City water rate study, version two

February 8, 2018 by Fred Allebach

The City of Sonoma has hired Raftelis Financial Consultants Inc. to do a water rate study. Documents and background information pertaining to this study can be found on the City website; type water rate study into the search box and explore the links. The economic bottom line for water rates, or any other public infrastructure financing, is how the system is going to pay for itself, who will be paying, and how the money gets allocated.

For the City, there are different possible rate structures, going from flat rate, to uniform rate, seasonal rate, inclining tiered rate, to a water budget, or per capita use rate. Each of these rate structures has pros and cons. A critical consideration: what is most fair overall? Which rate type can most legally, equitably and economically pay for the system over time?

Rate structures go on a scale from regressive to progressive, the same as taxes and health care. Regressive rates hit little guys more than big guys, progressive hits big guys more than little. What is most fair may be in the eyes of the beholder, but also according to the statewide San Capistrano court ruling, high volume users cannot be forced to progressively subsidize lower volume users. All rate payers now must pay their fully burdened share, more like a flat rate.

In California, a state prone to drought and also vulnerable to the effects of anthropogenic climate change, water is a precious resource. A critical water management goal here is to work in incentives for conservation. Here is where fixed system costs and the need for revenues bump up against needs for conservation, and fairness/affordability considerations. “Every degree of fairness creates a degree of complexity” said the City’s water lawyer.

For example, some rates may encourage weak conservation and also be less affordable for low- and fixed-income customers; other rates may be tiered to reward conservation and low volume users. High volume use customers may feel it is unfair they have to pay more. In fact, VOMWD high-use customers threatened a lawsuit based on San Juan Capistrano which resulted in higher rates for low-volume users. What is a “fair share” here? With no subsidies, less wealthy rate payers pay a fully burdened share, i.e. more. High water users pay less and have less incentive to conserve.

All water agencies have a built-in dilemma: conservation and affordable rates result in less revenue for their systems to operate. More conservation = less volume used = less revenue. Approximately 70% of city water system costs come from volumetric revenue. With fixed costs that mostly don’t change, this puts the city at a loss when less water is used.

At the end of the day, making low volume users who are trying to conserve water pay more is less fair, but the courts have said water agencies must do it. Hence the outrage at VOMWD. For the City, lifeline rates could be subsidized with transfers from other non-rate payer funds, and justified by the California Water Code, Section 106.3, wherein the state statutorily recognizes “every human being has the right to safe, clean, affordable, and accessible water adequate for human consumption, cooking, and sanitary purposes.” The human right to water extends to all Californians regardless of income level.

The rate study shows that the rate setting process has internally competing goals that have to be balanced. Affordability and conservation balance against the law, infrastructure investment and financial/revenue stability. A price structure that values conservation is less stable. Choosing for more revenue stability can mean higher rates and more hardship for retired seniors and others on low and fixed incomes, people known as essential users.

After the last drought, Governor Jerry Brown made sure to say that California “water conservation is a way of life.” Encouraging conservation in times of apparent plenty, however, can be difficult. When the last drought ended, Sonoma water use went up drastically. In the past decade, Sonoma has been a top per capita water user in the county. Efforts at conservation do not seem to be working.

For City municipal water users, most water use goes to irrigation. This supports a large, local landscaping and maintenance industry. Wealthy Sonoma homeowners are able to pay for these water and maintenance costs. Tourism also pays a part in Sonoma’s high water use. Water managers seem to view drought as a periodic inconvenience addressed at the time, after which all can go back to business as usual. Managers ramp up the “conservation signal” when necessary.

For setting new rates, water system maintenance, management and infrastructure needs to have a predictable revenue stream, and this has to be balanced against affordability and conservation. Rate structures have to meet all of the system’s needs. High and low revenues have to be anticipated in different seasons, and reserve funds stashed away.

The City is not expected to grow that much in the future, but growth will occur. Trends indicate more city affluence and progressively less water overall in California; water rates can reasonably be expected to rise over time. My forecast is for more people to pay more for less water. A precious resource cannot be seen as cheap. System costs will remain as a relative constant. Drought and climate change are California facts. Sonoma is at the end of the pipeline of Russian River water from a whole other watershed. Conservation and growing costs are facts that city ratepayers will have to deal with.

More water rate hearings by Raftelis will be forthcoming. They are usually not public, but water rate issues are public now, probably because of City Council candidate Chris Petlock’s efforts. Says Petlock, “All water users in Sonoma are being illegally charged to support other government activities, making water less affordable; the cost allocation & rate study should make water more affordable.”