Water Rate History: System analysis needs to begin with system scope.

1. Water Rate History:System analysis needs to begin with system scope. One element of scope for rate changes is time, another is geography. At the 2/24/2014 meeting I noted that the need for high water rate increases beginning in the most recent five years was due to artificial restraint of rates from 1996 to 2009. In the these13 years the netrate increase in the Pumped Zone was 5.6% while national water cost increased by an average of 82%. Following a break in the meeting Director Prada stated briefly that there were four rate “hikes” In that 13-year period . This demonstrates Director Prada’s overriding focus on rate “hikes” without regard to context. It also neglects two rate decreases in that period, the larger being a 13.3% decrease in 2001 in the Pumped Zone. The analytically important result is what I stated: The most basic cause for needing recent –years’ high rate increases was inappropriate restraint of rates below levels needed to meet operating costs. Because of Present-Value considerations, what matters is not only how much rates changebut also when they change. The largest deviations from balancing operating revenues with operating expenses result from compounding early deviations over time. The main part of the earlier problem occurred in the first 8 years of the 13-year period. In four of the last five years the board used a 5% annual increase to adjust for cost inflation. If this had begun in 1996 it would have been excessive. Beginning in 2004, it was insufficient to make up for the preceding cumulative shortage in Operating Revenues.

2. Water cost scoping involves geography and industry. Graphs on the next two pages show two points. One is that consumer costs for water, sewer, and trash services have risen much more rapidly than overall consumer costs. Another is the mathematical nature of the consecutive-year increases. • Inflation in overall consumer costs (the CPI-U “All Items” index) has been growing as a linear function of time. Each year an approximately constant amount is added to overall consumer costs. • Inflation in water/sewer/trash costs has been growing as a quadratic function of time. Each year’s cost growth multiplies the preceding year’s costs by an approximately constant factor. Similar cost growth is evident in data from multiple rate surveys for (at least) the States of California and Massachusetts. Data to date are consistent with a hypothesis that cost factors affecting water agencies are common to most water agencies throughout the nation and throughout California. If that hypothesis holds true, as seems likely, EID directors who campaigned on an argument that “There’s something wrong with EID” need to recognize that their complaint is national in scope. They cannot fix their focal problem (rates) by “fixing EID”.

3. Comparison of national inflation in Water, Sewer, and Trashconsumer costs with all consumer costsQuantified as percentage of 1996 costs for both indices Detail cost index in CPI-U tables for “water, sewer, & trash” Trend line is quadratic (order 2 polynomial) Annual increase is multiplicative Overall CPI-U cost index for “all items” Trend line is linear: Annual increase is additive

4. National inflation in Water, Sewer, and Trash consumer costsrelative toall consumer costs (CPI-U “All Items”)[graphed with the domain transform to relate to“constant 1996 dollars” for All Items] NATIONAL CPI-U detail cost index for water, sewer, & trash NATIONAL CPI-U index for “All Items”, constant 1996 dollars

5. Checking a different region:Massachusetts The next page includes a bar graph of average customer rates in Massachusetts, for retail rates set by over 60 cities and agencies. Two subsequent pages merge traces of the MWRA data, the CPI-U data, and EID data.MWRAis the Massachusetts Water Resources Authority, a water wholesaler. Its Advisory Board publishes an annual survey of its customers’ retail water costs for consumptionof 1,200 cubic feet per month (2,400 cf bimonthly). In the MWRA survey, this bar graph tracks customer costs since 1991. Two subsequent line graphs combine CPI-U data, MWRA data, and EID data. They show that increases in MWRA retailers’ average customer costs are nearly identical to increases in the CPI-U index of average customer costs or water, sewer and trash services. High customer cost growth has beenmeasured in California, Massachusetts and the nation as a whole. It’s not unique to EID.

6. MWRA 2012 Water & Sewer Retail Cost Surveywith 1991-2012 data historysurvey by Massachusetts Water Resources Authority Advisory Boardbased on1,200 cf water consumption monthly (2,400 cf bimonthly) Copied directly as an image from one page in the 2012MWRA Advisory Board report.

7. Comparison of EID water+sewer annual costs withMWRA retailers water+sewer annual costsand CPI-U water+sewer+trash detail index MWRA: 1,200 cf water monthly [2,400 cf bimonthly] , sewage flow not stated in data source [This is approximately equivalent to EID’s “Medium” water usage case; inside usage is similar, Massachussetts has more natural rainfall and less landscape irrigation.] EID: 2,400 cf water bimonthly [1,200 cf monthly] , 1,800 cf wastewater bimonthly [900 cf monthly]

8. Change relative to 1996 in constant dollarsadjusted for inflation by the CPI-U All Items index. Graph shows: • MWRA (Massachusetts Water Resources Authority) water + sewer • EID Water + Sewer • EID Water • National CPI-U detail index for water + sewer + trash MWRA: 1,200 cf water monthly [2,400 cf bimonthly] , sewage flow not stated by data source.[This is approximately equivalent to EID’s “Medium” water usage case; inside usage is similar, Massachussetts has more natural rainfall and less landscape irrigation.] EID: 2,400 cf water bimonthly [1,200 cf monthly] , 1,800 cf wastewater bimonthly [900 cf monthly] *The CPI-U detail index plot is scaled to make its 1996 value identical to the 1996 MWRA costs, for direct comparison between costs in the nation as a whole and in a region other than California.