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

1. Developing a Rate Structure that Addresses the Financial Consequences of SBx7-7 Association of California Water Agency Fall 2010 Conference December 1, 2010

2. Agenda • What is the Water Conservation Act of 2009 (SBx7-7)? • Reporting Requirement • Revenue Stability & Conservation • Are we stabbing ourselves in the back? • What other concerns do we have? • Developing the Approach that Meets Agencies’ Goals & Needs ACWA - Fall 2010

3. 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 ACWA - Fall 2010

4. Methods to Set Targets • 95% of 2020 Hydrologic Region Target: • 80% of Baseline • Water Budget • Method 4 TBD by DWR by December 2010 ACWA - Fall 2010

5. 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 ACWA - Fall 2010

6. 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 anticipatesthe decline in revenues ACWA - Fall 2010

7. Options for Developing an Appropriate Rate Structure ACWA - Fall 2010

8. 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? ACWA - Fall 2010

9. Equity • Water is one of the most capital intensive commodities • Customers do not pay for water - they pay for the transportation and treatment of water • Water 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? ACWA - Fall 2010

10. Equity Individual Customers have different peaking factor ACWA - Fall 2010

11. Option I: Fixed Cost = Fixed Revenue • 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 ACWA - Fall 2010

12. 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 • Option 2: Fixed Cost based on the Reliable Sales of Water ACWA - Fall 2010

13. 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 ACWA - Fall 2010

14. Tiered Rates Block width varies by meter size ACWA - Fall 2010

15. 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) ACWA - Fall 2010

16. Water Efficiency No change in lifestyle Reducing water waste Appropriate water use Conservation & Efficiency Water Conservation • Lifestyle adjustments • Reducing water usage • Restricting water use ACWA - Fall 2010

17. Inclining Block Pros +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 Budget Pros + 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 ACWA - Fall 2010

18. Case Study: El Toro Water District (ETWD) ACWA - Fall 2010

19. 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. ACWA - Fall 2010

20. Which Criteria Do You Care About? ACWA - Fall 2010

21. Contact Info Sanjay Gaur Manager Raftelis Financial Consultants 201 S Lake Av. Ste 301 Pasadena, CA 91101 Cell: 213 327 4405 Fax: 626 583 1411 Email: sgaur@raftelis.com ACWA - Fall 2010