That the City Council and Utility Authority:
A. Conduct a public hearing on a resolution amending the Master Schedule of Fees pertaining to water and sewer usage, connections and fees; and,

B. APPROVE AND ADOPT RESOLUTION NO. CC ____ & UA 2023-____ ENTITLED: A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF LA HABRA AND THE LA HABRA UTILITY AUTHORITY AMENDING THE MASTER SCHEDULE OF FEES PERTAINING TO WATER AND SEWER USAGE, CONNECTIONS AND FEES.

In December 2021, the City Council/Authority Directors adopted a two-year water and sewer rate structure that adjusted fees to provide the necessary resources to provide operating and capital funding for the Water and Sewer funds. The approved rate structure went into effect on January 1, 2022, and will continue through December 31, 2023.
 

In May 2023, the La Habra Utility Authority (Authority) entered into an agreement with Raftelis Financial Consultants, Inc. to reevaluate the water and sewer costs of service and to develop a five-year financial plan in accordance with Proposition 218 regulations. The goal of this review and study was to balance the Authority’s water and sewer revenues against planned and projected expenses, while maintaining prudent operating and capital reserves, and maintaining required debt service coverage levels.

The California Domestic Water Company (CDWC) produces and delivers to the Authority approximately 5,900 acre-feet (AF) of water annually for La Habra water customers, accounting for approximately 69 percent of the City’s total annual water needs (Attachment 8). Their supply source comes from groundwater pumped out of the Main San Gabriel Basin (Basin). 

Drought conditions in recent years, combined with higher water demand, drew the Basin’s groundwater down to historically low levels. In 2017, the Basin Watermaster developed a plan to correct the declining groundwater elevations in the Basin by purchasing imported water from the Metropolitan Water District (MWD) and allowing it to percolate into the Basin’s groundwater table. The Watermaster established a replenishment assessment fee charged to all water producers in the Basin to pay for the cost of the imported water. This fee continues to be incorporated into CDWC’s rates for all water that they produce and deliver to the Authority. In Fiscal Year 2021-2022 this replenishment fee cost the Authority $1.23 million based on the amount of water purchased that year, and comprised approximately 39% of the Authority's total water purchase cost from CDWC.
 

The Authority currently owns 2,580.25 common stock CDWC shares. Each share entitles the Authority to a calculated amount of water based on the number of shares owned and the acre-foot (AF) per share ratio of water allocated for that fiscal year. The AF/share ratio is adjusted annually and is dependent upon available water supplies within the Basin.  Historically, this ratio has averaged 1.55 AF/share, ranging as high as 1.90 AF/share in 2007 to as low as 1.35 AF/share in 2005.

Due to continuing water production demands being placed on the Basin, beginning in Fiscal Year 2023/2024, the production ratio was set at 1.45 AF/share, which is consistent with the prior fiscal year. Based on the current amount of water provided per CDWC share, and assuming the same level of water purchased by the Authority in Fiscal Year 2022-2023, the projected cost increase to the Authority is approximately $181,381 in Fiscal Year 2023-2024 and approximately $355,944 in Fiscal Year 2024-2025 as the cost to purchase water increases each year.

The Authority’s planned water and sewer system capital expenditures are generally funded through rate-based revenues on a "pay-as-you-go" basis.  Projected capital expenditures for the Water Enterprise Fund are $1.8 million during Fiscal Year 2023-2024 and $1.8 million in Fiscal Year 2024-2025.  Projected capital expenditures for the Sewer Enterprise Fund are $435,000 during Fiscal Year 2023-2024 and $435,000 in Fiscal Year 2024-2025. The rate study incorporated these planned capital expenditures to ensure both respective funds can maintain adequate reserve levels once construction is complete. The water fund’s target reserve level is approximately $6.1 million and the sewer fund’s target reserve level is approximately $1.2 million.
 

Raftelis Report
Raftelis has prepared two detailed reports, one for the Water fund and another for the Sewer fund. Both reports reflect proposed changes to the existing rates and the methodology utilized in calculating the new rate structure, and both were updated and revised in 2023. The water report proposes rate adjustments through Fiscal Year 2035 and the sewer report proposes rate adjustments through Fiscal Year 2035. 

Water demands continue to fluctuate due to prior year significant drought conditions, followed by a year of significant rainfall last year. Due to these fluctuations, and in anticipation of potential changes in Basin water levels next year, staff recommends adopting a shorter term two-year rate adjustment, which will allow time to re-evaluate the status of water supplies at a future date. This will also allow staff to review capital infrastructure needs and the Authority's operating/capital costs for both water and sewer operations over the next two years. If approved by the Authority, staff recommends that the initial adjustment for both water and sewer rates take effect on January 1, 2024, with the second rate adjustment to take effect January 1, 2025.

The City bills for water consumption in one-hundred cubic foot increments (ccf), also referred to as “units” on a water bill.  Each billing unit (or ccf) represents 748 gallons of water. La Habra’s current water rate is a tiered volumetric structure for residential use and a fixed volumetric structure for multi-family, commercial, municipal, irrigation, and fireline customers.  Each user group has a fixed monthly fee based upon the size of the water meter. Raftelis has reviewed and adjusted the current structure and modified the rates based on revised water purchase costs and any changes in existing usage patterns and revenues.  These modifications are Proposition 218 compliant. 

On average, a single-family residence uses 16 ccf of water per month and is served by a 5/8” water meter. At current rates, the water bill for this scenario is $78.18 per month. If the rate adjustments are adopted as proposed, this same hypothetical residence would experience a monthly water bill of $83.96 per month in Calendar Year 2024, and then increase to $89.81 per month in Calendar Year 2025. 
 

A lower-consumption single-family residence that uses 8 ccf of water per month that is served by a 5/8” water meter currently pays on average $40.02 per month. If rate adjustments are adopted as proposed, this same water bill would increase to $43.40 per month in Calendar Year 2024, and to $46.45 per month in Calendar Year 2025. 
 

A higher-consumption single-family residence that uses 24 ccf of water per month that is served by a 5/8” water meter currently pays $133.70 per month. If rate adjustments are adopted as proposed, this same water bill would increase to $143.64 per month in Calendar Year 2024, and to $153.65 in Calendar Year 2025. 

Raftelis has reviewed and adjusted the current structure and modified the rates based on inflationary factor costs and any changes in existing usage patterns and revenues. These modifications are Proposition 218 compliant. The Sewer rates consist of a monthly fixed charge per dwelling unit by customer class type and a variable charge per 100 cf of water by customer class type. The revenue requirements for each customer class is allocated by the amount of wastewater generated by that class. Because the City operates as a collection-only system, sewer flow is the most defensible rationale for allocating revenue requirements across different customer classes. Staff is proposing a change to the variable rate for single-family households, which would cap the variable rate at 20 ccf. Any additional water use above that cap is assumed to be for irrigation and therefore not generating wastewater. The current and proposed sewer rate structure for each customer class is shown below:

Based upon the average water use of 16 units (ccf) per month for a single-family residence being served by a 5/8” water meter, the current monthly bill is $11.84. If rates are adopted as proposed, this same sewer bill would increase to $13.63 per month in calendar year 2024, and to $14.42 per month in Calendar Year 2025.

Based upon a water use of 8 units per month and being served by a 5/8” water meter, a single-family residence monthly sewer bill is currently $8.32. If rates are adopted as proposed, this same bill would increase to $9.55 per month in Calendar Year 2024, and to $10.10 per month in Calendar Year 2025.

Based upon a water use of 24 units per month and being served by a 5/8” water meter, a single-family residence monthly sewer bill is currently $15.36. If rates are adopted as proposed, this same bill would increase to $15.67 in Calendar Year 2024, and to $16.58 in Calendar Year 2025.

A table and graph showing La Habra’s current and proposed water and sewer rates for a typical single-family residence in comparison with other Orange County cities is shown in Attachment 4.

Prior to implementing new rates, the City and Authority are required to conduct a public hearing in accordance with the requirements of Proposition 218.  This process mandates a 45-day advance notice of the meeting to all property owners within the Authority’s service area. Staff mailed notices to all property owners through First Class mail on October 17, 2023, providing notice 48 days before this public hearing.
 

At the time this report was prepared, staff received a total of one call related to the rate notice. No calls were protesting against the proposed rate adjustments and only one was on a general question regarding the notice itself or about rates in general. In addition to the calls received by staff, six protest letters were sent to the City, which have been included with this report as Attachment 6. The California Constitution requires that cities consider all protests against proposed changes in fees. If written protests against the proposed fees are presented by a majority of owners (over 50 percent) of identified parcels within the area of jurisdiction, the city shall not impose the fees. La Habra mailed out 13,151 notices to all current billing customers. For this public hearing, the City would need to receive 6,576 written protests in order for the City Council to be legally prohibited from approving the proposed fee changes. 

  The table below is a summary of written protests that have been received:
         

Note: Only one official protest is allowed per individual parcel. If a protest letter has multiple signatures, but signatures are from persons located at one individual parcel, (such as two families in one home or many families in a multi-family complex), then only one protest is counted. The City Clerk will keep track of each signature on petition letters mailed in to the City, but will only register official protests for each signature if they can be verified as belonging to an individual parcel.

If the proposed water rate adjustments are approved, and based on current water demand, the rate adjustments are estimated to generate additional revenues of approximately $635,912 in Fiscal Year 2023-2024, and approximately $814,401 in Fiscal Year 2024-2025. If the proposed sewer rate adjustments are approved, the rate adjustments are estimated to reduce annual revenues by approximately $78,825 in Fiscal Year 2023-2024, and approximately $241,305 in Fiscal Year 2024-2025.  The proposed rate adjustments are designed to provide sufficient resources to maintain the water and sewer fund balances in good financial condition, and provide sufficient resources to operate, maintain and improve the City's water and sewer systems and services.