That the City Council/Authority Directors:
A. Receive and file the report from Raftelis Financial Consultants regarding Utility Authority revenue requirements and recommended changes to the City’s Master Schedule of Fees for the Utility Authority Water Funds; and

B. Schedule a public hearing on proposed rate adjustments for the Utility Authority Water and Sewer Funds to be held on Monday, December 6, 2021; and

C. Direct staff to prepare and mail notices to all La Habra property owners regarding the scheduling of a public hearing on Monday, December 6, 2021, to consider the proposed water and sewer rate adjustments for the Utility Authority Water and Sewer Funds.

In January 2020, based upon the recommendations of City staff and advisors with Raftelis Financial Consultants (Raftelis), the City Council/Authority Directors adopted a two-year water and sewer rate structure that adjusted fees to provide the La Habra Utility Authority (Authority) with 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, 2020, and will continue through December 31, 2021.
 

In July 2021 the Authority entered into an agreement with Raftelis to review and evaluate the City's water and sewer costs of service and develop a five-year financial plan in accordance with Proposition 218 regulations.  The goal of this effort was to balance the Authority’s water and sewer revenues against planned and projected expenses, while maintaining prudent operating, capital reserves, and required debt service coverage levels.
 

Several factors impacting the Authority’s Water fund operating costs were considered as part of the rate study, including the following:
 

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 5,900 acre-feet (AF) of water annually for La Habra water customers, accounting for approximately 68 percent of the City’s total annual water needs.  Water supplied by CDWC comes from groundwater pumped from the Main San Gabriel Basin (Basin). 

Drought conditions experienced in the region in recent years, combined with higher water demand, has drawn down the Basin’s groundwater to historically low levels.  In 2017 the Basin Watermaster developed a plan to address declining groundwater levels by purchasing imported water from the Metropolitan Water District (MWD) and allowing it to percolate into the Basin’s groundwater table. To pay for the cost of this purchase, the Watermaster established a replenishment assessment fee charged to all water producers in the Basin for the cost of the imported water, including CDWC. This replenishment assessment fee is incorporated into CDWC’s rates for all water produced and delivered to its customers, including the Authority.

This fee was originally estimated to add $800,000 per year to the Authority's operating costs, but has increased over time to $1.3 million per year. This increase is attributable to the Authority's increased purchase of CDWC water in Fiscal Year (FY) 2020-21.

The Authority currently owns 2,455.25 of CDWC common stock, which entitles the Authority to an amount of water based upon the number of shares owned and the acre-foot (AF) per share ratio of water allocated for that fiscal year.  An AF is defined as the amount of water needed to cover an acre of land with 1 foot of water, which is approximately 326,000 gallons.  The AF/share ratio is adjusted annually and is dependent upon available water supplies within the Basin. 

Historically, this ratio has averaged 1.60 AF/share, though it has fluctuated as high as 1.90 AF/share during "wetter" years and as low as 1.35 AF/share during "drier" years.  For Fiscal Year 2021-2022 the ratio was set at 1.45 AF/share, the same ratio as the prior fiscal year.  Assuming water purchase levels from Fiscal Year 2020-2021 remain unchanged, the projected cost for the Authority's purchase of water during Fiscal Year 2020-2021 will increase by approximately $148,714 compared to Fiscal Year 2020-2021.  For Fiscal Year 2022-2023, that projected cost increase is expected to grow by an additional $133,319. 
 

Capital Improvement Plan and Reserve Levels
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 $2.8 million during Fiscal Year 2021-2022 and an additional $2.8 million during Fiscal Year 2022-2023. Likewise, projected capital expenditures for the Sewer Enterprise Fund are $427,000 during Fiscal Year 2021-2022 and $412,000 during Fiscal Year 2022-2023.

The Raftelis study incorporated these planned capital expenditures into their evaluation to ensure both funds are able to maintain adequate reserve levels once construction is complete. The Water Fund’s target reserve level is approximately $6.3 million and the Sewer Fund’s target reserve level is approximately $1.2 million.  These reserves allow sufficient resources to address most unforeseen or emergency operational issues or system repairs. 

As part of its work, 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. The water report proposes rate adjustments through FY 2026-27 and the sewer report proposes adjustments through Fiscal Year 2025-2026. 

Water demands are expected to continue to fluctuate in the short term due to consumer consumption patterns related to COVID-19 stay and below average rainfall within the region.  Due to potential changes in Basin water levels, rather than recommend a three or four year water rate structure, staff recommends adopting a two-year rate adjustment and then reevaluating the status of future water supply and demand, as well as Authority operating/capital costs for both water and sewer within the next two years.  Furthermore, staff recommends that the first adjustment for both water and sewer rates should take effect on January 1, 2022, with the second adjustment for both water and sewer rates to take effect January 1, 2023.

Water Rates

The City bills for water consumption in one-hundred cubic foot (ccf) increments, more commonly referred to as “units” on a customer water bill.  Each billing unit 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, as well as a fixed monthly fee for each user group based upon the size of the water meter.  Raftelis and staff have reviewed and adjusted the proposed rate structure to reflect water purchase costs and any changes in existing usage patterns and revenues, as well as remain compliant with Proposition 218. 

The current and proposed water rate structure for each customer class is as follows:

There are approximately 13,000 water meters in the City.  Of that amount, approximately 7,800 meters (60%) are classified as residential meters, which utilize a 5/8” water meter. 

On average, a typical single-family residence uses 16 ccf of water per month. Using current rates, and assuming a 5/8" water meter, the water bill for that household at 16 ccf is $71.43 per month. If the rate adjustments are adopted as proposed, this same water bill would increase to $75.88 per month during Fiscal Year 2021-2022 and $78.18 per month during Fiscal Year 2022-2023. 

For a lower consumption single-family residence that uses 8 ccf of water per month, and which is also served by a 5/8” water meter, the typical biil is $38.31 per month. If rate adjustments are adopted as proposed, this household's water bill would increase to $38.84 per month during Fiscal Year 2021-2022 and to $40.02 per month during Fiscal Year 2022-2023. 

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 $119.51 per month.  If rate adjustments are adopted as proposed, this same water bill would increase to $129.80 per month during Fiscal Year 2021-2022 and then increase to $132.10 during Fiscal Year 2022-2023. 

Sewer Rates:
The proposed sewer rate structure will remain the same as previously established and will 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. The proposed rate is slightly lower for most customers as shown below:
 

Based upon 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 $13.04.  If adopted as proposed, this same sewer bill would decrease to $11.84 per month in Fiscal Year 2021-2022, and then remain unchanged at $11.84 per month in Fiscal Year 2022-2023.

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 $9.12.  If adopted as proposed, this same bill would decrease to $8.32 per month in Fiscal Year 2021-2022 and then remain unchanged at $8.32 per month in Fiscal Year 2022-2023.

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 $16.96.  If adopted as proposed, this same bill would decrease to $15.36 in Fiscal Year 2021-2022, and then remain unchanged at $15.36 in Fiscal Year 2022-2023.

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 has prepared a sample notice showing the proposed rate adjustments as Attachment 3.  If approved, the public hearing will be set for Monday December 6, 2021.

Printing costs for the notice will be approximately $3,400 and mailing costs for the notice will be approximately $5,900, for a total of approximately $9,300.  The Adopted Fiscal Year 2021-2022 Water and Sewer Budgets have adequate funding allocated for the printing and mailing of notices. 

If the proposed water rate adjustments are approved, they are estimated to generate additional revenues of approximately $292,547 during Fiscal Year 2021-2022 and approximately $301,719 during Fiscal Year 2022-2023.  If the proposed sewer rate adjustments are approved, they are estimated to reduce annual revenues by approximately $168,000 during Fiscal Year 2021-2022, and approximately $0 during Fiscal Year 2022-2023. Both water and sewer fund balances are currently in sound financial condition.