ITEM 24 ATTACHMENT 2 - Laserfiche WebLink

City of Pleasanton 2025 Water Rate Study Water Resources Economics 2 • Develop updated water connection fees for 2026 that will be annually increased by the Consumer Price Index (CPI). 1.3 LEGAL REQUIREMENTS 2 Legal considerations relating to retail water rates in California focus heavily on Proposition 218, which was enacted in 1996 and is now reflected in Article XIII C and Article XIII D of the California Constitution. Proposition 218 states that “property related fees and charges” (which include retail water rates) may not exceed the proportional cost of providing the service to the customer and may not be used for any purpose other than providing said service. The practical implication is that public retail water agencies in California must demonstrate a sufficient nexus between the costs incurred by the agency to provide water service, and the rates charged to customers. The primary means by which retail water agencies address this requirement is by conducting a “cost-of-service analysis.” Proposition 218 also affects the rate adoption process by requiring agencies to hold a public hearing to adopt rates. The agency must mail public hearing notices to all customers no fewer than 45 days prior to the public hearing. The public hearing notices must clearly show all proposed rate changes, provide information on the public hearing date/time/location, and provide instructions on how customers may protest the proposed rate changes. If a majority of customers submit a protest, the proposed rate changes cannot be adopted. Water connection fees are regulated under Proposition 26, which was approved by voters in 2010 and amended provisions of Article XIII A and Article XIII C of the California Constitution. Proposition 26 defines what types of charges are considered a “tax” (which is subject to a two-thirds voter approval) and are not considered as such. Based on the definitions provided by Proposition 26, “a charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government conferring the benefit or granting the privilege” and “a charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product” are not considered “taxes.” As such, water connection fees are not taxes and do not require two-thirds voter approval. However, the calculation of connection fees must follow cost-of-service principles to prove that the fees charged do not exceed the reasonable costs of connecting new customers to the City’s existing water system. 1.4 RATE-SETTING METHODOLOGY This study was conducted using industry-standard methodology outlined by the American Water Works Association (AWWA) in its Manual of Water Supply Practices M1: Principles of Water Rates, Fees and Charges, Seventh Edition (M1 Manual). The rate study process includes the following steps: 1. Financial Plan: Annual revenues and expenses are projected over the rate-setting period to determine the magnitude of rate increases needed to maintain financial sufficiency. Financial policies, such as reserve targets, are also evaluated and updated if necessary. 2. Cost-of-Service Analysis: Costs are allocated to customers in proportion to use of and burden on the water system. The overall goal is to establish a robust nexus between the costs incurred by an agency and the rates charged to customers, as required by Proposition 218. 2 Although this section is named “Legal Requirements” and discusses Proposition 218 and 26, WRE is not a law firm and does not provide legal advice.