Is City Rate System Vulnerable to Proportionality Challenge? News Research Suggests Possibly

water-rate-iconA few months ago, the Vanguard ran a story that analyzed the city’s water rates and found that they appear to be proportional and fair.  However, that analysis may have been overly-simplistic if the work of two Water Advisory Committee members is correct.

In an article that ran in yesterday’s Davis Enterprise, Frank Loge and Matt Williams have come up with “a proportional fixed-fee structure based on water consumption history that could balance water bills in Davis” – a system that has never been tried before in California.

Reports the Davis Enterprise: “Like many public agencies in the state, Davis uses a tiered water rate structure where customers pay a fixed rate based on the size of their water meter and then a variable rate based on how much water they use.”

The problem is that Professor Loge and Mr. Williams believe that this type of system does not adhere to Prop. 218 requirements.

Indeed, the two write: “While meter size-based fixed rates seem proportional and fair at first sight, they are a simplistic, indirect and inexact measure of proportionality.”

They add: “Meter size-based rate schemes are … based on the potential demand, rather than the actual demand a consumer places on the (water) system.”

The meter size sets a fixed rate of cost, regardless of the amount of water that the household uses.  Of course, the Vanguard found that as water rates increase across categories, the system ends up with the appearance of proportionality.

But that may not be completely accurate.

“Thrifty and extravagant water users pay the same fixed fee, but derive entirely different benefits from the system they fund with their fixed fees,” they write. “The thrifty user’s fixed fees cover some of the fixed costs the wasteful user imparts on the system, in effect subsidizing the water waster.”

The Enterprise quotes Frank Loge as saying, “Roughly half of the people in Davis are subsidizing the water use of the other half.”

He adds, “That’s a specific example of how the current rate structure is not equitable.”

If that is the case, then it gives water opponents far more ammunition on the rate issue than previously believed.

But, as the Davis Enterprise also reports, while Matt Williams and Frank Loge have already presented this rate structure to the WAC, the staff in charge at the city level are balking at the proposal.

For example, the Davis Enterprise reports that Herb Niederberger, the city’s general manager in charge of, among other things, this water project, “has concerns that Williams’ and Loge’s proposal might be difficult to run in Davis.”

Mr. Niederberger told the Enterprise: “Rates based upon historical consumption patterns are difficult to employ in communities with a high number of rentals and transient populations… Most college communities meet this description.”

He adds: “It is much easier and more industry-acceptable to employ a rate structure that features a fixed charge based upon service or meter size, and variable charge based upon consumption, with inclining blocks to encourage conservation.”

Meanwhile, City Manager Steve Pinkerton “recognizes that the structure Williams and Loge have developed has potential and says city leaders will keep an open mind about it.”

At the same time, the Davis Enterprise reports, “Pinkerton also believes that implementing the system in the short time frame the city has to put a surface water project and a corresponding rate structure to a vote could be difficult.”

“We just don’t want to make a $10 million mistake,” he told the Enterprise.

So now we have a clear signal from the two city staffers in charge of this project that the fairness issue in the variable rates may not be fixed.

Enter into the picture Michael Harrington, who back in July sent a letter to the council and Steve Pinkerton, threatening a Proposition 218 proportional cost non-compliance suit if the new rate structure does not fix the issues that Professor Loge and Mr. Williams have now identified.

Mr. Harrington noted the City of Palmdale decision “held that a local water district’s rates were unconstitutionally disproportional and charged water customer classes different rates even though the cost of supplying the water was the same.”

In July, Mr. Harrington argued, “I still believe I am correct, and the current rates need to be fixed so each user pays the same cost per unit of water as other customer classes.”

He argued, “This needs to be fixed immediately, and can be, with a simple Prop 218 Notice and without any increase in the rates across the entire system output.”

He added, “I think that the current rates can be fixed this fall, to take effect in the new year, with no raise across the system.  This would not need a citywide ballot vote.  Please do not delay and attempt to wrap this immediate rate fix into a future water project.”

At the time, Mr. Harrington appeared to be wrong, given our analysis which found that as we went across levels of usage, the rates appear to be relatively proportional and in compliance with Prop 218 requirements, and nothing about this rate chart jumped out as being odd.

At the low levels of usage, the relatively small fixed costs of both single family and multifamily users are advantaged.

Naturally, we would not expect large metered users to use low levels of water, and once they move toward expected uses, the fixed costs even out.  Nor would we expect single-family or even multifamily users to use more than 37 and certainly not more than 50 ccfs (hundred cubic feet, a standard billing unit) per month.

What is striking about this chart is there is clearly no kind of subsidization of rates or usage from one class to another.

Parity and proportionality clearly occurs as the rate class moves toward its expected usage.

However, the work of Matt Williams and Frank Loge appears to undermine our conclusions, which were based simply on math calculated across categories.

Under their system, “The fixed fees on water bills would be proportional to the amount of water each customer uses so that water bills reflect the load each individual user puts on the water system.”

Those fixed fees would be set based on the customer’s previous year’s usage.

Writes the Enterprise: “Aside from encouraging residents to conserve more water so that their fixed fees would be set at a lower rate the next year, this structure would allow each water customer to pay for only their share of the total fixed costs that the city incurs for managing the entire water system.”

“What we’ve proposed is much more fair for the city of Davis,” Professor Loge said.

Matt Williams told the Enterprise, “This structure would double fixed rates on utility bills, while cutting variable rates in half.”

The real question at this point is whether they will get the chance to do this and whether their findings indicate that a challenger to the rate structure, such as Michael Harrington, could prevail on a proportionality challenge.

—David M. Greenwald reporting

Author

  • David Greenwald

    Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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Budget/Fiscal

33 comments

  1. I seem to remember Mike Harrington basing his assertion that the rates were unfair on comparing his own residential bills against the bill for his commercial building, rather than any broad analysis. He never responded to the analysis of the current rate structure and still declares that the rate structure is unfair without basis.

  2. Drat! I’m looking for that draft complaint based on the Palmdale decision that I had this spring

    I’ll probably find it by October

    You all realize the burden is on the city to prove proportionality, right?

    The only thing interesting here is: can we force the city to disgorge the ill-gotten money and pay back the victims?

    Of course, the City gets advice from the same cracker-jack attorneys/law clerk who wrote that memo last fall opining that the referendum was unconstitutional ?

    And the beat goes on and the urban forest suffers. Still see the city wasting our Money on that 4th Fire crew position

    The CC so far lacks the guts to do much. They even seem to swallow that we even need a 12 million gallon per day surface plant

    The unconstitutional rates that are never fixed is just more of the same

  3. I think the main brilliance of the model developed by Matt Williams and Frank Loge is this method of using prior-year usage to establish a fix-rate component that 100% funds fixed expenses. As long as variation of those fixed expense are linked to approved project costs or indexed to inflation, I like the idea of setting fixed rates to cover fixed expenses, and variable rates to cover variable expenses keyed to higher usage. We might look to this approach for many of our fee-based public services.

  4. One of my concerns is the impact of higher water rates on the residents of Rancho Yolo.

    I am aware of the various legal restrictions imposed by the law and can see how difficult it is to have a rate structure that meets the law yet takes into account Rancho Yolo’s special circumstances.

    I noticed this suit in San Juan Capistrano around the 218 tiering issues being discussed. For those who have a better understanding of the details what can we learn from this challenge to help us understand our local situation?

    David Thompson

    Published: Aug. 30, 2012 Updated: 5:22 p.m.
    Taxpayers group sues San Juan over water rates

    Action seeks a court order to stop the city’s tiered rate structure, which the Capistrano Taxpayers Association says violates state law requiring rates to be based on cost of service. The city denies that.
    By JOSH FRANCIS / FOR THE REGISTER

    A San Juan Capistrano taxpayers group upset with increasing municipal water rates filed a lawsuit and a petition for a court order Wednesday to try to stop the city’s tiered water-rate structure, which the group alleges violates state law. The city was served with the suit Thursday.
    “The goal (of the lawsuit) is to have a fair water rate that is within the guidelines of the law,” said Clint Worthington, a member of the Capistrano Taxpayers Association, which filed the complaint in Orange County Superior Court.

    San Juan City Attorney Hans Van Ligten, who officially started in his job this week, said Thursday that he had received “confirmation that a complaint and petition was served, but beyond that I have no comment on the litigation at this time.”

    The suit is not seeking damages but rather “declaratory and injunctive relief,” according to Benjamin Benumof, attorney for the Capistrano Taxpayers Association.

    The nonprofit group, founded in January, contends that importing water from the Metropolitan Water District, rather than using the city’s groundwater recovery plant, would save San Juan (and its ratepayers) close to $2 million a year. It claims the city’s water rates violate Proposition 218, a statewide initiative passed in 1996 with the goal of curbing perceived abuses in the use of assessments and fees that raise money for general government services, according to the state Legislative Analyst’s Office.

    The group says the rate structure is punitive and is not based on cost of service, which Prop. 218 requires.

    San Juan Capistrano adopted a tiered rate structure in early 2010 as a result of a rate study completed in December 2009.

    In 2010, water customers saw separate rate increases of 22 percent and 18 percent, on average. A 3 percent increase took effect in July this year.

  5. Alan Miller said (in a comment on the Enterprise . . .

    [i]”I would venture to guess that those proposing this own their homes. The rental population in Davis is enormous. You cannot ‘fair’-ly assess rental properties from one year to the next and base water rates on previous usage. Individual roomates at a residence come and go, sometimes change over completely. Many property owners now pass on City service bills to their tenants, and advertise the rental rates without City service included. Others do not, making comparison of rents very difficult for incoming persons unaware of this difference, a difference that can sway one’s rent significantly. Too many decisions are made on the assumption of and the perspective of owners, not renters. Some may be transient, and many are more permanent. Water use is water use, and the historical perspective should be left out, as such a structure in and of itself alienates the majority of residents.”[/i]

    Alan, indeed I do own my own home, but in our evaluation of the impact of the change, my water bill will increase 19%.

    The across the board impact is rather striking. If the solution were implemented we would see the following impacts

    total revenue generated = $10,400,000 (combined fixed and variable = FY 2010-2011 total
    total accounts = 16,433 accounts = 100.00% of total
    decrease over 25% = 2,862 accounts = 17.42% of total
    decrease over 10% = 9,377 accounts = 57.06% of total
    total accounts that decrease = 12,241 accounts = 74.49% of total
    accounts are unchanged = 108 accounts = 0.66% of total
    total accounts that increase = 4,084 accounts = 24.85% of total
    increase 10% = 1,750 accounts = 10.65% of total
    increase 10-25% = 1,488 accounts = 9.05% of total
    increase 25-50% = 672 accounts = 4.09% of total
    increase 50-75% = 139 accounts = 0.85% of total
    increase 75-100% = 22 accounts = 0.13% of total
    increase 100-200% = 13 accounts = 0.08% of total

    Bottom-line, three quarters of the 16,000+ accounts in Davis would see their annual bill go down if this system were implemented.

    The one quarter of the accounts that would see their annual bill go up are the ones that are A) placing the biggest load on the system as a whole, and B) are choosing to use a high volume of water relative to their meter size because that water is valuable to them.

    Alan Miller’s concern about protecting renters is counter intuitive when you look at the data, because on average the fees for the water used in the 513 Multi-Family Residential accounts would be reduced 9.7% or $190,000 per year. On average the fees for the water used for irrigation meters at Multi-Family Residential accounts would be increased 46.8% or $66,000 per year. It is clear from the data that on average Apartment owners have done a good job in installing water conserving fixtures inside apartments, but they have a significant conservation opportunity in the amount of water they use for landscape irrigation.

    On average the fees for the water used in Single Family Residential would be reduced 4.5% or $284,000 per year.

    David Thompson’s concern about protecting the residents of Mobile Home communities is a valid one, and the good news is that under proposed rate model, on average the 6 Mobile Home accounts would see their annual bill rise less than 3%.

  6. I understand what you have written here Matt in response to Alan Miller’s comment but I still think he has a point. It does not matter whether most or all water bills for renters will go down using your formula. I still struggle with the idea that if I begin to rent a place (or purchase a home), I will be paying rates based on the previous occupants’ consumption. This does not make sense. Is there no way to use a formula that quickly builds in their own consumption to calculate the next bill? While I really like the approach you are taking, I thnk there is going to be continued push back on this issue.

    Thanks for the hard work you (and the other WAC members) are putting in on this. Though Davis is being criticized by some for dragging this out, personally I am proud to be part of a community that is attempting to do the right thing. The WAC represents a good model for community processing of complex issues and I appreciate its work (under Elaine Musser’s leadership who I am chagrined to see is not commenting much on the Vanguard at this point).

  7. Robb, when you say the above are you talking about apartment complexes or single family homes that are rented?

    The answer to your “Is there no way . . .” question is, “Yes there is a way, and it is really very simple.”

    One aspect of the way that needs some input is whether it should be automatic and bill/credit both upward variances as well as downward variances. Human nature says that if the new tenant is using more water than the prior tenant, the new tenant will not be very quick to step up and say, “I should be paying more” but if the new tenant is using less water than the prior tenant, the new tenant will be much quicker to step up and say, “I should be paying less.”

  8. Matt – Maybe I am misunderstanding but as I understand it it does not matter whether we are talking renting or homeownership: if someone “new” moves into a place they will be initially charged based on prior consumption in the location. Am I missing something? That is what I am suggesting is a problem. Sorry if I am not quite getting it.

  9. Robb, homeownership changes are very easy to handle. For the typical (is there such a thing) Davis home, the annual amount of outdoor water usage exceeds the amount of indoor water usage, with significant peaking in the summertime. As a result, unless a new homeowner invests in new irrigation technology, the landscape irrigation usage from one owner to the next is likely to be very similar. Our tendency as human beings is to over water rather than under water, so a new owner is likely to do exactly that as they get used to the water needs of their newly acquired landscape. Indoor water use will vary by number of occupants, so a new owner with fewer family members could see indoor water use drop. Since home ownership in Davis is typically a long term endeavor, monitoring actual usage during the first year will be very easy.

    Apartment renters in Davis almost never have individual meters, and therefore the management company gets a large combined bill for the one meter and then allocates the water charges to individual units. Some apartment complexes have dual meters, one for indoor usage and one for outdoor landscape usage. How the landscape billings are handled by the management companies in those cases is not a detail that is available from the billing records, because again, there is only one common meter. Indoor usage from year to year at apartment complexes is pretty consistent (based on what I’ve heard from personal interviews). Because of the economic downturn and increasing tuition and fees, the number of people on a lease has been a bit higher in the past few years as occupants have chosen to add more roommates than they had in years past. However, the management companies know what those occupancy trends are and factor them into their algorithms for passing water charges through to the tenants.

    Regarding billing adjustments for renters, if you had a preference would you prefer to receive a refund/credit at some time during the year, or would you prefer to receive a catch-up bill for water usage that is above the usage level you have been billed for?

  10. Some responses about housing tenure for Matt and others to work with.

    From my work with housing in Davis.

    About 27% of all the single family homes/duplexes in Davis are rentals rather than owner occupied.

    At least 50% of all condos in Davis are rentals with a frequent turnover.

    Annual turnover in market rate rentals in Davis (over 9,000 units) varies from 30-50% per year.

    How does that affect matters.

    David Thompson

  11. David, the bills for all rentals go to the property owner, and I suspect that there is very little turnover of ownership of those units. Therefore the property managers are well versed in handling the water bills. I would expect that most, but not all, pass the water charges through to the tenants.

    All the elements of the answers I gave to Robb Davis above apply. Transitions are really very well delineated because even in a one year period there are currently 6 billing periods, probably soon to be 12 monthly periods.

    Regarding billing adjustments for renters, if you had a preference would you prefer to receive a refund/credit at some time during the year, or would you prefer to receive a catch-up bill for water usage that is above the usage level you have been billed for?

  12. Thank you Matt for your willingness to answer.

    I know you are looking for a fair mechanism.

    However, I am not comfortable that meeting the law in a fair way is going to occur or be possible.

    I get the feeling there will be a legal challenge from one or another group that feels it is not fair to them.

    This all started on the wrong foot with such bluster so there are few people I speak to that trust how it will turn out.

    David

  13. David T : The city rates are unconstitutional The WAC now has evidence of at least one way the water rates violate the law. I am fairly positive the sewer rates also violate the law.

    Like I say, the only interesting thing is can we make the city disgorge the ill gotten gains and pay the victims back ? I have a feeling the answer is yes.

  14. You know, Saylor Souza and friends really wrecked this city in so many ways. I hope the new CC can clean up the budget debacles, the disaster in the public utilities department, and actually become a fun place again.

    Speaking of fun, a rates case will give me depositions of the staff and consultants who set us up for the rates in effect before September 6, 2011, though to current. Audit time!

  15. So to clarify, Michael: you have a vested interest in this conflict and stand to profit from a lawsuit seeking damages. You are seeking plaintiffs on a public blog in order to reap thousands of dollars of Davis taxpayers and ratepayers money. Am I correct?

  16. Don: Sorry you are so upset that you didn’t get your 20 mgd plant or those Sept 6 rates On this issue you just don’t have any pull with me, as much as I respect your views on other things. But you made your record in public, and here we are

    The sky did not fall

    We have saved money, not suffered the $50 million extra cost you and ERM swore would be on my head

    Etc etc etc

  17. Mike: I asked a really simple question. Maybe I can make it simpler.
    [b]Are you doing this pro bono?
    [/b]Any answer other than “yes I am doing it pro bono” means my statement stands:
    [i]You are seeking plaintiffs on a public blog in order to reap thousands of dollars of Davis taxpayers and ratepayers money[/i].
    All your other words are evasions.
    If you want to seek plaintiffs, I suggest you contact David Greenwald about advertising rates on the Vanguard.

  18. Mike: why don’t you answer my question? [b]Are you doing this pro bono?[/b]
    How much are your fees?
    Do you get a contingency?
    What is your personal financial interest in this?

  19. Don: I think your question is unnecessary here. No one is going to hire Harrington to sue on this, he’s going to have to sue on his own behalf. You would then have to look up the law to see if he is entitled to attorney fees if he prevails.

  20. Ryan: I dont owe you or Don an explanation for anything. I do something, or nothing. I charge; or I don’t. It’s my business.

    I don’t attack either of you for your own pecuniary interests in the outcome of this public policy matter.

    We just have to disagree on the policy; it’s not personal.

  21. David: “[i]Don: I think your question is unnecessary here.[/i]”

    I think Don’s questions are perfectly legitimate and should be asked here, [b]by you[/b]. Any monies recovered through a lawsuit will simply be coming out of one pocket of the taxpayers and going into another, with a large fraction taken our for legal fees. Michael and his ilk will be the only winners as the taxpayers and ratepayers will simply lose. I call this sort of action public extortion and it should be condemned by all.

  22. More evasive answers from Mike. Now, an attack. (He forgets that he did attack me and accused me of benefiting financially from the water project in earlier posts.) I do think that Don is on the right track and his questions are legitimate.

  23. [i]”I don’t attack either of you for your own pecuniary interests in the outcome of this public policy matter.”
    [/i]
    The only ‘pecuniary interest’ I have is that my income, along with that of other local landscapers and maintenance gardeners, would be severely affected by an artificially contrived water shortage.

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