The Answer Depends On Whom You Talk To
On August 9, 2011, the Second District Appellate Court of California struck down the water rates for the City of Palmdale, located in Los Angeles County, ruling: “After conducting an independent review of the record (Silicon Valley Taxpayers’ Assn., Inc. v. Santa Clara County Open Space Authority (2008) 44 Cal.4th 431, 448), we conclude PWD failed to satisfy its burden to establish that its new water rate structure complies with the mandates of Proposition 218 (as set forth in article XIII D of the California Constitution (article XIII D)), including the proportionality requirement which specifies that no fee or charge imposed upon any person or parcel as an incident of property ownership shall exceed the proportional cost of the service attributable to the parcel. Accordingly, we reverse the judgment.”
The question that has emerged in recent weeks is what that decision will mean for Davis. There are really two questions embedded within this. One is a prospective question in that Davis, like all other cities, will have to take this decision into account when it conducts its rate study and ultimately sets its water rates, should the surface water project go forward.
The bigger problem, perhaps, is what if Davis’ current rates are out of line with the Palmdale decision? The issue there is complex and the answer depends largely on whom you ask.
Many believe that the problems of Palmdale were, in fact, unique to Palmdale because “in this instance, the District failed to demonstrate that the proposed budget based rates for one customer class were proportionate to the cost of providing water service in violation of Proposition 218.”
However, it is important to understand that the court did not invalidate tiered rates. The court decision, in fact, specifically allowed for tiered rates that were both budget-based and that promoted water conservation, but only if that conservation is attained in a manner that “shall not exceed the proportional cost of the service attributable to the parcel.”
Naturally, the City Attorney Harriet Steiner believes that the current rates, adopted prior to the Palmdale decision, meet current legal standards.
It is also not clear that the Palmdale decision does anything other than apply existing regulations within Prop 218 and their requirements for proportionality to the City of Palmdale, and therefore rules that their rates were out of compliance with the standards set under Prop 218.
Under Prop 218, “The amount of the fee or charge levied on any customer shall not exceed the proportional cost of service attributable to that customer.”
The question really is whether that is the case.
If you look at Davis’ metered rate charges, it is difficult to understand how that could be the case.
You basically have huge differences, not in the unit charges of the tiers between user classifications, but at the point of the rate cutoff.
So a single family resident has the higher tier 2 rate begin at 36 ccf. But a small commercial and industrial up to 1.5 inch meet has the rate cutoff at 115 and a large commercial 2 inches or larger has its second tier begin at 619 ccf.
That is, however, only part of the story.
There are also fixed costs of a base monthly rate, depending on the meter size. And so, a larger meter has a much larger base cost.
Doug Dove from Bartle Wells Associates presented the preliminary discussion on the rate study to the Water Advisory Committee last Thursday. He talked briefly and at various points about the Palmdale decision and its implications.
He told the committee, “With Prop 218, the burden of proof that the rates are proportional and are based on cost of service lies with the water agency.”
Bill Kopper, a member of the WAC, said at the meeting, “While an agency may have tiered rates, they must be the same for all parcels, including residential and commercial, provided the cost of providing water is the same for residential and commercial.”
He argued, “It would also appear that the city’s current rate structure violates that decision – isn’t that right, because before you get out of tier 1 if you’re a commercial user you can use much more water than if you’re a residential user?”
Mr. Dove responded, “I’m not going to comment on the current rate structure because I haven’t looked at the cost of service that that was based on.”
He added, “I feel confident that the Palmdale case resulted from some poor rate analysis and some poor decisions that were made by the district during the rate study process and also looking at the rates that were approved, it’s pretty obvious that you can argue that they were not proportional.”
Mr. Kopper responded, “The case did lay down the law, so then the question becomes how is it applicable here – but the cost for providing, wouldn’t you agree, [would] be the same for all parcels in the city of Davis? It’s all potable water and it’s all coming through the same system. How could the cost of delivery be different between a commercial user and a residential user in the city?”
“Water is essentially the same,” Mr. Dove responded, “but sometimes people need a lot of more of the water at a single time than other people – in other words a peak, so that can influence the cost of water.”
“I think it’s pretty clear that tiered rates are legally on solid ground. I think water budgets are legally on solid ground,” he continued. “It’s a matter of applying those proportionally to the different user classes.”
He argued that in Palmdale they “basically weren’t being proportional or fair.”
A water budget is a situation where each customer is provided a water budget based on needs. An indoor budget which would be based on the number of people would be the lowest rate. An outdoor budget which is based on size and weather, would have a middle rate. And a water use over budget would have the highest rate.
The price per unit increases as water use exceeds the budget.
Bill Kopper would later ask, “You don’t believe that you could legally do this in light of the City of Palmdale decision?”
Mr. Dove responded: “In the rate making community there isn’t a feeling that the water budget concept is at risk by the Palmdale decision. What happened in Palmdale is a bad rate structure and it didn’t withstand the court challenge. But it wasn’t the underlying water budget concept of the rate, [that] was not at fault. It’s still a sound concept.”
The discussion will be brought up at a future meeting date and the request was made by the WAC to have an attorney other than the city attorney advise the group.
Michael Bartolic argued, “If we do have a discussion on Palmdale could we please have an informed water lawyer provide that presentation under consultation to the city? I feel it needs more – the city attorney already advised the council in August, in September, and in December and no change was made in our rate structure by the city council based on her advice. So I don’t feel we’ll get anything other than a canned response.”
Staff assured the committee that the lawyer coming would be a water lawyer who specializes in Prop 218 issues.
As I stated at the start of this piece – and this piece is far from the definitive word or the end of the story – the answer about the current rates depends on whom you ask. I think Mr. Bartolic brought up an important point that in fact underlies a lot of problems with the way we utilize a city attorney in this community.
There is an inherent conflict in the attorney rendering an opinion and defending her opinion legally. The WAC recognized this inherent problem, and moved to avoid a possible conflict.
The city is basically arguing that the cost of providing water per unit is more expensive for residential, because residential has more peak use demand and a more variable demand.
There is a larger fixed cost for larger meters, but that does not necessarily solve the problem that the initial usage allows for a much lower rate for a much longer period of time. Residential users are paying more for water storage tanks and other peak use costs.
Others have told me that they do not believe we will be able to justify differential rates based on peak hours, as staff suggested to the committee.
This discussion will obviously frame future discussions on the rate study, but it may also impact residents if the city has to fix their current rate structures retroactively. Obviously, everyone on staff has an interest in avoiding that, and that makes bringing in independent eyes all the more important, to get at the truth.
—David M. Greenwald reporting
Good article David. There is absolutely no question that the Palmdale decision is going to affect rate discussions and rate structures throughout the state; however, when Bill Kopper said at the meeting, [i]”While an agency may have tiered rates, they must be the same for all parcels, including residential and commercial, provided the cost of providing water is the same for residential and commercial.”[/i] he was only looking at the Palmdale language from a single (somewhat restricted)perspective.
Lets take a look at that same language from a slightly different perspective . . . specifically the perspective that Bob Dunning and you have discussed in the past. From that perspective a user class is not a parcel, but rather an individual. As Bob has argued so eloquently, “[i]Why should the rate per gallon of water be different for his fourth child than for his first child?[/i]” Similarly, one can ask, [i]”Why should the rate per gallon of water be different for a foster child than it is for a biological child?[/i]
There will be plenty of legal discussion about how to be sure that rates are proportional and are based on cost of service.
One aspect of the [i]Palmdale[/i] that is important to remember. Like the Ninth Circuit decision regarding Prop 8, the [i]Palmdale[/i] decison is very “narrow.”
The narrowness of a decision affects how applicable it is across a broader spectrum. There has been a lot of discussion about whether SCOTUS will even consider the Prop 8 decision because of its narrowness. Time will tell just how broadly the details of Palmdale will be applied.
The Davis business community,most especially the restaurant sector which is a major part of local downtown economic activity, is already wary of the impact that the surface water project will have on their bottom-line. The bogus 14% rate increase proclaimed by the city was,IMO, directed primarily towards molllifying their concern. This decision raises the specter of additional costs to their businesses.
[quote]One is a prospective question in that Davis, like all other cities, will have to take this decision into account when it conducts its rate study and ultimately sets its water rates, should the surface water project go forward.[/quote]
Davis will have to take Palmdale into account no matter what water project goes forward! Any rate structure that Davis implements must be proportional, and does not depend on water water project is chosen. Even if we stay the course with our current well water system, our rate structure must still be proportional under Palmdale.
[quote]Obviously, everyone on staff has an interest in avoiding that, and that makes bringing in independent eyes all the more important, to get at the truth.[/quote]
This is not about getting at the “truth” of anything to create a “gotcha” moment. Remember, Palmdale is a RECENT case (in other words city staff did not have Palmdale to go by in making any decisions), with a narrow set of facts, so it is not even clear Palmdale will be applicable to much of anything. This is about making sure that prospectively, the rates going forward are proportional as required under Prop 218.
[quote]The Davis business community,most especially the restaurant sector which is a major part of local downtown economic activity, is already wary of the impact that the surface water project will have on their bottom-line. The bogus 14% rate increase proclaimed by the city was,IMO, directed primarily towards molllifying their concern. This decision raises the specter of additional costs to their businesses.[/quote]
I was on that committee. I am not a business person, and I am in no way affiliated with the business community. Everyone around that table was attempting to find some way to reduce the water rate increases for EVERYONE. They were just unmanageably high for every class, where it was residential or commercial. The 20% water conservation assumption built into the proposed rate structure was clearly stated in the Prop 218 notice, which has been noted in the blog by Matt Williams again and again. You are entitled to your opinion, but not your own set of facts!
Palmdale is a recent case but it’s not clear it does anything more than apply the proportionality requirement of Prop 218, which means that if the city’s rates are found retroactively to be disproportionate, the city could be on the hook.
On the hook for what David?
Possibly compensation.
The problem in deciding whether the current rate structure is proportional is fully understanding the rationale behind the actual figures, including peak demand, economies of scale, and various other factors that go into determining proportionality. There may or may not be good reasons for the rates to be structured the way they were. In Palmdale, the rate structure was clearly and patently unfair. The city as a class was kicked into the higher priced tier once it reached 130% of its water budget allocation, whereas other classes (residential, commercial) had to reach 160% (or greater) of their water budget allocation before they were kicked into the higher priced tier. There was absolutely no rhyme or reason given for this disparity, either prior to court or in the courtroom. It was clearly a disproportional rate structure. It is not clear that Palmdale will apply to any other city, unless that city had the exact same sort of unfair rate structure. One thing I think a city may be able to take from the Palmdale case is that it should have a clear RATIONALE behind its rate structure that verifies it is proportional under Prop 218.
The city has now hired a professional consultant to do a rate study, and that rate study and any rate structure that is proposed will be carefully scrutinized to ensure it is proportional as required by Prop 218. I’m sure that there will be a clear rationale to verify that whatever rate structure is selected will be proportional as required under Prop 218 and the Palmdale decision.
[quote]Possibly compensation.[/quote]
Please cite the authority for such an eventuality…
Elaine, I don’t think David is arguing for compensation, simply pointing out that that is a possibility. Even with the decision in place the City of Palmdale and the Palmdale Water District are wrangling about compensation, and have very different perspectives on what the decision’s guidance on that subject is.
. . . and they are the actual parties to the case.
. . . and of course will be the parties involved in the inevitable appeal.
I said possibly.
[quote] In August 2011, The City of Palmdale filed a claim seeking more than $3 million in financial reimbursement from the Palmdale Water District (PWD) from charges that were collected through the Water District’s illegal rate hike, which began in July 2009.
[/quote]
source ([url]http://www.examiner.com/neighborhoods-in-bakersfield/city-of-palmdale-still-waiting-for-3-million-refund-from-palmdale-water-dist#ixzz1nnJk0cKG[/url])
First of all, just because the city of Palmdale filed for financial reimbursement does not mean they will get it. Secondly, it is not clear in any way shape or form that Palmdale applies to any city other than Palmdale. I will repeat, the only thing I think you can take away from the Palmdale decision is that a city should have a rationale to verify any rate structure it institutes is proportional as required by Prop 218.
Here are some experts the WAC could contact: [url]http://www.acwa.com/content/region-8/region-8-forum-agenda-highs-lows-water-rate-changes-deeper-look-prop-218[/url]
I also suggest the city and/or the JPA consider joining the Association of California Water Agencies. Like similar groups, the legislative analysis and legal services would probably be of considerable benefit. They have the experts, or know the experts, who can help construct rate structures.
[url]http://www.acwa.com/[/url]
I’ll try to get back to this conversation later today or tomorrow when I have time, but the peak hour water use argument was really a stretch. The percentage of the total cost of water attributable to temporarily storing some water in the water tank and repumping during peak hours is miniscule compared to the total cost of procuring and distributing the water. I don’t think it would even be detectable. And different classes of commercial have as much peak hour differences as residential and commercial do.
I would go further and say that fixed costs are difficult to reconcile with Prop. 218, while conservation rates are not as difficult to reconcile. That is because it is the total amount of water used that drives the infrastructure expense, not the number of units in the city.
To illustrate: If we had 25,000 units, but they each used only 1 gallon a day, we might be able to get by with 1 or 2 wells, rather than over 30 wells and the new surface water project. Hence, our fixed costs would be very low.
Charging a constant rate per gallon used satisfies prop. 218. Bob Dunning has said that it satisfies him, and it does not penalize retired people on fixed incomes to the extent that high fixed costs do. It also encourages conservation when the rate is very, very high as it will be.
Fairness is obviously going to be a huge ongoing political issue as rates sky rocket.
[quote]the peak hour water use argument was really a stretch. The percentage of the total cost of water attributable to temporarily storing some water in the water tank and repumping during peak hours is miniscule compared to the total cost of procuring and distributing the water. I don’t think it would even be detectable.[/quote]
From: [url]http://files.dnr.state.mn.us/waters/watermgmt_section/appropriations/reducing_peak_demands.pdf[/url]
[quote]Water treatment plants and facilities are typically built to supply demands that are two, three and even four times larger than average daily demand on the system. This excess capacity is needed only a few days each year and adds significant costs to the design, construction and operation of a water system… Increasing block (rates that increase as consumption increases) rate structures and seasonal surcharges (higher rates during months with peak demands) are examples of rate structures that can be used to reduce peak demands and encourage efficient water use. Customers that use more water and contribute to peak demands on the system would pay higher water bills…[/quote]
[quote]I would go further and say that fixed costs are difficult to reconcile with Prop. 218, while conservation rates are not as difficult to reconcile. That is because it is the total amount of water used that drives the infrastructure expense, not the number of units in the city. [/quote]
There are fixed costs common to all users that have nothing to do with water consumption, e.g. billing.
[quote]To illustrate: If we had 25,000 units, but they each used only 1 gallon a day,…[/quote]
I’m not following you here… people cannot be expected to use only a gallon of water a day!
[quote]Charging a constant rate per gallon used satisfies prop. 218. Bob Dunning has said that it satisfies him, and it does not penalize retired people on fixed incomes to the extent that high fixed costs do. It also encourages conservation when the rate is very, very high as it will be. [/quote]
Who said anything about “high fixed costs”? I’m not sure where you are getting this from. Please explain…
[quote]Fairness is obviously going to be a huge ongoing political issue as rates sky rocket.[/quote]
By “fairness” do you actually mean proportionality?
“First of all, just because the city of Palmdale filed for financial reimbursement does not mean they will get it.”
Elaine: I said possibly. You asked me to cite my source, I did. I said nothing more than it was a possibility and it is a possibility.
That’s how I heard what you said David. A possibility is just that, a possibility.
David G: great article!
As Bob Dunning says, what a target rich environment … where do I start?
Matt: the Palmdale decision does not make new law; it only applies existing and clear California Constitutional Law to the facts of a tier system much like that used by Davis. Basically, it ties it all up in some easy and understandable reading. We all know that you cannot sell water for more than it costs to procur it. Period.
Davis clearly overcharges residential to subsidize commercial, and has for a very long time. (Anyone have the historical timeline for when we went to the subsidy?)
For me, the only question I have left is one: is the residential ratepayer class entitled to a refund? If so, how far back? I think that the City would be on the hook for that refund, not the subsidized commercial class since they did not set up the unconstitutional system: the City did it.
BTW, our City Attorney (yes, the one in the middle of the DACHA mess) twice certified to her client (ie, the City and its ratepayers) that the Sept 6th and Dec 6th rate structures were legal and consitutional. Not correct, and it is obviously not correct.
If the CC does not get on this right away and fix it, I think some ratepayers should sue the City to fix the rates, and to obtain a refund for the residential class. The case would be a class action by the residential class, with some representative individual plaintiffs.
If anyone wants to discuss this with me, my email is michael@mikeharringtonlaw.com, or call 759-8440.
[b]@Mike Harrington:[/b]The Palmdale decision was published only recently. I think we should be looking at our rate structure going forward, not looking back, both in terms of fairness and compliance.
[quote]There are fixed costs common to all users that have nothing to do with water consumption, e.g. billing.–[b]E. Roberts Musser[/b][/quote]Elaine, that expense is trivial. I think we should reexamine the entire concept of “fixed cost” billing. The infrastructure costs can be more reasonably paid on a per gallon basis. That’s why we have now have meters.
Sue: so, are you going to move to fire the City Attorney who did this to us? She has been certifying these bad rates for years; the point I made about Palmdale is that she must have had that decision in August 2011, yet she STILL certifed those bad rates, twice (Sept 6 and Dec 6th).
To date, we have three attorneys on the CC, two of whom claim to be water attorneys, and nothing has been done about the staff setting up the Sept 6 and Dec 6th votes to certify those rates, and currently defending their decisions and conduct.
Will the water attorney who will advise the WAC write a report and reach some conclusions? Or will it be a political white wash, like what we get from the City Attorney, over and over? (The same one who opined that the water referendum was illegal.)
Should the WAC ask the CC to refer this matter to the Yolo County Grand Jury? Actually, that might be quite interesting …
I think that the independent judiciary should have the opportunity to setting the record straight, since the City of Davis is still trying to cover it up and hood wink the WAC and the public.
Dear Residential Ratepayers: we are not talking about pocket change, here. The conduct of staff in presenting these unconstitutional rates to the CC for certification and approval as legal and fair and accurate has cost residential ratepayers millions upon millions of dollars over the years. Maybe the WAC will ask staff for an estimate of the overcharges for just the last 10 years?
So Sue, I am interested in moving forward and fixing the rates to conform to law, but there has to be some accountability here, and the City should refund those overpayments back to some point in time. So far, not a single member of Davis City Government is talking about either one, so that is why I think the residential class should look into a case against the City.
The question you should have is should the commercial ratepayer class be made to pay up, how far back?
Rather than asking for a refund for residential meters, which would create a deficit and then we would end up having to raise all rates make up for that deficit just to get back to square one, how about going back and asking the commercial meters to pay what residential meters have been paying. Wouldn’t that be fair too? Why look at the commercial rates as the base, but rather the residential rates as a base. Mike, take your commercial bill and figure out what you should have been paying all along and send it in.
Next question, why sue ourselves? We would only have to pay more to resolve the effects of the lawsuit, wiping out any perceived short-term benefit and satisfied egos.
Sue Greenwald
[i]”Elaine, that expense is trivial. I think we should reexamine the entire concept of “fixed cost” billing. The infrastructure costs can be more reasonably paid on a per gallon basis. That’s why we have now have meters.” [/i]
Sue, I respectfully disagree. What you have just described is a “100% Variable Rate Structure.” Such a structure is [u]guaranteed[/u] to break, and break very quickly. The reason is simple, and goes as follows:
Assume for the moment that the total costs of the system are $2.00 and that those costs are split 50/50 between Fixed Costs and Variable Costs. So that means this hypothetical system has $1.00 in Fixed Costs and $1.00 in Variable Costs. Per your suggestion you set up a 100% Variable Rate Structure that generates $2.00 in Revenue based on the expected meter readings. So far so good. $2.00 in Revenue balances $2.00 in Total Costs and there is no surplus or deficit.
Now fast forward to the actual meter readings, where due to conservation efforts the consumption of water is reduced 20% from expected. Therefore your billed Revenue is $1.60 which offsets your costs. The Fixed Costs don’t change from $1.00 and the Variable costs are reduced 20% from $1.00 to $0.80. Total Costs are $1.00 plus $0.80, which when added to the Total Revenues of $1.60 produces a $0.20 deficit.
If we were expecting consumption to increase, your proposed 100% Variable Rate Structure would produce a surplus, but realistically do you expect Davis’ water consumption in coming years to go up or down Sue?
The fixed costs for delivering water are substantial. The cost of the wells and pipes for to move the water from the wells to everyone’s house is fixed, regardless of how much water you use. The debt costs incurred to build the system is fixed, regardless of water usage. Each water user should be charged a fixed monthly cost which covers an ratable share of fixed costs, then a variable cost, based on water used. It is the only fair way to charge for having water available to a parcel, and for the variable cost of delivery.
Michael Harrington said . . .
[i]”Matt: the Palmdale decision does not make new law; it only applies existing and clear California Constitutional Law to the facts of a tier system much like that used by Davis. Basically, it ties it all up in some easy and understandable reading. We all know that you cannot sell water for more than it costs to procur it. Period.”[/i]
Michael, the reality is that in this case the existing California Constitutional Law is anything but clear. The rate structure you are advocating for treats individual Californians differently. It means that you will be charging Bob Dunning’s fourth child more per gallon for water than you are charging his first child. I want to be there when you try and convince Bob that what you are advocating for is fair. Talk about a target rich environment … where do I sign up for a ticket? That will be great entertainment!
Michael Harrington said . . .
[i]”Should the WAC ask the CC to refer this matter to the Yolo County Grand Jury? Actually, that might be quite interesting …”[/i]
Spoken like a Circus Barker. I think you have missed your calling Michael.
I assume that when an attorney solicits contact from what he/she perceives as injured parties on this blog, she/he is offering his/her services [i]pro bono[/i]. If not, she/he should contact David Greenwald about paying for ad space.
[i]and the City should refund those overpayments back to some point in time. So far, not a single member of Davis City Government is talking about either one, so that is why I think the residential class should look into a case against the City. [/i]
Great idea. The citizens sue themselves, run up large legal costs in so doing, and end up with assessments or taxes that are more than the historical costs that they were suing over. Winner….follow the money….lawyers like Michael Harrington.
Adam: didn’t the City pay some professionals to construct and certify those bad rates? Why should the taxpayers pay the damages? Just tender to the E & O carriers of those involved, right, and see what happens?
[quote]The fixed costs for delivering water are substantial. The cost of the wells and pipes for to move the water from the wells to everyone’s house is fixed, regardless of how much water you use. The debt costs incurred to build the system is fixed, regardless of water usage. Each water user should be charged a fixed monthly cost which covers an ratable share of fixed costs…[b]Adam Smith[/b][/quote]I could be convinced otherwise, but I see no compelling logic behind paying for fixed costs with fixed rates. Fixed costs can be paid with fixed or variable rates. Each will get the job done. With costs sky rocketing, people are already starting to get angry about fairness issues. Any perception that one group is subsidizing another will be questioned.
Fixed rates favor large families like Bob Dunning’s and hurt retired people on fixed incomes. Fixed rates can be used to give hidden subsidies to one class or another. Tiered rates help retired people on fixed incomes and office buildings, but hurt large families and restaurants. Rates pegged to some conception of peak hour use would hurt families and restaurants and help office buildings and factories.
Charging a flat rate per gallon is hard to argue against. No one is subsidizing anyone else. Conservation is still promoted.
Perhaps we could vote for a maximum rate and then employ a system each year whereby that rate is adjusted downward depending on aggregate use the previous year.
A perception of fairness is going to be critical if we are about to enter an era of extraordinarily high water/sewer rates. We will be having to pass Prop. 218 rates every few years, and they will be subject to initiative and referendum. If people are already concerned about fairness and hidden subsidies, it will only become more challenging in the future.
Both large families and retired people on fixed incomes seem to be okay with a per/gallon charge.
[quote]I was on that committee. I am not a business person, and I am in no way affiliated with the business community. Everyone around that table was attempting to find some way to reduce the water rate increases for EVERYONE. –[b]E. Roberts Musser[/b][/quote]The only way to do that, Elaine, is to either get the costs of the water/wastewater projects way, way down or to phase in the projects. There is no other logical way to lower the rates for “EVERYONE”. What you guys did was to lower the assumptions about cost and postpone a few necessary components until right after the prop 218 rate years under discussion. Hence, rate increases will be even higher when the next prop 218 vote comes along.
I understand outside paid consultants were involved with setting the bad rates. Anyone know the identitiespod these professionals ?
[b]@Michael Harrington:[/b]Mike, you will be much more effective if you focus on the policy issues involved rather than on recrimination and payback.
[quote]The fixed costs for delivering water are substantial. The cost of the wells and pipes for to move the water from the wells to everyone’s house is fixed, regardless of how much water you use.–[b]Adam Smith[/b][/quote]I think I will answer this one a little more specifically. The water for the pipes “to move the water from the wells to everyone’s house” were paid for by the developer through impact fees, or they were paid off long ago. Owner is responsible for maintenance of the costs of the main from the house or commercial lot to the street. So all we are talking about is maintenance and replacement of the pipes running through the streets, and there is no reason to believe that any differential that might or might not exist in this cost between commercial and single-family and apartments would have a significant impact on total costs of providing water to these units. The number of wells needed is a function of the amount of water used.
Again, just because the word “fixed” is placed in front of some costs and some rate structures, it does not follow that they somehow married.
Sue Greenwald said . . .
[i]”Charging a flat rate per gallon is hard to argue against. No one is subsidizing anyone else. [i]Conservation is still promoted.[/i]
Perhaps we could vote for a maximum rate and then employ a system each year whereby that rate is adjusted downward depending on aggregate use the previous year.”[/i]
Sue, your failure to understand basic accounting is tripping you up again. If conservation is indeed promoted then the quantity of gallons multiplied by the per gallon rate will produce less revenue . . . and a deficit.
In order for the deficit to be removed the per gallon rate will have to be adjusted up, not adjusted down as you indicate above.
The only way you could adjust the rate downward is if the quantity of gallons consumed goes up . . . and that is the antithesis of conservation.
Matt, we already have factored in conservation. The reason that I suggested passing a high rate and adjusting it downward is because we can’t adjust it upwards once it is voted on. The range of water usage is not infinite; we have a pretty good idea of the upper and lower boundaries. I suggested adjusting the rates once a year depending on the previous year’s aggregate use. The last pro-forma that I saw showed a reserve of over $10 million a year to smooth out the fluctuations.
It works, Matt.
Sue, how can you have already factored in all the likely conservation. Look at the per person gallon consumption in Davis compared to other California cities like Monterey and Irvine just to name two. I will agree with you that if you accept the notion that Davis has already achieved its full measure of conservation, then your rate structure works, but if there is still additional conservation to be achieved, then your structure will produce 1) annual deficits, and 2) the necessity of going back to the public for multiple Prop 218’s.
No Matt. If you were paying attention, you would know that staff has already built substantial additional future conservation into our model.
We do not need to go back for prop. 218 to adjust the rates downwards. Additionally, we will have to go back for prop. 218 votes every few years anyway.
Everyone, the per capita consumption after the 20% conservation effect in Davis is 157 Gallons per Person per Day. Compare that 157 number to the bolded numbers in the following report about Goleta, California.
[i]”Goleta, California: Avoiding Shortages and Plant Expansion
Background
The Goleta, California, Water District serves approximately 75,000 customers spanning an area of about 29,000 acres. Goleta’s water supply comes primarily from Lake Cachuma (9,300 acre-feet per year) and the state Water Project (4,500 acre-feet per year). The district can also produce approximately 2,000 acre-feet per year from groundwater wells. In 1972, analysts predicted future water shortages in Goleta, so the district began seeking additional water sources and established a water efficiency program.
Approach
Goleta’s water efficiency program cost approximately $1.5 million and emphasized plumbing retrofits, including the installation of high-efficiency toilets (1.6 gallons per flush) and showerheads. The program also included free onsite water surveys, public education, and changes in metering and rate structure. A mandatory rationing plan was imposed on May 1, 1989 to reduce use by 15 percent.
Results
Between 1987 and 1991, Goleta issued 15,000 rebates for high-efficiency toilets and installed 35,000 low-flow showerheads. Between 1983 and 1991, 2,000 new high-efficiency toilets were installed in new construction and remodels. Onsite surveys and public education efforts helped consumers improve outdoor water efficiency, and increased water rates provided extra incentive for consumers to reduce water use. The conservation and rationing programs, as well as the rate increases, contributed to a 50-percent drop in per capita residential water use in 1 year—between May 1989 and April 1990. [b]Total district water use fell from 125 to 90 gallons per capita per day[/b] — twice the original target of 15 percent. The water-efficiency program also reduced sewage flow from 6.7 million gallons per day (mgd) to 4 mgd. As a result, Goleta Sanitary was able to delay a multimillion-dollar treatment plant expansion.”[/i]
Bottom-line, relying on the projected 20% conservation as the downside limit of conservation in Davis is highly problematic. The 90 gallons per capita average that Goleta achieved is 43% below the 157 gallons per capita per day projection in Davis.
Sue Greenwald
[i]”No Matt. If you were paying attention, you would know that staff has already built substantial additional future conservation into our model.
We do not need to go back for prop. 218 to adjust the rates downwards. Additionally, we will have to go back for prop. 218 votes every few years anyway.”[/i]
You are absolutely right that you do not need to go back for a Prop 218 to dajust rates downward. However, as shown above by the Goleta example, conservation can easily far exceed the modest conservation assumptions that Staff has built into its models.
For point of comparison from a 2/18/2011 report, “During 2010, the City of Woodland used approximately 4.5 billion gallons of water, or 79,156 gallons per person.” Some quick math says that is 216 gallons per capita per day. Davis’ projected 157 gallons is 28% below Woodland’s, but still 43% higher than Goleta’s 1990 value. I would not be at all surprised if Goleta is currently well below 90.
From California American Water’s 2011 Report, “The Monterey Peninsula has the lowest per capita water consumption of any comparable community in the State of California, approximately 70 gallons per person per day.”
Sue Greenwald said . . .
[i]”No Matt. If you were paying attention”[/i]
Rest assured Sue . . . I’m paying attention.
[quote]The only way to do that, Elaine, is to either get the costs of the water/wastewater projects way, way down or to phase in the projects. There is no other logical way to lower the rates for “EVERYONE”. What you guys did was to lower the assumptions about cost and postpone a few necessary components until right after the prop 218 rate years under discussion. Hence, rate increases will be even higher when the next prop 218 vote comes along.[/quote]
And postponing components is essentially delaying, something you yourself have advocated for, no?
[quote]Fixed rates favor large families like Bob Dunning’s and hurt retired people on fixed incomes. Fixed rates can be used to give hidden subsidies to one class or another.[/quote]
It’s a bit more complicated than that. From [url]http://www.allianceforwaterefficiency.org/WorkArea/linkit.aspx?LinkIdentifier=id&ItemID=720[/url]
[quote]Fixed versus Variable Costs: Many costing methods identify costs of water service as either fixed or variable based on the characteristics of the expenditures. Fixed costs are expenditures that remain relatively unchanged throughout the year, irrespective of the volume of water produced.
Because large up-front capital costs are required to build capacity for meeting demand, some traditional costing methods classify all system expansion costs as fixed and refer to these costs as “demand” costs. Variable costs, also called “commodity costs,” are expenditures that vary
directly with the volume of water produced or consumed; variable costs include purchasedwater,electrical, and chemical costs. Marginal costing methods recognize that the dividing line between fixed and variable depends on the period of time used for the analysis. In the long run,
fixed capital expenditures can and do change, thus becoming “variable.”
Standard ratemaking methods intentionally develop pricing on the basis of “cost causation” rather than the fixed/variable cost paradigm associated with cost accounting. The intent of AWWA rate methods are to impose costs on those responsible for their incurrence rather than as
a reflection of capital-intensive cost structures.
Cost of Service Analysis
Traditionally water utilities (and regulators) use cost of service studies to allocate revenue requirements according to the cost of service (including capital and operating costs) associated with different patterns of water use. A cost of service study is used to identify, for example,
variations in costs caused by seasonal and daily peak demands.
Three specific activities guide the allocation of costs:
! Cost functionalization separates costs into functional categories, such
as source development, treatment, transmission, and distribution. The
calculation of costs by functional category is provided directly by the
accounting system or estimated indirectly using accounting information.
! Cost classification assigns functional costs to service characteristics.
Several approaches are possible. The base-extra-capacity method assigns
functional costs to average day, maximum day, and maximum hourly usage
categories. The demand-commodity method allocates functional costs to
demand and commodity usage categories. Other categories are often used for
customer-related costs such as billing, metering, and fire protection. An
important variation classifies costs by peaking period – peak versus non-peak.
! Cost allocation assigns each category of costs to customer classes. For
example, customer related costs are usually allocated according to the number of service connections in each class. Capacity costs are allocated differently under the base-extra-capacity and commodity-demand methods. Costs are allocated to customer classes in proportion to the respective demands these customers place on the utility system.[/quote]
Why get all worked up about the Second District Court of Appeals? Any case here would go to the Third District and then to the State Supreme Court so a narrowly written decision in another district seems like something we shouldn’t worry about too much.
Matt points a significant flaw in with the 100% variable pricing structure – if people conserve beyond the stated objective or goal, or if the population of the municipality decreases, and thereby decreases water use, then the rates have to increase for everyone else. I know you understand this Sue, because you rightfully warned the readers in previous discussions about the rates and the water project – you pointed out that conservation beyond the budgeted water use would cause rates to increase.
Some water districts in SoCal are facing insolvency now because of this problem – conservation has resulted in decreased revenue that doesn’t cover their costs. So what do they do? – raise rates, and people conserve more. Those place are actually pursuing rate structures which provide lower rates to the largest water users, because it will increase the revenue coming in to the system – every time they increase rates, revenue decreases.
For this type of utility a rate structure that includes fixed and variable components is the most fair rate allocation. First, every parcel should pay a similar fixed rate, unless they require different infrastructure to serve it – there is significant cost to provide the infrastructure to each parcel, regardless of usage. Then, there should be a variable rate that is associated with usage – you could have tiered rates for differing water usages.
[quote]Matt points a significant flaw in with the 100% variable pricing structure – if people conserve beyond the stated objective or goal, or if the population of the municipality decreases, and thereby decreases water use, then the rates have to increase for everyone else–[b]Adam Smith[/b][/quote]This is a given, Adam Smith. Again, that is exactly why I suggested setting the upper rate limit a bit higher than necessary, and adjusting the rate downward yearly if indicated. (Remember when staff told us that our last prop. 218 rates were higher than they expected to be necessary? We do that anyway.) Shorten the prop. 218 vote period from 5 to 4 years. We have a $10 or $11 million reserve to cover unexpected extreme conservation or mass exodus of Davis citizens to Dixon.
This is far, far safer than rates that people perceive as unfair and the risk of overturned the prop. 218 rates. At the rates we will be facing, fairness and hidden subsidies of one class or group by another are guaranteed to be heavily scrutinized for the next forty years. As you have seen, this process has already begun and rates have not yet risen. Better to be proactive.
[quote]For this type of utility a rate structure that includes fixed and variable components is the most fair rate allocation. First, every parcel should pay a similar fixed rate, unless they require different infrastructure to serve it – there is significant cost to provide the infrastructure to each parcel, regardless of usage.–[b]Adam Smith[/b][/quote]I think this is flawed reasoning. As I described, the developer pay and homeowner pay for pipes to the individual units, or they were paid off long ago. It is quite arbitrary to use the building as the recipient of the water, rather than the people in the building and the amount of water that they use.
Fairness is going to be in the eye of the beholder. Every system has winners or losers. What you want to avoid is perception of hidden subsidies. It has already become a huge issue.
When I listen to diverse categories of consumers, from those with large families to those retired on fixed incomes, from those with large lawns to those in apartments, from the well to do to the needy — everyone seems most comfortable with a non-tiered, per gallon rate.
Sue Greenwald said . . .
[i]”Fairness is going to be in the eye of the beholder. Every system has winners or losers. What you want to avoid is perception of hidden subsidies. It has already become a huge issue.
When I listen to diverse categories of consumers, from those with large families to those retired on fixed incomes, from those with large lawns to those in apartments, from the well to do to the needy — [b]everyone seems most comfortable with a non-tiered, per gallon rate.[/b]”[/i]
Sue, if that is the case, it is very, very important that the WAC hear that from the citizens [u][b]before[/b][/u] it deliberates about rates. As Elaine has said in earlier e-mails, the WAC’s e-mail address is [url]water@cityofdavis.org[/url] So Sue, every time someone tells you that they have clear preferences about a rate structure, please encourage each of them to e-mail the WAC. That feedback/input is essential.
Sue, policy issues involve accountability, and so far there has been none. It also involves compensation to the resudential class for the city taking their money without due process of law
Who set up those 2007-08 rates?
Sue said:” As I described, the developer pay and homeowner pay for pipes to the individual units, or they were paid off long ago.”
Of course this is true since there hasn’t been any growth to speak of since Sue got on the council. As for economic development there are few things more detrimental to decisions than lack of infrastructure. Of course water availability is one of the most crucial decisions for many businesses in deciding where to build so opposing water development is the second greatest obstacle to development for Davis behind measure R. I believe access to Putah Creek water now owned by the Solano Irrigation District was a big plus for Vacaville in landing Genentech at their production site there. You don’t have a dedicated supply of water you don’t need to set aside land for business development of any consequence certainly limited is our community as a biotech hub.
[quote]Sue Greenwald: This is far, far safer than rates that people perceive as unfair.
Fairness is going to be in the eye of the beholder. Every system has winners or losers. What you want to avoid is perception of hidden subsidies. It has already become a huge issue. [/quote]
Do you want the rates to be “fair” as in proportional, or do you want them “perceived as fair”? As you have said, “fairness” is in the eye of the beholder, and is not standard at all. In point of fact, the vague term “fairness” is not the standard, PROPORTIONALITY is the standard. Any rate structure must have proportionality built into it, so that user classes are paying for their proportional share.
[quote]When I listen to diverse categories of consumers, from those with large families to those retired on fixed incomes, from those with large lawns to those in apartments, from the well to do to the needy — everyone seems most comfortable with a non-tiered, per gallon rate.[/quote]
If the city has no tiers, a non-tiered per gallon rate hurts low income consumers who conserve and stay within a minimum amount of water usage. The purpose behind tiered rates is to give a break to people that stay within a minimum amount of water usage, and make those who use more water than necessary to pay extra for that amount above what is absolutely necessary, by bumping them up to a more expensive tier the more water they use. In effect, tiered rates help the lower income consumer, such as seniors on fixed incomes.
[quote]Do you want the rates to be “fair” as in proportional, or do you want them “perceived as fair”..PROPORTIONALITY is the standard.–[b]E. Roberts Musser[/b][/quote]Elaine, paying for the water per gallon is the easiest way to prove proportionality. What I am saying is that we might as well just do it, since it also perceived as fair and avoids getting bogged down in debates about whether Prop 218 is satisfied and about the importance of Palmdale.
[quote]If the city has no tiers, a non-tiered per gallon rate hurts low income consumers who conserve and stay within a minimum amount of water usage.–[b]E. Roberts Musser[/b][/quote]Elaine, one of the reasons that I like the per-gallon method without tiers is that I believe it will actually be less expensive for low income people. Add tiered rates to water bills about three times what they are today, and I am afraid that even affluent citizens with big yards will conserve. That will drive rates higher for the low-income people, who are probably conserving today. Hence, I suspect that the bills of low income people will more than triple.
[quote]Elaine, one of the reasons that I like the per-gallon method without tiers is that I believe it will actually be less expensive for low income people. Add tiered rates to water bills about three times what they are today, and I am afraid that even affluent citizens with big yards will conserve. That will drive rates higher for the low-income people, who are probably conserving today. Hence, I suspect that the bills of low income people will more than triple.[/quote]
Many large users of water cannot conserve, or will choose not to conserve, e.g. business that uses a lot of water, person with large house and large yard. This is why tiered rates are beneficial to low income users…
First off, Elaine, do single family homes currently subsidize apartments and businesses? I get the impression that they do.
Secondly, I think that low income people are already conserving with rates the way they are. My fear is, as I said previously, that with approximately 3 times higher rates and with tiers, even the large houses and large lots will start to dramatically conserve. This will raise prices for the low-income, small lot owners who are already conserving. Now they are being subsidized by the more affluent big lot owners. It is a zero-sum game. If water gets so expensive that the big lot owners start to conserve, the rates of the low income conservers more than triple.
Sue Greenwald said . . .
[i]”First off, Elaine, do single family homes currently subsidize apartments and businesses? I get the impression that they do.”[/i]
Well Sue, that impression would be incorrect. Here are the Single Family Residence (SF) and Multi-Family Residence (MF) rates:
Class
Code . . User Classification . . . . . . Tiers . . . . . . . . . . . . . Unit Charges
SF . . . . Single Family Residential . Tier 1: 0 – 36 ccf . . . . $1.50
. . . . . . . . . . . . . . . . . . . . . . . . . .. Tier 2: over 36 ccf . . . $1.90
MF . . . Multi-Family Residential .. Tier 1: 0 – 14 ccf . . . . $1.42
. . . . . . . . . . . . . . . . . . . . . . . . . . Tier 2: over 14 ccf . . . $1.90
What that translates to is that for bi-monthly consumption of 14 ccf and below, the SF rate is 5.6% higher, but that margin disappears at 17.5 ccf, and for all volumes of 17.5 ccf per bi-monthly period the MF rate is higher.
Very few MF accounts use less than 17.5 ccf per billing period.
I think the concern with this parity issue was the proposed rates, not existing.
Sue, since the September rates are now history and the existing rates are going to be history after the WAC finishes, is there any real difference between those two rate structures?
Help me out. Explain the difference.
[quote]Secondly, I think that low income people are already conserving with rates the way they are. My fear is, as I said previously, that with approximately 3 times higher rates and with tiers, even the large houses and large lots will start to dramatically conserve. This will raise prices for the low-income, small lot owners who are already conserving. Now they are being subsidized by the more affluent big lot owners. It is a zero-sum game. If water gets so expensive that the big lot owners start to conserve, the rates of the low income conservers more than triple.[/quote]
From [url]http://www.equinoxcenter.org/assets/files/pdf/Equinox Water_Pricing_Brief 102609.pdf[/url]:
[quote]Affect on Low Income Households
Another concern relates to the effect of tiered pricing on lower income families. Studies have shown that water pricing tends to have different effects on lower income and higher income households. Lower income households spend a larger percentage of their income on water, and therefore are more sensitive to changes in price. However, in a steeply tiered price structure, as in the case of IRWD’s tiered pricing structure, funds derived from rates charged for high usage can allow the utility to provide lower rates for high conservation consumers, creating less of a burden on lower income households that conserve. Of course higher income households also have the opportunity to use less water and reduce their bills as well – or pay the higher fees for higher usage. [/quote]
Also:
[quote]What are the advantages of tiered water pricing?
Tiered water pricing is a market- based mechanism for promoting water conservation, which has several
advantages.
Tiered water pricing is self-regulating and can be cost-effective. It requires less monitoring and enforcement to achieve its goals compared to prescriptive conservation programs that require specific behavioral changes and mandate civil penalties for those who do not adhere to the restrictions.
If the customer chooses to conserve, they determine how to do so within their own household. For example, a consumer may decide to install more water efficient appliances, decrease shower time, or install landscaping that requires less water to maintain. This differs from mandated restrictions such as when and how long to water landscapes, or what kind of fountains can be maintained.
When priced correctly, tiered pricing can decrease demand while providing a steady stream of revenue to the water provider. This is especially valuable in times of drought, when the utility or city will have enough revenue from water sales to purchase water when demand exceeds the projected availability of water. In uniform rate or low-tiered pricing systems, mandatory water restrictions can cause a steep drop in revenue for the water authority, making it difficult to meet water supply needs.
Tiered rate structures ensure that our water districts have the revenue to provide for our long term water needs. Appropriately configured tiered pricing structures are proven to reduce water demand over the long
term, not just during periods of drought – A study of more than twenty agencies nationwide with different tiered rate structures combined with water budgets found that customers used water more efficiently and
agencies had more stable revenues. In the short term, reductions in water usage come from curtailing wasteful activities, but in the long run, people invest in technologies that use less water, and water
conservation increases as a result. [/quote]
[b]@E. Roberts Musser:[/b]I don’t buy this, for reasons listed above. We already have stringent conservation rates. As water rates triple on the average, higher income people will start to conserve, shifting costs back to the low-income citizens who are currently benefiting from the fact that higher income people are now conserving less.
This is a zero-sum game. We need to collect a fixed amount of revenue; if someone’s costs fall, others will have to rise. If we push both costs and conservation incentives upwards, then higher income people will begin conserving shifting costs back down to the lower-income people.
Sue, we have far from “stringent conservation rates.” Stringent conservation rates would produce per capita water usage values like Monterey’s . . . 70 gallons per person per day. Davis’ most recent 12 months (2010 reporting year) achieved 152 gallons per person per day . . . but that is still more than double Monterey’s.
The 152 gallons per person per day is down from 199 gallons per person per day in 2006. We have a long way to go before we achieve anything close to “stringent.”
[b]@Matt Williams:[/b]Matt, our fixed rates already charge seniors on fixed incomes proportionately more for water. If you add to that a per person water budget with conservation rates, that will compound the burden on seniors. Currently, seniors can hope to balance their disadvantage when it comes to fixed rate with their advantage when it comes to tiered rates. Fixed rates plus a per person “water budget” will compound that disadvantage.
Sue, it wasn’t long ago that you were advocating a 100% variable (per gallon) rate. Now you are talking about fixed rates. That is a full swing of your pendulum from one end of rate structures to the other. Which are you for fixed rates or variable rates?
[b]@Matt William:[/b]Matt, you don’t understand my point. Yes, I do think that a 100% [b]FIXED[/b] per gallon rate would be the most fair. I also think that a fixed per unit rate plus tiered rate and water budgets would be the least fair to seniors. I would expect to see their rates increase to perhaps 5 fold under this scenario.
Sue your knowledge of accounting is tripping you up. By definition, in accounting the term “per” designates “variable.”
[b]@Matt Williams[/b]Matt, I am using the common English definition of ‘fixed’ per gallon rate in order to differentiate it from a “tiered” or “variable” per gallon rate. Using the term “variable” to designate “per” does not allow for this distinction, and this distinction is the crux of the issue.
Sue, use the words any way you want, but a rate per gallon is a 100% variable rate structure. Feel free to contact Doug Dove at Bartle Wells to verify that.
With that said, how does a rate per gallon rate structure match up to the makeup of the City’s current water costs?
If by “rate per gallon”, you mean a fixed rate per gallon and not a tiered or variable rate per gallon: That is the question that Mark Siegler asked staff to come back with.
I know Mark asked for that. I’m asking [u]you[/u] how well a rate per gallon rate structure matches up to the makeup of the City’s current water costs? I’m not asking Mark. You are the one posting here on the Vanguard advocating for a 100% Variable Rate Structure.
I meant:
If by “rate per gallon”, you mean a fixed rate per gallon and not a tiered or variable rate per gallon: That is the answer that Mark Siegler asked staff to come back with.
Again, I know Mark asked for that. I’m asking [u]you[/u] how well that kind of per gallon rate structure matches up to the makeup of the City’s current water costs? I’m not asking Mark. You are the one posting here on the Vanguard advocating for a 100% Variable Rate Structure.