Staff recommends that the City Council reopen the municipal rate hearing which began on May 27, 2025, and reopened on June 23, 2025, conduct a public hearing on wholesale wastewater rates, approve the proposed resolution adopting the wholesale wastewater rates effective July 1, 2025, and close the public hearing.

Public Works engaged AE2S Nexus to conduct a comprehensive cost-of-service rate study for water and wastewater services.  The methodology used in the study adhered to industry-standard practices and proposed rates for each customer class. These proposed rates ensure that the Public Works Department can recover costs proportionally to the expenses incurred in providing services to each customer class in compliance with legal requirements.

On May 27, 2025, the City Council held a public hearing and adopted water rates and fees, as well as wastewater schedules, excluding retail and wholesale schedules.  The public hearing was continued, and on June 23, 2025, Council approved the retail wastewater rates. The public hearing was again continued to allow for further Council consideration of the wholesale wastewater rates.

Since the May 27 meeting, staff has met three times with Par Montana and Phillips 66, and once with Lockwood Water and Sewer District, successfully reaching consensus on FY26 rates.  The agreed-upon adjustments include:

• Calculating capacity charges based on a rolling 7-day average, instead of the maximum daily value;
• Setting Phillip 66's maximum monthly flow at its permitted limit;
• Reassessing inflow and infiltration (I&I) assumptions and recalibrating total loadings to align with the plant's 2038 design capacity.

Both staff and the wholesale customers acknowledge that this methodology is provisional.  As such, Council is being asked to approve rates for FY26 only.  Starting in FY27, we plan to shift to using permitted maximums for allocating capital costs, an approach more aligned with industry best practices, and to establish surcharges for any exceedances beyond those limits. This transition cannot occur in FY26 due to the need for amended permits or agreements and additional data collection.

The attached resolution specifies the proposed rates and fees to be adopted. If the current proposed resolution is approved, rates will be effective retroactive to July 1, 2025. 

City Council may:

• Approve the recommended resolution; or,
• Approve an amended resolution; or
• Not approve a resolution. If Council does not approve a resolution specifying rates and fees for FY26, the rates and fees will continue at current levels and there will be a loss of revenue for the wastewater fund.

Under the agreed-upon changes, wholesale revenues will increase by approximately $238,000 compared to FY25 levels.  However, wholesale wastewater revenues are expected to decrease by an estimated $1.1M compared to the previous calculations. To offset this shortfall, staff recommends decreasing wastewater pipe extension funding by $700,000 and covering the remaining $400,000 with reserve funds.  Rate increases will be necessary in future years to restore reserve levels.