That the City Council and Utility Authority:
A.  Receive and file reports from Raftelis Financial Consultants, Incorporated regarding Utility Authority revenue requirements and recommended changes to sewer rates; 

B.  Schedule a public hearing on proposed sewer rate adjustments for Monday, July 20, 2026; and,

C.  Direct staff to prepare and mail hearing notices to sewer customer-of-record.

In December 2023, based upon a staff recommendation following an evaluation conducted by Raftelis Financial Consultants (Raftelis) retained by the Utility Authority, the City Council/Authority Directors adopted a two-year schedule of water and sewer rate adjustments to provide the resources needed to fund water and sewer system costs. The approved rate adjustments began on January 1, 2024.

In June 2025, the La Habra Utility Authority (Authority) entered into an agreement with Raftelis to reevaluate the water and sewer costs of service and to develop a five-year financial plan. The goal of this review and study was to balance the Authority’s water and sewer revenues against planned and projected operating and capital expenses, while maintaining prudent operating and capital reserves, and maintain required debt service coverage levels.

Several factors impacting the Authority’s Water fund operating costs were considered as part of the rate study.

Main San Gabriel Watermaster Replenishment Assessment and Entitlement Acre-Foot Per Share

The California Domestic Water Company (CDWC) produces and delivers to the Authority approximately 5,661 acre-feet (AF) of water annually for La Habra water customers, accounting for approximately 71 percent of the City’s total annual water needs. Their supply source comes from groundwater pumped out of the Main San Gabriel Basin (Basin).  Drought conditions over the past decade, 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 is still incorporated into CDWC’s rates for all water that they produce and deliver to the Authority. Originally estimated to add $800,000 per year, this cost in Fiscal Year 2025-26 is now estimated at $1.2 million per year.

The Authority currently owns 2,581.25 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 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. For perspective, the highest point in the last 20 years was 1.90 AF/share in 2007 and the lowest was 1.35 AF/share in 2005. Starting in Fiscal Year 2024-25, due to an improved Basin water outlook, the ratio was established at 1.60 AF/share, an increase from the previous year’s 1.45 AF/share. Due to current amount of water provided per CDWC share and assuming the same level of water purchased as in Fiscal Year 2024-25, the projected increase in cost to the Authority is approximately $112,061 in Fiscal Year 2025-26 and approximately $111,849 more in Fiscal Year 2026-27. 

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 Fund are $1.8 million during Fiscal Year 2025-26 and $1.9 million in Fiscal Year 2026-27.  Projected capital expenditures for the Sewer Fund are $437,000 during Fiscal Year 2025-26 and $459,000 in Fiscal Year 2026-27. 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 $7.0 million and the sewer fund’s target reserve level is approximately $1.4 million.

Raftelis has prepared two detailed reports, one for the Water fund and another for the Sewer fund. Both were updated and revised in 2026. The water report proposes no changes to the water rates and the wastewater report reflects proposed changes to the existing rates and the methodology utilized in calculating the new rate structure. The sewer report proposes adjustments through Fiscal Year 2030. Water demands continue to fluctuate significantly when the region experiences significant drought conditions in one year followed by above average rainfall the next year.

Staff recommends no change to water rates at this time and the adoption of sewer rate adjustments over the next two years.  Staff recommends that the initial rate adjustment for sewer take effect on August 1, 2026, with a second rate adjustment taking effect January 1, 2027.

Because of potential changes in Basin water levels and availability in the coming water year, Staff recommends that as the end of the two-year rate cycle approaches, the status of water supplies and demands, as well as Authority operating/capital costs for the water system, be reevaluated. The sewer system operating/capital costs can also be included in that reevaluation at that time. Based on that future study, staff can report back to Council/Authority with updated fiscal information and potential rate recommendations for future years.

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 the current rate structure and has recommended that the rates not be modified at this time.  A copy of the existing water rates is attached to this report as an exhibit.  

Raftelis has reviewed and recommended adjusting the current structure and rates based on inflationary factors costs and 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 hundred cubic feet of water by customer class type. The revenue requirements for each customer class is allocated by the amount of wastewater generated by that class. Since the City operates as a collection-only system, sewer flow is the most defensible rationale for allocating revenue requirements across different customer classes. 

The current and proposed sewer rate structure for each customer class is shown below:

Based on the average water use of 16 units per month for a single-family residence being served by a 5/8” water meter; the current monthly bill is $14.42. If rates are adopted as proposed, this same sewer bill would increase to $15.32 per month in calendar year 2026, and then increase to $16.11 per month in Calendar Year 2027.

Based upon a lower 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 $10.10. If rates are adopted as proposed, this same bill would increase to $10.68 per month in Calendar Year 2026 and then increase to $11.23 per month in Calendar Year 2027.

Based upon a higher 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 $18.74. If rates are adopted as proposed, this same bill would increase to $19.96 in Calendar Year 2026, and then increase to $20.99 in Calendar Year 2027.

Prior to implementing new proposed rates, the City and Authority are required to conduct a public hearing in accordance with the requirements of Proposition 218. This process involves the City providing a 45-day notice, via mail, of the hearing to sewer customers. Staff has prepared a sample notice showing the proposed rate adjustments as Attachment 3. If approved, the public hearing will be set for Monday, July 20, 2026. Pursuant to Proposition 218 if the City receives, by the close of the public hearing, written protests from customers-of-record (or parcel owners) of a majority of parcels affected by the rate increase, the Council will not be able to approve the proposed increase.

A new provision in state law permits the City to give interested persons the opportunity to also file written “objections” in connection with the public hearing. The proposed notice provides for such objection opportunity. The deadline for filing objections occurs in advance of the public hearing, and the City must respond to any objection prior to the public hearing. The advantage of providing for objections is that (i) only parties who have timely filed objections will be able to make certain types of legal challenges to the rate increases after the hearing and (ii) any such legal challenge will be limited to consideration of issues raised in the objections and decided based primarily on the contents of the objection, the City’s response, and any evidence that is part of the record of the public hearing.