TO:
Honorable Mayor and Members of the City Council
THROUGH:
Talyn Mirzakhanian, City Manager
FROM:
Erick Lee, Public Works Director
Jeff Page, Utilities Manager
SUBJECT: Title
Consideration of a Resolution Approving a Pass-Through Increase for Cost Recovery Related to Wholesale Water Purchases and Discussion of the Need for an Updated Water Rate Study, Sewer Rate Study, and Financial Plan (Budgeted Fiscal Year 2026) (Public Works Director Lee).
(Estimated Time: 30 Mins.)
A) ADOPT RESOLUTION NO. 25-0046
B) DISCUSS AND PROVIDE DIRECTION
Body
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RECOMMENDATION:
Staff recommends that the City Council:
1. Adopt Resolution No. 25-0046, approving the fiscal year (FY) 2025 pass-through water rate adjustment of $0.38 per centum cubic foot to recover increased wholesale water costs.
2. Direct staff to begin the process of updating the City’s water and sewer rate studies and align them on the same schedule.
FISCAL IMPLICATIONS:
Based on updated assumptions and actual wholesale water rates, the City is projected to incur approximately $647,000 in additional water purchase costs for FY 2025 compared to the estimates in the 2022 Rate Study. The proposed pass-through rate of $0.38 per ccf (centum cubic feet and equal to 748 gallons) is expected to generate approximately $638,004 in revenue over 12 months, enabling near-full cost recovery for these additional wholesale water charges. This adjustment is necessary to maintain the financial health of the Water Fund, which is not meeting fund balance requirements due to higher costs and declining water sales.
City financial policies require enterprise funds to maintain reserves equal to four months or 33% of operating expenses. At the end of FY 2025, the Water Fund is projected to have operating reserves of $2.4 million, which is $2.6 million short of the reserve requirement total of $5.1 million. The Sewer Fund is projected to have operating reserves of $974,906, which does meet the requirement. However, projections indicate the reserve will fall short in FY 2026 due to critical infrastructure projects and rising costs.
Having a capital reserve target of the average yearly capital spending is also a best practice. Capital reserve targets would total $3.8 million in the Water Fund and $2.8 million in the Sewer Fund. Neither fund has sufficient fund balance to meet these targets.
Each Fund does meet minimum coverage requirements on its outstanding debt. In 2021, existing Water and Sewer certificates of participation (COPs) were refunded to take advantage of lower interest rates. The 2021 Refunding COPs for Water and Sewer will be paid off in January 2026, leaving only the pension obligation bond debt service allocated to each Fund.
Conducting new rate studies for both the Water and Sewer funds will establish rates that fully fund operations, capital projects, and reserve requirements based on updated system costs. It will also ensure long-term financial stability of these funds and provide the City with the capital necessary to reinvest into these utilities.
BACKGROUND:
Metropolitan Water District (MWD) supplies treated potable water to West Basin Municipal Water District (West Basin), a regional water wholesaler. West Basin then delivers this water directly to the City of Manhattan Beach through a connection to the regional distribution system. The imported water is purchased by the City at wholesale rates, which include fixed and volumetric charges.
The 2022 Water Rate Study included cost projections based on expected wholesale rates and water volumes. However, actual MWD charges for FY 2025 exceeded projections, and the City purchased more imported water than planned for in the rate study. This gap was largely due to the delay of the Peck Reservoir Treatment Plant becoming fully operational. As a result, the City’s expenses associated with water purchases exceeded those anticipated during the 2022 rate study.
On June 7, 2022, the City Council adopted Resolution No. 22-0079 establishing water rate increases through November 1, 2026, including provisions for pass-through adjustments due to increases in wholesale water costs. The pass-through is a rate adjustment that allows the City to recover unanticipated increases in wholesale water purchase costs that were not accounted for in the most recent water rate study.
Government Code § 53756 allows the City to adopt water rates that include automatic pass-through adjustments for increases in wholesale water costs, such as those from MWD via West Basin. These adjustments can be made without a new Proposition 218 process, provided the methodology is clearly identified in the adopted rate schedule and customers are given at least 30 days written notice before the adjustment takes effect. This mechanism helps the City respond quickly to rising costs while maintaining financial stability in the Water Fund.
DISCUSSION:
In the fall of 2024, Raftelis Financial Consultants, Inc. was engaged to conduct the FY 2025 pass-through rate calculation to ensure compliance with the resolution and cost recovery objectives.
The FY 2025 Pass-Through Rate Calculation Report from Raftelis (attachment) shows increases in MWD Tier 1 water purchases and capacity costs. It also demonstrates decreases in West Basin fixed service charges and Water Replenishment District groundwater extraction costs. These changes, along with revised water production assumptions, resulted in an adjusted wholesale water cost of $6,647,353 for FY 2025, up from the previously projected $6,009,349.
To recover this difference, a $0.38 per ccf pass-through adjustment is proposed. This adjustment would be applied uniformly across all customer classes and is calculated to bridge the gap between projected and actual costs. Under State law and in conformance with the City’s Proposition 218 process, the City Council is authorized to enact this pass-through increase by adoption of Resolution No. 25-0046.
Looking forward, with the Peck Reservoir Treatment Plant now in operation, the City’s reliance on imported water is expected to decrease. This will help reduce future costs. However, new rate revenue is needed for the Water and Sewer funds to meet operational needs, complete necessary capital projects, and ensure the long-term solvency of both funds. Although the City still has two years of water rate increases and three years of sewer rate increases already adopted, these increases have proven to not be sufficient in meeting all these needs.
Therefore, staff requests City Council direction to conduct new rates studies for both funds. Updating the water and sewer rate studies together is both a logical and practical step that supports efficient planning and coordination across both enterprise funds. It reduces redundancy in outreach and analysis, provides a clearer framework for evaluating combined impacts on customers, and ensures that rate adjustments reflect a comprehensive view of system needs. Given the interrelated nature of these utilities, syncing the studies will help streamline decision-making.
If directed to proceed with new rate studies, staff anticipates this work will take approximately six months to complete. Thereafter, the results of the studies along with new proposed rates would be presented to the City Council for review. If the City Council determines that new rates should be implemented, another Proposition 218 process would then commence.
PUBLIC OUTREACH:
If City Council adopts Resolution No. 25-0046, staff will issue written notice of the pass-through rate adjustments to all customers during the week of May 12, 2025, in compliance with Government Code §§ 53755 and 53756. The rate increase will not go into effect until July 1, 2025, satisfying requirements that noticing must occur at least 30 days before implementation. Notices will be included in regular water billing statements and mailed to record property owners where required. This communication will ensure transparency and help maintain the City’s ability to enforce liens if necessary.
ENVIRONMENTAL REVIEW:
The City has reviewed the proposed activity for compliance with the California Environmental Quality Act (CEQA) and has determined that the activity is not a “Project” as defined under Section 15378 of the State CEQA Guidelines; therefore, pursuant to Section 15060(c)(3) of the State CEQA Guidelines the activity is not subject to CEQA. Thus, no environmental review is necessary.
LEGAL REVIEW:
The City Attorney has reviewed this report and determined that no additional legal analysis is necessary.
ATTACHMENTS:
1. Resolution No. 25-0046
2. FY 2025 Pass-Through Rate Calculation Report
3. PowerPoint Presentation