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Page 1 of 5 Item #18 CITY COUNCIL AGENDA REPORT June 3, 2025 Public Works - Utilities Division TITLE: RECEIVE A PRESENTATION AND ACCEPT STAFF RECOMMENDATIONS ON WATER DROUGHT RATES AND CONNECTION FEES SUMMARY The City owns and operates water systems that supply and deliver water to customers. These systems are financially managed as separate enterprise funds. On September 3, 2024, the City contracted with Water Resources Economics, LLC (WRE) to perform water rate and connection fee studies with the goal of establishing cost-based and legally defensible rates and connection fees to support the long-term financial sustainability of the City’s water program. To establish updated water rates, the City Council first approved a water system financial plan prepared by WRE in March 2025. In May 2025, WRE performed a rate design analysis to allocate the revenue requirements determined as part of the financial plan among the different customer classes. The resulting proposed water rates have been finalized and are included in the attached technical memorandum. As part of the water rate-setting process, it is also necessary to update the water drought rates, which are consumption-based surcharges that can be implemented during water shortage emergencies to maintain the City’s financial position. The attached technical memorandum by WRE details the staff-recommended rate structure, which includes a usage allotment for all customers of 8 centum cubic feet (ccf) every bi-monthly billing period exempt from the drought rate charges. The recommended allotment accounts for the difficulty in reducing low-end usage during water shortage emergencies, while encouraging high-end usage to be reduced to meet conservation targets. In addition to water rates, the City is recommending an update to its water connection fees, which are one-time capital fees assessed against new development(s) to recover the proportional share of capital facility investment to be constructed or previously constructed to accommodate growth. Staff recommends calculating the connection fee utilizing the hybrid method, which is typically used for water systems in cities that have some capacity available to serve new growth but also require some additional expansion. The recommended connection fee is $5,269 per dwelling unit equivalent (DUE), and the basis is included in the attached technical memorandum. The next steps in the process include accepting the water rate and connection fee reports and approving the Proposition 218 notice, which will be presented to Council in July 2025, conducting a 60-day public review period followed by a public hearing to adopt water rates and connection fees in October 2025, and implementing new rates and connection fees effective on January 1, 2026. Page 193 of 226