Open Letter to Supporters of Measure P

by Matt Williams and Donna Lemongello

The following letter was sent electronically to Michael Harrington and Pam Nieberg yesterday. Michael has acknowledged its receipt, and provided some early feedback.  The letter details for all Davis citizens and ratepayers the results of the community dialogue that over the course of the recent election cycle has produced a much clearer sense of what a better, fairer water rate structure might look like in Davis.  We share the letter here in the Vanguard in the hopes that it will be the latest component of open dialogue about water in Davis.

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Dear Supporters of Yes On Measure P and Members of the Yes On Measure P Leadership Team, 

Please accept this formal submission to your group of the current water rates proposal known as “87-13 with tiers.”

As you will see in the many points contained herein, we believe that this proposal developed with community input by Donna Lemongello and Matt Williams, gets as close as possible to what the various supporters of Yes On Measure P have advocated for.

At the end of this proposal you will find graphics that demonstrate in the Single Family Residential class and the Multi-Family Residential class that for virtually all users (high volume and low) the percentage proportion of water that is used is equal to the percentage proportion of revenue dollars that are paid. We believe that relationship is a very good approximation of the expressed desire by many of the Yes On Measure P supporters to see all Davis ratepayers paying the same dollar per ccf.

In the graph our preferred proposal is the green bar.  Two of the other alternatives (shown in yellow and red) have 40% fixed fees, which is well over three times higher than the amount referenced in John Munn’s Sunday OpEd in the Enterprise and the Vanguard, specifically, a “small fixed charge should be included for expenses, such as fire hydrants, providing benefits that are not proportional to water use.”

We believe this proposal honors both the spirit and intent of Measure P through the achievement of the following:

• It has eliminated the 6-month weighting.  It does not shift the costs to summer irrigators.
• As the attached graphics show, it means a 4 ccf per month user will see their current monthly bill go from $25.80 to $29.85 in 2018.  That is much much less than triple.
• A 6 ccf per month user will go from a current value of $28.86 to $39.01 in 2018, again much less than triple.
• The “typical” 11 ccf per month customer that Mark Siegler used in his analysis for Measure P will go from a current value of $36.51 to a 2018 value of $61.91, which is short of double.
• 18 ccf per month is both the “average” Davis single family home water use volume, as well as the 75th percentile.  An 18 ccf per month user will see their current bill of $47.22 go to $93.97 in 2018, again not even double.  Graphs of all those users are attached, and Mark Siegler, whom I have copied on this e-mail in order to practice open, transparent communication, has the Excel files that Donna and I used to generate the rates from actual historical data.
• In our proposal Single Family Residences use 55.6% of the water and pay 56.5% of the revenues.  Multi-Family Residences use 21.8% of the water and pay 19.7% of the revenues. Commercial/Industrial customers use 9.6% of the water and pay 8.9% of the revenues.  Irrigators use 13.0% of the water and pay 12.3% of the revenues.  The small differences are primarily due to the significant quantity (over 14,000) of Single Family accounts, which means they have incrementally more bills sent out each month and incrementally more iterations of Fire Readiness costs for the repair and pressurizing of hydrants. Mark can confirm that the above has eliminated the cross class disparities as much is possible.
• The bill that consumers receive each month under our proposal will be familiar, simple and easy to understand.  It will have two parts just like the bills today do, and it will only include charges for the current period’s water usage.
• Finally, to ensure that we get the lowest possible interest rates in any debt/borrowing, we have included Revenue Stabilization Reserve Fund provisions so that the Bond Rating agencies and lenders will see demonstrable revenue resiliency and sustainability … and most of all virtually no risk to the lender.  The rates contain the funds needed to self-fund this Reserve Fund.  The provisions of the Reserve Fund are going through due diligence steps as we speak, and those due diligence steps will be completed prior to Tuesday’s Council meeting.
• There is a good argument that Revenue Stabilization Reserve Fund provisions should be included in any rate that Davis adopts. Mother Nature doesn’t modulate her drought effects on the basis of what water rate structure a city has put in place. All rate structures are subject to the revenue erosion risks associated with drought. 60-40 isn’t a magic bullet. It too is vulnerable. If having a reserve fund and Stage 3 and Stage 4 surcharge provisions allows Davis to get lower interest rates, then all the ratepayers benefit from the lower borrowing costs. It is really a very simple mathematics problem … one that should be central to Davis’ presentation to bond rating agencies like Standard and Poors.
• This proposal honors the Yes On Measure P statement that “it is up to the City to come up with fair rates” and in sharing them with you and others, prior to any adoption steps, a democratic community dialogue is underway.

With all the above said, here is the draft language of the proposal presented to the URAC on Thursday.

Rate and Fee Increases

The City of Davis is proposing to increase the rates and water service and establish a new rate structure.  The new water fees would be imposed on all properties in Davis receiving water service.

Two-Part Structure

The rate structure has two components, 1) revenues from rates and 2) a revenue stabilization reserve fund

Traditional Fixed Volumetric Rate

Revenues from rates are derived from two components:  A) a monthly fixed fee and B) a monthly volumetric water use fee.  Those components are:

• A Fixed Fee, which for a 3/4-inch meter is $8.25 per month, to pay for billing costs, fire fighting infrastructure and readiness to serve infrastructure costs.
• A Volumetric Use Fee that has two tiers, specifically $3.14 per ccf for the first 20 ccf each month and $4.54 per ccf for all water usage above 20 ccf each month.  This fee pays for the costs of wells, above ground water storage, the surface water plant, water pumping electricity and water treatment chemicals. 
  

Revenue Stabilization Reserve Fund

Smooth Cash Flows for Debt Coverage

The revenue stabilization reserve fund supports the smoothing of monthly cash flows each fiscal year. During low revenue winter months, the revenue stabilization reserve fund will be used as revenues of the water utility for the calculation of adequate ongoing debt service coverage to comply with bond covenants.

Annual Reserve Fund Balance Target

The June 30^th end-of-year target balance for the revenue stabilization reserve fund is 25% of the annual revenue requirements.

Reduced Consumption Revenue Protection

The revenue stabilization reserve fund will also be a core component of the City’s response in times of substantially reduced consumption (whether from cumulative conservation or as a result of drought), which is outlined in the City’s Urban Water management Plan (see http://water.cityofdavis.org/water-conservation/drought),  

Reduced Consumption Provisions

Stage 1 and Stage 2

In order to keep the water utility financially stable through the circumstances of reduced consumption, the revenue stabilization reserve fund will be available for use as revenues during Stage 1 and Stage 2 shortages (a 10% reduction and a 20% reduction respectively).  

Stage 3

When aggregate system-wide consumption reaches a Stage 3 shortage (a 30% reduction), the cost of the volumetric portion of each customer’s monthly water usage shall have an extra 15% of that cost added to the bill.

Stage 4

When aggregate system-wide consumption reaches a Stage 4 shortage (a 50% reduction), the cost of the volumetric portion of each customer’s monthly water usage shall have an extra 43.75% of that cost added to the bill. 

Duration of Temporary Rate Adjustment

A Stage 4 rate adjustment will continue in effect until the reduced consumption stage has been reduced to Stage 3. A temporary Stage 3 rate adjustment will last until the drought stage has either been reduced to Stage 2 or increased to Stage 4.  During a Stage 4 shortage the Stage 3 cost provisions do not apply. 

 The following rate implementation guidelines currently apply to the proposal.

• The Tier 1 allocation for each SFR account, each unit within a MFR account, and each Irrigation Only Account is 20 ccf per month.  All ccf above 20 (21+) are at the Tier 2 rate.
• The Water Conservation Act of 2009 – U1 CII Task Force has guided our assignment of Tier 1 allocations for the Commercial accounts.  Each Commercial account has an individualized Tier 1 allocation equal to that account’s average monthly consumption from the 2011 historical data.  Since overall water use in Davis during 2012 and 2013 was 11.7% and 14.0% above the 2011 use, setting the Tier 1 allocation at the 2011 average monthly level creates a de facto conservation incentive for all Commercial accounts based on their most recent annual consumption. All ccf above each Tier 1 allocation are at the Tier 2 rate.
• Our modeling of alternative allocations for Irrigation Only accounts was limited by the absence of irrigable acreage values in the historical usage data provided. Setting the Tier 1 allocations for Irrigation Only accounts based on irrigable acreage is an alternative that may want to be considered if time and available data permit.

Thank you for your review of this submission.

Sincerely,

Matt Williams and Donna Lemongello

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