By law, rate increases can only be given to cover increased costs. The main reason for cost increases is the need to replace old pumps, pipes and tanks with new ones. Much of California's water facilities were installed after World War II. These facilities are reaching the end of their useful life. But pipe that was installed for $1 per foot in the 1950s (and that customers have been paying for at that rate) is being replaced with pipe that costs $40 to $100 dollars per foot. Generally, water rates will always increase faster than inflation for the above reason.
Another significant factor in costs is the new Federal and State-imposed drinking water standards. For example, perchlorate, a chemical used in rocket-fuel, has been detected in groundwater. The California Department of Heath Services has been ordered by the Legislature to set standards for it. Once set, water companies will be forced to pay to treat the water for perchlorate, and these costs will be passed on to the customers in a general rate case. For small systems, the utility can submit an advice letter request to the PUC to recover those costs.