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  Agenda Item   17.    
City Council Meeting
Meeting Date: 11/15/2022  
FROM: Bill Gallardo

Subject:
Proposed Water and Sewer Fees
RECOMMENDATION
Adopt the applicable resolutions to maintain the City’s existing four-tier residential water rate structure; update the City’s existing four-tier residential water rate structure to include “Conservation Rates”; adjust fixed meter charges; allow water consumption rate adjustments to align with wholesale water rate increase; and adjust sewer rates.  Receive and file the attached Water and Sewer Fee Studies.
BACKGROUND/DISCUSSION
Brea's water system service area includes the City of Brea, which has a population of more than 45,600. Growth from development within the City limits, as well as from annexation of underdeveloped property, is expected to increase the water demand with a projected population growth to approximately 49,250 by 2030. In FY 2021-22, Brea had roughly 212 miles of potable water pipeline, seven storage reservoirs (69.5 million gallons storage capacity), five booster stations, 94 pressure reducing stations, six supply connections serving approximately 13,437 customers and delivered more than 10,000 acre-feet of water. But, for a very small amount of well water used for golf course/park irrigation, Brea imports 100% of its water from California Domestic Water Company and Metropolitan Water District.

Timeline

On September 21, 2021, the City entered into an agreement with NewGen Strategies & Solutions, LLC (NewGen) for a Water, Sewer User Rate (the Study) and Impact Fees Studies. The City Council then participated in a Water and Sewer Rate Study Working Session on October 19, 2021.   At that meeting, the City Council was briefed on the methodology to be used and factors that will affect these rates. On November 10, 2021, interested parties were encouraged to participate in a Community Outreach Event to learn about the upcoming Water, Sewer, and Impact Fees Studies.  This meeting was available in person as well as online via Zoom. 

A preliminary discussion with the City Council was held on April 19, 2022.  At this meeting, the recommended water rates reflected 20% of the total revenue received would come from fixed meter charges.   Recommended sewer rates followed a budget that incorporated capital improvement projects identified in the adopted 2021 Sewer Master Plan.  For future years, rates were proposed to be adjusted by 2% annually.   At this meeting, the City Council requested the Public Works Department review these sewer projects to determine if any projects could be delayed.

On May 3, 2022, additional proposed water and sewer rates were provided.    Rates were provided to align with industry standards of at least 25% of revenue coming from fixed meter charges.  Sewer rates were realigned to reflect the numbers presented at the April 19th meeting, but now with a 3% annual increase for future years.   Additionally, sewer rates were presented with a reduced list of capital projects.   City Council requested the consultant to provide numbers that reflect a more realistic CPI increase of 5%.  At the conclusion of the meeting, staff requested permission to move forward with the public hearing notification and the maximum rates were being published.   The City Council was made aware they could choose to adopt rates that were lower than those published.

Approximately 14,700 Proposition 218 Hearing Notices were mailed to all Brea property owners on June 1, 2022.   In addition, notices were included in the utility bills mailed on May 31, 2022 and posted on the City's website.   The original Public Hearing date was July 19, 2022.   This date was continued until August 16, 2022 and then further continued to November 15, 2022.

A Community Outreach Event for Water and Sewer Rates was held on June 29, 2022.  This meeting was advertised in a utility billing insert (mailed on May 31); posted on the City's website; displayed on BreaTV; included in the June 2022 edition of the Brea Line Newsletter; and included in City Council announcements.  At this meeting, attendees were provided an overview of water and sewer systems; received water and sewer rate comparison for neighboring agencies; and had an opportunity to ask questions.  This meeting was available in person as well as online via Zoom. 

Water Rate Study

Brea's last completed water rate study was performed in 2015.  Due to City Council foresight and support, water rates have not increased since July 1, 2017.  It is ideal that a new study be performed every five (5) years.

Assumptions made through this study are as follows:
  • Costs will increase 4% each year through FY 2026-27; however, costs are expected to grow by 5.2% annually.
  • The addition of two (2) full-time employees in FY 2022-23, along with the associated vehicle costs.
  • City generated water costs are paid by the City, and the Water Fund pays office space rent, land use, and right-of-way charges.
  • The Study is based upon capital improvements identified in the 2021 Water Master Plan.
  • Cost escalation of 3% per year for water purchased from the City's two wholesale providers.
The Study supports the current tier structure for Brea's residential customers as well as the other customer existing structures.  However, based on the above assumptions, current fee collections do not cover expenditures for FY 2022-23 and FY 2023-24.  This is based on an aggressive capital improvement project plan and revenues in future years will support ongoing operations.  Overall, the Study does not recommend that Brea increase its overall rates. The Study recommends transferring more of its revenue collected to fixed charges.  Currently, Brea collects 17% of its revenue from fixed charges.  The recommendation is to receive 25-30% of water system revenue from fixed charges. This allows more reliance on revenues from fixed meter charges and less reliance on water consumption charges.   This reliance on water consumption becomes evident during conservation.  In such cases, the water system must raise water consumption rates in order to cover operating expenses. 

Water Rates

As previously mentioned, the City's water rates have not increased since July 1, 2017.  Fixed costs represent 63% of the City's annual expenditure budget for water.   Fixed costs include, but are not limited to:  debt service payments, some capital and infrastructure, staff, and ready to serve charges.  During the last water rate study, the City set rates to gradually cover 20% of revenues from fixed charges; however, as costs have increased,  current fixed revenues represent only 17% of total revenues.    
As noted in the attached 2022 Water Rate Study, “The City’s current water rates are sufficient to sustain the City’s water system operations, maintenance, and capital investment over the five-year projection period."  The recommendation is to not increase water rate revenues. However, in an effort to create a more sustainable and stable revenue source for the Water Fund, the Study recommends that the City adopt rates that increase the proportion of fixed revenues from 17% to 25% while reducing the water consumption rates.  Adjusted rates are listed in the attached resolutions.

Currently, Brea's fixed meter charges are one of the lowest in Orange County.   A comparison of water rates from surrounding Orange County cities (as of June 2022) is included in the water rate study as well in the attached presentation.   As can be expected, the City's consumption charges are among the highest due to its reliance on the sale of water to maintain its system.

Thus, staff is proposing two (2) alternatives to address this discrepancy:

Alternative 1. Adjust fixed charges to represent 25% of annual revenue in year one.  No further fixed rate adjustment will be implemented through FY 2024-25, with the exception of pass-through adjustments for wholesale water costs and applicable conservation rates, if needed.

Alternative 2. Adjust fixed charges incrementally over a three-year period.  19% fixed revenues in year one; 22% fixed revenues in year two; and 25% fixed revenue in year three.  Pass-through adjustment for wholesale water costs and applicable conservation rates will be applied, if needed. 

Future Water Rates

Wholesale Water Costs

Included in the water resolution is a pass-through adjustment for the cost of water purchased from Cal Domestic Water Company (CDW) and Municipal Water District of Orange County (MWDOC) for the period of five (5) years beginning with July 1, 2023, the City can adjust water consumption rate changes based upon changes in wholesale water costs.  Annually, both wholesale water providers provide to their customers the anticipated increases.  With this resolution, the City will pass on these costs directly.  Customers will be notified in advance, but a public hearing is not required.   Changes will be implemented as soon as practical provided that at least 30 days' written notice is given to customers.   For FY 2023, these increased costs have been calculated in the rates.  Should wholesale water costs increase by more than 3% annually, an adjustment to water consumption rates may be needed.

Conservation Rates

As mentioned, the City's water rate structure is heavily dependent on water consumption revenue.   When the City water system is not selling enough water (mostly commonly, but not limited to) due to water conservation, the water rates must be adjusted upward in order to meet its operating requirements.   Conservation rates will most like be triggered by State conservation mandates; however, should water sales drop below the needed sales quota, the City may elect to adjust rates accordingly.  Conservation Rates as presented in the attached Water Rate Resolutions are dependent on the revenue the City receives from fixed charges (19%, 22%, or 25%), as well as the reduction of water sales (10%, 20%, or 30%).

Sewer Rate Study

The last completed sewer rate study was conducted in 2006.  The current  2022 Sewer Rate Study (the Study) bases its assumption on the 2021 Sewer Master Plan and proposes rates to support the costs associated with the implementation of this plan.   The rate study assumes that the City will not issue debt to carry out the capital improvements needs to inspect, maintain, repair and replace the sewer system.  

The attached Sewer Rate Study identified that current sewer rates would not be sufficient to cover system expenses in the following five fiscal years and the Sewer Fund balance would fall below the required amount as instructed per its fiscal policies (minimum three (3) months of operating reserve and a capital reserve equal to one-year if capital expenditures).  It is anticipated that all reserves would be depleted by FY 2024-25.  Withstanding potential impacts to the rate payers, sewer rates are recommended to increase one-time largely by 55% ($5.19) and 5% thereafter until FY 2026-27 for single-family residences with a 1" meter.

Assumptions made through this study are as follows:
  • Costs will increase 4% each year through FY 2026-27;
  • Addition of two (2) full-time employees shared with the Urban Runoff Fund (410) in FY 2022-23;
  • City generated sewer costs are paid by the City; and the Sewer Fund pays office space rent and right-of-way charges; and
  • The Study is based upon capital improvements identified in the 2021 Sewer Master Plan.
Sewer Rates

The City levies charges on its sewer customers in order to inspect, maintain, repair, and replace its sewer collection system.

Although sewer rates have been adjusted annually by CPI, the rates have not been adequately adjusted to reflect current costs to maintain the City's sewer system.  In comparison to surrounding Orange County cities, Brea's current sewer rates are low.  The average monthly sewer rate for 1" meter (Single Family Residence) is $13.28.  This rate does not include Brea's monthly base rate of $9.43.   

To address these discrepancies, staff proposes the following three (3) alternatives:

Alternative 1. Adjust the monthly fee charge to cover the projects noted in the capital improvement plan.   This equates to a one-time increase of 55% ($5.19 per month for a 1" Residential Meter).  In years two and three (June 2023 and 2024), the rate will increase by 3%;

Alternative 2. Adjust the monthly fee charge to cover the projects noted in the capital improvement plan.  This equates to a one-time increase of 55% ($5.19 per month for a 1" Residential Meter).  In years two and three (June 2023 and 2024), the rate will increase by 5%; or

Alternative 3. Adjust the monthly fee charge to cover a reduced number of projects noted in the capital improvement plan.  This equates to a one-time increase of 33% ($3.11 per month for a 1" Residential Meter).   In years two and three (June 2023 and 2024), the rate will increase by 3%
.
To avoid proration for both water and sewer rates, effective dates for adjusted rates will align with billing dates.   Customers will receive notice in the prior month's bill. 
FISCAL IMPACT/SUMMARY
Per the City's adopted fiscal policies, "The City will maintain adequate reserves in each of the enterprise funds to protect these essential City programs. Water and sewer reserves should equal a minimum of three months of fund expenditures." Also, it is prudent to establish a capital reserve of at least one year's worth of CIP to address unexpected capital expenditures and/or fund large project costs when scheduled. Appropriate reserve levels provide available funding in order to avoid the need to borrow from other funds or issue bonds to finance these projects.

The water and sewer rates proposed will allow the City to continue to provide safe and reliable water and sewer services to the City of Brea customers while maintaining operating reserves at a minimum of three (3) months of operations and maintaining capital reserves in each fund.
RESPECTFULLY SUBMITTED:
William Gallardo, City Manager
Prepared by: Faith Madrazo, Financial Services Manager - Revenue
Concurrence:  Kristin Griffith, Administrative Services Director
 
Attachments
2022 Water Rate Study
2022 Sewer Rate Study
Water/Sewer Rate Presentation
Water Resolution - Alternative 1
Water Resolution - Alternative 2
Sewer Resolution - Alternative 1
Sewer Resolution - Alternative 2
Sewer Resolution - Alternative 3

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