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?


12 thoughts on “Tiered Water Rates – Part 3

  1. This week the City sent out the most deceptive letter ever in regards to the public meeting on water rates. The letter, with the City name and address on the return label, contained two pieces of paper (one gold, one green) with information about the Community Center. I began to throw the whole thing away when I saw the white folded paper stuck between. This is where the notice of the public meeting was.

    I contacted four neighbors who all saw the letter and threw it away thinking it was junk mail. I can guarantee that this was intentionally done to deceive and hide the meeting from the public. This matter is of great importance to every citizen in Brea and should have been presented as such in a clear, concise manner so it would garner every citizens attention when the notice was sent. Thoughts Rick?

    • Paul… Out of curiosity, how can you guarantee this was done with malicious intent? The public meeting notice was sent out last month, on its own, to all water customers. I’m told (not by staff by the way) the notice in the mailer you’re talking about is just a copy.

  2. Rick,

    I can’t guarantee that this was done maliciously, and quite frankly, it probably wasn’t. More than likely it was probably a poor decision by someone to include it with the Community Center announcements, and the above was my knee jerk reaction to that poor decision. Now whether or not the next part of the letter I want to speak of was done maliciously, I won’t say either way.

    The part I’m talking about is the ability for citizens to protest this absurd rate action (hike). On the very form we’re chatting about is the following information;

    1. To protest this proposed rate action (hike), a letter must be received by February 2, 2016 – email will also be accepted.

    2. Each protest must provide the affected property and must indicate that the protest is specifically related to the proposed Customer Charge increases AND include signature and name of citizen.

    3. Even though the City is holding a public hearing, NONE of the comments made by citizens of Brea will count as protests.

    Let me repeat that with an extreme example; If EVERY citizen of Brea shows up to the public hearing and protests this rate action (hike), NONE of those of those statements would qualify as a protest. We could basically pull a Frankenstein with pitch forks and torches and that would not be considered as a protest to this action.

    4. If protests are received by a majority of the affected parcels, the proposed rate action (hike) will not be implemented.

    So why isn’t this going to be a ballot issue? Shouldn’t everyone in Brea be allowed to protest via the ballot box and not by writing a letter/email? This is where government fails the average tax payer.

    • Paul… I read about these protest letters on Nextdoor and had similar thoughts. It sounds a bit like something the state might have incorporated into Prop 218, which you’ll recall was a ballot measure passed by voters. While there may be some prohibition to tally anything but letters, you can bet that Council can be influenced by a congo line of articulate dissenters at the podium.

      Brea has never adopted term limits, the argument has always been “protest at the ballot box.” You’ve seen how well that works.

      By the way… the public meeting is being held on Groundhog Day. I wonder what sort of omen that might be?

    • Note that you can hand in a written letter at the Feb 2 hearing and your protest will be counted. I plan on mentioning this when I speak at the hearing.

      The protests have to be tallied somehow so it makes sense that only written (or emailed) protests will be considered.

      Making this a ballot issue would cost more taxpayer money and would delay the rate change until November. The rate change is already well overdue. Longer delays means more money will need to be pulled from reserves to keep the water system running, which means rates will have to be set even higher to compensate.

      • Jason… Thanks for the clarification. I’m glad to know that those attending the meeting can hand in their protest.

        Maybe it is just a semantics thing, but how does tallying the protests provide a useful number? How useful would it be to know how many left-handed redheads live in Brea east of the 57 freeway if twice as many live to the west?

        I would hope that the protests AND the comments made at the hearing would be considered — even if only the written protests would be counted. Ignoring the comments goes against the very purpose of holding a public hearing.

        Your point regarding further delay is well taken. Is it possible that Council would recognize the greater merit of your plan and adopt it over the plan provided by the consultant?

    • According to Prop 218, they have to count the number of individual water customers (e.g. households and businesses) that file a protest and compare the number of protests received against the total number of water customers. If they also count verbal protests (which is not in the Prop 218 language), they would need to cross reference the verbal protests with the written protests to ensure there are no duplicates, and also verify that only one protest from each household/business is counted.

      Taking an extra minute or two to write down your name/address or send an email doesn’t seem like an excessive burden for protesters.

      As far as the impact of comments at the hearing…the council has leeway to stick to the minimum fixed charge and maximum commodity charge indefinitely instead of implementing the large hikes to fixed charges, even if there are not enough protests to reject the changes. I would hope that there are enough comments on this specific topic (keeping fixed charges low) to sway the council to do this. Comments that oppose any rate increase whatsoever would not be as productive, since that’s simply not a viable option.

      I think it would be useful to look at alternative rate plan options as a strategic discussion down the road, but for the purpose of this hearing it’s important to implement a reasonable increase ASAP.

      If these changes are rejected, I would support (as a short term fix) a new proposal similar to the current one, but restricted to the minimum fixed charge and maximum commodity charge, and with language that commits the council to reevaluating rates on a regular basis to ensure we’re not paying too much or too little.

      • Jason… I figured Prop 218 was at fault. Leave it to legal language to cloud every issue possible. “Taking an extra minute or two to write down your name/address or send an email…” is a burden to folks who have done little or nothing forever.

        I agree, the horse is out of the barn. Objecting to any increase is wasted effort. I hope you’re able to drive home your point regarding minimum fixed charge and maximum commodity charge to Council in a way they will feel compelled to embrace. They should toss out the consultant’s plan and ask for their (our) money back.

  3. My question is: How come no one is protesting the fact that basically this is an endeavor by the City Council to SHIFT the costs of maintaining the water supply system from mixed residential/commercial to residential consumers? The folks who use less water. Speaking of the fixed rate/per-meter charges only.

    Look at the chart: They’re actually proposing in their chart if you look at it closely to LOWER rates for commercial users, NOT raise them and raise the rates for residential users from at the lowest 12% to at highest 57% !!!!

    In contrast, commercial rates are being REDUCED from 19 to 38% at low end, to raised at most 6% to reduced 15.5% at the middle of range (calculated by me), to being raised at most 31% down to 7% (vs. residential 57%) at highest end.

    Now, if the City Council felt that commercial users are somehow being overcharged and they want to rectify this, then offer a clear and rational explanation of the situation, and I’m sure people would be understanding. But to purport to be imposing an increase on everyone when it’s actually a plan to shift costs to homeowners is inexcusable.

    Do you have a way to post .pdf files? I can send you my spreadsheet with calculations or a .pdf of same if you like.

    Everyone should protest this until the Council can be honest and forthcoming about what they’re doing, not trying to sneak commercial decreases through under the guise of an “Increase for everybody” by hoping no one will pay enough attention to the gibberish on the notice to realize.

    • Kevin… Generally I take a dim view of anonymous commenters, however, as you seem to be a resident of Blackstone/Brea who has obviously done his homework, I welcome your remarks.

      On Nextdoor Jason Kraft summarized his prime concerns and I asked Jason to please explain in plain language for us dummies.

      Here are his key concerns:

      • Hold fixed charges at the 14% level.
      • Reevaluate and adjust commodity charges on a regular basis.
      • Look into strategic solutions for alternative rate plans.

      Here is his response:

      The proposal allows the flat monthly charge (fixed charge) to increase to a point where it covers 14% of all revenue, this would increase the current $9.66 flat monthly charge for most residential customers to $10.81/month. This is a relatively minor increase. However, it also allows the flat monthly charge to increase to where it covers up to 20% of all revenue, which means the flat monthly charge for residential customers would be $15.16.

      If the flat monthly charge is increased to 20%, the commodity charge rate (what we pay per unit of water) for tier 4 would drop below the current tier 4 rate, while the rate for tier 1 would still be higher. This is essentially giving a break to those who use the most water, paid for by those who use the least. That’s why it’s important to keep fixed charges at 14%; it’s the least objectionable solution in the proposal.

      The rationale for increasing flat monthly charges is to collect more revenue from charges that don’t depend on usage, so we don’t have a situation in the future where lower usage causes a revenue shortfall. While this makes sense from a financial perspective, it imposes a significant hardship on low income customers and greatly reduces the effectiveness of the Lifeline program. The revenue shortfall issue could instead be addressed by examining rates more often (for example, every time supply cost from Cal Domestic or MWDOC changes), looking at historical and forecasted usage to adjust rates up or down accordingly so total revenue more closely matches total costs.

      The last point is where other rate proposals come in. We don’t have time to start from scratch (we are burning through reserves every month until higher rates are put in place), but after we have an approved interim solution in place it would make sense to start looking at how to simplify the rate structure, so the city can implement changes without paying for expensive consultants.

      A reminder to all, Council is holding the hearing as part of a general session, not a special meeting. If you feel strongly, please be there next Tuesday, Feb. 2nd. at 7:00 pm, and make your comments during the hearing, not Matters From The Audience.

      Get the agenda and staff report here: AGENDA/REPORT

  4. Yes, Mr. Kraft’s explanation and analysis is valuable in understanding the overall picture and the variables at play. It doesn’t address my concern however. And unless I am missing something (completely possible) it seems like it would be much easier to keep the fixed charges at 14% – as stated – if we weren’t giving a huge break to commercial customers, instead of raising the fixed rates the same percentage for everyone (until at some point the entire formula is re-thought out).

    Please view this ATTACHMENT for the data related to this comment.

    Note for 1-1/2 thru 12″ meters the amounts in column 3 go down drastically from the rates currently being charged. Hence the large negative percentages. Why?

    I understand the need to move from a volumetric based system to more emphasis on the fixed side. So why are fixed rates for highest users proposed to be REDUCED? Doesn’t make sense.

    • Kevin… You concern seems quite valid and I encourage you to speak at the hearing this evening. Print out your data with enough copies for Council and Staff (perhaps a dozen copies) and hand them to the City Clerk as you approach the podium to speak. Thanks again for the hard work.

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