Item 08 - Water and Sewer Rate Adjustments

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Water and Sewer Rate Adjustment Authorization January 20, 2026 Page 2 DISCUSSION The Public Works Agency Water Resources Division (PWA) oversees and maintains the daily operations of the City's water and sanitary sewer systems. The water system comprises approximately 480 miles of water main, 21 groundwater wells, seven pump stations, 10 reservoirs with a storage capacity of 49 million gallons, four pressure - regulating stations, and seven connection points to the Metropolitan Water District (MWD). The system has an average daily demand of 30 million gallons from its roughly 45,500 metered service connections. The sanitary sewer system consists of approximately 400 miles of sewer main, 7,000 manholes, 46,000 sewer laterals, and two sewage lift stations. All sewage carried by the City's sewer mains is conveyed to the Orange County Sanitation District for treatment. The cost to keep these critical assets operational and invest in their replacement comes from the water and sewer rates charged to and collected from the community they serve. The California Constitution, via Proposition 218, mandates that all revenue collected from water and sewer charges is solely used for water and sewer operations and infrastructure related expenses. Background The American Water Works Association recommends as a best management practice that public utilities periodically review and perform cost of service and rate studies every five years to adjust water and sewer rates annually thereby ensuring rate revenue is sufficient to cover the cost of operating and maintaining public water and sewer systems. The City last performed a Cost of Service and Rate study in 2019. Based on this study, on November 19, 2019, the City Council adopted a 5-year rate plan for the City's water and sewer services. The adoption of the 2019 rate plan has enabled the City to keep pace with increased operation costs and enable the City to compete critical infrastructure projects, including well rehabilitation, the addition of new wells, and the implementation of a smart water meter program. The adopted 2019 rate plan established a series of annual rate adjustments with the last adjustment taking effect on July 1, 2023. Due to several compounding factors, including heightened community affordability concerns and the City's desire to minimize additional financial burden during a period of economic uncertainty, water and sewer rates have not been adjusted in nearly three years. While this approach provided short-term rate stability, it has also deferred necessary adjustments needed to keep pace with rising operational, regulatory, and infrastructure costs. During this same time period, the costs for delivering Santa Ana's award -winning drinking water and maintaining its sewer systems have increased significantly. In the past two years, both the Metropolitan Water Agency and the Orange County Water District, the agencies that supply and manage the region's imported water and groundwater basin, have raised their rates by 15% and 22.1 % respectively. As a result, the City's expenditures for water supply and system operations have increased, while revenues have remained relatively flat, reducing the City's capacity to fund capital improvements necessary to support long-term system performance.