Tiered Water Rates – Part 2.

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I sat through round two of Council’s review of tiered water rate recommendations from staff and Raftelis Financial Consultants. I saw the room full of glazed eyes and quizzical expressions. The only thing that seems abundantly clear was that nothing was clear at all.

Well, not exactly true. A couple of those residents bold enough to address Council during Matters From The Audience spoke in ways I could understand and brought up questions I’ve seen mirrored on NextDoor and in other social media.

For the average resident, there is way too much convoluted math, reliance on unsubstantiated industry standards and rocket science to ever understand this whole tiered water rates issue. So, rather than paint myself into a corner I asked one of Tuesday night’s more obviously bright speakers to write up his take on the meeting.

Thankfully, he agreed.

Brea Tiered Water Rates Follow-up

By: Jason Kraft

Jason KraftThe discussion about new tiered water rates at the October 6 Brea City Council meeting provided some interesting insights into the decision-making process. First of all, it’s important to note that no decision was made at this meeting regarding what the new water rates should be. It’s likely that no decision will be made for at least a month or two, since direction was given to city staff to provide alternative rate structure options.

Impact of Prop 218.

Once a decision is made and a new rate structure is selected, the new rates can only go into effect after information is mailed to each property owner and a public hearing is held 45 days after the mailing.

These requirements were put in place by Proposition 218, passed in 1996, which constrains local government’s ability to raise general taxes, assessments and certain property-related fees. Prop 218 also says that cities can’t charge fees for certain services that are higher than the cost of providing those services.

The text of Prop 218 is not clear on whether or not water rates are included in the scope of the law. Recent court cases about tiered water rates, including a high profile case in San Juan Capistrano, have found that Prop 218 does apply.

This means that tiered water rates are only legal if you can justify the tiers based on the cost of supplying the water, and you can’t base the tiers on incentivizing conservation (Editorial note: applying a punitive component to the rate as a means of social engineering).

I had heard that the state water board was trying to fight this decision, but it looks like it will stand for now. As a result there are restrictions on how water rates can be set up, and explaining rates based on cost alone will be critical to avoiding legal issues down the road.

Fixing fixed revenues.

Raftelis Financial Consultants, Inc. was commissioned to put together a water rate study. One of the early insights was the disparity between the fixed costs of maintaining water infrastructure (63% of all costs) and fixed revenues based on meter charges (14% of revenue). Since so much of the revenue is variable instead of fixed, we lost a lot of revenue when conservation reduced water usage.

Of course, the obvious solution is to increase fixed rates. Cut to the next slide, which proposes a 6% total reduction in fixed rates.

The proposed new fixed rates are a 12% hike for residential customers and a cut of up to 38% for customers with larger meters. Oddly enough, the 6% total reduction figure was never mentioned in the presentation, I had to calculate that myself. You’d think that would be an important piece of information.

The proposed fixed rates represent industry-standard fees consisting of both a flat service charge and an additional cost component based on the size and maximum flow rate of each meter size. The current fixed rates were apparently pulled out of thin air, as no one seemed to know what they were based upon.

I was surprised by the consultant’s inability to address this; someone who specializes in presenting water rate studies should have realized the implication of these changes.

Brea’s fixed charges are among the lowest in Orange County – the charge for a standard 1” residential meter is $9.66/month (increase to $10.81 proposed), while Fullerton charges $12.94/month, and Yorba Linda recently increased their 1” fixed meter charge from $16.77 to $41.57.

No, that’s not a typo.

Increasing the fixed cost component based on max flow rate would help share the burden among all customers, and the council provided direction to investigate alternative structures that have a higher share of revenue from fixed charges.

Which variable rates are which?

The presentation then continued to variable rates, which provide most of the revenue. There are two major decisions to make about these rates: whether to use a blended supply cost or a differentiated supply cost, and whether to have uniform rates versus three tiers or four tiers for single family residential customers.

Most of Brea’s water (70%) is imported from Cal Domestic, which is much cheaper per unit than the 30% of our water that comes from the Municipal Water District of Orange County (MWDOC). Using blended supply would charge the same supply cost per unit (an average of both water sources) to all tiers, while differentiated supply would increase the supply costs for higher tiers, essentially allocating the more expensive MWDOC water to those who consume more.

Note that supply cost is only one component of the total cost of water: you also have to factor in the cost of delivery as well as peaking costs, which account for ensuring maximum customer demand and fire prevention requirements can be met. Under a blended supply model (the staff-recommended option), the only difference between the tiers is the peaking cost. Differentiated supply rates are farther apart since both the supply cost and the peaking cost increase with each tier.

The uniform rate – where there are no tiers and all customers pay the same — seemed to be dismissed out of hand. A proposed three tier model would be differentiated by water source, but the four tier model used today was the option recommended by staff.

Flat rates for other customers.

Aside from single family residential customers, Brea also supplies other types of customers: multiple family residential, non-residential, green belt, customers outside Brea city limits (county parks and the landfill), Brea Creek Golf Course, and construction. The first three types of customers currently pay the same flat rate, but the proposal would cut the rate for multi family residential and increase the rate for green belt customers, leaving non-residential customers at about the same flat rate.

There were questions from the council about why multi family residential customers were at such a low rate ($2.94 flat, which is only slightly higher than tier 1 for single family residential). It was explained that multi family residential customers tend to have relatively low water needs for each individual household, putting them somewhere between tier 1 and tier 2 if they were separate SFR customers, which makes sense.

There was also direction from the council to investigate setting up tiers for green belt customers based on square footage. The other customer classes have large variances in usage so tiering them would be tough, but for green belt customers this makes a lot of sense. The city should already have square footage information — even in the case of HOAs as green belts are usually separate parcels – and irrigation usage scales similarly among green belt properties.

The “Outside Brea” customer class was another point of discussion. The council directed staff to look at making a separate class for the landfill (which has relatively constant water use due to air quality requirements) and moving the county parks to the green belt category, since they mostly use water for irrigation anyway.

Conservation rates.

The biggest impact on Brea water customers, by far, will be conservation rates. Due to the aforementioned reliance on variable revenue, reduced water usage has caused costs to exceed revenues. This shortfall needs to be covered by raising rates.

Tiered Water RatesUnder this proposal, variable rates would be 17% higher than base rates while Brea is under a 24% conservation mandate. If the mandate is dropped to 10%, variable rates would be 6% higher than base rates. I’ve consolidated the data and charted it as best as I can, view a full size PDF here: Brea Water Rates Chart

Efficiency & Sustainability.

Going into the council meeting, I was concerned about the efficiency of the water supply system in terms of maintenance and administrative overhead. Apparently Brea’s water department is one of the leanest in the county, and capital projects have been scaled down to only what is critical for maintenance. It would be great to see public reports confirming this to help justify why revenues need to go up, but costs can’t go down.

I was also concerned about sustainability, given Brea’s water usage drop of only 13.8% in August, short of the 24% target. However, the new September reduction numbers are over 30%, and the metrics the state uses to calculate total water use reduction (current usage vs. two years ago) don’t take into account new customers added to the water system. So it looks like we’re in pretty good shape here.

Transparency & Fairness.

I still think there is an easier way to do this than setting up tiers based on seemingly arbitrary usage levels – for the four tier system, the justification for each tier is average indoor use, average summer use, everything else up to 90%, and the top 10%.

I’m not sure if that’s good enough to survive a Prop 218 lawsuit.

I had originally proposed a uniform rate with an added high usage tier for incentivizing conservation. However, given the legal restrictions and the latest water use reduction numbers, I believe focusing on allocating the more expensive MWDOC water to customers with the highest usage is the best way forward. I’m not sure what the specifics of this model would look like yet, but I think reducing the number of tiers and using a differentiated supply model is a step in the right direction.

Keep it simple, easy to understand, fair, and legally defensible.

To dream the impossible dream.

I believe Jason is exactly right.

  • Keep it simple, so those footing the bill clearly understand what they’re paying for and why.
  • Easy to understand, presented in lay language with math that doesn’t require an HP calculator to confirm.
  • Fair, distributing cost recovery and reserve requirements equitably without slipping in hidden punitive charges as has been typical since Brea created tiered water rates.
  • And legally defensible, living up to both the letter and the spirit of the law.

From day one, Council was duped into believing tiered water rates were, without question, perfectly legal. They weren’t. They violated Prop 218. The City Attorney must have realized this, as did the consultant. According to a source above reproach, Prop 218 was never even whispered in the room.

Sure, there hadn’t been a legal challenge, as in San Juan Capistrano, but so what? The law is the law. Crossing your fingers and hoping you don’t get caught is hardly the way to run a city. Is that what you teach your kids?

Hopefully, this time, Council will have all the facts at hand, a clear understanding of the legal obligations and a desire to put first those who are saddled with paying back the $30 million in water bonds.