DATE: November 5, 2025
TO: Honorable Mayor and City Councilmembers
FROM: Water Utilities Department
TITLE: ADJUSTMENTS TO CUSTOMER RATES FOR WATER, RECYCLED WATER, AND WASTEWATER
RECOMMENDATION
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Staff recommends that the City Council adopt resolutions approving rate adjustments for calendar years 2026 and 2027 for water, recycled water and wastewater.
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BACKGROUND AND ANALYSIS
On October 1, 2025, the City Council held a public hearing to consider adjusting the rates customers are charged for Water, Recycled Water and Wastewater. The public hearing was closed, City Council deliberated, and the item was continued until November 5, 2025, to allow staff additional time to gather information in response to public comment and Council inquiries regarding the possibility of pursuing rate increases lower than initially recommended by staff. The staff report from that hearing is included as Attachment 2.
Staff believes that the initial rate increases presented on October 1 remain the most prudent option as the rates presented on that date would ensure that capital project delivery remains fully funded and without disruption to current and planned staffing levels. As noted later in this staff report, reducing the rate increases below the initially recommended levels will likely impact service delivery to the City’s rate payers. However, in light of the inquiries received at the October 1 meeting, staff has revisited the financial models and developed an option for Council consideration that would halve the increases previously suggested for Year 1 of the two-year plan. Year 2 increases would remain as originally proposed. Under this revised option, the City-controlled rate increases would be reduced from 6% for water and 4% for wastewater to 3% for water and 2% for wastewater in Year 1, with 6% increases for water and 4% increases for wastewater in Year 2. The revised proposed water and wastewater rates are reflected in the resolutions included as Attachments B and C, respectively, and would take effect on January 1st of each year.
A summary of the actions requested is outlined below:
• A 3% average increase in City water rates in 2026 with a 6% average increase in 2027 (original staff recommendation was a 6% average in both years)
• A 2% average increase in City wastewater rates in 2026 with a 4% increase in 2027 (original staff recommendation was a 4% average in both years)
• Increases to the City Watershed Protection Charge
• Increase to Fire Protection Line Service Charge per connection.
• Adjustments to external water agency pass-through costs from the San Diego County Water Authority and Metropolitan Water District
The City’s water and wastewater rates are structured to recover costs through both fixed monthly charges and volumetric charges based on consumption. The City-controlled portion of the rate increase is necessary to meet ongoing cost increases for utilities, chemicals, equipment, and materials, as well as to address construction cost inflation. It is also required to fund the replacement of aging infrastructure, maintain system reliability, expand local water supply, and meet debt coverage requirements.
While the Water and Wastewater Funds currently maintain strong reserve balances, several major capital projects are scheduled to enter construction in the near term, including the Downtown Water and Sewer Replacement Phase 2, Sewer Centralization project components, and improvements at the Mission Basin Groundwater Purification Facility. These projects are expected to draw significantly on existing reserves over the next several years, which may reduce available liquidity. Reductions in operating revenues, as compared to the initial proposal, will narrow the debt service coverage ratio in the near term.
In addition, reduced revenue growth realized from the reduced Year 1 rate could potentially increase the need for future borrowing to maintain momentum on essential infrastructure projects. To help mitigate these pressures, staff would implement several cost-saving and revenue-enhancing measures, including the proposed introduction of a credit card convenience fee for utility bill payments (subject to future City Council review and approval), the elimination of after-hours non-emergency water service responses, and strategic budget savings resulting from accrued salary vacancies.
Pass-through costs from the San Diego County Water Authority (SDCWA) and Metropolitan Water District (MWD) are updated annually based on those agencies’ adopted rates and the amount of imported water purchased. These pass-through charges are explained below in the Water section. There are no external provider costs that impact wastewater rates; they are entirely based on the City’s cost to provide the service.
It’s important to note that, even with the proposed water rate and external provider rate increases, Oceanside’s water rates would remain below the median for the region as shown in Attachments D1 and D2.
Revenue Requirement and Debt Coverage
The Water and Wastewater Financial Model includes a determination of the Water and Wastewater Funds’ revenue requirements. The revenue requirement is the amount needed each year to fund the water and wastewater utilities. The water and wastewater rates and charges are set to ensure these needs are met; if projected revenues fall short, adjustments are required.
Existing Debt Covenants require a minimum coverage ratio of 1.25 to 1, or that the utility generates $1.25 of net revenues for every $1 of debt service. The proposed rates will achieve a 1.32 coverage ratio, providing only a minimal buffer in the event of an unexpected decrease in revenues, such as a wet winter resulting in lower water sales during wetter or an unexpected increase in operating expenses.
WATER - Proposed Changes
The City’s potable and recycled water rates are designed to recover the full cost of providing safe, reliable service through a combination of fixed service charges, and volumetric commodity charges, and pass-through charges.
• City-controlled Potable and Recycled Water Rates: This is comprised of a fixed monthly service charge and a usage commodity charge. The base monthly service charge is paid regardless of water consumed at the property and is imposed proportionate to the water meter size. The proposed commodity charges for residential customers consist of two pricing tiers, expressed in units. One unit is equal to 748 gallons or one hundred cubic feet (HCF). Tier 1 water is considered “essential consumption” and is priced lower. Consumption above the Tier 1 limit falls within Tier 2 and is more expensive. Non-residential rates are not subject to a tier structure. These rates will increase an average of 3% across all rate categories in 2026 and 6% in 2027.
• City-controlled Watershed Protection Charge: This charge recovers the cost of the City’s watershed protection activities. The charge will increase from $0.27 per unit of water in 2025 to $0.31 in 2026 and $0.32 in 2027. This reflects an increase of 14.8% in 2026 and 3.2% in 2027.
• City-controlled Fire Protection Line Service Charge: The fee is based on the number of fire service connections per account to the City’s water system and is independent of the water meter size. The charge is recommended to increase from $22.03 in 2025 to $22.75 in 2026 and $24.11 in 2027. This represents a 3.3% increase in 2026 and a 6.0% increase in 2027.
• MWD’s Readiness-to-Serve Charge (MWD RTS) Pass-through to City: This is a fixed pass-through charge based on meter size that recovers the cost of standby and peak conveyance capacity and emergency storage. The MWD RTS charge will decrease by $0.01 for a 5/8-inch meter, the typical size for a single-family residential meter, and then increase by $0.07 in 2027. This represents an average decrease of 1.6% in 2026, followed by an average increase of 11.7% in 2027 across all meter sizes.
• SDCWA Infrastructure Access Charge (IAC) Pass-through to City: This is a fixed pass-through monthly charge based on meter size that recovers the cost of maintaining connections to the SDCWA system. The charge will be $4.55 for a typical 5/8-inch meter in 2026, and increase to $4.89 in 2027. This represents up to a 0.2% increase in 2026 and up to a 7.5% increase in 2027.
• SDCWA Surcharge Pass-through to City: This is a volumetric charge based on the amount of water consumed each month. It recovers the cost of purchasing water from SDCWA. The surcharge will increase to $4.35 per unit in 2026 and $4.99 per unit in 2027. This represents an increase of 25.4% in 2026 and 14.7% in 2027. This charge is expected to decline in the future as Oceanside continues to expand its local water supply.
Below in Table 1 is an example of water charges for typical single-family residential customers with the proposed City rate and pass-through charge adjustments. It is important to note that the majority of projected cost increases result from the pass-through charges from MWD and SDCWA. A gallon of Oceanside tap water will retail for under two-cents, even with all the proposed water rate increases.
Table 1 Water Monthly Bill for Typical Single-Family Residential
WASTEWATER - Proposed Changes:
Wastewater rates consist of a fixed service charge that is determined by the number of residential dwellings for residential customers or by water meter size for non-residential customers. Unlike water rates, they do not include pass-through charges from outside agencies.
Wastewater Rates: The flow charge is volumetric-based and is determined by the customer class. Both non-residential customers and customers in multi-family complexes have a flow charge that is based on a percentage of water used.
Residential accounts serving individual dwellings on a master meter, such as manufactured homes and master-metered single-family accounts, pay a flow charge based on the number of dwelling units. For single-family residential accounts, each customer’s wastewater discharge is based on the winter quarter average (WQA). The WQA is based on water consumption during January, February, and March, when outdoor water use is typically at its lowest. It is reasonably assumed that most water used during this period is returned to the wastewater system. WQA rates are effective for one year, beginning in July, and are reset annually.
Below in Table 2 is an example of wastewater charges for a typical single-family residential customer at various WQA levels with the proposed City wastewater rate increases.
Table 2. Comparison of Wastewater Rates Impact
Even with the proposed adjustments, Oceanside’s rates will remain below the regional median, reflecting the City’s commitment to affordability and responsible financial management. The phased approach ensures continued investment in critical infrastructure and local water supply reliability while minimizing impacts to customers.
FISCAL IMPACT
The proposed water and wastewater rate adjustments are necessary to keep the utilities financially sustainable and aligned with long-term operating and capital needs. These adjustments will generate the revenue needed to operate, maintain, and improve the City’s water and wastewater systems while meeting all debt service and coverage requirements. The increases have been factored into the Department’s financial models to ensure projected revenues match anticipated expenditures in FY 2025-26 and beyond.
City-controlled Water Rate Three Percent Increase
The FY 2025-26 impact for the six-month period of January 2026 to June 2026, is projected to increase revenues by an estimated $601,000. Revenues for a full year of the rate increase are estimated at $1,400,000 to meet expected expenditures. This revenue is included in the Department’s rate modeling budget planning.
City-controlled Fire Service Charge Increase
The proposed adjustments to the Fire Service Charge is projected to increase revenues by an estimated $6,000. The additional revenue is included in rate modeling and supports the ongoing cost of this service.
City-controlled Watershed Protection Program Charge Increase
The increase in the Watershed Protection Program charge is projected to increase revenues by an estimated $49,000. This revenue is incorporated into the Department’s financial planning to ensure sustained program funding.
Wastewater Two Percent Increase
The FY 2025-26 impact for the six-month period of January 2026 to June 2026, is projected to increase revenues by an estimated $504,000. Revenues for a full year of the rate increase are estimated to be $1.0 million to meet expected expenditures. This revenue is included in the Department’s rate modeling budget planning.
COMMISSION OR COMMITTEE REPORT
The Utilities Commission approved staff’s recommendations at its regularly scheduled meeting on July 15, 2025.
CITY ATTORNEY’S ANALYSIS
The referenced documents have been reviewed by the City Attorney and approved as to form.
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Prepared by: John McKelvey, Principal Management Analyst
Reviewed by: Frederick Mayo, Water Utilities Director
Submitted by: Jonathan Borrego, City Manager
ATTACHMENTS:
1. Staff Report
2. A. 10/15/2025 Staff Report
3. B. Resolution Adopting Water User Rates and Agency Pass through Fees
4. C. Resolution Adopting Wastewater User Rates and Special User Fees
5. D1 Regional Water Rates Comparison
6. D2 Regional Wastewater Rates Comparison