Consultant outlines multiyear water and wastewater rate increases, proposes baseline cut and new drought surcharge

Mark Hildebrand, the rate consultant hired by the city, told the Merced City Council that the city must align its rates with legal limits under Proposition 218 and finance a backlog of repair and rehabilitation projects while maintaining minimum reserves. "You can't charge more than the cost of providing service," Hildebrand said, summarizing the legal constraint that frames the study.

Hildebrand said the water enterprise currently holds healthy reserves — an operating fund roughly $40 million and a capital facility fund of about $53 million — but the next decade will draw those reserves down as capital delivery increases. The consultant showed average historic capital spending near $272,000 and a planned increase to about $8.7 million per year to clear an encumbered backlog (about $23 million), saying the study assumes no new debt for water at this time.

To close forecast gaps, the presentation proposed a five‑year rate adoption window (legal maximum for adoption at one time) with an illustrative five‑year revenue plan shown as 8% increases per year for three years followed by 7% in years four and five. Hildebrand said the 8%/7% numbers are a revenue plan; the first‑year bill impacts vary because of a structural change in rate design.

On rate design, the study recommends lowering the fixed "allocation" included with the meter charge from 20 HCF to 15 HCF for the smallest meter classes, shifting a portion of recovery from fixed to usage charges. Hildebrand said the average residential use is about 16 HCF and that the change would better target the baseline to typical use. He showed bill‑impact examples in which low‑use single‑family customers would face minimal increases (a $0.55, or 1.7%, example) while higher users would see larger percentage increases in year one, with identical percentage increases for all customers in subsequent years.

The consultant also proposed a water shortage surcharge tied to the city's existing shortage stages (part of the urban water management plan). Under the proposal the city council would have to declare implementation of a stage and the surcharge would increase rates incrementally (examples shown: 5% at shortage level 3 up to 21% at level 6) rather than requiring an emergency rate study.

On wastewater, Hildebrand noted that there has not been a formal rate study since about 2011 and that wastewater faces a much larger near‑term capital program. He presented two scenarios for a major treatment plant project: (1) a $30 million federal seismic retrofit grant plus $37 million cash; or (2) no grant and a low‑interest State Revolving Fund (SRF) loan of roughly $50 million plus $17 million cash. The consultant said both scenarios produce very similar recommended rate paths in the near term, though the non‑grant scenario would raise rates more in years nine and ten because of debt service.

Capital facility fees were updated in the study: the water expansion need was identified at about $131 million (roughly 14.4 million gallons per day of capacity), producing only a small increase (about 2%) in water capital facility fees; wastewater fees rose more sharply as the study apportioned roughly $33 million to collection system improvements and $52 million to plant expansion, yielding an example per‑unit fee that increased from $7,433 to about $10,882 for a typical single‑family equivalent (a roughly 45% jump).

Council members and staff pressed for clarifications on the jump in capital spending, collection of delinquent accounts, conservation effects, and whether the city would realize full collections from higher rates. Finance Director Venus Rodriguez noted the city uses termination (under SB 998 safeguards) as a tool that often encourages payment of delinquent accounts.

The presentation concluded with a discussion of AB 2257, a statutory process that supplements Prop 218 by adding a written objection/administrative review step intended to reduce litigation risk. Hildebrand recommended the city consider adopting the AB 2257 administrative objection language into its outreach and Prop 218 notice strategy to provide an early legal review of objections rather than face litigation later.

Next steps: staff and the consultant will finalize the written report and return to council with materials needed to start a Prop 218 notification and public hearing process; no formal rate adoption or vote occurred at this meeting.