Council directs staff to advance water cost‑of‑service study; phased rate increases proposed to cover imported water cost spike

San Clemente city staff and the city’s rate consultant presented a draft water cost‑of‑service study on Sept. 16 and the council directed staff to finalize the analysis and prepare required public‑notice materials under Proposition 218.

Consultant Sanjay Gar (Water Resources Economics) told the council that imported water costs the city purchases from Metropolitan Water District (via MWD/MODC) have risen substantially since the last rate update in 2022 and that without a rate adjustment the water enterprise could fail to meet coverage targets that underlie bond covenants and reserve policies. The consultant said an immediate single increase equal to the full current cost pressure (about 17%) would meet financial tests but would be sharply disruptive. Instead, the study recommends a phased plan:

• A 9.5% rate increase effective February 2026, followed by • Annual increases of 3.5% in subsequent years, and • A pass‑through mechanism for future increases in imported water charges so the city can recover those costs without separate, immediate Proposition 218 votes each time.

Consultant analysis showed the phased approach should restore the required debt‑service coverage ratios, maintain reserve targets and fund planned capital needs without issuing new debt. The proposed rate structure includes an explicit fixed charge component tied to imported‑water fixed costs allocated by meter size, and a uniform consumption rate across customer classes; recycled water would retain a separate rate structure. Staff also proposed a multi‑stage drought/rationing surcharge framework (six stages) that the council would authorize but only implement if the city declares restrictions during an emergency.

Council voted unanimously to direct staff to complete the study and prepare a Proposition 218 notice, with a timeline that includes a staff report and complete rate study in November, mailing of 45‑day Proposition 218 notices in early December and a public hearing in February 2026. Staff and the consultant said alternatives such as a municipal desalination project were modeled in the analysis; as presented to council, a hypothetical desalination option modeled at current South Coast Water District numbers would have increased an average customer's monthly bill by roughly $1.80 if added in 2029 (model inputs contingent on project design and financing).

Ending: Staff will draft the final cost‑of‑service report, prepare required Proposition 218 notices and return for a public hearing. The council’s direction begins the standard rate‑setting sequence; the council may adopt different amounts or timing after the public hearing.