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Attachment D monthly basis. If the shift was increased to 25 percentage points for both water and sanitary sewer usage, residential customers would save an additional $3.87 on a monthly basis.7 Both strict class allocation of costs, as well as shifting the allocation based on affordability, have merit. Based on its goals, it is up to the Council to decide if, and by how much, it is comfortable with inter-class subsidies. There is almost certainly a range of reasonable answers. Based on my review, the current class allocations do not appear to be unreasonable. b. Recovering Fixed Costs through the Base Char�e It is the goal of electric and natural gas IOUs to recover all of their fixed costs through the base charge. Currently, electric and natural gas base charges are set significantly below the cost to serve residential customers, because it was thought that higher base charges are burdensome to lower-income households. It is a common convention that lower-income households are lower-usage customers, so high base charges are unfairly discriminatory. While there is a correlation, low-income households do not always equal low-usage customers.8 Setting the base charge below cost means the IOUs must charge higher variable rates to recover all of their costs. So lower-income, high-usage residential customers could actually pay more than what it costs to serve them (intra-class subsidies). IOUs are moving toward higher base charges, but the increases must be modest to balance with rate design goal #3, which is to prevent rate shock. My understanding of the current rate structure for the City's utility is that almost all of the fixed costs (infrastructure, personnel, admin) are recovered through base charges, and almost all of the variable costs are charged through the usage fees. Charging rates in this way clearly shows customers what they are paying for. The City of Roseville is already billing its costs in a manner that IOUs will take significant time to achieve. Based on my review, I believe that Roseville's method of calculating base charges is reasonable. c. Recoverin� Fixed Costs throu�h the Tax Levy The Council has discussed the possibility of shifting the recovery of fixed infrastructure costs from base utility rates to the tax levy. This is a recovery mechanism that is not available to � Id. g While lower-income electric and natural gas customers may have smaller houses or make an effort to reduce their usage, these customers may not have the resources to further reduce their usage in ways higher-income households can (e.g. buying more efficient appliances, adding insulation, replacing windows, etc.). I would argue the same is probably true for water usage. Demand is elastic for higher-income amenities such as swimming pools and lawn watering. Lower-income households may not have high demand due to swimming pools or lawn-watering systems, but they may have older pipes that leak, less efficient appliances and toilets, less expensive fixtures that do not have water-saving features, etc. In addition, for both energy and water utility customers, lower-income customers may have other circumstances which increase usage (e.g. more people living in their household, or residents who disabled, unemployed, or retired who are home during the day). Page 3 of 5