Tiered Water Rates – Part 3

tiered water ratesA couple of months ago Brea Matters shared a very creative and user friendly formula for tiered water rates from Jason Kraft. Jason has continued to follow this closely and, with a critical public hearing scheduled for February 2, it’s time to share Jason’s sequel… and thankfully we don’t need to be rocket scientists to understand his plan.

Tiered Water Rates – It’s Time To Act!

By: Jason Kraft

Jason KraftYou probably received a notice in your mail recently indicating that a public hearing for a tiered water rate increase will be held at the Brea city council meeting on Tuesday, Feb 2, 2016 at 7pm, with a proposed effective date of Feb 8, 2016.

The proposed changes would increase the fixed rate for most residential water customers from $9.66 to a minimum of $10.81 and a maximum of $15.16. The variable rate — which is based on water usage — will also change, with the lowest tier of usage seeing the highest percentage increase.

The notice includes examples of how the change will impact monthly bills: someone who uses very little water will see their bill increase between 12% and 38%. Bills for average users would be 12% to 15% higher, while a heavy water user will see increases from 0.5% to 8%.

Why are tiered water rates increasing?

There are two major issues with water rates in Brea (and just about everywhere else in California): the gap between costs and revenue, and the financial volatility caused by relying on commodity charges to fund fixed infrastructure.

If you look at the fixed costs involved in maintaining our water infrastructure (which is the same regardless of usage) and the declining revenues from conservation, there are not enough revenues to cover those fixed costs. This is an urgent, short-term tactical issue that needs to be addressed ASAP to avoid even higher rates down the road.

tiered water ratesThe second issue relating to financial volatility is actually the root cause of the revenue gap. Since a large percentage of our fixed costs are paid for by water usage fees, when water usage falls we don’t collect enough revenue to pay those costs with the existing rates. The obvious solution is to just increase the fixed charge to a point where fixed revenue closely matches fixed costs, but the discrepancy is so large (63% of costs are fixed compared to 13% of revenue) that the resulting fixed charge would need to be ridiculously high.

This is what’s happening in Yorba Linda, who used the same tiered water rate consultant (Raftelis Financial Consultants) as Brea.

The compromise solution in Brea’s proposal increases the % of revenue from fixed charges to 14% (this is the minimum proposed fixed charge), then 17%, then 20%. That’s great, but even with the highest proposed fixed charge you still have 20% revenue from fixed vs 63% of costs. How much would this really reduce volatility, and is it worth burdening light water users and lower income residents with larger fixed charge increases that will never be rolled back?

To keep the system running, revenue has to increase, but the structure of the proposed increase puts too much of a burden on those who use the least amount of water. It’s an especially raw deal for Lifeline customers: the good news is they still get a 20% discount on fixed charges, but the bad news is those fixed charges will increase by 57% within a few years. I don’t think that’s fair.

Fixing the existing proposal.

tiered water ratesThere is a simple short-term solution to this short-term problem: keep the existing structure as-is and just apply a uniform increase to both fixed and commodity costs. I haven’t run the numbers for this but it should be similar to what you see on your rate notice for the minimum proposed fixed charge, maximum proposed commodity charge, and bill impacts for minimum proposed fixed charges.

If we look at the existing proposal, removing the proposed ramp-up for fixed charges in future years would result in bill increases about 8-12% across the board. I could get behind this proposal without the fixed charge ramp-up as a short-term fix. It’s not ideal but it would work for now, as it would only require minimal modification to the proposal and the city could save face on the money spent for the water rate consultant (which is an entirely separate issue).

Proactive water rates for the future.

Some of you may have heard me speak about this at the Nov 17th city council meeting, where I discussed an alternative tiered water rate structure that also meets revenue goals. The alternative structure I presented imposes a much smaller fixed charge increase, simplifies the tier structure so most customers stay within the first tier, and creates three tiers that align with the actual supply costs of our different water sources.

tiered water ratesThe solution I put together involves looking at historical and forecasted usage data to get an idea of how much the water district will have to pay during the next fiscal year for both fixed costs and commodity costs (supply and delivery). Once you have that cost number, you can look at each customer type based on their usage share, and set commodity rates for that customer type so the revenue from their forecasted usage matches their share of costs.

The rates can be adjusted as needed when supply costs or forecasts change. I put together an Excel worksheet that handles all the calculations, so the readjustment process is pretty simple.

With my solution the fixed charge would only see a small increase, which means commodity charges would still be contributing a significant amount towards fixed costs. However, if you reevaluate rates on a regular basis using usage data we already collect, changes in usage patterns would impact rates more quickly and there would be no excessive deficit or surplus.

I also propose changing to a 3 tier system to match supply costs of our water sources (Cal Domestic shares, Cal Domestic overage, and MWDOC). From a Prop 218 perspective this should be more legally defensible than the current 4 tier system, which as far as I can tell is not based on supply costs at all.

What you can do about it?

According to Prop 218, if a majority of Brea water customers submit a written protest by Feb 2, 2016, the rate increase will not be implemented.

If you’d like to file a protest, you can mail or hand deliver a letter to the City Clerk’s Office, 3rd Floor, 1 Civic Center Circle, Brea CA 92821, or you can email CityClerksGroup@cityofbrea.net. The protest must include the address of the affected property, the name of the property owner or tenant, and a note indicating that the protest is related to the proposed Customer Charge increases.

Note that if you speak at the Feb 2 hearing, your protest will only be counted if you also submit a written letter or send an email.

Due to the time constraints of the existing revenue gap and limitations in the city’s utility billing software (which would increase development time needed to implement a proposal with too many changes) I think the best course of action in the short term is to reject this proposal, modify it to remove the 17% and 20% fixed charge options, and send out a new public hearing notice with the revised proposal ASAP.

Then, we can start a real discussion about how to strategically shift tiered water rates so they make sense — and this time let’s see what Brea residents can come up with before throwing more money at consultants.

tiered water ratesIf you find this still a bit above your pay grade, as I do, at least file your official protest with the City Clerk as Jason Suggests. We should be willing to put the brakes on even if Council seems hell bent on rushing to judgement.

The first step to getting Council and staff to seriously consider and adopt ideas coming from the public is to convince them that doing so isn’t an admission of failure on their part. We’re a team, right? We share the common goal of putting Brea first, right?

If staff and Council aren’t willing to meet us half way, what right do we have to expect anything we contribute to Envision Brea to be implemented?

 

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.

Voters Sweep Brea Clean!

Operation Clean SweepA week ago today, Brea voters and Operation Clean Sweep succeeded in rebooting City Council! Welcome and congratulations to Cecilia Hupp, Steve Vargas and Glenn Parker. Your convincing win confirms that Brea voters, eager to turn around a floundering Council, see something in you they like.

To whom much is given, much is expected. Simply put, privilege brings responsibility and that responsibility entails accountability. Now is the time to set aside personality conflicts and petty grievances. Too many serious issues are tucked into your information packets and need your undivided attention.

Brea Matters (Voters) Wade In.

While waiting for the dust to settle and the provisional votes to be tallied, I invited Brea Matters readers (voters) to tell me how they see the issues stacking up. Thanks to all who took the time to share their thoughts. Here are the top three issues.

Unfunded Pension Liability.

The small contribution now required of new hires, bolstered by similar changes in state regulation, have slowed the rate of debt increase… slightly. The escalation of unfunded debt has neither been reversed nor solved.

The problem is still our largest fiscal nightmare. You will not be able to nudge pension reform into existence. Nothing less than sweeping change, with the full participation of the beneficiaries, will address this issue.

Water, The Currency Of Tomorrow.

The drought is real. This chronic shortage is effecting more than shorelines. It is the catalyst behind Brown’s Measures 1 and 2. The real effects of their passage will likely come as a shock to voters who cast their ballot in favor.

Our tiered water rates, still on the back burner awaiting the San Juan Capistrano decision, will be pulled to the front burner when the state’s budget based water rates enter the discussion. Brea is already giving the state detailed monthly water consumption data.

Once the camel’s head is in the tent it’s ass is soon to follow. The state will insert itself into the water business and it won’t make more water available or lower your rates.

With Silver Bells And Cockle Shells.

On a semi-related note, the drought tolerant demonstration garden rushed to approval a few weeks ago enjoys zero public support. None. Nada.

Beyond a small consulting contract, no other handcuffs exist. No RFQ has been drafted or circulated. No bids have been submitted, reviewed or approved.

Put the garden back on the agenda. Recognize it for what it is, a boondoggle. A complete waste of a quarter million dollars. Reverse the original decision. Terminate the project. Fix the leak in the subterranean parking using the Building Maintenance Fund.

Fracking, A Black Hole Of Deception.

The most significant missing component in fracking’s risk/reward equation is truth.

Truth about water, how it is combined with which chemicals or acids, where it comes from in the first place, how it is handled during the process and where it goes when disposed of. Truth about noxious fumes. How much methane and other hazardous gases are really escaping from wells, how far might they travel in the air, what are the risks of exposure or inhalation?

Truth about potential failure of equipment or of human error. Truth in documentation, willingness to be subject to regulation, oversight and enforcement of noncompliance or infraction.

Council may be comfortable, for whatever reasons, peeking through the wool pulled over their eyes… but a significant number of Breans do not share their complacency. They’ve read about thousands of incidents, from unfortunate to catastrophic, where people’s health and safety was put at risk, where the environment was put at risk, where seismic concerns grew exponentially over just a few years.

What we don’t know could kill us. That is not Chicken Little screaming, “The sky is falling!” That is not some conspiracy theorist’s attempt at scare tactics. That is the unvarnished truth. Until we know more, until oil companies are more forthcoming, until regulatory agencies are able to oversee the industry without having their hands tied by state and federal intervention… the smart thing to do is put a moratorium in place.

A Laundry List Continually Overlooked.

These “lesser” more procedural issues will sound familiar. Why? Because they’ve been at the center of campaign promises, half-hearted studies by overpaid consultants and counterfeit community conversations for years. They are in no particular order.

  • Inattention to public comment during Matters From The Audience.
  • Disregard of public comment during Matters From The Audience.
  • Growing abandonment of meaningful public hearings.
  • General lack of transparency and accountability.
  • Too much business conducted in study session.
  • Too many items buried on the Consent Calendar.
  • Failure to faithfully implement Measure T.
  • Runaway senior staff salaries and the ten city survey.
  • Satisfactory resolution of former RDA projects.
  • Consistent and equitable support of the business community.
  • Traffic congestion.
  • Open discussion of possible public safety JPA’s.
  • Declining senior services.
  • Street sweeping citations.
  • Decline of Lagos de Moreno Park.

A Show Of Good Faith.

Pass an ordinance limiting political/campaign signage to a maximum of 500 square inches and a display period, on public and private property, no more than 90 days prior to the election. Pass a resolution limiting campaign expenditures to no more than $10,000, campaign mailing pieces to no more than two. Pass a resolution limiting Council seats to no more than two terms.

Do the right thing. Without your honorable preemptive resolution of these issues, please believe that the public is willing and able to gather the necessary signatures and put them on the ballot.

In Conclusion…

Arguably the most disconnected, delusional, Council member in recent history was held accountable for his lack of performance and overwhelmingly denied reelection to a second term.

Members of Council, this is meant as a reminder, not a threat. Brea voters have extended to Council members, new and old, the privilege of representing their best interests. Expect to be held accountable.