Developing a Rate Structure that Addresses the Financial Consequences of SBx7-7

Association of California Water AgencyFall 2010 Conference

December 1, 2010

2ACWA - Fall 2010

Agenda

What is the Water Conservation Act of 2009 (SBx7-7)?

Reporting RequirementRevenue Stability & Conservation

Are we stabbing ourselves in the back? What other concerns do we have?

Developing the Approach that Meets Agencies’ Goals & Needs

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3ACWA - Fall 2010

What is SBx7-7?

In November 2009, the California State Senate enacted SBx7-7 ◦To increase water use efficiency by setting an overall

goal of reducing urban water per capita use by 10% by 2015 20% by 2020

◦Water agencies may achieve these reductions individually or regionally

◦A detailed plan on how a retail agency will achieve these reductions must be included in their 2010 Urban Water Management Plan

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4ACWA - Fall 2010

Methods to Set Targets

1. 95% of 2020 Hydrologic Region Target:

2. 80% of Baseline

3. Water Budget

4. Method 4 TBD by DWR by December 2010

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5ACWA - Fall 2010

DWR’s Guidelines “Methodologies for Calculating Baseline and

Compliance Urban Per Capita Water Use” October 1, 2010 http://www.water.ca.gov/wateruseefficiency/sb7/docs/methodologies-urban-per-capita-water-use-10042010.pdf

“20x2020 Water Conservation Plan” February 2010 http://www.water.ca.gov/wateruseefficiency/sb7/docs/20x2020plan.pdf

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6ACWA - Fall 2010

The Financial Consequence of SBx7-7

For most agencies, as demand decreases, revenues fall more than the monetary benefit in water savings costs◦Rates increases are required to offset the

decline in revenues Politically challenging and not well received by the

public and Elected Officials

The key is to develop a rate structure that anticipates the decline in revenues

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7ACWA - Fall 2010

Options for Developing an Appropriate Rate Structure

Fixed Cost = Fixed Revenue (1)• Cover all water agency costs in the fixed

monthly revenue • The variable cost includes expenditures for

producing and purchasing imported water• Hedge away the risk of lower water sales

Fixed Cost on Reliable Water Sales (2)• Determine the amount of water that will be

sold under SBx7-7 and develop a revenue strategy based on that portfolio

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8ACWA - Fall 2010

Other Considerations

Other factors to be considered:◦Customer Understanding

◦Administrative Ease

◦Affordability for low water users and essential uses Under Proposition 218, a lifeline rate is not an option

◦Equity associated with peaking costs◦Encourage conservation / water use efficiency

Who should cut back and by how much?

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9ACWA - Fall 2010

EquityWater is one of the most capital intensive commoditiesCustomers do not pay for water - they pay for the

transportation and treatment of waterWater demand is highly seasonal

◦ Water system is designed for the hottest day + fire

◦ This creates idle capacity in the system during the colder months

Who should pay for this idle capacity?◦ Everyone?

◦ Only the customers that use additional water during the summer?

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10ACWA - Fall 2010

Equity

December 1, 2010

Individual Customers have different peaking factor

Customer Ave Winter (ccf) Ave Summer (ccf) Summer / WinterNon-peak # 1 10 11 117%Non-peak # 2 25 27 105%

Peak # 1 6 54 947%Peak # 2 9 91 971%

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Cover all water agency costs in the fixed monthly revenue

The variable rate includes the cost to produce and purchase imported water◦Hedge away the risk of lower water sales

December 1, 2010

Option I: Fixed Cost = Fixed Revenue

12ACWA - Fall 2010

1. Determine the amount of water sales within the requirements of SBx7-7

2. Allocate the amount of water to each customer

◦ Inclining rate structure Example: Cucamonga Valley Water District

◦Water budget rate structure Example: El Toro Water District

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Option 2: Fixed Cost based on the Reliable Sales of Water

13ACWA - Fall 2010

Creating Revenue Stability

Collect the remaining fixed costs from usage in the lower tiers

Customers who are above their allocation will be asked to reduce their consumption◦The rate structure is aligned with the goals of

meeting SBx7-7 compliance◦ Inclining rate structures focus on larger water

users◦Water budget rate structures focus on inefficient

water users

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14ACWA - Fall 2010

Tiered Rates

December 1, 2010

Block width varies by meter size

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Water Budget Rates

The tier widths are individualized for each account

A typical water budget takes into account:◦An indoor allocation based on household size ◦An outdoor allocation based on the landscaped

area and weather conditions◦Example: El Toro Water District

Indoor: 4 people per household & 60 gallons per capita per day = 10 hcf per month

Outdoor: Actual weather and 70% *(lot size – foot print of the house)

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16ACWA - Fall 2010

Water Efficiency

No change in lifestyle

Reducing water waste

Appropriate water use

Water Conservation

Lifestyle adjustments

Reducing water usage

Restricting water use

Conservation & Efficiency

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17ACWA - Fall 2010

Inclining BlockPros+Easy to administer+Sends clear conservation signal+Addresses affordability for basic

needs

Cons-Targets larger water users and

doesn’t focus on efficient use of water High water use = wasteful water

use- Equity concerns

Penalizes large families / lots Exacerbated during drought pricing

Water BudgetPros+ Provides water efficiency targets

Addresses equity concerns for large families / lots

+ Properly allocates drought penalty rates

+ Addresses affordability for basic needs

Cons- Higher administrative costs

How is efficiency defined? Billing system update required Proactive Public outreach Increases staff for customer

service (implementation phase)

Conservation Rate Structures

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18ACWA - Fall 2010

Case Study: El Toro Water District (ETWD)

Tiers Current Rates

Adopted Rates

Water Supply Delivery Conservation Offset Total

Indoor Use $1.89 $1.86 ($0.06) $1.80

Outdoor Use $1.89 $1.86 $0.34 $2.20

Inefficient Use(50% of total

budget)$1.89 $3.80 $0.34 $0.24 $4.38

Excessive Use $1.89 $5.70 $0.24 $5.94

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19ACWA - Fall 2010

Outcomes of Water Budget: ETWD

62% of the customers will see a reduction in their bill, if we did not have to increase revenue requirements.

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20ACWA - Fall 2010

Which Criteria Do You Care About?

Criteria Fixed Cost = Fixed Revenue

Inclining Rate -Fixed Cost on Reliable Sales

Water Budget – Fixed Cost on Reliable Sales

Customer Understanding

Easy to Administer

Revenue Stability

Affordability

Equity

Encourage Conservation

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21ACWA - Fall 2010

Contact Info

Sanjay GaurManager Raftelis Financial Consultants201 S Lake Av. Ste 301Pasadena, CA 91101

Cell: 213 327 4405Fax: 626 583 1411Email: sgaur@raftelis.com

December 1, 2010