Background
On February 16, 2016, the City Council adopted Resolution 2016-013 (2016 Water Rate Resolution) adopting new water rates effective March 9, 2016 through June 30, 2018 based on the conservation rates developed in the Water Rate Study. The Water Rate Resolution provided for operational increases on July 1, 2016 and July 1, 2017 by 2.5% and the implementation of a phased-in increase in the fixed monthly charge from 14% to 20% (July 1, 2017) of the annual water service revenue coupled with an offsetting decrease in the per unit water usage charge. These adjustments did not include the increased cost of wholesale water. Accordingly, pursuant to Resolution 2015-049 (adopted July 7, 2015) the increased cost of wholesale water from Cal Domestic Water (CDW) and Municipal Water District of Orange County (MWDOC) has been passed through each July and January since the adoption of the new water rates.
On May 2, 2017, the City Council concurred with staff's position to move from Phase 2 (20% reduction) to Phase 1 (10% reduction) water conservation restrictions. City Council asked staff whether or not all or a portion of the current water rates could be reduced due to the anticipated increase in usage. Staff indicated that the conservation rates were implemented to provide a financial stability during a period of lower than usual usage, and that increased usage has not yet occurred. On May 16, 2017, staff recommended that customer usage patterns be monitored for six months (May through October 2017) in order to gauge the change in water use.
Discussion
Based on water production records provided by the City’s Public Works Department, from May through October 2017, customer demand is up approximately 7.8% as compared to the same period last year. Assuming no change in customer usage in the cooler months of November through April, the result would be an annual increase of 3.4%. However, staff would recommend using a mid-point of approximately 6% as a reasonable projection for FY 2017/18.
The 2015 Water Rate Model has been updated to reflect customer usage patterns during FY 2016/17; projected operational costs based on the FY 2017/18 budget and an updated capital improvement plan based on the FY 2018/19 through FY 2023/24 Seven-Year Capital Improvement Program. Based on the updated Water Rate Model, the six percent (6%) increase in net water usage revenues (water usage revenue, less the cost of water to meet that demand) is approximately $434,000, which is approximately 2% of water service revenues for FY 2017/18. Additionally, the Water Enterprise Fund is making its final payment on its inter-fund loans during FY 2017/18 which total $817,000.
The updated Water Rate Model Financial Plan shows that current rates are sufficient to cover projected operational costs; the increased cost of wholesale water and capital costs for the remainder of FY 2017/18 and FY 2018/19 and maintain targeted operating and capital reserve levels. In other words, the current rates would allow the City to forego the projected 2.5% operational increase on July 1, 2018, as identified in the 2015 Water Rate Study, as well as any pass-through adjustments based on the increased cost of water from the Municipal Water District of Orange County (MWDOC) on January 1, 2018, as well as the projected increases from Cal Domestic Water (CDW) and MWDOC projected for FY 2018/19. |