Water Rate Proposal Fairness, Equity, Revenue Resilience

Matt Williams, Donna Lemongello, and Sue Greenwald listen intently to council discussion on Tuesday night.
Matt Williams, Donna Lemongello, and Sue Greenwald listen intently to council discussion at a pre-election City Council Meeting.

by Donna Lemongello

Matt Williams and I have been fully engaged in the URAC  process for the past 2.5 weeks.  On Thursday evening that process was dominated by a thorough discussion of ten criteria:

  • Responsive to Voters/ Customers
  • Simplicity/ Understandability
  • Fairness/Equity
  • Revenue Resilience/ Sustainability
  • Incentivizes Conservation
  • Reward for Efficient Use
  • Acceptability by Financial Markets
  • Proportional to Cost of Service
  • Meets Prop 218 Provisions
  • Susceptibility to Legal Challenge

For me personally, Fairness/Equity is the most important of those criteria, and I believe it is no coincidence that the clear message of both the Yes and No on Measure P campaigns was Fairness.

“Keep Rates Fair” – Vote No On P

“Establish a Fair Water Rate System” – Yes on Measure P

Of course I understand that a fair and equitable structure that does not pay the bills is not worth considering.  To that end, as requested, we have provided our proposal to the URAC, joined the URAC discussions, and thoroughly studied the alternative proposals offered by Bartle Wells.

All five of the Bartle Wells rate structures are based on the same principle, a relatively high fixed fee to generate 40% of the revenue and a variety of variable fee options to generate 60% of the revenue based on consumption.  What was crystal clear at the Thursday URAC meeting, from Staff’s statements, from Bartle Wells’ statements and from our analysis was that any revenue resilience generated by a 40% fixed fee comes with the disadvantage of substantially decreased fairness and equity.

Davis has put up with this type of structure for too long and it is time to change to a more equitable structure, especially since rates will be higher.  People who are efficient and use little water simply should not  be subsidizing those who use a lot of water.  The only reason not to do so is if achieving fairness and equity means we don’t have revenue resilience and revenue sustainability.

Our proposal generates significantly more revenue resilience than any of the Bartle Wells proposed rates. The comments of Staff, Bartle Wells and the URAC members were universal in stating that all the rate structures proposed are vulnerable to loss of revenue with loss of consumption.  The key is how to anticipate and respond to any loss of consumption.

Our proposal has calculated the per ccf rate based on a projection of heavy conservation with the revenue floor (where revenue does not cover costs) at a point that is 14% below any of the alternatives.  At the point where our proposal is transitioning from surplus to break even, the other proposed rates are generating annual deficits that range between $840,000 and $1.5

Further, we propose a proactive “Drought” response provision built right into the structure and the 218 notice, that would kick in a preapproved “drought rate” surcharge in the event of consumption dropping due to a drought, to provide revenue resilience and revenue stability and clear rate predictability for the customers.  The City of Roseville has just activated just such a “Drought Surcharge,” and our proposal incorporates all the lessons they have learned (both good and bad) from  Roseville’s very recent experience.

Further, when consumption is above the revenue floor, our proposal generates a surplus that can self-fund the kind of rate stabilization reserve recommended in the March 2013 Bartle Wells Rate Study (attached pdf) and/or “a reserve fund to be used for future drought-related mitigation purposes” as recommended in Chapter V.3 of the AWWA’s M1 Rate Manual (attached pdf).

Given the revenue resilience and revenue stability coupled with demonstrably better fairness and equity in our proposal,  I hope you will consider these concerns and community needs when deciding on a rate structure, we’re counting on you.

The above was a letter to Mayor Joe Krovoza describing the how the Lemongello-Williams rate structure deals with the issue of social equity

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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48 Comments

  1. Polly Ticks

    Donna and all, I understand this is a letter to Mayor Krovosa, and was not written as an article to the Vanguard. But it raises a question for me. Can you elaborate on this “drought surcharge”? Specifically, what is the amount per bill per month (I hope it is clear I am not asking for the rationale, or how the amount was determined, although you are welcome to explain that — I am asking for the dollar and cent cost), and who determines when a “drought” is occurring?

    I suspect this was discussed before the URAC, but (a) some people attend those meetings and (b) the URAC does not post minutes, except for those of the first meeting on April 13. And what is on the long-range calendar bears little resemblance to what apparently is going on, unless they discussed only the Solid Waste Rate Orientation and the DWR Contract, and not your rates, on their meeting of June 13.

  2. Barack Palin

    It’s my understanding that in years of drought we can rely on our wells more so the effect on Davis residents would be minimal compared to other cities. So why a drought surcharge?

  3. dlemongello

    Polly, the consultant will have to calculate these amounts, they are generally simple percentages added onto each bill, based on volume used, only when consumption drops below a designated threshold that will no longer generate enough revenue to pay fixed costs as in our obligations to pay for the project.

    BP, we can and will use our wells, but by volume is how the variable component of our structure (and all the others as well) generate revenue needed to pay for the project. So if volume used drops below a designated threshold that will no longer generate enough revenue to pay fixed costs for the project, the surcharge would kick in. We actually do not anticipate to need to use the surcharge in Davis precisely because of what you have stated, but we have built it in just in case to have solid revenue resilience and be in a better position for the best bond financing available.

  4. dlemongello

    BP, it is simple math, the income that has to be generated to pay for the project is a fixed amount. Anyone who told you anything else either did not have the facts straight or was lying. The water is measured in ccf which is 100 cubic feet.

    1. Barack Palin

      This is the first time that I’ve heard anyone admit that the more we conserved the more we will be paying per unit. I mean we all figured that was the case but it seemed that those pushing the rates and the project stayed away from admitting it.

      1. dlemongello

        The good news is that the rates that we start with assume 20% (I believe that is the right amount) conservation from historic use, so they will not rise unless conservation exceeds that anticipated amount that is already built in. For example, Davis’ reaction to the recent drought was to use more water, not less and so a reserve of money would have been generated. Our rates will create what is considered a standard reserve as another measure to keep us from reaching a point where that surcharge kicks in.

        1. Barack Palin

          “For example, Davis’ reaction to the recent drought was to use more water, not less”

          That’s unbelievable to me when I look at the number of my neighbors now letting their grass die. I guess you have the numbers though.

          1. Davis Progressive

            and given the severity of the draught, is that a bad thing? i know in the early 90s people in southern california replaced their grass with lower water level ground cover. isn’t that just a reality?

      2. Matt Williams

        BP, you are conflating two separate issues … conservation (which is a voluntary set of actions and response by individual consumers) to … an advanced Drought Stage which is an imposed reality that forces a global set of actions community-wide and/or state-wide.

        In the former the decision whether or not to reduce consumption through water use reduction is both personal and discretionary. In the latter the decision whether or not to reduce water use is neither personal nor discretionary. In WWII they called it rationing.

        Rationing is a collective action that by definition has collective consequesnces. Conservation is an individual action that more often than not has no drastic consequences. Conservation can, as you have pointed out, have aggregate consequences when the proportion of the collective that has personally and discretionarily decided to conserve no longer becomes a minority of the community.

        Regarding the metered water consumption for the Davis water utility the 2011 aggregate use was 4,549,938 ccf. In 2012 that jumped up 11.7% to 5,082,137 ccf and then in 2013 up to an aggregate 14.0% at 5,186,084 ccf. Davis has responded to a water shortage by using more water.

      3. DT Businessman

        BP, this is the first time I’ve heard anyone make your assertion. It has been stated over and over again that the more the community conserves, the higher the rate. The project has a fixed cost and has to be paid for one way or another. $100/5=$20 is more than $100/10=$10. How would it ever work otherwise?

        -Michael Bisch

          1. Davis Progressive

            people aren’t thinking creatively. i’m sure don shor could come up with a bunch of very nice looking landscapes that are low water users.

      1. dlemongello

        Let’s hope that is just a step in the process of making a change to something more sustainable. What is very unfortunate is that we did not do that proactively. If we had, we would most likely not have needed the project .

          1. dlemongello

            Clearly rates would have had to rise either way and having more than one option for obtaining water seems more secure than having only 1.

  5. Polly Ticks

    *sigh* Here we go again.

    The change to the rates Lemongello and Williams originally proposed is a “proactive ‘Drought’ response provision” that says there will be some “preapproved ‘drought rate’ surcharge in the event of consumption dropping due to a drought”. But the consultant has to tell us how much the change is. And there is *still* no explanation of when the charge will kick in (that is, no explanation of who determines when a “drought” exists or what factors are to be applied).

    Further, we have been repeatedly told that one consideration is to encourage conservation — but when we do conserve, the rates go up. This makes no sense; so how does this “drought surcharge” encourage conservation? Or has that goal been discarded?

    Indeed, will a surcharge kick in if water use drops too much even if there is no drought? I ask because “the income that has to be generated to pay for the project is a fixed amount” (see Donna’s comment of 8:50am). If a drop of X ccf in a drought causes the surcharge to kick in, would not a drop of X ccf due to conservation require the charge to kick in to meet the obligations? If so, why call it a “drought surcharge” — it’s a “low water use surcharge”. If this is wrong, please explain why, and define the conditions under which the “drought surcharge” will kick in.

    Again, my objection is to the near-complete lack of transparency. If you have the time to attend the URAC, I’m sure everything is spelled out; but those of us who can’t attend those meetings don’t get that information because no minutes or video is posted. And now we’re hearing the original Lemongello-Williams plan is to be changed with the addition of some low-water-use charge, the amount of which is not known, and when it kicks in is nebulous.

    This whole process troubles me greatly.

    1. Don Shor

      no explanation of who determines when a “drought” exists

      Usually a ‘drought emergency’ is declared by the governor. One thing that allows, I recall, is a relaxation of water quality standards, which would enable Davis to use the shallower aquifer wells during an official ‘drought emergency’. I can’t answer your other questions.

      1. dlemongello

        Polly you are correct. I used that term, which I agree is misleading, because it is a standard term. But it simply would kick in if consumption fell below a predefined threshold of (I believe it’s) 20% conservation, determined by revenue requirements. It actually is transparent and I apologize for using an ambiguous term that you’ll notice I put in quotes for this very reason. As for the URAC process, there has been a lot of discussion.
        Meanwhile , whether the water comes out of the aquifer or the river, the variable component of the rates are still the same per ccf.

    2. Matt Williams

      Polly, this is a work in process that was precipitated by Herb Niederberger’s very appropriate fiscal resilience questions about the 87/13 rate proposal that Donna and I presented to Council on May 27th. That proposal was not Athena springing fully armored from the brow of Zeus. The problem Herb’s questions illuminated prompted some additional due diligence on Donna’s and my part. That due diligence homework produced some very timely results. The City of Roseville has a very active Drought Management Plan which can be accessed at https://www.roseville.ca.us/eu/drought.asp. It is very interesting reading. Roseville has had a Drought Management Plan written into their Municipal Code since 2009, and this year is the first time they have had to consider activating its provisions. Their first step was not fiscal, but rather behavioral when Roseville announced mandatory 20% water-use reductions on March 24, 2014 due to drought conditions. The results since March 24 can be seen at https://www.roseville.ca.us/images/EU/Maywaterreductiongraphic_2.jpg. The second step was fiscal, in part because of the impact on the water budget by the reductions achieved as a result of the First step. Roseville announced the second step on June 5, 2014 (see https://www.roseville.ca.us/news/displaynews.asp?NewsID=4061&TargetID=1) as a drought rate surcharge. The notice they sent to their consumers can be viewed at http://www.sacbee.com/2014/06/03/6447193/roseville-plans-drought-surcharge.html

      Decoupling the first step and the second step was a mistake. Better to be transparent up front in the rate structure itself rather than come back to the ratepayers with an after the fact “penalty.”

      The bottom-line of this due diligence has added the following provisions to Donna’s and my proposal:

      —————-

      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),

      Drought and 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 fund will be available for use as revenues during Stage 1 and Stage 2 shortages (a 10% reduction and a 20% reduction respectively).

      Stage 3

      When the consumption reduction reaches a Stage 3 shortage (a 30% reduction), a temporary 15% rate adjustment will be applied to the volumetric portion of each customer’s monthly water usage.

      Stage 4

      During a Stage 4 shortage (a 50% reduction) an incremental temporary 25% rate adjustment will be applied to the volumetric portion of each customer’s monthly water usage.

      Duration of Temporary Rate Adjustment

      The temporary Stage 4 rate adjustment will continue in effect until the reduced consumption stage has be reduced to Stage 3. The temporary Stage 3 rate adjustment will last until the drought stage has been reduced to Stage 2.

      1. Polly Ticks

        Matt and Donna,

        Is the 30% reduction in the Stage 3 shortage a personal reduction, or a citywide reduction? That is, if in the winter my water usage drops to 60% of my summer usage, will the 15% rate adjustment be applied to my bill? Or must the entire city’s water usage drop by 30% in order for my bill to be adjusted?

        In either case, please confirm these are the correct formulas (M is the distribution charge by meter size, C1 the number of ccf 20 used that month):

        1. No reduction (Stages 1 and 2):
        * without tiers, M + $3.50 x (C1 + C2)
        * with tiers, M + $3.14 x C1 + $4.54 x C2

        2. With 30% reduction (Stage 3):
        * without tiers, M + $4.025 x (C1 + C2) = M + $3.50 x (C1 + C2) + 0.15($3.50 x (C1 + C2))
        * with tiers, M + $3.611 x C1 + $5.221 x C2 = M + $3.14 x C1 + $4.54 x C2 + 0.15($3.14 x C1 + $4.54 x C2)

        3. With 50% reduction (Stage 4):
        * without tiers, M + $4.37 x (C1 + C2) = M + $3.50 x (C1 + C2) + 0.25($3.50 x (C1 + C2))
        * with tiers, M + $3.925 x C1 + $5.675 x C2 = M + $3.14 x C1 + $4.54 x C2 + 0.25($3.14 x C1 + $4.54 x C2)

        1. Matt Williams

          Polly, it would be a citywide reduction.

          Here is how I envision the math.

          1. No reduction (Stages 1 and 2):
          * without tiers, M + $3.50 x (C1 + C2)
          * with tiers, M + $3.14 x C1 + $4.54 x C2

          2. With 30% reduction (Stage 3):
          * without tiers, M + $4.025 x (C1 + C2) = M + ($3.50 x 1.15 x (C1 + C2))
          * with tiers, M + $3.611 x C1 + $5.221 x C2 = M + ($3.14 x 1.15 x C1) + ($4.54 x 1.15 x C2)

          3. With 50% reduction (Stage 4):
          * without tiers, M + $5.03 x (C1 + C2) = M + $3.50 x 1.15 x 1.25 x (C1 + C2)
          * with tiers, M + $4.514 x C1 + $6.526 x C2 = M + ($3.14 x 1.15 x 1.25 x C1) + ($4.54 x 1.15 x 1.25 x C2)

          P.S. there is in my opinion a very high probability that Don Shor is correct when he says that, “Davis would never have any reason to call for the kind of 20% reduction that Roseville has implemented.” The primary reason to implement this kind of finacial resiliency/sustainability/certainty into Davis’ water rate structure is to get a substantially higher Bond Rating, which would result in a substantially lower interest rate for any money that is borrowed, resulting in much lower interest costs each year, and therefore lower rates for the water ratepayers.

          1. Polly Ticks

            Matt,

            Thank you for the clarifications. It was unclear that the 25% Stage 4 surcharge would be on top of the previously-applied 15% Stage 3 surcharge, so the Stage 4 surcharge is effectively 43.75%.

            This is what I mean by lack of transparency. In what you quoted above, the Stage 4 surcharge was to be applied “to the volumetric portion of each customer’s monthly water usage.” Had the authors wanted to be clear, they would have simply said that the Stage 4 surcharge was 25% on top of the 15% stage 3 surcharge, which is 43.75% in total, and that would be applied to the cost of the volumetric portion.

            The failure to use clear English in things like this is very worrisome. It’s like Alice in Wonderland — words mean whatever the writer wants them to mean, not what they really mean.

          2. Matt Williams

            The failure to use clear English in things like this is very worrisome. It’s like Alice in Wonderland — words mean whatever the writer wants them to mean, not what they really mean.

            Actually Polly since I am the author, this is a first hand dialogue. The wording was crystal clear, as was the author’s intent. Your suggested wording “[…] 25% on top of the 15% stage 3 surcharge, which is 43.75% in total […] uses 14 words to replace three words ” […] incremental temporary 25% […]” and your 14 words say less than the 3 do because you fail to illuminate the transient reality of the surcharge. The words said “incremental.” The words meant “incremental.” The words said “temporary.” The words meant “temporary.”

            During a Stage 4 shortage (a 50% reduction) an incremental temporary 25% rate adjustment will be applied to the volumetric portion of each customer’s monthly water usage.

        2. Don Shor

          It is a complete misrepresentation to use the word ‘drought’ in the context of these rate hikes. They would be entirely revenue-related. With a combination of surface water, deep wells, and the ability to use shallower wells in a state ‘drought emergency’, Davis would never have any reason to call for the kind of 20% reduction that Roseville has implemented. So the only reason for the surcharge would be if Davis residents and businesses conserved too much and dropped our variable use lower than had been projected.

          1. Matt Williams

            Don, you are making that statement from the perspective of the on-the-ground realities of our specific situation here in Davis vis-a-vis water. However, the perspectives of a Bond Rating Agency and a Municipal Lender really couldn’t care less about our water realities. All they care about are the actuarial risk numbers associated with a municipality’s ability to provide 100% surity that they have the revenue flows to cover their debt paymets each and every month of each and every year. For them, Roseville and davis are identical. If Roseville has had to take drought risk revenue protection steps then davis is at risk to have to take those same risks. They do not want to hear about the impact of water source diversity on likely water use reduction … in fact they are going to apply risk to their analysis of Davis from in the even more extreme example of Cambria, which is bringing in portable desalinization units (see http://www.sanluisobispo.com/2014/01/31/2902954/cambria-water-shortage-emergency.html) to deal with its drought.

            So, the features built into Donna’s and my proposal, while rooted in time-honored principles that are memorialized in the AWWA M1 Rates Manual, are really targeted at the obsessive risk aversion of the financial markets. The reward for doing so is lower interest rates, lower borrowing costs, and the comfort of knowing that in the very unlikely chance that we actually do get to a Stage 3 drought here in Davis, that we have a clear plan for dealing with that unlikely reality.

          2. Don Shor

            It has nothing to do with drought. Your use of the word is misleading. Davis and Roseville are not the same. Davis is not at risk of having to take those same measures with respect to drought. It is entirely a revenue issue.

          3. Matt Williams

            It is entirely a revenue issue.

            Actually Don it has virtually nothing to do with revenue. It is entirely a cost issue imposed on the water district by the lending institutions and the bond rating agencies.

            As you have very accurately pointed out, the chances of either of these temporary surcharges actually being activated are somewhere between slim and none.

          4. David Zetland

            Sorry, Matt — your scaremonger replies are wrong. Bond agencies look at city finances, not “similar” cities, since bond covenants depend on local laws, taxes and revenue streams. The EASIEST way to get low rates, is to have a higher share of fixed revenues, e.g., 80 percent.

    3. DT Businessman

      The project has a fixed cost. It has to be paid for one way or the other. If demand goes down due to conservation or drought it must be clear to everyone that the rate goes up. If demand goes up because BP and his neighbors insist on acres of green grass, or for any other reason, the rate goes down. Not sure why any of this is a mystery. Sigh.

      -Michael Bisch

  6. Barack Palin

    It’s not a mystery, all along people like Dunning have been saying the more we conserve the more we’re going to end up paying for each CCF. What is a mystery is this is the first time I’ve heard it being admitted by anyone from the city. I agree with Don, calling it a drought surcharge is very misleading. It should be called an over- conservation surcharge or something to that effect. I’m sure many ratepayers will once again feel they got the wool pulled over their eyes when they hear of this “drought surcharge”.

  7. DT Businessman

    That’s absurd, BP. The city has never hidden the fact that the more we conserve, the higher the rates. In fact, that concept has always been front and center. In every rate calculation I’ve ever seen from the city they assumed there would be significant conservation. The rates they calculated were always higher as a consequence. The city has always agreed with Dunning in this regard, or rather the other way around.

    The only meaningful disagreement the city and Dunning appear to have is Bob insists he somehow doesn’t have to pay the full cost of water without ever saying how that’s even remotely possible. Must be nice living in a fantasy land while others have to deal with reality.

    -Michael Bisch

  8. dlemongello

    BP, I don’t know who you are referring to by saying “anyone from the city”, we all live here. But if you are implying I am employed by the city, you are sorely mistaken.

  9. Polly Ticks

    [This is in response to Matt Williams’ post of June 18, 2014 at 10:28 pm; there is no reply button to his post (David, you might want to check into that), so I have to start a new thread.]

    Matt,

    “Incremental” means “of, relating to, being, or occurring in especially small increments”, which in turn are defined as “a usually small amount or degree by which something is made larger or greater” (Merriam-Webster Dictionary). If you want a more authoritative source, the Oxford English Dictionary defines it as the adjective form of “increment”, which in turn is defined as “an increase or addition, especially one of a series on a fixed scale”.

    You wrote “an incremental temporary 25%”. I wrote “25% on top of the 15%”. Ignoring the word “temporary” (which obviously had absolutely nothing to do with what I was complaining about), it was not clear what the word “incremental” applied to; I assumed it was an intensifier applying to the 25% (that is, the 25% was an incremental increase to the cost of the volumetric portion of the bill).

    Perhaps a lawyer, or someone versed in the ways of legal writing, would have understood that “incremental” here meant “incrementing the charge from the previous section”. I certainly did not, and I suspect many others would not have either.

    And as the extra charge only applies during a Stage 4 shortage, the additional 43.75% charge is obviously temporary (unless the city intends never to declare a Stage 4 shortage will end). So if your concern is to save words, you didn’t need the word “temporary”, because “during” means “throughout the course or duration of (a period of time)” according to the Oxford English Dictionary.

    So let’s restate this without “incremental” and understanding that “during” means the charge will exist only during the shortage — a “temporary” one as you would put it.

    During 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.

    During 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.

    If you add the words “the cost of the” to your writing (because you aren’t adding 25% of the volume, you’re adding 25% of the cost of that volume), the above have 1 word more than what you wrote, and is clear to us non-legal types.

    1. David Greenwald

      The threading mechanism cuts off after three or four replies to avoid the situation were we have a single letter (which I think used to happen)

    2. Matt Williams

      Excellent Polly!!! In your collaborative posts on this subject, you have engaged the first two of the eleven decision criteria that the URAC discussed last Thursday. You are absolutely right that what ever is presented to the public has to be both simple and understandable.

      — Simplicity

      — Understandability

      — Fairness

      — Equity

      — Revenue Resilience/ Sustainability

      — Straightforward Incentive for Conservation

      — Timely Reward for Efficient Use

      — High Acceptability by Financial Markets

      — Meets Prop 218 and Cost of Service proportionality provisions

      — Minimal susceptibility to legal challenge

      — Is Responsive to the Voters / Customers

      I believe you have, in your comments, been very clear that if whatever is chosen isn’t described transparently, then it isn’t fair. Your through questions have helped us identify ways to achieve that fairness in all its facets. Thank you.

      1. ucdavisstudent

        I thought that CBFR was supposed to properly allocate fixed revenue to pay for fixed costs. Doesn’t this go in the opposite direction and is even worse than conventional rate structures in that regard? I’m a bit confused about why this is not a consideration any more.

        1. Matt Williams

          Very reasonable question ucds. The answer to your question is rooted in semantics. The water industry has been very simplistic in how it defines the word “fixed” both with respect to costs and with respect to revenues. In both cases one way to look at “fixed” is as “reliably recurring” and “essentially unavoidable.”

          The water industry is dominated by engineers and the “engineering perspective” on costs is heavily oriented towards the design and construction perspective. That results in a base system and supplemental system perspective that has been memorialized by the American Water Works association (AWWA) M1 Rates Manual with the “Commodity-Demand” method for allocating costs … with Commodity being the equivalent of base system and Demand being the equivalent of supplemental system. In the information that Bartle Wells presented to the WAC (and in an abbreviated form to the URAC last night) the Commodity-Demand allocation came out to close to 50-50 (56-44 if I remember correctly). Thus, from an engineering design perspective the Davis water system can be said to be 44% fixed costs and 56% variable costs … and if we paid cash for the system then the costs (from an accounting perspective) would be historical and the 56-44 ratio would be right on the mark.

          However, we have not typically paid cash for the system and will not typically be paying cash for future (and present) system improvements. We issue debt. We borrow. When we do that, what we do is shift our perspective of costs from one that is “historical cash flows” to one that is “present and future cash flows.” In effect the engineers leave the room and the accountants take over … and accountants really don’t care what the engineered purpose of costs are, all they care about is how those costs are going to hit the Income Statement. Are those costs going to come in a “reliably recurring” and “essentially unavoidable” way. If they are, then they are “fixed” costs. If they are not, then they are “variable” costs. The yellow circle with “36%” in the middle represents the portion of the Demand costs in the Davis water system that moved over from Variable to Fixed as a result of issuing debt … and in the process the Variable-to-Fixed ratio changes from the Commodity-Demand engineers’ 56-44 over to the accountants’ perspective, which is 20-80 (variable to fixed).
          .
          Final Slides
          .
          That brings us to “fixed” revenues. Here too the definition is “reliably recurring” and “essentially unavoidable.” To use a specific Davis example, are the volumetric fees paid by Sudwerk Brewery “reliably recurring”? Given that the bulk of the water they use goes into their product, the only way that their use would not be “reliably recurring” would be if they started selling fewer bottles of beer. Said another way, their business model means that their use of water and the costs for that water are “essentially unavoidable.” That appears to fit the description of “fixed” revenue for the water district from Sudwerk. However, in the 87-13 model, all the water use by Sudwerk and all the fees that Sudwerk pays are based on actual volume used and as such are defined as “variable” … but in fact those variable revenues from Sudwerk are “reliably recurring” and “essentially unavoidable.”

          1. David Zetland

            This explanation (and the accompanying diagram) does not justify the Lemongello/Williams proposal. It is, in fact, misleading — and bordering on sophistry.

            Fixed costs include current spending and debt repayment that does NOT change with daily volumes of delivered water. They average 80 percent at most utilities. Taking 87 percent of revenues from water sales is ASKING for financial instability. It also does nothing extra to reduce use, versus CFPR.

            Matt — you’re proposing that people pay for 87% of their driving with gas, with the other 13% coming from the cost of buying the new car. This is silly.

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