Despite strong praises for the Loge-Williams Consumption Based Fixed Rate (CBFR) water rate structure, the council, fearing public confusion about their water rates during the election, essentially elected to scrap the model in favor of a more conventional model, at least for the time being, sending the issue back to the WAC for a discussion and analysis on Thursday.
Mayor Pro Tem Dan Wolk fought off several attempts to amend his motion, amendments that would have allowed the WAC to re-consider CBFR. The council decided, at least temporarily, against a more formalized move toward CBFR in two years after the rate structure will have taken effect. This was pushed through, by a 4-0-1 motion, to have the WAC re-examine the original Bartle Wells proposal.
Council called the Loge-Williams proposal “innovative” and “elegant” but ultimately feared that it was confusing and would require a high degree of education to help the public to understand it and their own rates.
Mayor Pro Tem Dan Wolk called the rate structure “very innovative” and told his colleagues, “I think there’s a lot of great merit to the CBFR, but I feel… there may be a better way. One of those is a uniform block rate model, as represented by the Bartle Wells fixed rate.”
On the CBRF he added later, “I think it’s wonderfully innovative. I think it’s something we should think about in the future. I just don’t feel comfortable going through with that as our rate model.”
The motion tasked the WAC to analyze and return to the council with a recommendation on either a five-year uniform block rate model such as Bartles Well, or a five-year inclining block rate model with an expanded first tier.
Councilmember Brett Lee attempted several times to modify the motion to allow the WAC to reconsider Loge-Williams, but Mayor Pro Tem Wolk declined.
In the end, the motion passed 4-0 with Brett Lee abstaining, arguing he wanted not to constrain the WAC but to allow them to consider all options.
The criticism of Loge-Williams started early on, at the original public comment, as a number of local residents in the water community came forward to weigh in on their concerns.
Rob Roscoe, a 25-year Davis resident and General Manager of the Sacramento Suburban Water District, expressed concerns about the impact of this water rate on the financing of the project.
“You have a proposal from the water advisory committee for a rate structure that has never been used ever before, anywhere, anytime,” he told the council during public comment. He argued that when they go to the bond rater, “They will want to see certainty. They’re not going to want to see untried, unproven. That will cost you in the credit rating that you receive.”
Alf Brandt, a member of the WAC and a critic of the current model, advocated to keep the water rate structure simple, tried and true.
“I just want to come back after talking to a lot of my colleagues in the water community, how important it is for voter support that the water rate be kept as simple as possible, and tried and true, proven, so that when you go before a judge and go before voters, you can say everyone else in California has something similar,” he said.
Alan Pryor later, during the public comment for the item itself, praised the Loge-Williams rate structure, saying, “I believe it is truly innovative and I came away convinced it was the most equitable and fair proposal that the WAC could have considered and after listening to comments from very experienced water professionals, I’m also convinced that the proposed Loge-Williams water rate structure will be incorporated by many other communities in the near future.”
Alan Pryor made the critical point, and it is something the city needs to keep in mind going forward, “It is clear that the small volume water users are subsidizing extravagant use and waste by the largest residential water users in town.”
However, Mr. Pryor acknowledged that it was a new system and complicated, “and given the current controversy over the water project, we should offer a more conventional tiered water rate structure even if it’s not optimal.”
Despite the criticism, staff and consultants working with the city on developing this project, many of whom were initially skeptics of the structure, became strong believers.
Doug Dove, a consultant with Bartle Wells Associates, argued in an email that he forwarded to the Vanguard on Tuesday morning, “We’ve also made every effort to simplify the rate structure so Davis ratepayers and voters will be able to understand it.”
“I’m now confident that the refined rate structure will be easily understood by the average ratepayer in Davis,” he added. “Since the new rate structure is essentially 2/3rds traditional and 1/3rd new and it’s been thoroughly vetted by BWA, City staff and attorneys, I feel confident that it will not affect the strong credit quality of the City’s debt for the surface water project.”
The city’s financial adviser also believed that the rate structure was solid and would not affect the city’s bond rating.
“I feel very optimistic we can address the rating services,” he said.
He argued the fact that the city will be on conjunctive use ground water is a huge credit factor, because it allows the city to maintain its water supply during worst-case scenario drought years, when surface water availability is reduced.
He said of the CBFR, “This is truly innovative” and that “I feel good about being able to explain it.” The CBFR has built into it an automatic 25% consumption reduction component that would allow the city to automatically recover costs based on a declining consumption.
“We have a rate structure that will automatically recover a 25% reduction in consumption, automatic. That works as well as a fixed rate structure within those parameters,” he told the council. So while it’s not 100% fixed (which is illegal in California), they have a way of splitting the proverbial baby between consumption and fixed where they can mitigate the worst-case scenario drought.
Doug Dove explained that because of the size of the project, a lot of the costs need to go into the fixed category because a lot of the costs will be fixed – in other words, the city will have to pay the costs, regardless of consumption.
However, by setting a high fixed charge and a low variable charge, “that really hurts the low user because they’re going to see a very high charge, so that’s not ideal.”
So they proposed about a 50-50 scenario, where the fixed charged recovers half of the costs and the variable charges recovers the other half.
“With the consumption based fixed, there’s a third element here that’s somewhat in between fully fixed and fully variable,” he said. He argued, “That really helps model the revenues and expenses much better than with just the two elements.”
Mr. Dove told the council that for a family of four, strictly indoor usage, they would consume on average about 10 ccf a month. The current tier structure allows 18 ccf per month.
As Steve Pinkerton pointed out, 18 ccf per month is at the 75th percentile of usage, so well above the median.
Mr. Dove estimated that at 18 ccf, it would accommodate 8 to 10 people per household for indoor usage.
Mayor Joe Krovoza noted, “So at 18 ccf, with basic water use, you’d really have to have a family of 8 or larger basic indoor needs.”
In other words, at the 18 ccf cut-off point, you really are not prejudicing indoor usage, you are cutting down on outdoor usage – irrigation.
Everyone acknowledged that, under this project, rates would go up. The question was whether people would understand the structure.
“I think we really simplified the structure over what it was originally,” Doug Dove told the council. He argued that people will be able to understand the CBFR structure. “The credit issues can be dealt with. It’s a good structure, it’s innovative and fair.”
The council pressed Mr. Dove to explain how much someone’s rate would go up.
“It will vary depending on use like any structure,” he responded. “If you’re a typical user, it will go up 20% at the first rate increase. Then another 20% and so forth. If you’re a high user, it’s going to be more. If you’re a low user, it will be less.”
Councilmember Brett Lee told the council, “I think the Consumption Based Fixed Rate is really an elegant solution, there’s a simplicity and there’s sort of a beauty to it.”
“It takes a little bit of time to understand it,” he said.
His concern, one shared by Mayor Krovoza and some others was, “I am a little concerned that with the Consumption Based Fixed Rate that we’re planning on setting the middle portion that roughly 50% of the fixed costs, the CBFR portion, based upon a time that has gone by.”
It would be based on the summer of 2012, a rate that Councilmember Lee argued has been set without the ability for people to reduce their usage in advance.
This led to efforts by Mayor Krovoza to look into a two-year model or two years of the Bartle Wells structure to be transitioned into a CBFR for the final three years of the Prop 218.
Staff cautioned against this approach, arguing that for maximum bond ratings, they needed to show a willingness to raise rates to support the full five years. Council can come back in a year or two to revisit the model, but complicating the Prop 218 was frowned upon by both staff and the rest of the council.
Mayor Pro Tem Dan Wolk said, “There’s no sugar-coating the fact that our rates are going to have to go up. Even if we don’t adopt the joint-water project.”
“I and others are willing to pay more to a water project that is essential to the future of our community,” he said. “To paraphrase Corey Booker, the Mayor of Newark, we drink from wells that we did not dig. It is incumbent on us as policy makers to [e]nsure that we have a clean water supply for our children and our children’s children.”
—David M. Greenwald reporting
I’d like to be able to compare my water bill under the Loge-Williams proposal to my water bill under the Bartle-Wells proposal. That would certainly help my voting decision.
I’m actually working on an editorial to that effect that will be out, mid-morning hopefully.
Watching the interesting dynamics last night. It seemed Brett came up with an innovative plan that Joe embraced to transition into the LW rate structure. I am disappointed that didn’t get clear adoption and hope the WAC will address it even tho Dan’s motion did not include it and doubt the Chair favors it. Will be interesting to see what comes back.
I was there on the second row.
Brett and Joe almost got it together on the L-W
The CC could have had themselves a Cirrus SR22 but ended up putting a down payment on a 1979 Cessna C152. Close of escrow is next month.
Looked to me that Alf and friends had it dialed in with Dan.
They made a political decision rather than one that could have chosen a better rate model blessed by every consultant and staff member in the room
So, what are the arguments against the Dunning rate plan… basically pay for the water used at a consistent per-unit rate? It seems to work well for gasoline.
Thinking about my own question, one of the arguments is the need to fund a fixed operational expense – including the debt service – for our water works. If the billing/revenue is variable based on usage, there is a risk that revenue will fall short if useage falls below what is necessary.
That is one of the primary problems that the L-W solution attempts to solve.
However, I worry that people will reject rate plans that are too complex. We need to keep it simple. A consistent per-unit rate (like gasoline) seems to be the fairest and the easiest to understand. As long as the rates are set to accomodate a reasonable usage variance, the revenue should be adequate to fund the water works fixed and variable costs.
Jeff,
As was explained last night, there is a protection mechanism in the L-W model that mitigates that problem. I have asked for a fuller explanation from Doug Dove and will post it when I get it. If Matt’s around, I’m sure he can explain it as well.
Doug Dove told me: “The rate model assumes about a 25% reduction in consumption over the next 5 years due to the increase in rates for the WDCWA project.”
Jeff, sorry to be so slow in responding to your questions.
Addressing your first question, any parallel between gasoline and water breaks down when you look at the respective cost structures of the typical gas station. I don’t have any citations to give you, but the costs of gasoline for the typical gas station are 100% variable. They purchase the product from a refiner and then resell it to the public. The fixed costs associated with debt service for the buildings, tanks and pumps is probably less than 10% of the station’s costs, perhaps less than 5%. Therefore, when demand fluctuates so do costs on an almost dollar for dollar basis. The City’s water utility is the exact opposite, with 80% of its costs fixed (90% if you only look at the surface water plant). Therefore when a unit of demand is lost, five units of revenue are lost, but only one unit of costs are saved. Structural deficits like that are fine in a period of increasing demand, but death in a period of declining demand like we have experienced since the turn of the century.
Regarding a simple message . . . the Distribution-Supply-Use rate structure has three components, a “readiness to serve” charge (Distribution) that on our PG&E bills is called “Standby.” An actual water used charge (Use). And a Supply charge that transparently shows each of us how much our fair share is of the capital costs of water supply. Think of the Supply charge as a “subscription.” In sports it would be called a PSL.
So what we have is a Distribution-Supply-Use rate structure that transparently answers, “What am I paying?” and “What am I paying for?”
Alternately, in a traditional two part Fixed-Variable rate structure, you can easily answer the question, “What am I paying?” but answering “What am I paying for?” is impossible to answer because the Supply costs (like the $113 million for the surface water plant are subdivided and randomly allocated to both the Fixed charge and the Variable charge.
Regarding protection against lost revenue due to conservation, both the Bartle Wells and Distribution-Supply-Use (CBFR) models use price elasticity formulas to project reduction in demand. The net result is a gallons per person per day value of 122 gpcd in 2018-2019, which is significantly below the NRC’s goal of 134 gpcd by 2020-2021.
Our 2011 gpcd attainment was 152, and in 2012 year to date we are tracking at approximately 164 gpcd due to the dry winter, spring and summer.
Matt,
Thanks for this explanation. I understand the difference re. fixed and variable cost structures for a gas station and water works. However, for a more accurate comparison you would need to incorporate the entire oil production, refinement and delivery system. I think the fixed costs for gas considering this more comprehensive view are quite substantial. However, those fixed costs are amortized over a very long period of time and for a much larger customer base; and hence the debt service for capital expense of plant and equipment would be much lower on a per-unit basis. But, there is a much higher operational cost for gas production and delivery than for water.
The main difference with gas and our water rate proposals is that the allocation of fixed cost for gas is fixed in the price, and the expense-revenue risk for the fixed-cost structure is born by the suppliers and not the customer. There is competition and it results in very limited price elasticity on a micro level… a gas station with higher fixed and operational costs cannot charge very much more for their gas or else they will suffer too much lost sales. Basically, customers do not suffer gas rate change risk based on lower than expected consumption (e.g., conservation) and unexpected fixed or operational cost fluctuations.
There is value in expense predictability. The question is which party bears the risk for errors in estimation and unplanned impacts. I think it is strike one if Davis water customers understand that their rates will go higher. However, I think that strike can be mitigated by an explanation of the benefits. Strike two and strike three happen when customers understand that there is unpredictability and fee risk they bear for things out of their control and that are difficult to predict. Tiered rates add a level of difficulty for predicting expense that is unacceptable for many people. The goal of conservation is admirable, but not when it is punitive for those with bigger lots and more mature landscaping… and punitive of all residents for estimating their monthly bills. It is also punitive to saddle customers with rate-fee risk from failures in estimating usage accurately… since they have no control over this estimating process.
My preference is to increase the fixed component to a level that covers 2/3 of the total expense of the water works, and then implement a single usage rate tier to cover the remaining 1/3. Initial rates should be set to build some surplus revenue as an operating account buffer to mitigate risks for big rate adjustments due to unexpected revenue drops due to higher conservation and/or unplanned wet weather.
“My preference is to increase the fixed component to a level that covers 2/3 of the total expense of the water works, and then implement a single usage rate tier to cover the remaining 1/3.”
Unless I misunderstand your proposal, you are going to end up with the Bartle Wells system that way without the tiers.
[i]Mayor Pro Tem Dan Wolk called the rate structure “very innovative” and told his colleagues, “I think there’s a lot of great merit to the CBFR, but I feel… there may be a better way. One of those is a uniform block rate model, as represented by the Bartle Wells fixed rate.”[/i]
I agree with Dan’s comment here. I would add that I wish I had more confidence in the voting public to understand what these two smart people have devised. But I don’t. It isn’t that the voters are low IQ, they just don’t have time to educate themselves.
Since I support the surface water project, I don’t want to lose votes over rate system complexity.