City Council Agenda Report
Meeting Date: December 16, 2025
From: Todd Dusenberry, General Manager of Public Utilities Department: Public Utilities
Submitted by: Adriana Ramos, Principal Management Analyst Subject
Amended Five-Year Water Rate Schedule
Recommendation
A. Find that the proposed action is categorically exempt from California Environmental Quality Act (CEQA) review, in accordance with CEQA Guidelines Section 15273(A)(4), which states that CEQA does not apply to the establishment, modification, structuring, restructuring, or approval of rates, tolls, fares, and other charges by public agencies which the public agency finds are for the purpose of meeting operating expenses, purchasing for leasing supplies, equipment, or materials, meeting financial reserve needs and requirements, and obtaining funds for capital projects, necessary to maintain service within existing service areas. Furthermore, even if the proposed changes in water rates were subject to CEQA review, the approval requested is exempt in accordance with CEQA Guidelines Section 15061(B)(3), the general rule that CEQA only applies to projects that may have a significant effect on the environment; B. Conduct a Public Hearing for the proposed five-year water rate adjustment and consider all protests against the proposed water rate adjustments that have been submitted in accordance with Proposition 218; and
C. Adopt Resolution No. 2025-035 approving an amended five-year water rate schedule to go into effect January 1, 2026.
Background
The City of Vernon operates its own potable water system, serving approximately 860 customers with an annual demand of about 4,700 acre-feet of water. The city's water supply and distribution system includes the following facilities: six active groundwater production wells, four inactive wells, fourteen booster pumps, a ten-million-gallon underground concrete reservoir, six onemillion-gallon ground-level steel reservoirs, one elevated steel tank with a capacity of 600,000 gallons, and roughly 49 miles of distribution pipelines. Additionally, the city has a connection to the Metropolitan Water District (MWD) for imported surface water, which is used only as needed.
Furthermore, there is a recycled water connection that supports the city’s power plant.
To set appropriate rates that fulfill stakeholder business requirements while ensuring that only essential operating and capital costs for Vernon Public Utilities (VPU) are included, VPU requested the City Council's approval on February 4, 2025, for an agreement with NewGen Strategies & Solutions, LLC (NewGen). This agreement offers VPU utility cost of service analysis, rate design, financial planning services, and recommendations for rate adjustments for the City’s domestic water, fire protection, and recycled water services.
A Cost of Service (COS) Study is an essential analytical tool that utilities use to develop rates that accurately reflect the actual cost components associated with each customer rate class. It is considered best practice for utilities to conduct a COS Study every five years, a standard many nearby public utilities follow. The most recent Water COS and Rate Design Study for VPU was completed in 2019.
The Water COS study conducted by NewGen enables VPU to make informed decisions and recommendations regarding utility finance, operations, and future capital investments. This study provides VPU with a clear understanding of customer affordability, competitiveness, cost constraints, and the necessary steps to stabilize expenses amid a fluctuating global economic environment. It also lays the foundation for setting water rates for the fiscal years (FY) 2025-26 through 2029-30.
All recommended rates comply with Proposition 218, which mandates that rates do not exceed the cost of providing the service. The study allocates costs across three types of service: general water service, fire protection service, and recycled water service. This allocation is based on the proportional costs of each service, ensuring no cross-subsidization among customer classes. It maintains fairness and transparency while complying with utility ratemaking standards.
VPU staff has worked closely with its rate consultant, NewGen, to establish the cost of service in compliance with Proposition 218 requirements. To achieve financial targets, establish reserve balances, and maintain water system capital investments to ensure the highest reliability standards, the Water COS Study recommends a 7% annual rate increase from FY 2025-26 through FY 2029-30, with effective dates of January 1 for each year. The study forecasts total operating and maintenance expenses increasing from approximately $8.6 million in FY 2025-26 to $9.7 million in FY 2029-30. Major cost drivers include inflationary increases in salaries, maintenance, and replenishment assessment charges from the Water Replenishment District (WRD). Existing debt service obligations remain constant at about $1.1 million annually, related to the WRD well rehabilitation loan and the Revenue Bond Series 2020A.
Capital improvements total $18.2 million over the study period, with funding coming from Electric Fund loans ($10.5 million), Water Fund Balance, and water rate revenues. The City’s capital investments will focus on system reliability, maintenance of critical assets, and infrastructure rehabilitation. Miscellaneous revenues, including water rights leases and investment income, are projected to contribute approximately $900,000 annually during the first three years of the study.
Consequently, the net revenue requirement, which is the annual amount that needs to be recovered from rates, increases from approximately $9.0 million in FY 2025-26 to $11.2 million by FY 2029-30.
Proposition 218 requires the City Council to conduct a public hearing to consider new water rates and provide notification to all property owners at least 45 days prior to the hearing date. Notices were prepared and mailed to customers and property owners on October 28, 2025. Additionally, the draft Water COS study has been posted on the City’s website. On October 2, 2025 staff provided a presentation on the Water COS study to the Business and Industry Commission (BIC).
Members of the BIC discussed the reasons for the recommended rate increases and expressed support. Subsequently, staff received feedback from the City Council during the Water COS study session on November 4, 2025.
The recommended rate increases outlined in the Water COS study will generate the necessary revenue to continue to provide the City with high-quality drinking water, maintain a modern and reliable water system, and invest in its resilience and reliability. The proposed rate increases over the next five years (from FY 2025-26 to FY 2029-30) will enable the Water Fund to collect enough revenue to cover projected operating and maintenance expenses, maintain adequate reserve levels, and implement proactive infrastructure management.
The rates and charges are established in accordance with Section 13.08.010 of the Vernon Municipal Code. In addition, pursuant to California Government Code 53756, the proposed increase to water rates will authorize automatic adjustments that pass-through to the water customers increases in wholesale charges to the City from WRD, and/or the MWD. These passthrough adjustments will solely be applied to the Water Consumption Rate per 100 Cubic Feet (CCF) and will only reflect actual costs in excess of estimated costs already included in the proposed rates.
VPU staff recommends that the City Council hold a public hearing to receive public comments, consider any protests against the proposed water rate adjustments, and adopt the proposed resolution to establish a five-year water rate schedule that would take effect on January 1, 2026.
The proposed rates cannot be imposed or increased if a majority of property owners or tenants submit written protests. All valid protests will be counted both before and at the conclusion of the public hearing. If protests are received from fifty percent or fewer of the affected properties, the proposed rates may be adopted.
Fiscal Impact
The recommended 7% water rate adjustment is estimated to generate $2.6 million in additional water revenue and will be included in the Water Fund, Revenue Budget, Water Sales, Account No. 058-450-700-450040 through Fiscal Year 2029-30.
Attachments
1. Resolution No. 2025-035
2. Public Notice
3. NewGen Strategies & Solutions, LLC – Final Report: Water Cost of Service and Rate Study