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.
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.”
“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