HomeMy WebLinkAboutItem 8a - 2026 Water and Sewer Rate Structure Study Item 8a
Department: Utilities
Cost Center: 6001; 6101
For Agenda of: 4/21/2025
Placement: Study Session
Estimated Time: 60 minutes
FROM: Aaron Floyd, Public Works & Utilities Director
Prepared By: Shane Whittington, Utilities Business Manager
SUBJECT: 2026 WATER AND SEWER RATE STRUCTURE STUDY
RECOMMENDATION
1. Receive a presentation and conduct a Study Session on the 2026 Water and Sewer
Rate Structure Study;
2. Confirm the City’s prioritization of rate design attributes; and
3. Confirm staff’s recommendation to proceed with a four-year rate adoption period.
REPORT-IN-BRIEF
Staff typically begin the water and sewer rate study process in the second year of the
financial plan. This Study Session is an early step in that process and does not involve
adopting new rates. Instead, it allows Council to provide direction on key rate design
elements before detailed analysis begins. Rate adoption will occur in the winter and spring
of 2027 through a separate process that includes public outreach, no ticing, and a public
hearing in accordance with State law.
Staff is initiating the 2026 Water and Sewer Rate Structure Study to evaluate the City’s
water and wastewater rate design in accordance with State law, City policy, and prior
Council direction. This Study Session provides an opportunity for Council to confirm the
prioritization of rate design attributes and provide direction on the preferred rate adoption
period. Council direction will guide development of cost-of-service and rate structure
options to be considered at a future public hearing prior to adoption of any new rates.
A rate structure is the framework a utility uses to allocate the cost of providing water and
sewer services among customers. It determines how charges are designed —such as
fixed service charges and variable usage-based rates—to recover costs in a manner that
is fair, understandable, legally compliant, and aligned with policy goals. In California, rate
structures must comply with Proposition 218, which requires that rates reflect the
proportional cost of service attributable to each parcel and revenue cannot exceed the
reasonable cost of providing the property-related service. Well-designed rate structures
also balance objectives such as revenue stability, conservation, and equity, while
remaining legally defensible.
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As part of this Study Session, staff request Council’s direction on the following:
Overall Rate Design: Confirm whether to generally maintain the existing rate
structure. If significant changes are directed, staff will return for a second Study
Session in August 2026.
Rate Adoption Period: Confirm a preferred rate adoption period (e.g., two-year
or four-year).
POLICY CONTEXT
The City periodically conducts water and wastewater rate studies to ensure utility
revenues are sufficient, legally compliant, and aligned with City Council policy direction.
Water and sewer rates must be designed and adopted in accordance with State law, the
City’s Municipal Code, and prior Council policy decisions regarding rate structure and cost
recovery.
Utility rates for water and wastewater service are governed by California Constitution
Article XIII D, adopted by voters through Proposition 218 in 1996. Article XIII D establishes
several key requirements for property-related fees and charges, including:
Revenues derived from a utility rate may not exceed the funds required to provide
the service.
Revenues may only be used for the service for which the fee was imposed.
Fees must not exceed the proportional cost of providing service to each parcel.
Fees may not be imposed for general governmental services available to the public
at large.
Utilities must conduct a public noticing and protest hearing process prior to
adoption of new or increased rates.
Because of these requirements, water and wastewater rate structures must be supported
by a cost-of-service analysis demonstrating that rates are proportional to the cost of
providing service.
California law also establishes expectations regarding the frequency and transparency of
utility rate studies. California Government Code Articles 4.6, 4.6.5, and 4.7 require local
agencies that charge water or wastewater service fees to periodically evaluate the
adequacy of those fees and publicly report on the findings of that review. This requirement
is intended to ensure that agencies:
Regularly review whether rates generate sufficient revenue to fund operations,
maintenance, and capital needs, and
Provide public transparency regarding the basis for utility rates.
Consistent with this requirement and industry best practices, local governments
commonly conduct rate studies on a multi-year cycle to maintain financial stability and
compliance with Proposition 218.
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The San Luis Obispo Municipal Code §13.04.090 authorizes the City Council to establish
water service rates and charges necessary to operate, maintain, and improve the
municipal water system. The Municipal Code provides Council with the authority to adopt
and periodically adjust rates to ensure the water utility remains financially sustainable and
capable of meeting service obligations. Wastewater rates are similarly established by
Council authority to ensure the wastewater utility can fund required operations,
maintenance, regulatory compliance, and infrastructure investments.
The San Luis Obispo City Charter also establishes requirements regarding the use of
utility revenues. Charter Section 806 requires that all income derived from the operation
of a City public utility be devoted exclusively to the expenses of operating, maintaining,
improving, or bettering the utility system, and to the repayment of related debts and
interest. This provision reinforces the principle that utility revenues must be used solely
for utility purposes and supports the cost-of-service framework used in developing water
and wastewater rates.
Collectively, these State constitutional provisions, statutes, and local ordinance and
policies establish the legal and policy framework that constrains utility rate setting. Under
this framework, water and wastewater rates must be based on the cost of providing
service, may not generate profit, and revenues must be used exclusively for the operation,
maintenance, and improvement of the water and sewer enterprises.
Within this policy framework, there are ten industry-standard rate design attributes that
are considered in the development of public utility rates. Cost -of-service rate-making
principles originate from Bonbright’s Principles of Public Utility Rates and are reflected in
industry guidance such as American Water Works Association’s (AWWA) Principles of
Water Rates, Fees, and Charges (M1) and Water Environment Federation’s (WEF)
Financing and Charges for Wastewater Systems (MOP 27). These rate principles are
meant to serve as guides in the development of sound rate design.
These rate attributes are described in Table 1.
Table 1 - Rate Design Attributes
Rate Design Attribute Plain Meaning Example in Rates
1. Effectiveness in yielding
total revenue requirements.
Rates should bring in enough
money to run the system and
recover the full cost to provide
service.
Making sure fixed charges and
usage rates together fully fund
operations, maintenance, and
infrastructure replacement.
2. Revenue stability and
predictability (revenue the
City receives).
The utility should receive steady
income so it can plan, maintain
service, and avoid sudden
financial problems.
Having a reasonable fixed
monthly charge so revenue
doesn’t collapse during wet or
drought years when water use
alters.
3. Stability and predictability
of rates (water rates that
customers pay).
Customers shouldn’t see large
or sudden swings in their bills
from one year to the next.
Gradual rate adjustments over
time instead of large one-time
increases.
4. Promotion of efficient
resource use.
Within the confines of the law
(while still being cost-based),
Tiered pricing where higher
usage matches the higher cost
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rates should encourage people
to use water wisely, but not
punish normal or necessary use.
per unit of delivering those
services.
5. Reflect all present and
future costs and benefits of
providing utility service.
Rates should cover not only
today’s costs, but also long-term
repairs, upgrades, and reliability
needs.
Including funding for pipe
replacement or treatment
upgrades instead of waiting for
failures.
6. Proportional distribution of
total costs among the
customer classes of service.
Different customer groups
should pay based on what it
costs to serve them.
Large irrigation users paying
more if they drive peak demand
or infrastructure sizing.
7. Avoidance of undue
discrimination in rate
relationships.
Customers in similar situations
should be treated the same, and
differences should be based on
real cost differences.
Avoiding special discounts for
one group unless there’s a clear
difference in the cost to provide
service.
8. Dynamic in its ability to
respond to changing supply
and demand conditions
and/or environmental
concerns.
Rates should be flexible enough
to respond to droughts, growth,
or changing water supply
conditions.
Drought surcharges or seasonal
rates.
9. Simple and easy to
understand; easy to
administer.
Customers should be able to
understand their bill, and staff
should be able to run the system
efficiently.
Limiting the number of tiers or
keeping the bill format clear and
consistent.
10. Freedom from controversy
as to interpretation.
The rate structure should be
clear enough that people don’t
constantly argue about what it
means or how it works.
Using clear formulas and
definitions so customers, staff,
and auditors all interpret rates
the same way.
The order of these rate design attributes does not indicate relative importance.
Application of these attributes is constrained by State constitutional provisions, statutes,
and local policies, which take precedence in the development of utility rates. In practice,
the attributes may be complementary, overlapping, or at times even in conflict with one
another, and must be balanced in the design of the rate structure.
DISCUSSION
Background
The current water rate structure consists of a monthly base fee and a volumetric usage
charge.1 Volumetric rates vary based on the cost of service for single-family residential,
multi-family, non-residential, and landscape irrigation customers. Monthly base fees vary
by meter size to reflect differences in system capacity requirements.
Tables 2 and 3 summarize the water rates approved by the City Council on June 17, 2025
(Resolution No. 11582), including the current volumetric usage charge shown in Table 2
as “Water Usage (Variable Per Unit Cost)” and the current monthly base fee shown in
Table 3 as “Water Monthly Base Fees (Fixed Cost).”
1 A volumetric water charge is a utility pricing mechanism where consumers are billed directly proportional
to the volume of water consumed (e.g., per gallon).
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Table 2 - Water Usage
(Variable Per Unit Cost)
Approved Rates
Effective July 1, 2025
Approved Rates
Effective July 1, 2026
Single Family Residential
Tier 1: 0 to 5 units
$9.01 $9.51
Single Family Residential
Tier 2: 6 to 12 units
$10.38 $10.95
Single Family Residential
Tier 3: 13+ units
$17.90 $18.88
Multi-Family $10.11 $10.67
Non-Residential $10.70 $11.29
Landscape Irrigation $10.92 $11.52
Table 3 - Water Monthly
Base Fees
(Fixed Cost)
Approved Rates
Effective July 1, 2025
Approved Rates
Effective July 1, 2026
Single Family Residential $31.91 $33.67
Multi-Family, Non-Residential, and Landscape Irrigation by Water Meter Size
0.75-inc or less meter $31.91 $33.67
1-inch meter $53.28 $56.21
1.5-inch meter $106.34 $112.19
2-inch meter $170.17 $179.53
3-inch meter $319.24 $336.80
4-inch meter $532.19 $561.46
6-inch meter $1,064.07 $1,122.59
8-inch meter $1,702.61 $1,796.25
The current sewer rate structure also consists of a monthly base fee and a volumetric
usage charge. Volumetric sewer rates vary based on the cost of service for single -family
residential and multi-family customers (subject to a sewer cap) and for non-residential
customers. Monthly base fees vary by meter size.
Tables 4 and 5 summarize the sewer rates approved by the City Council on June 17,
2025 (Resolution No. 11584), including the current volumetric usage charge shown in
Table 4 as “Sewer Usage (Variable Per Unit Cost)” and the current monthly base fee
shown in Table 5 as “Sewer Monthly Base Fees (Fixed Cost).”
Table 4 - Sewer Usage
(Variable Per Unit Cost)
Approved Rates
Effective July 1, 2025
Approved Rates
Effective July 1, 2026
Single Family and Multi-
Family Residential Per
Unit Cost
(Up to Sewer Cap)
$10.46 $11.14
Non-Residential Per Unit
Cost
$10.94 $11.65
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Table 5 - Sewer Monthly
Base Fees
(Fixed Cost)
Approved Rates
Effective July 1, 2025
Approved Rates
Effective July 1, 2026
Single Family Residential $26.11 $27.81
Multi-Family, Non-Residential, and Landscape Irrigation by Water Meter Size
0.75-inc or less meter $26.11 $27.81
1-inch meter $43.61 $46.44
1.5-inch meter $86.93 $92.61
2-inch meter $139.20 $148.25
3-inch meter $261.15 $278.12
4-inch meter $435.33 $463.63
6-inch meter $870.40 $926.98
8-inch meter $1,392.70 $1,483.23
10-inch meter $2,002.22 $2,132.36
The City’s current water and wastewater rate structures reflect policy direction provided
by the City Council during prior rate study sessions conducted on October 4, 2005 (Item
Bus 4), June 14, 2011 (Item PH 1 and PH 2), and January 9, 2018 (Item 11). During these
meetings, Council identified the relative importance of rate design attributes to guide
development of the rate structure. Table 6 summarizes Council’s prioritization of the top
five out of ten rate design attributes described in Principles of Public Utility Rates
(Bonbright), with 1 representing the highest priority.
Table 6 - Council’s Top 5 Rate Design Attributes
Rate Design
Attributes
October 4, 2005 June 14, 2011 January 9, 2018
1. Effectiveness in
yielding total revenue
requirements. 1 N/A - will be met for all
rate design options N/A - will be met for all
rate design options
2. Revenue stability
and predictability
(revenue the City
receives).
1 1
3. Stability and
predictability of rates
(water rates that
customers pay).
4 2 3
4. Promotion of
efficient resource use. 2 5 2
5. Reflect all present
and future costs and
benefits of providing
utility service.
5
6. Proportional
distribution of total
costs among the
customer classes of
service.
5 4 4
7. Avoidance of undue
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discrimination in rate
relationships.
8. Dynamic in its
ability to respond to
changing supply and
demand conditions
and/or environmental
concerns.
9. Simple and easy to
understand; easy to
administer.
3 3
10. Freedom from
controversy as to
interpretation.
Between 2005 and the 2011 and 2018 study sessions, Council placed increased
emphasis on revenue stability and predictability. This shift was influenced by drought
conditions throughout the 2000s and 2010s, which resulted in reduced water
consumption. At that time, the rate structure relied heavil y on volumetric charges that
varied directly with water use. As consumption declined, utility revenues decreased while
the cost of operating the water system remained largely fixed. This resulted in structural
revenue shortfalls and the need to implement temporary drought surcharges to maintain
financial stability.
In response to these conditions, Council directed staff to develop a rate structure that
provided greater revenue stability. Based on this direction, Council adopted a rate
structure that included a monthly base fee in addition to volumetric charges on June 12,
2013 (Item PH 4). This change increased the portion of revenue recovered through fixed
charges, improving the ability of the utility to meet revenue requirements during periods
of reduced water use.
Across the 2005, 2011, and 2018 study sessions, Council’s rate design priorities have
remained generally consistent. In addition to revenue stability and predictability, Council
has consistently prioritized:
Stability and predictability of rates paid by customers;
Promotion of efficient use of water resources; and
Proportional distribution of costs among customer classes based on cost of
service.
Although the relative ranking of these attributes has varied over time, the overall policy
direction has remained consistent. Staff believe the current rate structure reflects these
priorities and has been effective in maintaining financial sustainability, le gal compliance,
and alignment with Council policy direction.
These established rate design priorities are recommended by staff to provide the policy
framework for the 2026 Water and Sewer Rate Study, which will evaluate potential
adjustments to the rate structure while maintaining consistency with State law, City policy,
and Council direction.
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Public Engagement
On February 23, 2026, staff conducted
a public information session regarding
water and wastewater rate structure
design to obtain community input. Prior
to the meeting, staff advertised the
public information session through two
social media posts, one social media
story, and direct email outreach to 159
organizations and contacts, including
homeowner associations, property
management companies, mobile home
parks, multifamily property contacts,
and community organizations and
service providers.
Despite the outreach, public participation was minimal and no written feedback forms
identifying rate design priorities were submitted at the meeting. Verbal comments
received at the meeting generally expressed support for maintaining the existing rate
structure. Additional public outreach and opportunities for public engagement and input
will be conducted by staff throughout the Water and Sewer Rate Study, including emails,
postcard mailers, public postings, social media, and public meetings and hearings.
Customer Assistance Program
Although not part of the rate structure itself, the City’s Customer Assistance Program
(CAP) provides a mechanism to support qualified customers and is relevant to Council’s
consideration of rate affordability. No Council direction is requested on this program at
this time. Staff are highlighting recent increases in participation and ongoing efforts to
expand enrollment among eligible customers. The program is funded through late fees,
which are not property-related charges and are therefore not subject to Proposition 218
requirements.
Following Council authorization in 2025 to increase the program discount from 15% to
20% (Resolution No. 11583) and expanded outreach efforts, program participation has
increased. Over the last five years, enrollments are forecasted to increase by
approximately 51%, and utilization of available assistance funds is forecasted to increase
by approximately 313%.
Figure 1 summarizes assistance provided through the Customer Assistance Program
from Fiscal Year 2021-22 through the Fiscal Year 2025-26 forecast.
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Figure 1 – Customer Assistance Program
Staff will continue to evaluate opportunities to increase awareness of and participation in
the program to ensure that available assistance reaches eligible customers , including
potential program administration modifications that could provide pathways to users not
currently able to participate in this program.
STUDY SESSION QUESTIONS
Based on the discussion above, Staff requests Council’s consideration and direction
regarding the following topics.
1. General Concurrence Regarding Rate Design Priorities.
As noted above, staff recommend the following prioritization of rate design attributes,
consistent with prior Council direction:
1. Revenue stability and predictability (revenue the City receives).
2. Promotion of efficient resource use.
3. Stability and predictability of rates (water rates that customers pay).
4. Proportional distribution of total costs among the customer classes of service.
5. Reflect all present and future costs and benefits of providing utility service.
Staff request the City Council consider and confirm the existing rate design priorities or
provide staff with direction on modifications to the rate design attribute prioritization.
If Council provides direction that significantly shifts rate design priorities, staff will return
for a second Study Session in August 2026 to further explore those policy directions. The
relationship between rate design attributes is complex, and changes are typically
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implemented and evaluated over multiple rate cycles rather than through a single
adjustment. While staff are not able to present specific rate impacts at this stage, different
priorities can influence the structure in meaningful ways—for example, greater emphasis
on revenue stability may increase the proportion of fixed charges, while greater emphasis
on simplicity and ease of administration may result in fewer rate tiers or a more
streamlined rate structure. Any resulting rate structure must be supported by a cost-of-
service analysis and comply with Proposition 218 requirements. Table 1 provides general
examples of how these attributes can be reflected in rate design.
2. General Concurrence for a Four-year Rate Adoption.
Staff are proposing a four-year rate adoption period. Council has historically adopted two-
year rate adjustments in alignment with the City’s financial plans. A four-year rate
adoption period provides greater revenue stability, customer bill predictability, and
administrative efficiency by reducing the frequency of rate studies, public noticing, and
Proposition 218 proceedings. Longer adoption cycles also support multi-year capital
planning and financial forecasting, allowing the City to align rate adjustments with planned
infrastructure investment. This approach is commonly used by utilities when costs and
operating conditions are reasonably predictable. State law allows for adoption of utility
rates for up to five years (California Government Code § 53756). Industry practice is to
conduct rate studies on a one- to five-year cycle to ensure revenues remain sufficient,
legally compliant, and aligned with community priorities.
The predictability of the current rate structure and its demonstrated ability to successfully
maintain financial sustainability, legal compliance, and alignment with prior Council policy
direction from 2005, 2011, and 2018 has given staff the comfort to recommend a four-
year rate adoption concurrent with adoption of the 2027-29 Financial Plan. As a reminder,
any rate adjustments require noticing, a public hearing, and Council authorization to
adopt. If Council provides direction to significantly alter the existing rate structure, staff
may return with a recommendation to only proceed with a two-year rate adoption as a
new rate structure may not result in the revenue stability required for a longer rate
adoption period.
NEXT STEPS
If Council provides direction that significantly shifts rate design priorities, staff will return
for a second Study Session in August 2026 to further explore those policy directions. If
Council generally confirms the existing rate design priorities, staff will proceed with
development of the Water and Sewer Rate Study.
Public outreach for the rate setting process is anticipated to begin in winter 2027 and will
include emails, public postings, social media, and public meetings. Staff anticipate
returning to Council in spring 2027 to request authorization to initiate the Proposition 218
noticing process. The Proposition 218 public hearing and Council consideration of rate
adoption is anticipated to occur in May or June 2027.
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CONCURRENCE
The City’s Finance Department concurs with the staff recommendation.
ENVIRONMENTAL REVIEW
The evaluation and modification of rates and charges by public agencies is statutorily
exempt from the California Environmental Quality Act (CEQA) under Public Resources
Code §§ 21083 and 21080(b)(8) and State CEQA Guidelines § 15273, as it involves the
establishment of rates to fund operating expenses and capital projects necess ary to
maintain service within existing service areas. The proposed Water and Sewer Rate
Study would not result in the commitment to or funding of the expansion of capital projects
not otherwise evaluated under CEQA. Therefore, no environmental review is r equired for
this item.
FISCAL IMPACT
This item does not have a direct fiscal impact. The study session is intended to obtain
Council direction to inform the upcoming Water and Sewer Rate Study. Funding for the
rate study is included in the adopted budget for the Water and Wastewater Utilities. Any
future fiscal impacts associated with rate adjustments will be evaluated and presented to
Council as part of the rate study and Proposition 218 rate adoption process.
Budgeted: N/A Budget Year: 2025-27
Funding Identified: N/A
Fiscal Analysis:
Funding
Sources
Total Budget
Available
Current
Funding
Request
Remaining
Balance
Annual
Ongoing
Cost
General Fund $0 $0 $0 $0
State
Federal
Fees
Other:
Total $0 $0 $0 $0
ALTERNATIVES
1. Provide different direction on rate design priorities. Council may provide
direction regarding the prioritization of rate design attributes to be used in the
development of the Water and Wastewater Rate Structure Study that differs from
staff’s recommendation. Changes to the prioritization of these attributes may result
in different rate structure options being evaluated and presented to Council at a
future meeting. Significant changes to the prioritization ranking may affect the
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predictability of the resulting rate structure, warranting a two-year rate plan rather
than a four-year rate plan to monitor the effects.
2. Direct staff to prepare a two-year rate adoption instead of a four-year adoption.
Instead of confirming a four-year rate adoption period, Council may direct staff to
prepare a two-year rate study. A shorter rate adoption period may provide greater
flexibility to respond to changing financial, regulatory, or economic conditions but
may result in more frequent rate studies and Proposition 218 proceedings. Industry
standard guidance is to conduct rate studies every one to five years.
3. Defer direction and return at a later date. Council may choose to defer direction
on the rate study and request that staff return at a future meeting with additional
information, analysis, or public outreach. Deferring direction may delay the rate
study schedule and could affect the timing of future rate adjustments.
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