Item 08 - Water and Sewer Rate Adjustments

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Water and Sewer Rate Adjustment Authorization January 20, 2026 Page 6 coverage, and fund planned capital improvements in a manner that supports reliable service and long-term financial sustainability. In brief, these recommended rates evaluated in the study are intended to: • Fully fund utility operations o Costs to replenish the groundwater basin o Costs to purchase imported water o Costs for electrical power • Fund capital improvements o Funds $8 million a year in average water capital spending o Funds $5 million a year in sewer capital spending • Contribute to healthy reserve balances o Ensure the day-to-day operations of each enterprise will continue during emergencies o Promote the future stability of each enterprise • Maintain debt service coverage requirements o Net revenue must exceed 120% of debt payments each year • Ensure our credit rating remains strong Rate Design Legal requirements surrounding water and sewer rate setting in California continue to evolve. In recent years the courts have made rulings with respect to California Constitution Article XIII (Proposition 218) that have created a higher "cost of service" standard for rate setting. Bottom line, the burden of proof is on the public water and sewer agencies to demonstrate that all aspects of water and sewer rates are directly proportionate to the cost of providing service. This means aligning fixed revenue (fixed charges) with fixed costs and variable revenue (usage rates) with variable costs, as well as ensuring rates for all customer classes are equitable. The proposed water and sewer rates are structured to directly align with the water and sewer utility costs in a manner that fully complies with the current Proposition 218 requirements. Water usage rates are tied to the cost of purchasing water and electricity, while water fixed charges are aligned with the utility's fixed costs such as maintenance and capital spending. Water usage rates will continue to be two -tiered, with Tier 1 water having a lower cost aligned with the cost of groundwater, and Tier 2 water having a higher cost aligned with the cost of imported water supplies. All customer classes will be charged under the same tier structure and the limit between Tier 1 and Tier 2 water usage will be based on water meter size such that, on average, water usage will be 85% on Tier 1 and 15% on Tier 2 across all customers. Sewer rates are proposed to be fixed for all customers based on the size of their water meter, as the size of the water meter is proportionate to the amount of water returned to the sewer system.