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. _____ 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 January 2020 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, 2020, and will continue through December 31, 2021.

In July 2021 the La Habra Utility Authority (Authority) entered into an agreement with Raftelis Financial Consultants, Inc., to evaluate 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 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.
 
Several factors that impact 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 5,900 acre-feet (AF) of water annually for La Habra water customers, accounting for approximately 68 percent of the City’s total annual water needs.  CDWC's supply comes from groundwater pumped out of the Main San Gabriel Basin (Basin). 

Drought conditions in recent years, combined with higher water demand, have drawn 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 incorporated into CDWC’s rates for all water that they produce and deliver to the Authority.

Originally estimated to add $800,000 per year to annual water costs, this fee actually added $1.3 million to total water costs during Fiscal Year 2020-2021.  The higher than anticipated increase is mostly due to increased amounts of water purchased by the Authority from CDWC in 2021.  If the amount of water had been purchased as was originally estimated in 2017, the cost increase to the Authority would have been approximately $957,000.  The replenishment fee comprised approximately 21% of the Authority's $6.1 million water purchase cost for FY 2021.
 

The Authority currently owns 2,455.25 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 1.60 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 demands being placed on the Basin, beginning in Fiscal Year 2021-2022 the ratio was established at 1.45 AF/share, the same level as the prior year.  Based on the current amount of water provided per share, and assuming the same level of water purchased in Fiscal Year 2021-22 as was purchased in Fiscal Year 2020-2021, the projected cost increase to the Authority is approximately $148,714 in Fiscal Year 2021-2022 and approximately $133,319 in Fiscal Year 2022-2023.

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 $2.8 million in Fiscal Year 2022-2023.  Projected capital expenditures for the Sewer Enterprise Fund are $427,000 during Fiscal Year 2021-2022 and $412,000 in Fiscal Year 2022-2023.  The rate study incorporated these planned capital expenditures to ensure both funds can 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.

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.  The water report proposes rate adjustments through Fiscal Year 2027 and the sewer report proposes adjustments through Fiscal Year 2026. 

Water demands continue to fluctuate due to new consumer patterns related to the 2020 COVID-19 "stay at home" orders and the subsequent below average rainfall experienced in the region last winter.  In anticipation of potential changes in Basin water levels next year, and rather than recommend a three to four year water rate structure, staff recommends adopting a shorter term two-year rate adjustment and then reevaluate the status of the water supplies at a future date. This will also allow staff to review infrastructure demands and Authority operating/capital costs for both water and sewer infrastructure over the next two years. Furthermore, staff recommends that the initial rate adjustment for both water and sewer take effect on January 1, 2022, with the second rate adjustment to take effect January 1, 2023

Water Rates
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 rate structure and modified rates based on revised water purchase costs and any changes in existing usage patterns and revenues.  These modifications are Proposition 218 compliant. 

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

There are approximately 13,000 water meters in the City and approximately 7,800 of them are classified as residential, utilizing a 5/8” water meter. 

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 $71.43 per month.  If the proposed rate adjustments are adopted, this same hypothetical residence would experience a monthly water bill of $75.88 per month during Calendar Year 2022, increasing to $78.18 per month during Calendar Year 2023. 
 
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 $38.31 per month.  If rate adjustments are adopted as proposed, this same water bill would increase to $38.84 per month during Calendar Year 2022, and to $40.02 per month in Calendar Year 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 in Calendar Year 2022, and then increase to $132.10 during Calendar Year 2023. 

Sewer Rates
The proposed sewer rate structure will remain the same and consist of a monthly fixed charge per dwelling unit by customer class type and a variable charge per 100 cf off water by customer class type.  The revenue requirements for each customer class are 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.  The current and proposed sewer rate structure for each customer class is 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 rates are adopted as proposed, this same sewer bill would decrease to $11.85 per month in calendar year 2022, and then remain unchanged at $11.85 per month in Calendar Year 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 rates are adopted as proposed, this same bill would decrease to $8.33 per month in Calendar Year 2022 and then remain unchanged at $8.33 per month in Calendar Year 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 rates are adopted as proposed, this same bill would decrease to $15.37 in Calendar Year 2022, and then remain unchanged at $15.37 in Calendar Year 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.  It should also be noted that a change in the sewer fee rate and methodology for large multi-family customers that was previously approved by the City Council for implementation will be initiated in January 2022.

Summary of Resident Calls and Protest Letters:
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 on October 18, 2021, providing notice for 49 days before the public hearing.

At the time this report was prepared, staff received a total of two phone calls related to the rate notice. One call was a protest against the proposed rate adjustments and one was on a general question regarding the notice itself. In addition to the two phone calls received by staff, two protest letters were sent to the City, provided as Attachment 6 to this report. 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 13,473 notices to all current billing customers.  For this public hearing, the City would need to receive 6,737 written protests in order for the City Council to be legally prohibited from approving the proposed fee changes. At the time that this report was prepared, the City received two written protests.

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

Note: Only one official protest is allowed per each individual parcel.  If a protest letter has multiple signatures, but signatures are from persons from 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 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, they are estimated to generate additional revenues of approximately $292,547 in Fiscal Year 2021-2022, and approximately $301,719 in Fiscal Year 2022-2023.  If the proposed sewer rate adjustments are approved, they are estimated to reduce annual revenues by approximately $168,000 in Fiscal Year 2021-2022, and approximately $0 in Fiscal Year 2022-2023.  If these proposed rate structures are approved by the City Council, there will be sufficient resources to maintain the water and sewer fund balances in good financial condition.

ED 9.1          Balanced Fiscal Practices
ED 9.2          Long-Term Infrastructure Viability