Water Issue Ends at 87-13?

Matt Williams and Donna Lemongello explain their rate structure to council more last time
Matt Williams and Donna Lemongello explain their rate structure to council one last time

If the water issue has been Davis’ Soap Opera, its closing act may have been last night. Following a 5-0 council vote to ask the staff to bring back a Prop 218 process reflecting 87-13 water rates, Michael Harrington was his usual coy self, declining to make any direct comment about the evening’s events.  Several councilmembers also declined to comment.

However, there is sufficient circumstantial evidence to believe that Mr. Harrington (among others) helped engineer the majority council vote on the condition that there would be no further legal action, and that the new water rates will be allowed to take effect following the Prop 218 process.

Mayor Dan Wolk made the motion for adoption of an 87-13 rate as follows, “Consistent with Article 10 of the California constitution my motion would be two parts. First, we would adopt an 87-13 rate structure with uniform tiers by class.   Second, We implement a drought surcharge.”

Any drama, about how that motion would fare, ended immediately when Rochelle Swanson and Lucas Frerichs instantly offered simultaneous seconds.  Rochelle Swanson’s was accepted as the official by the mayor.

The language of the motion built on a point made by Herb Niederberger during the staff presentation. He recommended that, if the council adopted either the 70-30 or 87-13 structures, they include the following language, “Consistent with Article X of the California Constitution, the City is electing to recover more than 60% of the costs from the volumetric rate. This is to provide additional incentive to encourage conservation and discourage the waste or unreasonable use of water is Davis.”

After making his motion, Mayor Wolk stated, “I think I have been motivated on two things. One is finding a fair and viable rate structure and the second is honestly trying to find a global solution to this water issue. I feel that an adoption of a rate structure 60-40 does not address really either of those. It doesn’t appease a large group of our community and I think there is a real fairness issue about that 40-60 rate.”

Between the staff presentation and Mayor Wolk’s motion, Matt Williams (perhaps for the final time) argued for the 87-13 proposal. However, there was a critical difference this time, as he was finally able to use assumptions established by Bartle Wells in terms of conservation and usage patterns.

Mr. Williams, during his presentation, argued that the 87-13 achieves a number of important goals for our community.

  • It honors the democratic process.
  • It comes closest to “charging everyone the same amount per gallon used” and thus satisfying most citizens’ fairness standards.
  • It provides a solution to the community’s long-running water disputes, and
  • It achieves equity at a far greater level than the 60-40 or 70-30 alternatives.

He argued, “It never puts the water district in a position where it cannot pay its bills… its revenues are never less than the water district’s costs.” He added, “With the Reserve Fund and revenues protected by the provisions of the Revenue Stabilization Surcharge, Mark Northcross should be able to procure the best possible financing.”

The point made by Matt Williams and others is that 87-13 is not an experimental rate. San Francisco and Palo Alto are at 90-10, Arcata is at 87-13, Santa Rosa, Anaheim and Santa Ana are at 85-15, Santa Barbara, San Diego and Hayward are at 84-16, and Ventura is at 82-18.

In his presentation, Herb Niederberger presented the following information that he had received from Mark Northcross the NHA Advisors, “Most California water utility rate structures generate between 30% and 50% of their water sales revenue from fixed charges. Some utilities do use rate structures that generate as little as 10% of their water sales revenue from fixes charges. However, due to this larger than normal reliance on volumetric revenues, these more volumetric rate structures are considered by the rating services to be more subject to volatility and uncertainty in actual revenues received.”

Councilmember Brett Lee and Mayor Pro Tem Robb Davis look on
Councilmember Brett Lee and Mayor Pro Tem Robb Davis look on

They added, “Accordingly, they negatively influence the actual rating the utility would receive on any publicly offered water revenue secured debt. Applying this experience to the City of Davis’s proposed water rate structure alternatives, we believe that the 13% fixed rate alternative would most likely result in a rating downgrade of one notch, from A+ to A, for example.”

NHA Advisors concluded, “This would add under current market conditions anywhere from 15 to 25 basis points to the interest cost of the City’s bonds (0.15% to 0.25%). It is possible that by mandating more actual cash reserves (rate stabilization fund) in the bond legal documents, that the rating downgrade could be eliminated, but no assurances can be provided in that regard.”

Councilmember Swanson later noted in her comments that part of the reason why some people saw this rate proposal as experimental was that instead of simply referring to it as “an 87% Variable and 13% Fixed rate” we referred to it using people’s names. She said, “Even if we do 13-87, we’re not doing something outside of the box. I think maybe we have done ourselves a disservice by adding a level of complexity by calling it by the proposers’ names. It was well intended, but probably we shouldn’t have done it.”

She emphasized that point by stating that just because we do not use the specific numeric assumptions of Matt Williams and Donna Lemongello, “the philosophical reasons for going to 87-13 hold strong. I think that’s where there’s confusion for some of it being experimental because we’ve assigned a name to it.  When they talk about equity, they are talking about the split.”

Herb Niederberger responded to the Swanson comment by stating, “We used all the same assumptions (for the rate comparisons), it’s just the revenue split (that’s different).” He added, “The 87-13 that was analyzed behaves very similarly to what Matt and Donna had done.”

Lucas Frerichs in support of the motion stated, “The reasoning for supporting the proposed rate structure this evening, if we have a high fixed meter rate charges, we really are heavily penalizing low users. If we are to adopt a high meter size fee without tiers the city would have imposed the ultimate anti-conservation rate.”

He said he appreciates the work that was done by staff and their consultant, “but I respectfully disagree with the staff recommendation and will be supportive of the 87-13 rate scenario.”

Brett Lee was more cautious when he stated, “We hired experts to hire expert advice and we are free to do what we please. I think that we found ourselves in this situation because we ignored the expert advice in the past.” He added, “I am a little apprehensive about the additional costs of financing potentially. I am apprehensive about the potential increased likelihood of a lawsuit. I guess we’ll just see what happens.”

However, during public comment, it was many of the members of the Yes On Measure P committee … people like Sue Greenwald, Pam Gunnell, Don Price and others …who pushed the council towards 87-13 because they felt it represents an acceptable compromise for people who had opposed the water project and the previous water rates.

In addressing Brett Lee’s point, Rochelle Swanson would note “The unique position of governing is that you hire the best that you can that gives us great professional advice. Then the policymakers have to make a political calculation with the best information possible.”

She added, “I don’t think this community has the stomach for more litigation and more issues on this.”

In the end the council voted 5-0.

In other water-related issues, while council met in closed session on the YRAPUS lawsuit, nothing was reported out. However, it is our belief and understanding that shortly this historical part of the water controversies will also all go away, and that the water project will now be able to proceed.

Can the city get the low interest revolving loans? That remains to be seen.

—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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18 Comments

  1. Davis Progressive

    the council does the right thing, now we can put this issue to rest. one person who ironically deserves a lot of credit here was krovoza who it appears finally got bartle wells to really evaluate 87-13 and de-mystify it.

    really disappointed in elaine roberts musser’s comments last night. had we followed her lead, we would likely have another law suit.

  2. Davis Progressive

    the council does the right thing, now we can put this issue to rest. one person who ironically deserves a lot of credit here was krovoza who it appears finally got bartle wells to really evaluate 87-13 and de-mystify it.

    really disappointed in elaine roberts musser’s comments last night. had we followed her lead, we would likely have another law suit.

  3. Alan Miller

    Odd the lack of comments here.

    From the staff report at the last Krovoza meeting, most businesses and people with lawns and those who passed a certain threshold in any month would pay much more per month. I also got the impression at that meeting that Brett Lee would be joined by Lucas and Rochelle and the vote for 60-40 was likely to continue to the new council. If higher interest rates or funding a reserve lead to a higher overall cost and everyone together pays more, how much are lower end users really saving? No, seriously, I know there isn’t an exact number, but how much? So, if Harrington “made a deal” with the Council not to sue, is that not extortion, sort of? Did a majority of the Council decide the cost of additional interest rates / reserve fund was less than the cost of the City fighting a lawsuit, and therefore they were kinda-sorta looking out for the ratepayers? I’m not sure how I fall on any of this, or if I’m reading between the lines remotely correctly, or if anyone knows. I’m just surprised with so much controversy there is so little discussion on this in comments. So I thought I’d say some stuff and see what others had to say.

    1. dlemongello

      Alan, the staff report at the last Krovoza meeting was not comparing rates that generated the same revenues, they showed lines on the same graphs where 87/13 was generating higher revenues than 60/40, so of course they looked more expensive. It was a ridiculous thing to do, it was meant to mislead, and that is why staff was directed by Council to make an equal comparison for this week’s meeting between the 3 structures that they narrowed down to.

      It is very easy to understand that a structure that has a higher variable portion 87%, based on consumption is going to cost closest to the same amount per unit volume and therefore less if you use less and more if you use more, compared to a structure that has a higher fixed 40% and lower variable 60% portion. This week’s presentation was a true and accurate comparison. So it showed 87/13 being less expensive for low users and more expensive for high users compared to 60/40, just as the math dictates. It is a very volumetric rate.

      As for financing, the financial advisor was not able to give a definitive answer. We know there is a chance we will have an A rating rather than A+ rating, but CBFR that was to be implemented in January and was rescinded by Measure P got an A+ rating and it too was 87/13. Now we ALSO have the surcharge built in to correct revenues in case of a drop in consumption. The thing is solidly revenue resilient.

      The council also really likes that 87/13 is a strong conservation rate; you use less or more, you pay less or more accordingly, period.

    2. Matt Williams

      Alan, the consumption volumes shown on pages 9, 10 and 11 of Wednesday night’s Bartle Wells Staff report ( see http://city-council.cityofdavis.org/Media/CityCouncil/Documents/PDF/CityCouncil/CouncilMeetings/Agendas/20140701/09-Water-Rate-Designs-Presentation.pdf ) were,

      — 6 ccf per month (the 15th percentile)

      — 11 ccf per month (the middle of the 5th decile, just under the median, typically “people with lawns”)

      — 29 ccf per month (the 95th percentile … only 5% of the 14,700 single family accounts use more water per year, typically “people with extensive landscaping”)

      Of those three, only the 29 ccf per month user will pay “much more.” The apartments shown on pages 12 and 13 show no one paying “much more.” None of the four businesses shown on pages 14 through 17 show anyone paying “much more.”

      The reason that the examples from last week looked the way they did was because the 60/40 scenario rates that Staff gave Bartle Wells produced $2 million a year deficits at the same water consumption volume as the 87/13 scenarios produced break even. When the 60/40 rates were adjusted to eliminate those fiscal deficits (that would have resulted in significantly higher borrowing costs), they monthly cost differences were either eliminated or substantially reduced. If you compare the Wednesday Bartle Wells graphs to last week’s Bartle Wells graphs the effect of comparing the 87/13 and 60/40 scenarios on an apples-to-apples basis is very clear.

      Bottom-line, what the Council saw when the comparisons were done on an even playing field (one free of deficits) was that borrowing costs weren’t going to any different for 87/13 than for 60/40.

  4. Alan Miller

    Odd the lack of comments here.

    From the staff report at the last Krovoza meeting, most businesses and people with lawns and those who passed a certain threshold in any month would pay much more per month. I also got the impression at that meeting that Brett Lee would be joined by Lucas and Rochelle and the vote for 60-40 was likely to continue to the new council. If higher interest rates or funding a reserve lead to a higher overall cost and everyone together pays more, how much are lower end users really saving? No, seriously, I know there isn’t an exact number, but how much? So, if Harrington “made a deal” with the Council not to sue, is that not extortion, sort of? Did a majority of the Council decide the cost of additional interest rates / reserve fund was less than the cost of the City fighting a lawsuit, and therefore they were kinda-sorta looking out for the ratepayers? I’m not sure how I fall on any of this, or if I’m reading between the lines remotely correctly, or if anyone knows. I’m just surprised with so much controversy there is so little discussion on this in comments. So I thought I’d say some stuff and see what others had to say.

    1. dlemongello

      Alan, the staff report at the last Krovoza meeting was not comparing rates that generated the same revenues, they showed lines on the same graphs where 87/13 was generating higher revenues than 60/40, so of course they looked more expensive. It was a ridiculous thing to do, it was meant to mislead, and that is why staff was directed by Council to make an equal comparison for this week’s meeting between the 3 structures that they narrowed down to.

      It is very easy to understand that a structure that has a higher variable portion 87%, based on consumption is going to cost closest to the same amount per unit volume and therefore less if you use less and more if you use more, compared to a structure that has a higher fixed 40% and lower variable 60% portion. This week’s presentation was a true and accurate comparison. So it showed 87/13 being less expensive for low users and more expensive for high users compared to 60/40, just as the math dictates. It is a very volumetric rate.

      As for financing, the financial advisor was not able to give a definitive answer. We know there is a chance we will have an A rating rather than A+ rating, but CBFR that was to be implemented in January and was rescinded by Measure P got an A+ rating and it too was 87/13. Now we ALSO have the surcharge built in to correct revenues in case of a drop in consumption. The thing is solidly revenue resilient.

      The council also really likes that 87/13 is a strong conservation rate; you use less or more, you pay less or more accordingly, period.

    2. Matt Williams

      Alan, the consumption volumes shown on pages 9, 10 and 11 of Wednesday night’s Bartle Wells Staff report ( see http://city-council.cityofdavis.org/Media/CityCouncil/Documents/PDF/CityCouncil/CouncilMeetings/Agendas/20140701/09-Water-Rate-Designs-Presentation.pdf ) were,

      — 6 ccf per month (the 15th percentile)

      — 11 ccf per month (the middle of the 5th decile, just under the median, typically “people with lawns”)

      — 29 ccf per month (the 95th percentile … only 5% of the 14,700 single family accounts use more water per year, typically “people with extensive landscaping”)

      Of those three, only the 29 ccf per month user will pay “much more.” The apartments shown on pages 12 and 13 show no one paying “much more.” None of the four businesses shown on pages 14 through 17 show anyone paying “much more.”

      The reason that the examples from last week looked the way they did was because the 60/40 scenario rates that Staff gave Bartle Wells produced $2 million a year deficits at the same water consumption volume as the 87/13 scenarios produced break even. When the 60/40 rates were adjusted to eliminate those fiscal deficits (that would have resulted in significantly higher borrowing costs), they monthly cost differences were either eliminated or substantially reduced. If you compare the Wednesday Bartle Wells graphs to last week’s Bartle Wells graphs the effect of comparing the 87/13 and 60/40 scenarios on an apples-to-apples basis is very clear.

      Bottom-line, what the Council saw when the comparisons were done on an even playing field (one free of deficits) was that borrowing costs weren’t going to any different for 87/13 than for 60/40.

  5. David Zetland

    It’s a bit sad to see water policy driven by a few people making contradictory assumptions and predictions. All I want to know is if this will pan out over the next 1-3 years. It would be sad for all the predictions to fail without someone calling attention…

  6. David Zetland

    It’s a bit sad to see water policy driven by a few people making contradictory assumptions and predictions. All I want to know is if this will pan out over the next 1-3 years. It would be sad for all the predictions to fail without someone calling attention…

  7. dlemongello

    We had to use informed predictions to set rates, but if the predictions are off in either direction, there will either be surplus revenue that can be used to offset costs and provide an opportunity for less borrowing, or if it goes the other direction, we have already built in the ability for rates to rise and fall in response to changes in consumption, thereby avoiding deficits.

  8. dlemongello

    We had to use informed predictions to set rates, but if the predictions are off in either direction, there will either be surplus revenue that can be used to offset costs and provide an opportunity for less borrowing, or if it goes the other direction, we have already built in the ability for rates to rise and fall in response to changes in consumption, thereby avoiding deficits.

  9. Alan Miller

    Higher costs produce conservation; conservation brings in less revenue; less revenue triggers surcharges; surcharges mean higher costs; higher costs produce conservation . . . so the end game is we are a broke town with infinity per gallon water that we don’t use.

  10. Alan Miller

    Higher costs produce conservation; conservation brings in less revenue; less revenue triggers surcharges; surcharges mean higher costs; higher costs produce conservation . . . so the end game is we are a broke town with infinity per gallon water that we don’t use.

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