My View: Bait and Switch on Water Rates?

Williams-presentation-photoSo yesterday, in addition to other issues, I got the answer to how do I vote if I want to keep the current CBFR rate structure in place – the current CBFR rate structure does not exist.

At Tuesday’s meeting, Councilmember Brett Lee stated, “I discovered just recently that CBFR is not calculated in the way that I thought it was.” This is part of what prompted the councilmember to state “If Measure P passes I want to redo the rates. If Measure P doesn’t pass, I want to redo the rates anyway.”

While Herb Niederberger noted in his email, “’Modified CBFR’ eliminated the prior 6 month look-back, but in doing so transformed the original CBFR rate design into the aforementioned Conventional Rate Design where 13% of the total water revenue required is recovered from the revenue derived from fixed rates.” But in effect, that’s what they have done with the original CBFR anyway.

What they have basically done is calculated the revenue they need, estimated the supply charge based on that revenue need, and as long as they keep the rates at or before the Prop 218 noticed levels, they are okay legally doing so. At the same time, it is believed that they have probably over-estimated the charges in order to be sure they meet revenue needs.

As one councilmember told the Vanguard, in following the legal restrictions of the noticing provisions of Proposition 218 (as recommended by their Prop 218 lawyer Kelly Salt and their rate consultant Doug Dove), the city has done away with the most appealing parts of CBFR and left in place the worst elements such as the look-back.

Herb Niederberger explains some of this in his exchange with Brett Lee on Tuesday night.

Brett Lee stated, “One of the elegant things about the CBFR proposal was that people were charged exactly based upon their proportional use of the plant and the proportional costs of the plant.”

But, as Mr. Niederberger explained, that’s not how the city is doing the calculations presently.

“What you are talking about originally with the look back was how we originally proposed CBFR but it became really apparent that we couldn’t give you a year-to-year projection on how much revenue would be generated if we were constantly changing that rate,” he explained. “So one of the solutions was the six-month look-back and we fixed the water supply fee based upon a projected demand during that period. So because remember we have a demand and then we projected a reduction in demand over time because of the conservation but again remember that demand peaks in July.”

Mr. Niederberger continued, “If we take the hypothetical average user – the median user is 11 CCF per month over time, but during the peak period it’s 17 CCF per month – you take that portion of the demand divided by how much revenue you need to generate and that’s how that’s how the revenue is calculated on the supply fee but it takes all those components, groundwater, surface water, and capital, and puts it into that fee. “

He would add, “One of the things that my basic understanding of what is presented tonight is it essentially takes your supply fee and wraps it into your demand fee, so it’s really two components I think, it’s really a fixed portion and a variable portion but the variable portion is two components, both new charge of demand and supply fee. So what I think what happens there is you end with a fee where you’re only collecting 13% of your revenue in the fixed charge, the other 87% is in this variable charge and that’s the fundamental difference between what was proposed tonight and what was proposed last year with the six-month look back.”

Councilmember Brett Lee continued, “So under the currently envisioned CBFR process there is estimation going on. There is estimation of what the general overall demand will be incorporating that conservation component, and then the price per ccf is based upon the 218 rate that was calculated based upon the assumed usage and the need to cover the revenue.”

Harriet Steiner agreed with Councilmember Lee’s interpretation.  If Kelly Salt and Doug Dove had been in the room, they would have agreed as well.

What becomes clear is that the city did not do what the voters thought they were doing in terms of CBFR and the Prop 218 rates. Unfortunately for the voters, not only is the Prop 218 process itself limited as a mechanism for the voters to control water rates, but it’s limited in constraining the city – it seems that the city believes as long as the rates come in at or below Prop 218 published rates, they are in the clear in terms of transparency of formula.

I believe there is going to be a natural tendency for people to, as a matter of principle, vote yes on Measure P.

Matt Williams lays out the choices to the voters, “A Yes vote forces Council to change the rates. A No vote leaves it to Council’s discretion to change the rates (or not change the rates).”  Mr. Williams then states emphatically,  “With Council’s actions on Tuesday they made it clear that regardless of whether Yes prevails or No prevails the rates will be changing because of the input they have received from the community dialogue that the democratic process has produced.

He argues that as a result of the Tuesday council’s 5-0 vote on Brett Lee’s motion, the Measure P choices for most voters are now, “Council will be changing the rates in an considered, open, transparent way without $25 to $100 million of fiscal liability risk. (the result if you vote No).” Or, “Council will be changing the rates in the same considered, open, transparent way with $25 to $100 million of fiscal liability risk. (the result if you vote Yes).”

“Which of those two outcomes makes more sense to you?” he asks. “Said another way, what incremental benefit do you receive for taking on the incremental $25 to $100 million of fiscal liability risk?”

To evaluate the risk of liability, we go back to the city’s April analysis of the probable impact of Measure P’s passage.

Staff notes, “Passage of Measure ‘P’ would limit the ability of the City to meet deadlines stipulated in the agreement and affect the City’s ability to pay its obligations. In effect, passage of Measure ‘P’ can trigger the Termination Sections of the JPA.”

Staff continues, “City staff has reviewed the fiscal and legal impacts if Measure P were to pass and has determined that the passage of Measure ‘P’ could have several adverse cost impacts. These impacts assume that the City will not be able to timely adopt new water rates that fully cover the upcoming costs of the DWWSP [Davis-Woodland Water Supply Project] and provide this funding within the timelines necessary to avoid a default on the City’s obligations for this project.”

Staff estimates that it would take 75 to 90 days (two and a half to three months) to adopt new water rates.

The city highlights several key impacts.  First, “Davis will not be able to proceed with financing of the DWWSP and will not have funds to proceed with the remainder of the Davis Water improvement projects.”

There are huge financial impacts of up to $25 million for the city of Davis, but the bigger problem is that damages to Woodland would be around $50 million.

City staff estimates, “Davis would likely miss the opportunity to finance the DWWSP and other Water improvements at the lowest interest rates. This has the potential to cost Davis residents over $100 million in long term project costs.”

Third, “If the City cannot perform its obligations to fund construction of the DWWSP and foregoes its chances to conjunctively use surface water to meet the demands of its residents, then the City will be mandated to retrofit at least 12 groundwater wells to treat for hexavalent chromium. The construction costs for wellhead treatment are estimated at $1 million per site or a $12 million immediate impact. The City does not have reliable estimated costs for the annual O&M costs for this treatment and removal but it could easily exceed $1 million annually.”

Finally, “If the City cannot perform its obligations to fund construction of the DWWSP and foregoes its chances to conjunctively use surface water to meet the demands of its residents, this will adversely impact the design and operation of the wastewater treatment plant improvement project. The City’s Wastewater NPDES Permit adopted in October 2013 contains water quality standards for Selenium and Electrical Conductivity that can only effectively be met with the City migrating to surface water or conjunctive use (combining surface water and deep wells). There are no viable solutions to meet these water quality standards through improvements at the wastewater treatment plant.”

But that plays out like a worst-case scenario.

Sue Greenwald differs in that view, putting out a statement to this effect, “It is unfortunate that city staff and the City Council have given false information to the press and to citizens regarding potential costs to the water project if Measure P passes. Not only is it morally wrong, but it deprives council of an important opportunity to learn what citizens really think about the rate structure. The truth is that the passage of Measure P will NOT cause the water project to fall through, will NOT cause the project to cost more, will NOT cause us to lose low interest loans. All Measure P does is roll back the water rates to what they were last year for the 2 or 2 1/2 months until Council puts a fairer rate through the Prop. 218 process. Our reserves are more than enough to make up the relatively small shortfall. Since the project will not fall through, there will be no fines or penalties. And we will not lose low-interest loans. The state low interest loans were lost because council made a terrible error when they chose a project with privatized operations. The state has a law against giving its low-interest loans when projects with privatized operations are involved. This problem has nothing to do with Measure P one way or the other.”

The voters will naturally have to weigh the risk here. The city obviously paints the worst-case scenario, but that doesn’t mean they won’t find a way to make it through the 90 to 120 days it would take to come up with new rates and put forth a Prop 218 process. Woodland obviously would have a vested interest in seeing that the project not collapse in the interim as well, which is something that the city staff report does not seem to take into account.

That leads us to a final point which is people will naturally wonder why Davis has turned their process into a circus while Woodland has managed to get to the point of implementation with no drama whatsoever.

When I looked at the current rate impact in the fall of 2011, I was appalled by the inequity in the traditional rate structure. Matt Williams and Frank Loge noted this deficiency as well and constructed a way to greatly reduce the inequity. They convinced first the WAC and then council and ultimately the community through Measure I, and got the Prop 218 to go along with it.

If there was a fatal flaw here, it was born out of good intentions of fixing a very inequitable system. It was this system that Donna Lemongello and Matt Williams a few weeks ago set about making even more equitable.

The council on Tuesday committed to changing and fixing the rate structure. You may not trust them to do so, and that is perfectly understandable. At the same time, it does not appear that anything in Measure P will change who sets the next water rates and how those water rates are changed.

—David M. Greenwald reporting

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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  1. SODA

    The confusion continues !
    So now we hear CBFR isn’t really what we thought it was based on how staff has implemented it? And it doesn’t matter because late night policy making from the dais restricts the URAC from discussing CBFR.
    Where is Frank Loge in this discussion? I would be interested in his opinions.

  2. Tia Will

    Barack Palin

    Thanks for the smile. I think the same thing every time that I try to read an article on particle physics. I don’t interpret that to mean that the particle physicists are wrong or that they are trying to deceive me or that the laws of particle physics will somehow adversely affect me.


    I share this sensation when trying to understand the CBFR. But then, I am admittedly arithmophobic and therefore anticipate this reaction. I have come to accept that my lack of understanding of something arithmetic does not necessarily mean that it is a bad idea.

    1. Barack Palin

      Tia Will, math was always my best subject. I’ll get about half way through some of the explanations and just quit reading. I’ll bet about 95% of the public has no idea either. There’s no reason the rates had to be this convoluted.

      1. David Greenwald

        They are really not that convoluted, but the reason they are as they are was that the simpler model was patently unfair to the low end rate payers. So if you have to use a fixed rate to cover the fixed charge – the charges to the system regardless of consumption – how do you do it more equitably than by meter size that penalizes 70% of the rate payers?

      2. Matt Williams

        BP, the reason they are as convoluted as they are is because of the legal provisions/restrictions of Prop 218 which became Article XIII of the California Constitution and the legal provisions/restrictions of California Constitution Article X (the Water Bill of 1908). Those two portions of the California Constitution directly contradict one another in certain areas. Therefore the creation of water rates is a delicate balancing act of those two competing requirements.

        With that said, is there anything convoluted about the graphic I posted above?

          1. Matt Williams

            Agreed BP. Donna was a real force in helping me see how we could have all the fiscal resilience/sustainability and have simplicity/understandability as well. She (and Bob Dunning) are the people who deserve credit for making the rates much simpler. I’ve done the due diligence to take Donna’s model and give it numbers that cover our budget and comply with prop 218. Bob has been our conscience, making sure that (A) we didn’t slip backward into penalizing anyone and (B) that renters and new home owners weren’t paying for water that somebody else used. Bob has been an incredibly positive force in making sure that this proposed solution is responsive to the concerns that our community and its citizens have raised … and he has done it with a twinkle of humor.

            Here is what we believe is the bottom-line on the proposal that Council heard from us last Tuesday.
            Final Slides

  3. Matt Williams

    I believe there is a significant flaw in the point that Sue makes in the quote David has included in the article. In order to get clarity on that significant flaw, I have sent Mark Siegler and Sue the following e-mail. I’m hoping to hear from them soon.

    Sue, one point that you makes in your recent comment on the Enterprise is that, “Our reserves are more than enough to make up the relatively small shortfall.” My examination of the City’s 2013-2014 Budget tells me that that point you make is not correct.

    My examination of the budget and financial statement numbers indicate that there are no available reserves in the Water Enterprise Fund. Any reserves that do exist in the Water Enterprise Fund are specifically restricted and unavailable because they are necessary in order to comply with the debt covenants of the borrowing that the City undertook to drill the three most recent deep aquifer wells and build the Mace Blvd above ground storage tank.

    It is my understanding that because of cash-flow fluctuations, over the past three years the Water Fund has been forced to use borrowing against a Wells Fargo line of credit in order to pay all its operating bills in a timely manner.

    Can you and/or Mark help me reconcile your comment with the numbers in the City’s fiscal reports? Mark certainly knows a lot more about the fiscal detail based on his long involvement in the Finance and Budget Commission. Both Mark and I were provided information about the Wells fargo line of credit situation while we were on the WAC, but if there is additional information that I am missing I would love to know about it.

      1. Davis Progressive

        perhaps he feels mislead. i certainly do. you’ve focused on the liability, but it would be interesting to hear your take on the bait and switch?

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