Plan (CIP) expenditures, and non-cash expenses (such as depreciation). Raftelis projected Solid Waste O&M expenses over the study period based on the City’s FY 2027 revised budget and annual inflationary assumptions shown in Table 6-7. All inflationary assumptions are consistent with assumptions used in the water rate study in Section 4 and wastewater rate study in Section 5. The general inflation rate is consistent with long-term changes in the Consumer Price Index (CPI). All other O&M expense inflationary assumptions shown were developed by Raftelis based on professional judgement and industry trends and reviewed by City staff.

Table 6-7: Inflationary Assumptions for Solid Waste Enterprise O&M Expenses Inflationary Category Annual Inflation
General 3.0%
Salary 3.0%
Benefits 5.0%
Utilities 4.0%
Inter-Dept charges 5.0%
Table 6-8 shows a summary of projected Solid Waste Enterprise O&M expenses over the study period. It is projected that O&M expenses will increase by approximately 3.0 percent per year on average over the study period.

All O&M expenses in FY 2027 are from the City’s FY 2027 revised budget.

All O&M projections for FY 2028-FY 2031 were calculated by increasing FY 2027 revised budget amounts by the assumed annual inflationary increases in Table 6-7 (each line item O&M expense from the FY 2027 revised budget was assigned to one of the five inflationary categories shown).

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86 CITY OF WATSONVILLE
Table 6-8: Solid Waste Enterprise O&M Expenses
O&M Expenses
Actual
FY 2025
Budget
FY 2026
Revised Budget
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
Collections (570)
Personnel $3,288,601 $3,609,476 $3,802,848 $3,992,990 $4,192,640 $4,402,272 $4,622,386 Operations $11,145,477 $10,150,103 $9,819,249 $10,163,222 $10,519,982 $10,890,037 $11,273,913 Subtotal $14,434,078 $13,759,579 $13,622,097 $14,156,213 $14,712,622 $15,292,309 $15,896,299 Street Sweeping (571)
Personnel $256,104 $257,698 $268,801 $282,176 $296,220 $310,966 $326,449 Operations $192,696 $189,014 $190,363 $196,074 $201,956 $208,015 $214,255 Subtotal $448,801 $446,712 $459,164 $478,250 $498,176 $518,981 $540,704 Material Recycling (572)
Personnel $797,988 $850,429 $894,972 $939,721 $986,707 $1,036,042 $1,087,844 Operations $551,743 $726,323 $732,527 $754,793 $777,738 $801,384 $825,751 Subtotal $1,349,730 $1,576,752 $1,627,499 $1,694,513 $1,764,445 $1,837,426 $1,913,595 Landfill (575)
Personnel $322,319 $532,165 $561,033 $589,085 $618,539 $649,466 $681,939 Operations $486,811 $727,023 $729,196 $751,236 $773,945 $797,342 $821,451 Subtotal $809,130 $1,259,188 $1,290,229 $1,340,321 $1,392,483 $1,446,808 $1,503,390 Landfill Closure (576)
Personnel $0 $0 $0 $0 $0 $0 $0
Operations $14,025 $150,761 $150,761 $150,761 $150,761 $150,761 $150,761 Subtotal $14,025 $150,761 $150,761 $150,761 $150,761 $150,761 $150,761 Total $17,055,764 $17,192,991 $17,149,750 $17,820,057 $18,518,487 $19,246,284 $20,004,749 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 87

6.1.3.SOLID WASTE ENTERPRISE CAPITAL IMPROVEMENT PLAN
The City has planned approximately $12.8 million in Solid Waste Enterprise capital expenditures between FY 2027 and FY 2031. This amounts to $2.6 million per year on average over the study period. Detailed CIP project costs are shown through FY 2031 in Table 6-9. City staff provided all CIP project costs estimates in current dollars. Raftelis then inflated all costs by 2 percent per year beginning in FY 2027 based on long-term changes in the Engineering-News Record Construction Cost Index. The most significant CIP project costs over the study period are associated with replacing collection vehicles, Container Area/Stormwater Improvements at MSC, and Public Drop Off Facility Improvements.

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88 CITY OF WATSONVILLE
Table 6-9: Detailed Solid Waste Enterprise Capital Improvement Plan (FY 2025-FY 2031) Solid Waste Enterprise CIP Projects Actual
FY 2025
Budget
FY 2026
Projected
FY 2027
Projected
FY 2028
Projected
FY 2029
Projected
FY 2030
Projected
FY 2031
Solid Waste Document Management $71,000 $0 $0 $0 $0 $0
Collection Vehicles $1,230,101 $1,428,000 $0 $1,591,812 $0 $1,656,121 Container Truck $160,139 $0 $245,335 $0 $270,608 $0
Gas Emission Monitoring System $20,808 $0 $0 $0 $0 $27,602 Public Drop Off Facility Improvements $439,111 $816,000 $0 $0 $0 $0 Nature Center Building $167,394 $0 $0 $0 $0 $0
MSC Kitchen Repairs $11,502 $0 $0 $0 $0 $0
Landfill Water Truck $0 $364,140 $0 $0 $0
Green Waste Chipper $200,000 $0 $0 $0 $0 $0
Landfill Vehicles $40,000 $61,200 $0 $0 $0 $0
Fuel Trailer $250,000 $0 $0 $0 $0 $0
Street Sweeper $400,000 $0 $624,240 $0 $0 $0
Roll-Off Truck $357,000 $0 $0 $378,851 $0
Container Area/Stormwater Improvements at MSC $510,000 $2,080,800 $0 $0 $0 Landfill Gas Wells Maintenance $101,876 $102,000 $104,040 $106,121 $108,243 $110,408 Landfill Scale System $78,990 $6,510 $0 $0 $0 $0 $0
Replace Dozer $0 $0 $0 $0 $0
Replace Scraper $0 $0 $0 $0 $0
Landfill Property Improvements $94,572 $200,000 $102,000 $104,040 $106,121 $108,243 $110,408 Landfill Cell IV Opening $4,348,400 $162,634 $0 $0 $0 $0 $0 Landfill Closure $1,252,039 $159,525 $255,000 $260,100 $265,302 $270,608 $276,020 Total $5,774,001 $3,620,600 $3,631,200 $3,782,695 $2,069,356 $1,136,554 $2,180,560 Attachment 1

WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 89
CIP projects are primarily funded by rates and cash reserves (referred to as “pay-as-you-go”) or by issuing debt.

Potential grant funding for CIP projects through FY 2031 is uncertain and was not considered in this study. The City does not expect to issue new debt to fund Solid Waste Enterprise CIP projects over the next five-year implementation period. All CIP expenditures over the ten-year horizon are assumed to be funded by rates and cash reserves as shown in Figure 21.

Figure 21: Solid Waste Enterprise CIP Summary

6.1.4.SOLID WASTE ENTERPRISE DEBT SERVICE
The Solid Waste Enterprise currently has three existing debt service obligations (see Table 6-10). The proposed financial plan does not propose new debt service obligations.

Table 6-10: Solid Waste Enterprise Existing Debt Service Existing Debt Service FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 PG&E 2019 Notes $972 $0 $0 $0 $0 $0
iBank Loan $378,148 $378,027 $377,901 $377,771 $377,339 $377,339 Master Lease Purchase
Agreement $337,691 $0 $0 $0 $0 $0
Total $716,811 $378,027 $377,901 $377,771 $377,339 $377,339

6.1.5.SOLID WASTE ENTERPRISE FINANCIAL POLICIES
Debt Coverage
Debt coverage indicates whether an agency is able to meet annual debt service payments and is defined as the ratio of net operating revenues (total revenues less operating expenses) to annual debt service. Although the Solid Waste Enterprise currently has no debt service coverage requirement on its existing debt, maintaining sufficient debt coverage may benefit the Solid Waste Enterprise by providing lower cost debt financing options over the next ten years.

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90 CITY OF WATSONVILLE
Reserve Targets
Adequate cash reserves are required to meet operating, capital, and debt service requirements. No changes are proposed to the Solid Waste Enterprise’s existing reserve policies. Operating reserves provide funds to meet ongoing cash flow requirements related to operating expenses. The current operating reserve target is equal to 25 percent of annual O&M expenses or three months of working capital. Capital reserves are maintained to provide available funds for CIP project costs. The current capital reserve target is equal to 2 percent of the replacement cost of the Solid Waste Enterprise capital assets. Table 6-11 summarizes the Solid Waste Enterprise’s key financial policies relevant to this rate study. Table 6-12 shows projected operating and capital reserve targets over the study period based on the reserve policies outlined.

Table 6-11: Solid Waste Enterprise Financial Policies
Financial Policy Target/Requirement
Debt Coverage
Required Debt Coverage Ratio N/A
Reserve Targets
Operating Reserve Target 25% of annual Solid Waste Enterprise O&M expenses Capital Reserve Target 2% of replacement cost of Solid Waste Enterprise capital assets Table 6-12: Solid Waste Enterprise Reserve Targets
Reserve FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Operating Reserve15F
18 $4,298,248 $4,287,438 $4,455,014 $4,629,622 $4,811,571 $5,001,187 Capital Reserve16F
19 $653,111 $666,173 $679,497 $693,086 $706,948 $721,087 Total $4,951,359 $4,953,611 $5,134,511 $5,322,708 $5,518,519 $5,722,274 18 Equal to 25 percent of annual projected Solid Waste Enterprise O&M expenses (from Table 6-8). 19 Equal to 2 percent of current replacement cost of Solid Waste Enterprise capital assets and escalated by 2 percent each subsequent year to account for capital cost inflation (consistent with inflationary assumptions used to escalate CIP project costs).

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WATER, WASTEWATER, AND SOLID WASTE RATE STUDY 91

6.2.Solid Waste Enterprise Proposed Financial Plan
The Solid Waste Enterprise must increase its revenues from rates over the study period to adequately fund its operating and capital expenditures, meet required debt coverage, and maintain sufficient reserve funding. Raftelis worked closely with City staff to determine appropriate solid waste revenue adjustments. Operating and capital funding needs over the next five years will require increases in rate revenues to maintain the solid waste fund as a financially sustainable Enterprise. Customer affordability was a key consideration as well due to the magnitude of revenue adjustments considered over the study period. Raftelis and City staff recommend that 2.0 percent revenue adjustments be implemented annually over the next five fiscal years (see Table 6-13). Revenue adjustments represent annual percent increases in total rate revenue relative to rate revenue generated by the prior year’s solid waste rates.

Table 6-13: Proposed Solid Waste Enterprise Revenue Adjustments Fiscal Year Effective Date Revenue
Adjustment
FY 2027 July 1, 2026 2.0%
FY 2028 July 1, 2027 2.0%
FY 2029 July 1, 2028 2.0%
FY 2030 July 1, 2029 2.0%
FY 2031 July 1, 2030 2.0%
Proposed financial plan results are shown in Table 6-14. Revenue adjustments (Line 3) represent additional rate revenues collected each year as a result of proposed revenue adjustments in Table 6-13. With the addition of proposed revenue adjustments, Raftelis projects that the Solid Waste Enterprise reserve balances will remain above the total reserve (equal to operating plus capital reserve) target in all years.

Under the proposed financial plan, debt coverage is projected to be strong in all years of the study period. Note that the Solid Waste Enterprise currently has no formal debt coverage requirement. However, projected debt coverage ratios of over 1.5 demonstrate the ability to meet existing debt service obligations and potentially take on additional future debt beyond the study period, if required. The proposed revenue adjustments are necessary to address increasing operational costs due to inflation and to provide viable funding for planned CIP projects over the next ten years.

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92 CITY OF WATSONVILLE
Table 6-14: Proposed Solid Waste Enterprise Financial Plan Proforma Line Description FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 1 Revenue
2 Solid Waste Rate Revenue from Current Rates $20,124,223 $20,217,025 $20,310,309 $20,404,080 $20,498,338 $20,593,087 3 Revenue Adjustments $0 $404,340 $820,536 $1,248,893 $1,689,722 $2,143,345 4 Other Revenue $250,000 $250,000 $250,000 $250,000 $250,000 $250,000 5 Total Revenue $20,374,223 $20,871,365 $21,380,846 $21,902,973 $22,438,060 $22,986,432 6 7 O&M Expenses
8 Collections $13,759,579 $13,622,097 $14,156,213 $14,712,622 $15,292,309 $15,896,299 9 Street Sweeping $446,712 $459,164 $478,250 $498,176 $518,981 $540,704 10 Material Recycling $1,576,752 $1,627,499 $1,694,513 $1,764,445 $1,837,426 $1,913,595 11 Landfill $1,259,188 $1,290,229 $1,340,321 $1,392,483 $1,446,808 $1,503,390 12 Landfill Closure $150,761 $150,761 $150,761 $150,761 $150,761 $150,761 13 Total O&M Expenses $17,192,991 $17,149,750 $17,820,057 $18,518,487 $19,246,284 $20,004,749 14 15 Net Revenues [Line 5 – Line 13] $3,181,232 $3,721,615 $3,560,788 $3,384,485 $3,191,776 $2,981,683 16 17 Debt Service
18 Existing Debt Service $716,811 $378,027 $377,901 $377,771 $377,339 $377,339 19 Proposed Debt Service $0 $0 $0 $0 $0 $0
20 Total Debt Service $716,811 $378,027 $377,901 $377,771 $377,339 $377,339 21 22 CIP Expenditures
23 Debt Funded $0 $0 $0 $0 $0 $0
24 Cash Funded $3,620,600 $3,631,200 $3,782,695 $2,069,356 $1,136,554 $2,180,560 25 Total CIP Expenditures $3,620,600 $3,631,200 $3,782,695 $2,069,356 $1,136,554 $2,180,560 26 27 Net Cash Change [Line 15 – Line 20 -Line 24] ($1,156,179) ($287,612) ($599,807) $937,359 $1,677,883 $423,784 28 29 Beginning Fund Balance $11,832,052 $10,675,873 $10,388,261 $9,788,454 $10,725,812 $12,403,695 30 Ending Fund Balance [Line 27 + Line 29] $10,675,873 $10,388,261 $9,788,454 $10,725,812 $12,403,695 $12,827,480 31 32 Operating Reserve Target $4,298,248 $4,287,438 $4,455,014 $4,629,622 $4,811,571 $5,001,187 33 Total Reserve Target $4,951,359 $4,953,611 $5,134,511 $5,322,708 $5,518,519 $5,722,274 34 35 Projected Debt Coverage [Line 15 ÷ Line 20] 4.44 9.84 9.42 8.96 8.46 7.90 36 Required Debt Coverage N/A N/A N/A N/A N/A N/A
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