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Attachment D electric and natural gas utilities, but I argue that the rate design goals stated above still apply. To restate goal #2, it is important to send appropriate price signals to customers by reflecting the cost of serving them. Using the tax levy as a recovery mechanism is not optimal in relation to this rate design goal, as it would undervalue utility services on customers' bilis. This situation could lead to a decrease in water conservation, since customers may perceive water as "cheap." It could also lead to customer confusion since it would be less clear as to why the City needs to significantly increase the tax levy and/or potentially issue bonds. To compound the issue, if utility capital expenditures are funded through the tax levy, the risk is that a future Council will not fully understand the value of the City's utility in context with all of the other services funded through the tax levy. The City's levy is discretionary in a way that utility rates are not. Utility infrastructure is expensive and needs to be maintained, regardless of the tax levy set in any given year. If the levy is not set high enough to pay for the capital needs of the utility, the City could be faced with a situation where it needs to issue bonds in order to pay for the infrastructure. In that situation, customers would have the additional financial burden of paying interest on expenditures that could have been directly recovered through rates. 3. Rate changes should be gradual in order to limit rate shock to customers. As discussed above, Roseville already charges almost all of its fixed costs through its base charge. Therefore, this is not the same risk of rate shock in increasing base charges as in electric and natural gas IOU rates. There is risk of rate shock through user fees as the cost of purchasing water increases, however those increases can be somewhat mitigated by conservation. 4. Rates should be understandable and easy to administer. It appears to me that the City's current utility rate structure is understandable and easy to administer. Some customer education is always necessary, but the City's rates generally follow good rate design principles. It is for this reason the recent discussions to shift funding for utility infrastructure from rates to the tax levy gives me significant pause. Collecting fixed costs through the base charge provides important transparency to all parties involved, whether they are the customer, City Finance Staff, or the Council. Shifting capital expenditure funding from utility rates to the tax levy eliminates this transparency. If utility capital expenditures are buried in the tax levy, and ultimately property taxes, customers will no longer see the full cost of providing these utility services to their point of service. As discussed previously, this greatly undervalues the utility and could put it at risk to materially under-recover its full capital costs. If it is the Council's goal to provide relief to a certain population of residents, I suggest taking a more targeted approach. Specific programs maintain transparency in which population is Page 4 of 5