Will Council Put to Rest the Water Rate Discussion?

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

At the last city council meeting, the council moved for staff to prepare the Prop 218 to adopt a five-year water rate structure with a 13 percent fixed component and an 87 percent variable component.

Herb Niederberger, following the Measure P election, indicated that the city would be eligible for state revolving funds as long as the council followed the strict timeline of having a rate structure ready to enter the Prop 218 process by July and in place with no legal challenges by October 1.

Will this bring an end to legal action? In public comment on July 2, Don Price argued that fear of legal action was a red herring. He explained, “The only reason that the council has been plagued with legal action this past year is that people didn’t like the experimental rates that the city council voted for before. I can’t imagine anyone bringing any kind of legal action or challenge to an 87-13 rate.”

In the motion adopted on July 2,Thirteen percent (13%) of the annual revenue will be derived from the fixed component of the rates. The fixed component shall be based on meter size in compliance with ratios established by American Water Works Association (AWWA). The remaining 87% of the revenue will come from the uniform block rates charges to each specific customer class in accordance with the Bartle Wells Associates (BWA) Cost of Service Study.”

“Consistent with Article X of the California Constitution and in conjunction with Article XII, 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 in Davis,” staff explains.

Staff adds, “Included in the revenue calculations will be the accumulation of $8.5 million in rate/revenue/Operations and Maintenance reserve. Implementation of a Water Shortage Surcharge (Drought Surcharge) that can be added to the water charges in the event of a declared water shortage emergency.”

According to staff, “The proposed rates will provide the necessary funding to meet bond coverage requirements, pay future debt service obligations, sustain the capital improvement program and cover increased operating and maintenance costs.”

There has been some discussion regarding equity in the rate structure. Staff writes, “For some, equity could be expressed that one class of customers may use 25% of the water and therefore should pay 25% of the fees. This type of exclusive, so-called, social equity does not work for every water system and is often disputed by water rate experts generally because of the high fixed costs associated with running a utility.”

Staff continues, “Social equity was traditionally one of the main objectives of urban water pricing; however, design today focuses increasingly on balancing economic efficiency, conservation, financial sustainability, and cost recovery. Pricing and planning decisions will always be politically and socially sensitive issues that transcend market-based decision making.”

The rate design chosen by city council and sanctioned by BWA “emphasizes conservation, financial sustainability, and cost recovery, while recognizing affordability.”

Staff goes on to note, “It should be noted that the City does currently have a low-income water rate assistance program whereby qualified owner-occupied households can receive a discount of ten dollars per month on utility rates.”

Some councilmembers have indicated that they wish to expand that program in order to cover more low-income residents.

Staff notes that these rates will result in a 6.4% increase in revenues from approximately $13.77 million in fiscal year 2013/2014 to $14.66 million in fiscal year 2014/15. That number will increase over the next five years reaching $24 million by fiscal year 2018/2019.

Water-Rates-2014-Proposed

Bartle Wells has prepared a draft of the Water Rate Cost of Service Study. Writes staff, “The purpose of this study was to review the City’s current water rates and develop alternative rates structures to fund the regional water supply project and provide funds for necessary additional capital improvements and for operations and maintenance of the water system. The result is a comprehensive cost-of-service water rate study and the development of a long-term financial plan.”

Staff recommends that the city council adopt the Water Rate Cost of Service Study in its current draft form, subject to minor modification and final publishing in July 2014.

An issue of growing concern is water shortage and drought. Staff believes this addresses those concerns as well.

“Due to continuing multi-year drought conditions in California, on January 17, 2014, Governor Jerry Brown proclaimed a State of Emergency and directed state officials to take all actions necessary to prepare for existing drought conditions and their impact on water supplies in California,” staff writes. “The amount of water available for purchase by the City is often affected by climatic and other environmental conditions such as the current drought. In such instances, it may become necessary for the City to implement water conservation measures and to establish a surcharge on the rates (Water Shortage Surcharge) for its water service fees.”

Staff continues, “The Water Shortage Surcharge will be established to ensure the City receives sufficient revenues to recover its costs of providing water service when consumption decreases.”

In the event of a declared mandatory reduction in water use, staff has put into place several surcharges that may be implemented by the City. “The Water Shortage Surcharges are established on the basis of blocks of 10% reductions, commencing at a 20% reduction, and may be pro-rated if the mandatory reduction in water use falls between two blocks.”

Drought-Surcharge-2014-proposed

“At the time of this notice, a Water Shortage Surcharge is not anticipated to be in effect,” staff adds.

If council approves the rate design and the new rate study on Tuesday and authorizes the Prop 218 notice, the notices would be mailed on July 31. There would be a public hearing on September 16 on the majority protest for Prop 218 and the 1st reading of the water rate ordinance. The second reading would take place on September 30 and the new rates would go into effect on November 1.

—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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38 Comments

  1. SODA

    “Staff continues, “The Water Shortage Surcharge will be established to ensure the City receives sufficient revenues to recover its costs of providing water service when consumption decreases.”
    In the event of a declared mandatory reduction in water use staff has put into place several surcharges that may be implemented by the City. “The Water Shortage Surcharges are established on the basis of blocks of 10% reductions, commencing at a 20% reduction, and may be pro-rated if the mandatory reduction in water use falls between two blocks.”

    Just when I thought I was beginning to understand! This talks about mandatory reduction in consumption. I thought the water surcharge would also kick in if the community greatly increased their conservation efforts???

  2. SODA

    “Staff continues, “The Water Shortage Surcharge will be established to ensure the City receives sufficient revenues to recover its costs of providing water service when consumption decreases.”
    In the event of a declared mandatory reduction in water use staff has put into place several surcharges that may be implemented by the City. “The Water Shortage Surcharges are established on the basis of blocks of 10% reductions, commencing at a 20% reduction, and may be pro-rated if the mandatory reduction in water use falls between two blocks.”

    Just when I thought I was beginning to understand! This talks about mandatory reduction in consumption. I thought the water surcharge would also kick in if the community greatly increased their conservation efforts???

  3. Tia Will

    SODA

    I was under the same impression and do not see the two as contradictory. My understanding is that the surcharge would be triggered by a certain level of reduction regardless of causation.
    Could someone with more clarity on this help us out ?

    1. SODA

      Yes, Tia, I don’t see it as contradictory either; I was just confused that the story seemed to imply only mandatory conservation and I thought/hoped it more likely to come from community conservation. Pretty sure you would agree?

      1. Matt Williams

        SODA and Tia, I believe that staff’s wording does imply only mandatory conservation. Addressing the impacts of Community conservation is definitely the intent of the surcharge provisions of the Revenue Stabilization Reserve Fund.

        The goal is to bring down borrowing costs by maximizing the credit rating that Davis gets from the bond rating agencies. Stable revenues, with no deficits is the best way to accomplish that.

  4. Tia Will

    SODA

    I was under the same impression and do not see the two as contradictory. My understanding is that the surcharge would be triggered by a certain level of reduction regardless of causation.
    Could someone with more clarity on this help us out ?

    1. SODA

      Yes, Tia, I don’t see it as contradictory either; I was just confused that the story seemed to imply only mandatory conservation and I thought/hoped it more likely to come from community conservation. Pretty sure you would agree?

      1. Matt Williams

        SODA and Tia, I believe that staff’s wording does imply only mandatory conservation. Addressing the impacts of Community conservation is definitely the intent of the surcharge provisions of the Revenue Stabilization Reserve Fund.

        The goal is to bring down borrowing costs by maximizing the credit rating that Davis gets from the bond rating agencies. Stable revenues, with no deficits is the best way to accomplish that.

  5. dlemongello

    Staff continues to insist on using this wording. We are doing our level best to have the Council understand how counterproductive and dangerous this is and word it such that the surcharge kicks in at the appropriate levels during any drop in consumption REGARDLESS of the cause or conditions by which it occurs. Thank you for paying such close attention. I encourage you to come down on Tuesday and tell them that.

    1. Don Shor

      I guess they should just put “drought” in quotes and explain that it is regulatory jargon, and not connected to actual drought conditions per se. It’s a consumption/revenue issue that usually results, in other water districts, from drought conditions causing mandatory conservation, leading to reduced revenues. But it doesn’t matter what prompted the conservation. It’s the revenues that matter.

      1. SODA

        Thanks Don for clarification. Would hope terminology would reflect actual process and encourage conservation tho understand that true conservation will lead to surcharge as it must for revenue flow. Sorry Donna, am away this week, will try to stream the CC meeting. Hope others will express this thought.

        1. Matt Williams

          SODA, please feel free to send the Council members an e-mail containing your thoughts. All the remaining issues on the table are policy issues that the Council will be addressing Tuesday. Hearing from the rate payers directly will be helpful when they weight the pros and cons of those policy issues.

    2. Davis Progressive

      so don’t take this question the wrong way, but i thought this was no longer the williams-lemongello, that being the case, what is your role in all of this?

      1. Matt Williams

        Fair question DP. The simplest answer to that question is shown in the following two slides that Donna and I put together based on the Staff Report for tomorrow night’s Council meeting. Staff’s recommendation poses a couple of challenges for the water district as shown in this first graphic.
        .
        Staff's 87/13 Water Rates
        .
        As you can see from the following graphic, Donna and I have resolved those challenges.
        .
        L-W 87/13 Water Rates
        .
        So the complete answer to your question is that Donna and I are just paying attention to the details.

      2. Matt Williams

        UPDATE: Donna and I met with Herb Niederberger this afternoon at 3:00 at his invitation to discuss our concerns about the budget deficit (shown in yellow in the graphic above) projected for water use between 10% reduced and 20% reduced consumption, as well as between 40% reduced and 50% reduced consumption. In the meeting Herb addressed all of Donna’s and my concerns.

        Specifically, Herb disclosed that in the annual Revenue Requirements (contained in the Cost of Service Study Update published in tonight’s Staff Report), there is at least $1.3 million of “cost” that is specifically designated to build up the balances of the Water Reserve Funds. Herb explained that should the deficit we calculated come to pass, the budgeted build up of the Reserve Funds would be foregone until revenues increased enough to once again produce a surplus. That reduction would eliminate the deficit and should give Mark Northcross the kind of “no deficits, only surpluses” message that will allow him to maximize the chances of getting an A+ rating from the rating agencies, which would produce lower interest rates for the water district and lower borrowing costs in the budget when borrowing occurs.

        Addressing the deficits the way Herb suggests will result in a $0.30 per ccf savings for all ratepayers. That is a good outcome.

  6. dlemongello

    Staff continues to insist on using this wording. We are doing our level best to have the Council understand how counterproductive and dangerous this is and word it such that the surcharge kicks in at the appropriate levels during any drop in consumption REGARDLESS of the cause or conditions by which it occurs. Thank you for paying such close attention. I encourage you to come down on Tuesday and tell them that.

    1. Don Shor

      I guess they should just put “drought” in quotes and explain that it is regulatory jargon, and not connected to actual drought conditions per se. It’s a consumption/revenue issue that usually results, in other water districts, from drought conditions causing mandatory conservation, leading to reduced revenues. But it doesn’t matter what prompted the conservation. It’s the revenues that matter.

      1. SODA

        Thanks Don for clarification. Would hope terminology would reflect actual process and encourage conservation tho understand that true conservation will lead to surcharge as it must for revenue flow. Sorry Donna, am away this week, will try to stream the CC meeting. Hope others will express this thought.

        1. Matt Williams

          SODA, please feel free to send the Council members an e-mail containing your thoughts. All the remaining issues on the table are policy issues that the Council will be addressing Tuesday. Hearing from the rate payers directly will be helpful when they weight the pros and cons of those policy issues.

    2. Davis Progressive

      so don’t take this question the wrong way, but i thought this was no longer the williams-lemongello, that being the case, what is your role in all of this?

      1. Matt Williams

        Fair question DP. The simplest answer to that question is shown in the following two slides that Donna and I put together based on the Staff Report for tomorrow night’s Council meeting. Staff’s recommendation poses a couple of challenges for the water district as shown in this first graphic.
        .
        Staff's 87/13 Water Rates
        .
        As you can see from the following graphic, Donna and I have resolved those challenges.
        .
        L-W 87/13 Water Rates
        .
        So the complete answer to your question is that Donna and I are just paying attention to the details.

      2. Matt Williams

        UPDATE: Donna and I met with Herb Niederberger this afternoon at 3:00 at his invitation to discuss our concerns about the budget deficit (shown in yellow in the graphic above) projected for water use between 10% reduced and 20% reduced consumption, as well as between 40% reduced and 50% reduced consumption. In the meeting Herb addressed all of Donna’s and my concerns.

        Specifically, Herb disclosed that in the annual Revenue Requirements (contained in the Cost of Service Study Update published in tonight’s Staff Report), there is at least $1.3 million of “cost” that is specifically designated to build up the balances of the Water Reserve Funds. Herb explained that should the deficit we calculated come to pass, the budgeted build up of the Reserve Funds would be foregone until revenues increased enough to once again produce a surplus. That reduction would eliminate the deficit and should give Mark Northcross the kind of “no deficits, only surpluses” message that will allow him to maximize the chances of getting an A+ rating from the rating agencies, which would produce lower interest rates for the water district and lower borrowing costs in the budget when borrowing occurs.

        Addressing the deficits the way Herb suggests will result in a $0.30 per ccf savings for all ratepayers. That is a good outcome.

  7. Matt Williams

    SODA, staff has chosen the wording in the Staff Report based on their preconceptions. In a formally submitted letter to the Council on Thursday, prior to the issuance of the Staff Report on Saturday morning, Donna and I made the following point:

    “6. We believe it to be very important that Council should have the ability to activate the surcharge under the provisions of the rate ceiling set in the Prop 218 Notice, regardless of the cause for the drop in aggregate consumption. Constraining the surcharge trigger to be contingent upon proclamation of a drought by the governor is not fiscally wise. Davis ratepayers understand that the water district must pay its bills, and especially its debt service payments if we are going to keep water district costs down.”

    When the draft Prop 218 Notice is posted by Herb Niederberger on Monday we will see if he has gained any fiscal wisdom between the drafting of the Staff Report and the drafting of the Prop 218 Notice,

  8. Matt Williams

    SODA, staff has chosen the wording in the Staff Report based on their preconceptions. In a formally submitted letter to the Council on Thursday, prior to the issuance of the Staff Report on Saturday morning, Donna and I made the following point:

    “6. We believe it to be very important that Council should have the ability to activate the surcharge under the provisions of the rate ceiling set in the Prop 218 Notice, regardless of the cause for the drop in aggregate consumption. Constraining the surcharge trigger to be contingent upon proclamation of a drought by the governor is not fiscally wise. Davis ratepayers understand that the water district must pay its bills, and especially its debt service payments if we are going to keep water district costs down.”

    When the draft Prop 218 Notice is posted by Herb Niederberger on Monday we will see if he has gained any fiscal wisdom between the drafting of the Staff Report and the drafting of the Prop 218 Notice,

  9. paul Brady

    Water cost increases are quite dramatic: Tier 1 SFR users now paying 1.50/ccf would pay 5.01/ccf on Jan.1/2019 plus the fixed charge of 13.07 up from the current 11.50 for 3/4″ connection.
    This is a factor of 3.34! Larger users would also pay a large increase – near a factor of three by 1/1/2019.

    So rates are in general larger than those of the previous Prop. 218!

    1. Matt Williams

      No Paul they are not higher than in the March 2013 Prop 218.

      The 2015 Revenue Requirement in the prior Prop 218 was $16,214,000 (see Option 3 of Table 1 of the Cost of Service Study below) . The 2015 Revenue Requirement in this Prop 218 is $15,048,000.

      The 2016 Revenue Requirement in the prior Prop 218 was $20,268,000. The 2016 Revenue Requirement in this Prop 218 is $17,155,000 .

      The 2017 Revenue Requirement in the prior Prop 218 was $21,889,000. The 2017 Revenue Requirement in this Prop 218 is $19,557,000 .

      The 2018 Revenue Requirement in the prior Prop 218 was $23,640,000. The 2018 Revenue Requirement in this Prop 218 is $22,295,000.

      Your personal rates are higher because as you have told us many times, your discretionary use of water for your fruit trees and your vegetable garden and you landscaping is in the top 10% of of City of Davis single family homes. That high usage of water is a choice you have personally made. No one else has made that choice for you.

       Table 1 of Cost of Service Study

  10. paul Brady

    Water cost increases are quite dramatic: Tier 1 SFR users now paying 1.50/ccf would pay 5.01/ccf on Jan.1/2019 plus the fixed charge of 13.07 up from the current 11.50 for 3/4″ connection.
    This is a factor of 3.34! Larger users would also pay a large increase – near a factor of three by 1/1/2019.

    So rates are in general larger than those of the previous Prop. 218!

    1. Matt Williams

      No Paul they are not higher than in the March 2013 Prop 218.

      The 2015 Revenue Requirement in the prior Prop 218 was $16,214,000 (see Option 3 of Table 1 of the Cost of Service Study below) . The 2015 Revenue Requirement in this Prop 218 is $15,048,000.

      The 2016 Revenue Requirement in the prior Prop 218 was $20,268,000. The 2016 Revenue Requirement in this Prop 218 is $17,155,000 .

      The 2017 Revenue Requirement in the prior Prop 218 was $21,889,000. The 2017 Revenue Requirement in this Prop 218 is $19,557,000 .

      The 2018 Revenue Requirement in the prior Prop 218 was $23,640,000. The 2018 Revenue Requirement in this Prop 218 is $22,295,000.

      Your personal rates are higher because as you have told us many times, your discretionary use of water for your fruit trees and your vegetable garden and you landscaping is in the top 10% of of City of Davis single family homes. That high usage of water is a choice you have personally made. No one else has made that choice for you.

       Table 1 of Cost of Service Study

  11. dlemongello

    The first thing that needs to be done is convert from one rate structure to another to make this comparison. I don’t have time to do that right now and Matt may be able to whip it out more easily than I could anyway. But yes, it is not news that rates are going to be a lot higher by 2019 and the rates you are using as a starting point are from I believe 2010, so we are talking about a 9 year spread and a very expensive project.

  12. dlemongello

    The first thing that needs to be done is convert from one rate structure to another to make this comparison. I don’t have time to do that right now and Matt may be able to whip it out more easily than I could anyway. But yes, it is not news that rates are going to be a lot higher by 2019 and the rates you are using as a starting point are from I believe 2010, so we are talking about a 9 year spread and a very expensive project.

  13. John Munn

    This is just an observation. Deciding on a rate structure only gets us part of the way to bottom line ratepayer costs on the water bill. Also to be determined is the revenue needed to pay for water production and system financing costs. Then, to set rates, the volume of water to be provided needs to be estimated. Knowing what we are paying for will require much attention to individual costs included in the rate calculations.

    John Munn

    1. Matt Williams

      Well said John. Very well said.

      Rate structures generate the amount of revenue needed to satisfy the Revenue Requirement identified in the cost of service study. Each annual Revenue Requirement within a rate is equal to the costs that have been identified that will need to be paid that year.

      One of the problems we currently face in coming up with accurate estimates of annual costs is that we do not know what interest rate we will be paying on the borrowing for the surface water plant construction and the capital infrastructure maintenance. Table 15 of the March 2013 Cost of Service study lays out the assumptions that are used for interest rates and borrowing costs (debt service). As you can see in Table 15 the interest rates are very conservative (between 5.5% and 6.5%) and as a result the annual debt service costs are quite high … definitely higher than we are likely to experience when the actual borrowing takes place.

      Any ability to act on Paul Brady’s often expressed desire to see the total costs of the project come down is captive to the high projected interest rates. It is much better to budget conservatively and come in under budget rather than to budget over optimistically and have to go out to the rate payers with a request for more money because we didn’t plan wisely. In the meantime, practicing patience until the actual borrowings happen is our only choice.

       Table 15 of Cost of Service Study

  14. John Munn

    This is just an observation. Deciding on a rate structure only gets us part of the way to bottom line ratepayer costs on the water bill. Also to be determined is the revenue needed to pay for water production and system financing costs. Then, to set rates, the volume of water to be provided needs to be estimated. Knowing what we are paying for will require much attention to individual costs included in the rate calculations.

    John Munn

    1. Matt Williams

      Well said John. Very well said.

      Rate structures generate the amount of revenue needed to satisfy the Revenue Requirement identified in the cost of service study. Each annual Revenue Requirement within a rate is equal to the costs that have been identified that will need to be paid that year.

      One of the problems we currently face in coming up with accurate estimates of annual costs is that we do not know what interest rate we will be paying on the borrowing for the surface water plant construction and the capital infrastructure maintenance. Table 15 of the March 2013 Cost of Service study lays out the assumptions that are used for interest rates and borrowing costs (debt service). As you can see in Table 15 the interest rates are very conservative (between 5.5% and 6.5%) and as a result the annual debt service costs are quite high … definitely higher than we are likely to experience when the actual borrowing takes place.

      Any ability to act on Paul Brady’s often expressed desire to see the total costs of the project come down is captive to the high projected interest rates. It is much better to budget conservatively and come in under budget rather than to budget over optimistically and have to go out to the rate payers with a request for more money because we didn’t plan wisely. In the meantime, practicing patience until the actual borrowings happen is our only choice.

       Table 15 of Cost of Service Study

  15. paul Brady

    Current AAA muni-bond rates are close to treasuries: 2.95 for 20 yr and 3.35% for 30yr. HN seemed confident we could get the SRF rate which is even better.

    Water rates did triple in the past decade and homeowners did a lot of conserving. The easy part has been done by most. Another large increase – a factor of approximately 2.5 to 2.75 – will produce some real effects in the loss of greenery, etc. Look around town and you can see it – the combination of drought and water conserving. Most homeowners use more water in a drought – is the City planning to charge more in a drought?!

    Thank goodness we in northern Cal have one of the best and biggest water-sheds in the world – which recharges our reservoirs – surface and groudwater!

  16. paul Brady

    Current AAA muni-bond rates are close to treasuries: 2.95 for 20 yr and 3.35% for 30yr. HN seemed confident we could get the SRF rate which is even better.

    Water rates did triple in the past decade and homeowners did a lot of conserving. The easy part has been done by most. Another large increase – a factor of approximately 2.5 to 2.75 – will produce some real effects in the loss of greenery, etc. Look around town and you can see it – the combination of drought and water conserving. Most homeowners use more water in a drought – is the City planning to charge more in a drought?!

    Thank goodness we in northern Cal have one of the best and biggest water-sheds in the world – which recharges our reservoirs – surface and groudwater!

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