We have heard much about the inadequacies of CBFR. The look-back is considered unfair. The public does not understand the rates. CBFR was said to punish people who chose to have water and summer intensive outdoor uses.
But the bottom line is that CBFR equalized a very inequitable situation where the reliance on 40% fixed costs meant that low end users paid more – a lot more proportionally per unit – than high end users.
Matt Williams and Donna Lemongello have offered a system that can fix that. But it is clear that neither the city, especially Herb Niederberger, nor a working majority of the URAC are in favor of such a system.
This graphic re-structures the city’s sample bill comparison for single family residential billing under the various rate scenarios that the WAC was asked to look at – without the Williams-Lemongello rates.
Except, instead of raw billing, we look at cost per ccf and this is what illustrates most clearly the problem with all of these rates.
The lowest user spends TWICE per CCF what the middle tier users at 11 CCF spend. And they spend THREE TIMES the amount that the highest end users use. They are effectively subsidizing the water usage of the top end users. As Matt Williams would state a few meetings ago, “That is not fair.”
The critical issue facing the council is the seeming tradeoff between social equity versus the need for revenue certainty and drought resilience.
At the URAC meeting, Elaine Roberts Musser would argue that these differences are not necessarily that great. She argued that the cost differences across all schemes is only $9.
Greg Clumpner, a URAC member, argued in his synopsis that he submitted to the Vanguard, “Ideally, fixed costs are recovered through fixed charges and variable costs are collected through volumetric rates. The higher the percentage of rate revenue collected from volumetric rates (i.e., above variable costs), the greater the revenue instability.”
He argues, “The perception that the ‘social-equity bar charts’ presented numerous times fairly represent social equity presumes that all costs are variable. This is just not true, and I believe this is a poor measure of the fairness and social equity of rate structures.”
On Tuesday, the city’s financial advisor, Mark Northcross, discussed the implications of the 87-13 structure.
“Any rate structure you can bond against, that’s not the question,” he stated. “The question is what’s the cost of bonding. The more different it is, the more uncertainty there is which means volumetric, the more likely the rating will be adversely impacted.”
He talked about a revenue stabilization reserve fund as a mechanism to protect the bond rating. “The way this thing is set up, my instinct is that I would want to see cash deposited in the vat from day one and restricted,” he said. “I want to see money in there from day one.”
“I said $4 million as a ballpark figure for how much cash would need to be in there,” he said.
He would add, “The reason you want cash upfront is that promising to deposit cash after everything goes bad is something that the ratings services have finally figured out doesn’t always work. Because after everything goes bad you may not have the cash.” He added, “They want to see it restricted… Once it goes in there, you’re pregnant, it’s there.”
He noted that drought recovery fees should be on the fixed, not the volumetric charge, because in a drought, the uncertainty is on the volumetric side, “you don’t know how far down its going to go. So putting your drought recovery fee on the volumetric is like a dog chasing its tail.”
Mr. Northcross added, “The way out of that particular bind in a drought situation is to put your drought recovery fee… put it all on the fixed… so whatever you have to cut on the consumption, it’s all coming back.”
While Greg Clumpner argued that any CBFR was “opposed by much of the public (via Measure P), and is difficult for the general public to understand,” Matt Williams believes otherwise.
“I believe this proposal honors both the spirit and intent of Measure P,” he would write. “It has eliminated the 6-month weighting. It does not shift the costs to summer irrigators. “
He argues, “The bill that consumers receive each month under our proposal will be familiar, simple and easy to understand. It will have two parts just like the bills today do, and it will only include charges for the current period’s water usage.”
He added, “There is a good argument that Revenue Stabilization Reserve Fund provisions should be included in any rate that Davis adopts. Mother Nature doesn’t modulate her drought effects on the basis of what water rate structure a city has put in place. All rate structures are subject to the revenue erosion risks associated with drought. 60-40 isn’t a magic bullet. It too is vulnerable. If having a reserve fund and Stage 3 and Stage 4 surcharge provisions allows Davis to get lower interest rates, then all the ratepayers benefit from the lower borrowing costs. It is really a very simple mathematics problem … one that should be central to Davis’ presentation to bond rating agencies like Standard and Poors.”
He and Donna Lemongello believe they have addressed the rate-stabilization issues. Here is what they presented to the URAC on Friday.
Rate and Fee Increases
The City of Davis is proposing to increase the rates and water service and establish a new rate structure. The new water fees would be imposed on all properties in Davis receiving water service.
The rate structure has two components, 1) revenues from rates and 2) a revenue stabilization reserve fund
Traditional Fixed Volumetric Rate
Revenues from rates are derived from two components: A) a monthly fixed fee and B) a monthly volumetric water use fee. Those components are:
- A Fixed Fee, which for a 3/4-inch meter is $8.25 per month, to pay for billing costs, fire fighting infrastructure and readiness to serve infrastructure costs.
- A Volumetric Use Fee that has two tiers, specifically $3.14 per ccf for the first 20 ccf each month and $4.54 per ccf for all water usage above 20 ccf each month. This fee pays for the costs of wells, above ground water storage, the surface water plant, water pumping electricity and water treatment chemicals.
Revenue Stabilization Reserve Fund
Smooth Cash Flows for Debt Coverage
The revenue stabilization reserve fund supports the smoothing of monthly cash flows each fiscal year. During low revenue winter months, the revenue stabilization reserve fund will be used as revenues of the water utility for the calculation of adequate ongoing debt service coverage to comply with bond covenants.
Annual Reserve Fund Balance Target
The June 30th end-of-year target balance for the revenue stabilization reserve fund is 25% of the annual revenue requirements.
Reduced Consumption Revenue Protection
The revenue stabilization reserve fund will also be a core component of the City’s response in times of substantially reduced consumption (whether from cumulative conservation or as a result of drought), which is outlined in the City’s Urban Water management Plan (see http://water.cityofdavis.org/water-conservation/drought).
Reduced Consumption Provisions
Stage 1 and Stage 2
In order to keep the water utility financially stable through the circumstances of reduced consumption, the revenue stabilization reserve fund will be available for use as revenues during Stage 1 and Stage 2 shortages (a 10% reduction and a 20% reduction respectively).
When aggregate system-wide consumption reaches a Stage 3 shortage (a 30% reduction), the cost of the volumetric portion of each customer’s monthly water usage shall have an extra 15% of that cost added to the bill.
When aggregate system-wide consumption reaches a Stage 4 shortage (a 50% reduction), the cost of the volumetric portion of each customer’s monthly water usage shall have an extra 43.75% of that cost added to the bill.
Duration of Temporary Rate Adjustment
A Stage 4 rate adjustment will continue in effect until the reduced consumption stage has been reduced to Stage 3. A temporary Stage 3 rate adjustment will last until the drought stage has either been reduced to Stage 2 or increased to Stage 4. During a Stage 4 shortage the Stage 3 cost provisions do not apply.
Does this do enough to quell the concerns raised by both the council last week and the URAC? Hard to know. But given the distribution of cost per ccf for the conventional rates, I suspect that a rate challenge like Measure P could prove effective if the council cannot find a more equitable means to create the revenue stability needed for the bonding agencies.
—David M. Greenwald reporting