Tiered Water Rates – Part 3

tiered water ratesA couple of months ago Brea Matters shared a very creative and user friendly formula for tiered water rates from Jason Kraft. Jason has continued to follow this closely and, with a critical public hearing scheduled for February 2, it’s time to share Jason’s sequel… and thankfully we don’t need to be rocket scientists to understand his plan.

Tiered Water Rates – It’s Time To Act!

By: Jason Kraft

Jason KraftYou probably received a notice in your mail recently indicating that a public hearing for a tiered water rate increase will be held at the Brea city council meeting on Tuesday, Feb 2, 2016 at 7pm, with a proposed effective date of Feb 8, 2016.

The proposed changes would increase the fixed rate for most residential water customers from $9.66 to a minimum of $10.81 and a maximum of $15.16. The variable rate — which is based on water usage — will also change, with the lowest tier of usage seeing the highest percentage increase.

The notice includes examples of how the change will impact monthly bills: someone who uses very little water will see their bill increase between 12% and 38%. Bills for average users would be 12% to 15% higher, while a heavy water user will see increases from 0.5% to 8%.

Why are tiered water rates increasing?

There are two major issues with water rates in Brea (and just about everywhere else in California): the gap between costs and revenue, and the financial volatility caused by relying on commodity charges to fund fixed infrastructure.

If you look at the fixed costs involved in maintaining our water infrastructure (which is the same regardless of usage) and the declining revenues from conservation, there are not enough revenues to cover those fixed costs. This is an urgent, short-term tactical issue that needs to be addressed ASAP to avoid even higher rates down the road.

tiered water ratesThe second issue relating to financial volatility is actually the root cause of the revenue gap. Since a large percentage of our fixed costs are paid for by water usage fees, when water usage falls we don’t collect enough revenue to pay those costs with the existing rates. The obvious solution is to just increase the fixed charge to a point where fixed revenue closely matches fixed costs, but the discrepancy is so large (63% of costs are fixed compared to 13% of revenue) that the resulting fixed charge would need to be ridiculously high.

This is what’s happening in Yorba Linda, who used the same tiered water rate consultant (Raftelis Financial Consultants) as Brea.

The compromise solution in Brea’s proposal increases the % of revenue from fixed charges to 14% (this is the minimum proposed fixed charge), then 17%, then 20%. That’s great, but even with the highest proposed fixed charge you still have 20% revenue from fixed vs 63% of costs. How much would this really reduce volatility, and is it worth burdening light water users and lower income residents with larger fixed charge increases that will never be rolled back?

To keep the system running, revenue has to increase, but the structure of the proposed increase puts too much of a burden on those who use the least amount of water. It’s an especially raw deal for Lifeline customers: the good news is they still get a 20% discount on fixed charges, but the bad news is those fixed charges will increase by 57% within a few years. I don’t think that’s fair.

Fixing the existing proposal.

tiered water ratesThere is a simple short-term solution to this short-term problem: keep the existing structure as-is and just apply a uniform increase to both fixed and commodity costs. I haven’t run the numbers for this but it should be similar to what you see on your rate notice for the minimum proposed fixed charge, maximum proposed commodity charge, and bill impacts for minimum proposed fixed charges.

If we look at the existing proposal, removing the proposed ramp-up for fixed charges in future years would result in bill increases about 8-12% across the board. I could get behind this proposal without the fixed charge ramp-up as a short-term fix. It’s not ideal but it would work for now, as it would only require minimal modification to the proposal and the city could save face on the money spent for the water rate consultant (which is an entirely separate issue).

Proactive water rates for the future.

Some of you may have heard me speak about this at the Nov 17th city council meeting, where I discussed an alternative tiered water rate structure that also meets revenue goals. The alternative structure I presented imposes a much smaller fixed charge increase, simplifies the tier structure so most customers stay within the first tier, and creates three tiers that align with the actual supply costs of our different water sources.

tiered water ratesThe solution I put together involves looking at historical and forecasted usage data to get an idea of how much the water district will have to pay during the next fiscal year for both fixed costs and commodity costs (supply and delivery). Once you have that cost number, you can look at each customer type based on their usage share, and set commodity rates for that customer type so the revenue from their forecasted usage matches their share of costs.

The rates can be adjusted as needed when supply costs or forecasts change. I put together an Excel worksheet that handles all the calculations, so the readjustment process is pretty simple.

With my solution the fixed charge would only see a small increase, which means commodity charges would still be contributing a significant amount towards fixed costs. However, if you reevaluate rates on a regular basis using usage data we already collect, changes in usage patterns would impact rates more quickly and there would be no excessive deficit or surplus.

I also propose changing to a 3 tier system to match supply costs of our water sources (Cal Domestic shares, Cal Domestic overage, and MWDOC). From a Prop 218 perspective this should be more legally defensible than the current 4 tier system, which as far as I can tell is not based on supply costs at all.

What you can do about it?

According to Prop 218, if a majority of Brea water customers submit a written protest by Feb 2, 2016, the rate increase will not be implemented.

If you’d like to file a protest, you can mail or hand deliver a letter to the City Clerk’s Office, 3rd Floor, 1 Civic Center Circle, Brea CA 92821, or you can email CityClerksGroup@cityofbrea.net. The protest must include the address of the affected property, the name of the property owner or tenant, and a note indicating that the protest is related to the proposed Customer Charge increases.

Note that if you speak at the Feb 2 hearing, your protest will only be counted if you also submit a written letter or send an email.

Due to the time constraints of the existing revenue gap and limitations in the city’s utility billing software (which would increase development time needed to implement a proposal with too many changes) I think the best course of action in the short term is to reject this proposal, modify it to remove the 17% and 20% fixed charge options, and send out a new public hearing notice with the revised proposal ASAP.

Then, we can start a real discussion about how to strategically shift tiered water rates so they make sense — and this time let’s see what Brea residents can come up with before throwing more money at consultants.

tiered water ratesIf you find this still a bit above your pay grade, as I do, at least file your official protest with the City Clerk as Jason Suggests. We should be willing to put the brakes on even if Council seems hell bent on rushing to judgement.

The first step to getting Council and staff to seriously consider and adopt ideas coming from the public is to convince them that doing so isn’t an admission of failure on their part. We’re a team, right? We share the common goal of putting Brea first, right?

If staff and Council aren’t willing to meet us half way, what right do we have to expect anything we contribute to Envision Brea to be implemented?