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FROM: WATER COMMITTEE Costa
Supervisor Gayle B. Uilkema, Chair County
Supervisor Joe Canciamilla 4"
DATE: OCTOBER 14, 1997
SUBJECT: WATER COMMITTEE REPORT ON COMPILATION OF WATER RATE ISSUES
FOR THE AD HOC COMMITTEE ON EBMUD RATE STRUCTURE
SPECIFIC REQUEST(S) OR RECOMMENDATION(S) & BACKGROUND AND JUSTIFICATION
RECOMMENDATIONS
1. Accept report from Water Committee regarding testimony on EBMUD water rate
structures.
2. Recommend that the Ad Hoc Committee on EBMUD rate structure consider
receiving additional testimony in view of the extremely short period of time which
was available to solicit responses from affected cities and unincorporated regions.
FISCAL IMPACT
None
BACKGROUND/REASONS FOR RECOMMENDATIONS
On October 6, 1997 the Board's Water Committee met to solicit comments from the
community on rate structures, specifically the tiered rate structure in place at the East Bay
Municipal Utility District (EBMUD). Prior to the meeting, cities within EBMUD's district
were requested to forward their positions regarding EBMUD rates. The request was also
made at the Mayor's conference in Pinole on October 1, 1997. In accordance with the
September 23, 1997 Board report on this subject, response to the above inquiries is being
forwarded to the entire Board prior to the first Ad Hoc Committee meeting.
CONTINUED ON ATTACHMENT: ✓ YES
RECOMMENDATION OF COUNTY ADMINISTRATOR _V RECOMMENDATION OF BOARD COMMITTEE
APPROVETHER
SIGNATURE(S):
Supervigar Gayle B. Uit ema, Chair Supervisor Joe Canciamilla
ACTION OF BOARD ON October 14, 1997 APPROVED AS RECOMMENDED x OTHER_
VOTE OF SUPERVISORS
I HEREBY CERTIFY THAT THIS IS A TRUE
x UNANIMOUS (ABSENT -------- ) AND CORRECT COPY OF AN ACTION TAKEN
AYES: NOES: AND ENTERED ON THE MINUTES OF THE
ABSENT: ABSTAIN: BOARD OF SUPERVISORS ON THE DATE
SHOWN.
Contact: Roberta Goulart (510/335-1226) ATTESTED October 14. 1997
Orig: Community Development Department (CDD) PHIL BATCHELOR, CLERK OF
cc: County Administrator Office THE BOARD F SUPERVISORS
AND ADM NIST R
BY
r/:aw Christine Wampler
J:\groups\cdadpool\maqorie\water.bo
• v
WATER COMMITTEE REPORT ON COMPILATION OF WATER RATE ISSUES FOR THE AD HOC
COMMITTEE ON EBMUD RATE STRUCTURE
October 14, 1997
Page 2
BACKGROUND/REASONS FOR RECOMMENDATIONS (continued)
Written responses were received from:
City of Orinda: see attached resolution
City of Hercules: see attached letter September 30, 1997
Town of Moraga: see attached letters July 7, 1997 and December 1, 1995
City of Lafayette: letter October 6, 1997
WATER: written comments and exhibits provided as part of oral testimony at
Water Committee (and attached)
Oral testimony was received from:
Don Bradley, City Manager for the City of Pinole, who stated that the City
is in general support of the current rate structure.
Gwen Regalia, City Council, City of Walnut Creek. Ms. Regalia indicated
that the City of Walnut Creek has opposed the tiered water rate system since its
inception years ago. Ms. Regalia commented that she has worked with WATER (a
Central County group of ratepayers actively opposing tiered rates), has testified at
EBMUD twice, and has testified on behalf of then-Assemblyman Rainey's bill
regarding EBMUD rates. Ms. Regalia commented that (we) realize that people in
Walnut Creek live in a hotter climate , and that (we) use more water. People are
willing to pay more money for higher volume use, but do not wish to be held up at
gunpoint, instead favoring a rational, reasonable water rate system. She
emphasized that Walnut Creek is one of the most responsible water conserving
areas in EBMUD's district, and wished to go on record (speaking for herself,
although she has had city council support for this in the past) in support of the pursuit
of a more equitable system, and that she wished the Ad Hoc Committee well in this
endeavor.
Scott Denney, Senator Richard Rainey: Mr. Denney indicated that Senator
Rainey had been informed on the purpose and intent of the Ad Hoc Committee and
wished to express his support.
Bill Highfield, WATER: Mr. Highfield's comments are provided in the written
testimony section of this report.
John Nejedly, former State Senator: Mr. Nejedly's comments are contained
in the written testimony section of this report.
a � •
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10/02/97 13:38 `b' CITY OF ORINDA Q001/002
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OCT 0 2 1997
SUPERVISOR UILKEMA
BEFORE THE CITY COUNCIL OF THE CITY OF ORINDA
In the Matter of:
i .
I_ East Bay Municipal Utility )
District Rate Setting Policy ) RESOLUTION NO. 36-95
WHEREAS, the Orinda City Council recognizes the duty of East
Bay Municipal Utility District (EBMUD) to conserve water resources
by controlling waste, protecting against overuse and abuse, and
encouraging water conservation; and
WHEREAS, EBMUD has a duty to preserve water for our children
and future generations. River, lakes springs, and other water
resources are all part of our national heritage; and
WHEREAS, there are warm weather and cool weather areas within
the jurisdiction of EBMUD; and
WHEREAS, customary and usual water usage varies in each area
within the jurisdiction of EB1UD in part because of the varying
weather patterns; and
WHEREAS, citizens in each area, notwithstanding weather
patterns, are entitled to equivalent landscaping as is reasonably
prudent; and
WHEREAS, citizens throughout the District have a
responsibility to lessen their usual and customary water usage
through the use of prudent conservation policies, including the
practical use of drought resistant plants and effective water
irrigation systems; and
WHEREAS, even though such conservation policies have been
implemented throughout the District, certain areas will still
require more water because of the climate; and
WHEREAS, cities, counties and other governmental entities use
� . % large quantities of water to provide parks and recreational areas
for the use of all citizens within the use of the jurisdiction of
EBMUD; and
WHEREAS, the City of Orinda recognizes that EBMUD has the
direct responsibility to set rates to encourage water conservation;
and
Post-ft-brand fax transmittal memo 7671 F#--1 Pa"s
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WHEREAS, the Orinda City Council recognizes that EBMUD has to
be fair and reasonable to all water users within its jurisdiction
when it sets the rates;. and
WHEREAS, the Orinda City Council recognizes that EBMUD must
set its rates to encourage the reasonable use of water, and to f
further encourage water conservation.
NOW, THEREFORE, BE IT RESOLVED that the Orinda City Council
hereby respectfully requests the Board of Directors of EBMUD to
reconsider its proposal to set a uniform rate for all water users
without taking into consideration fluctuations of climate as it
varies throughout its jurisdiction.
PASSED AND ADOPTED by the City Council of the City of Orinda
at a regular meeting of said Council held on May 16, 1995 by the
following vote:
AYES: COUNCILMEMBERS: Abrams, Littlehale, Tabor,
Wheatland, Hawkins
NOES: COUNCILMEMBERS: None
ABSENT: COUNCILMEMBERS: None
/Jo ce wkins, Mayor
ATTEST: /
Mary R. llsworth, City Clerk
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OCT-03-1997 14:25 CITY OF HERCULES 510 799 2521 F.02/02
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CITY OF HERCULES
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y 111 CMC DRIVE; HERCULES, CA 94547
PHONE: 510. 799 •8200 �.. : y C i
September 30, 1997 OCT a 3 1997
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SUPER` ISU: UILKE AJr1
Supervisor Gayle B. Uilkema
Contra Costa County
Supervisorial District Two
County Administration Building
651 Pine Street, Room 108A
Martinez, CA 94553-1293
Dear Supervisor Uilkema:
We are in receipt of your letter of September 23, 1997 with respect to the proposed
Ad Hoc Committee's work relative to the issue of EBMUD's tiered water rate
structure.
Thank you for your personal efforts to insure that your local jurisdiction served by
EBMUD has an oppomuiity to express their position regarding the proposed tier
water rate structure.
At this time Hercules has not taken a formal position with respect to EBNf D's
proposed tiered water rate structure. I expect that the item will be on our upcoming
October 14, 1997 City Council meeting agenda for discussion of a possible
position. Regretfully, we are unable to provide you with information prior to your
October 6, 1997 meeting. However, upon our consideration of this issue I will
quickly convey the position taken by our City Council.
Thank you again for your request for input.
Sincerely,
Ken S. Hobbs
City Manager
cc: Mayor& City Council
Connie Jackson, Asst. City Manager
KSH/sjm
10/06/97 13:33 FAX 1 510 376 2034 TOWN OF MORAGA Z003
5 Corte Fresea
Moraga, CA 94556
510-283-4918
July 7, 1997
Honorable Katy Foulkes
Director, Ward 3
East Bay Municipal Utility District
375 Eleventh Street
Oakland, CA 946074240
Re: Applicability of Proposition 218 to EBMUD Rate Increases
Dear Katy:
I thank you and the EBMUD staff for hosting the breakfast meeting for elected officials within your
ward on June 26, 1997, at the Masonic Lodge in Orinda. I found the meeting very informative and
commend General Manager Dennis Diemer and his staff on the quality of their presentations.
I would like to bring to your attention as Moraga's elected representative on the EBMUD board a
policy issue which surfaced at the meeting. I believe*this matter requires EBMUD board action.
As you will recall, I asked during the meeting whether EBMUD's proposed rate increases to cover
the District's $189 million seismic retrofit program would be subject to the applicable"voter consent"
provisions of Proposition 218 (i.e., majority approval by mailed-ballot voting on assessment increases
and majority protest rights on fee increases). As explained to us, the District is paying for this
discretionary capital project by levying assessments on the water meter installed on each customer's
property. As I indicated, the increased assessments the District is imposing to fund this project seem
to be precisely the type of new or increased fees that are"an incident of property ownership,
including user fees or charges for a property related.service"that are covered by Proposition 218.
Mr. Diemer's response was that EBMUD's legal staThas determined that increased assessments and
fees on ratepayers for the seismic project(and presumably other capital projects) are not covered by
Proposition 218 because property owners within the District can elect not to pay the assessments by
electing not to have a water meter on their property(and thus not have water service). Since
ratepayers presumably have this choice, EBMUD feels it is exempt from Proposition 218 -- even
though increased assessments for water service are specifically mentioned in this ballot measure.
I find the District's reasoning and position on this matter dubious for several reasons. First, EBMUD
has an exclusive franchise to supply water within its service territory and operates as an unregulated
monopoly. I can assure you that property owners in Moraga do not feet they have a choice when it
comes to paying increased assessments, fees, and charges imposed by E13MUD for water service.
Indeed, when a group of East-of-the-Hills ratepayers objected last year to the tiered rates, the only
recourse they had was to mount a succession movement. They could not legally protest the charges,
nor could they obtain service from another supplier. Secondly, gas and electric service (but not
water) are categorically exempted from Proposition 218. Presumably, this is because there is (or
soon will be)residential competition for these services. Thus, unlike water, property owners have
real choices for gas and electric service. Finally, to ensure that taxpayers are given the bencfit of
doubt,the text of Proposition 218 says: "The provisions of this Act shall be liberally construed to
effectuate its purposes of limiting local government revenue and enhancing taxpayer consent."
a � •
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10/06/97 13:34 FAX 1 510 376 2034 TOWN OF MORAGA 0 004
Honorable Katy Foulkes
page 2
7/7/97
Given these facts, why has the District chosen not to comply with the spirit and intent of this voter
mandate? By taking a position that is contrary to the drafters' intent and deprives voters of their full
rights, the District risks creating(or furthering) controversies -- and lawsuits-- by its ratepayers.'
For instance, as noted at our meeting on June 26, most of the costs of the District's $189 million
seismic retrofit program will only benefit property owners West-of-the-bells. Indeed, the big ticket
items in this project -- strengthening the Claremont Water Tunnel and constructing the Southern
Loop Pipeline-- are exclusively for the benefit of West-of-the-Hills property owners. Yet, as I
understand the Distr'ict's method for financing this program, the total project costs are be assessed as
increased meter fees charged on a uniform basis across the District's entire service territory. This
cost allocation scheme seems to have East-of-the-Hills property owners paying disproportional
higher assessments than justified by the benefits they derive from the project.'
If the District were following the tenets of Propositions 218, the District's current method of
assessing capital charges for its seismic program would be illegal, since all assessments, fees and
charges must be imposed such that costs are proportional to benefits. Furthermore, even if a valid
cost allocation scheme were devised, any proposed increases in assessments on water meters to fund
the project would have to be approved by a majority of property owners in a mailed-ballot election.
These same two issues-- property owners' approval for property-related assessments and majority
protest rights on cost allocation schemes -- arise with respect to the District's proposed $310 million
capital project for securing additional water supplies from the American River. As I understand the
District's proposed financing plan for this project, 70% of the capital costs will be allocated to new
water users(through increased System Capacity Charges) and 30%will be allocated to existing
ratepayers (as a component of general rate increases). What is the basis for the 70/30 allocation?
Why shouldn't new users pay 100% of the costs for this new more expensive supply? Why aren't
current ratepayers being given the opportunity to approve(or protest) the$93 million in capital costs
that the District will recover from them by imposing higher fees and charges for water service?
Lag but not least, Proposition 2I8's requirement that all "existing, new or increased fees and
charges" for a property-related service must be"proportional to the cont of service" draws into
question the fairness (and legality) of EBMUD's controversial tiered rate structure for water service.
Unless the District can show that its tiered rates are truly cost-related, this rate structure-- which
many ratepayers feel discriminates against East-of-the-Hills property owners-- should be revised.
t The District's legal department is advocating the narrow-commodity approach" interpretation of Proposition 218.
The broader interpretation is the"delivery approach,"which enhances voters' rights and is the interpretation intended
by the drafters of Proposition 218. (See League of California Cities Proposition 218 Implementation Guide,January
1997,pp.46-49,and accompanying"Statement of Drafters'Intent.") A key campaign issue for me in November's
elections was advocating that voter initiatives be given broad interpretation consistent with the drafters' intent.
2 In contrast to the uniform District-wide assessments charged for the seismic program.,the District's System Capacity
Charges,which are used"as a furans of assessing new water customers an appropriate share of the costs of capital
improvements,"vary by geographic region to reflect"variations in costs for providing new service." The assessments
charged for East-of-Hills regions arc 2 to 4 times higher than the assessments charged for West-of-Hills regions.
P ♦ •
` lU/UU/97 13:34 FAX 1 510 376 2034 TOWN OF NORAGA zoos
Honorable Katy Foulkes
page 3
7/7197
By enacting Proposition 218 last November, the voters of the state"shifted more of the power of
taxation from locally elected governing boards to residents and property owners."' Local
government agencies"now have very little authority to raise funds without a vote of the residents or
property owners."' As city-level elected officials, we have had to accept this change in municipal
governance and subject our actions to greater voter oversight --whether we like it or not.'
Rather than trying to place itself above the law, the EBMUD board should accept similar voter
oversight on its actions. So long as the District remains a monopoly service provider, it should give
its ratepayers their full rights by adhering to the voter-mandated provisions of Proposition 218.
I am submitting a copy of this letter to Moraga's mayor, and hereby request that Mayor Majchrzak
agendize this issue for discussion and action at our Town Council meeting on July 14, 1997. At this
meeting, I will request that our Council consider and adopt a resolution encouraging the EBMUD
board of directors, as matter of public policy, to.-
(1)
o:(1) consider all fixed charges imposed on ratepayers to finance capital projects for
water service to be"assessments" subject to the provision of Proposition 218;
(2) consider all fees and charges for water service to be"property-related fees"
subject to the provisions of Proposition 218; and
(3) make all financing, cost allocation, and ratemaking decisions for water service
in accordance with the requirements of Proposition 218.
If Moraga's Town Council approves this resolution, I will request that it be forwarded to the Contra
Costa County Mayors' Conference for consideration and endorsement by that body, before it is
forwarded to the EBMUD board for your consideration. Thank you for your attention.
Sincerely,
Ronald I Enzweiler
Towncouncil Member
Town of Moraga
cc: Mayor Mike Majchrzak
3 Understanding Proposition 218,Legislative Analyst's Office,Elizabeth G. Hill.December 1996,p. 13-
4
Ibid.,p. 15.
' I personally support the seismic program(but charges should be aligned with benefits),the American River Project
(subject to acceptable environmental mitigation and a voter-approved financing plan),and the tiered rate structure(if
legal)to promote conservation. My concern is the lack of compliance with Proposition 218 in how these matters are
being handled by the District and the precedent that will be set if this noncompliance is not addressed at this time.
a s •
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10/06/87 13:32 FAX 1 510 376 2034 TOWN OF NORAGA _ Z002
Zown of Morasa
1907
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2100 nor*ALn nRIVE
P.O. SC1X 1.88
MORAGA. GA 9455G
(510)376•:4690
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December 1, 1995
Mr. John Gioia, Chair
East Bay Municipal Utilities District
P. O. Box 24055
Oakland, CA 94607
Dear Mr. Gioia and Members of the Board:
Your current deliberations concerning the water rate
structure have prompted me to write this letter. During
your discussions we ask that you set rates based upon a
basic sense of fairness, taking into account all of the
factors concerning water use. As you are well aware,
climate conditions in the eastern part of the District call
for additional water use by most customers as part of their
daily basic need. We believe the basic tier for water
usage must account for the average, conservative customer
in the most severe climates of the district.
Here in Moraga, we are also concerned that communities
in the eastern part of the District may be unfairly
burdened. These communities are newer; therefore, they have
paid higher costs for water infrastructure construction.
These customers should not be further burdened with the
cost to upgrade older sections of the water system, a
majority of which are in the western part of the District.
While all water users should pay for. maintenance of the
entire system, infrastructure costs should be apportioned
more directly to the area being upgraded.
As I will not be able to attend your December 12
public hearing, I hope that this letter can be made part of
the record and used in your deliberations on the water
rates. Thank you for your consideration of these points .
Binc rely,
�am s J. Swee
Mayor
I
OCT-06-9T 13:31 From-.CITY OF LAFAYETTE 5102843169 T-235 P 01/01 Job-191
CRY COUNCIL
Don T&Wn,Mayor
L"'EM-L) Anne Grnqu�,Yice Mayor
LAFAYETTE Judy°8"ena
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October 6, 1997 SUPERA
Gayle B. Uilkema
Supervisor, District 11
Contra Costa County
651 Pine Street,Rm. 108A
Martinez, CA 94553-1046
Subject: Board of Supervisors/ESMUD Ad Hoc Committee on Tiered Rates
i Supervisor Gayle B. Uilkema:
I
Thank you for your letter of September 23 regarding ESMUD's tiered water rates.
Historically, Lafayette's concerns regarding water service have focused on quantity, quality, and
i price. We want our residents to have adequate supplies of high quality water at reasonable
prices. We believe that the current four-tiered rate program is not in the best interests of our
citizens. The tiers fail to adequately recognize the climatic differences east of the Oakland hills
that necessitate higher use of water even for drought tolerant landscaping. Nor do the rates
address different land development patterns that call for less density. (We anticipate that these
patterns may result to less water usage per residential acre than occurs on the East side of the
hills.) As a result of the current rate structure,our residents are penalized vis-a-vis residents in
other parts of EBMUD's district even 6 they try to conserve.
We hope that you and other members of the Ad Hoc Committee can develop proposals that will
alleviate this discrimination.
incerely
Don Tatzin
Mayor
----- — -- POST OFFJCE BOX 1961;
— -- - —--- — 3675 MT.DIABLO BLVD..SUITE 210,LAFAYETTE,CA 94s49-1968
TELLPHONE! (510)284.1968 FAX! (S 10)284.3169
y'd l
. 1
THE EAST BAY MUNICIPAL UTILITY DISTRICT
RATE STRUCTURE
Worldwide attention has been directed in the last decade to the compounding
and menacing problems of planet air quality. The accelerating effects of
contamination and reduced natural melioration have given the world serious cause
for concern.
Increasing discharge of life inhibiting gasses and reductions in the earth's
green cover of vegetation, rain forest removal, clear-cutting of timber, loss of
environmental reservoirs and other induced changes have taken their toll.
Nature's capacity to sustain present life systems is obviously in question.
While man is slow to correct abuses, one remedy at least is immediately available to
us. That is our own amelioration of loss of plant life by encouraging replacement
vegetation and it's life preserving natural process conversion of one element of
contamination to essential oxygen and the element carbon.
Despite this growing problem, the Board of the East Bay Municipal Utility
District has adopted, as a matter of policy, a discriminatory rate structure that
subsidizes a political majority of low volume domestic customers by providing water
to that group at a rate below the cost of service, while charging, at a higher level,
more substantial users with larger families, engaged in animal husbandry or other
necessary uses, or maintaining more extensive vegetation. In one rate structure,
larger users were required to pay over 315% of the lower volume user cost for the
same amount of water
These domestic customers who use larger amounts of water are found
throughout the District, but constitute a political minority. This is not a west
county-east county circumstance, or an example of waste, as the District Board
alleges. It is simply a fact that some domestic customers require more water than
others. The charge of"waste" is a deliberate fiction. No matter how water efficient
they are, they have paid rates far higher than a low-volume consumer, as much as
$3.44 for a water unit that cost a low-rate domestic consumer only $1.09. Not only
does this create a huge rate differential to attract political support, that high rate
provided revenue to subsidize the political majority who obtained water far below
the cost of delivery, $1.45 per 750 gallons, and even further below the $3.44 once
charged to a high volume user for the same amount of water.
2
It is also absolutely contrary to the State Public Utility Commission
requirement that fixed system costs be a principal rate element. Thus, a private
public utility would never secure approval of such a politically oriented subsidized
rate.structure which includes delivery below cost to a political majority.
Thus, the EBMUD plan goes directly against years of public policy and public
support to establish parks and other greenbelts to increase the quality of life for all
citizens.
Aside from community aesthetics and comfort, for example, the citizens of
Detroit recently rated urban tree programs second only to education. The Lawrence
Laboratory has demonstrated that air conditioning costs can be reduced by as much
as 57 percent by maintaining three appropriate trees around a dwelling. Two
thousand acres of tree canopy will remove six tons of particulate from the air we
breathe every day. A single tree will absorb 48 pounds of carbon dioxide annually,
and release enough oxygen to sustain two human lives.
The City of Sacramento has experienced a 10 percent drop in ambient
temperature.with 35 percent citywide canopy cover. Just 120 acres of that tree
canopy will absorb 5.5 pounds of carbon monoxide, 127 pounds of sulfur dioxide, 24
pounds of nitrogen dioxide and 170 pounds of miscellaneous particulate.
Still, the EBMUD policy, brands larger use of water to maintain vegetation
as "waste", and claims higher rates will reduce consumption. While it is patently
clear that when water is necessarily required to maintain essential uses such as
vegetation, a lesser use will obviously result in lesser vegetation maintenance.
Even more serious is the fact that the increased unit charges for larger consumers
applies to no other class than single family dwellings, while if conservation were a
concomitant fact of higher unit of use charges, higher unit charges for larger uses
would be made applicable to all classes of users. It is not.
One single section of land devoted to vegetation will provide air cleansing
capacity that otherwise would cost $30,000 in scrubbers, filters and mechanical air
cleaning. In a Salt Lake City Study, a 20 percent citywide tree canopy retained 19
million gallons of water during a 1-inch rainfall, eliminating the need for expensive
catch basins and storm channels.
Nationwide, wind break and soil erosion control programs have provided and
continue to contribute to an understanding of the critical importance of vegetation.
A tree canopy substantially reduces vegetation watering. But, these lessons are lost
to the interest of political support not quality water management, and "outside"
vegetation is a "waste" of water to be taken advantage of by charging a higher price
for such use, so that water may be provided below cost to a political majority.
•
3
Landscaping can increase property values by at least 10 percent. Each tree
has been found to produce $73 in energy conservation, $75 in erosion control, $75 in
wildlife shelter, and $50 in air quality benefits. Each tree produces four times the
cost of planting and maintenance during its lifetime.
The message of Frank Lloyd Wright, that landscaping is the "stage of
architecture" obviously has escaped the attention of the Board of the EBMUD.
Even if vegetation played a lesser role, the tragedy of that conclusion is
obvious for all improvements in any degree, even in carbon dioxide alone, is clearly
vital in our diminishing air quality, and vegetation plays many roles in addition to
carbon dioxide conversion as pointed out before. But the facts are far different.
Studies, particularly by the National Oceanic and Atmospheric Administrator and
the University of Colorado, demonstrate the error of the Board as vegetation is
known to complement the capacity of the oceans to absorb carbon dioxide, a
principal contributor to the greenhouse effect.
In order to divert attention from the inclined rate structure, the EBMUD
Board paid $175,000 to secure a consultant report on water rates. The EBMUD
Board of Directors gave orders that higher rates should be imposed for larger
volumes of use. Given those parameters, the consultant, as requested, presented a
study with a built-in prejudice against those with larger needs.
But even that report gave reluctant notice that larger water use does not
translate into waste.
When dealing with multi-family owners, the consultant noted, "Direct
applications 'of inverted block rates for multifamily customers would
merely penalize large users for being large instead of penalizing those
who use water inefficiently." "A small user might be very inefficient and
yet pay only the 1st block rate."
This logic does not extend to single-family homeowners, however. A small
family with little landscaping is presumed to be water-use efficient. A large family
or one with substantial landscaping is presumed to be a water waster, no matter
how efficiently its water is used. A large volume water user maintaining vegetation
is a "waster", but a low-volume user with a smaller family and less vegetation to
maintain washing a car is not.
If, as the EBMUD Board suggests, conservation is universally generated by
higher rates, then subsidized lower rates below cost of delivery must obviously
generate unnecessary use. The fact is, the Board majority really is not interested in
equitable rates or conservation, but in political support.
1
1
4
Conservation was effected before the imposition of higher unit charges for
single families was initiated.
For Example:
• The total consumption of water in those areas where larger water use is termed
"waste"was 11.2 billion gallons in 1986. In 1994, the total consumption in that
same area was only 10.8 billion gallons, while the number of single family
customers had risen from 54,484 to 66,246.
• Thus in the areas portrayed as wasting water, total consumption actually has
been reduced, even with the addition of 11,762 families.
What EBMUD either does not understand or fails to consider is if higher
prices do in fact limit essential use, then income from deliveries at the inflated
prices would be reduced. Will EBMUD then protect that political security blanket
by again increasing the prices required of larger essential-need users, who then
must repeat the tragic cycle that continues until loss of vegetation and termination
of other essential needs occurs?
Not only will larger consumers who require larger volumes of use continue to
pay higher rates to subsidize consumers who require only lesser use, but with these
rates in affect which provide subsidy by the sale of water at far less than cost to the
political majority, the larger consumers who require larger consumption for
essential uses, will be paying an increasing disproportionate share of system
earthquake renovation and renovation.
These comments upon rates are but a brief review of the essential nature and
purposes of the current Board of the East Bay Municipal Utility District. The
agenda is to establish a financial management plan that secures a disproportionate
income from a political minority. The process not only is served by higher rates for
necessary, larger volumes of use, but by increased connection charges, system
improvement requirements, charges for so called earthquake improvements
through which targeted areas pay to improve service facilities for older areas
requiring replacement independent of seismic considerations, imposing
unnecessary construction requirement to particular areas and generally increasing
charges and service costs to politically limited sections of the District. These issues
will be addressed in other discussions. ,
THE REAL PROBLEM OF THIS SINGLE-CLASS DIFFERENTIAL RATE
STRUCTURE LIES IN THE ENORMOUS FUTURE COSTS OF A NOW
EMASCULATED INTENT TO SECURE AMERICAN RIVER WATER.
The effect of the discriminatory single family classification rate structure of
EBMUD is not limited to the securing of funds to maintain the present system and
5
its renovation. It has been made clear that the discriminatory rate structure which
has been made to apply only to the single family consumer class, has obviously
taken advantage of the numerical minority of that class, those requiring the larger
volume of users paying an inequitable share of District expense.
To that unconscionable circumstance, must now be added the enormous
potential expense of securing an American River source, and the fact that if this
subsidy oriented rate system is continued, it is the larger single family consumer
who will be burdened with an inequitable share of the cost of the project, and its
operation. While those so affected are found in all areas of the District, those whose
larger use is occasioned by larger property sizes and consequent vegetation
maintenance, are substantially found in the warmer areas of Alameda and Contra
Costa Counties, and newer areas with larger lot sizes.
This potential is quite evident and equally serious, and the American River
project must continue to be viewed, in terms of its approval, with a.full disclosure of
its financing, its costs, and the manner in which those costs are to be secured. To
illustrate this point: In order to obscure the subsidy base of its rate structure in
providing service below cost to the political majority and not establishing costs
upon, primarily, a fair distribution of fixed costs, EBMUD prepared a list of charges
by its selected utilities in California distributing water.
This list included the Contra Costa Water District, which, by reason of
present system capital improvements, has been required to dramatically increase
rates. EBMUD making the point that however excessive EBMUD rates are, they
are lower than those of the CCWD.
Obviously, this is not the issue, but EBMUD made it out to be, publicizing
the comparison widely throughout the District. A realistic comparison would
require EBMUD to presently project American River and all attendant costs and
expand the present rate structure in its present configuration to include payment of
these costs. This it has declined to do. Until the American River Project and its
financing is made public, no serious determination of its feasibility can be made.
In addition to the potential expansion of the discriminatory subsidy of the
present rate structure to extend to American River costs, one should carefully
review that proposed in the light of its present dimensions compared to its original
form. ,
When first outlined in the early `60's, and, in fact in the regional system
project of the 1920's, the additional supply of 150,000 acre feet per year was to be
secured at an area of water quality equal to that of the Mokelumne at Folsom-South
Canal, so that consistent system water quality could be maintained with no source
treatment required. To this absolutely essential quality element, was added the
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provision of an essential West Delta Reservoir to avoid potential aqueduct failure in
the shifting peat soils of the Delta.
That project has never materialized. Litigation has limited the times and
amounts of water availability through the contract with the Bureau of Reclamation.
The essential West Delta Reservoir was eliminated and the capacity of the Walnut
Creek Treatment Plant consequentially indispensable to provide an adequate water
supply to San Ramon Valley has not been developed.
The alternative of a direct access to a Delta supply eliminating the enormous
costs of a delivery system from Sacramento has been abandoned along with the
pumping facilities at Middle River, and Bixler. The justification being given that
the Delta water quality is not acceptable to EBMUD. A quality acceptable to the
Contra Costa Water District and nearly half of the domestic water market in
Southern California.
EBMUD cites the water quality circumstances of September 1977, the second
year of a drought when the EBMUD did pump Delta water. Those quality
conditions are irrelevant to present or future planning. The miniscule flows of both
the Sacramento and San Joaquin Rivers in 1977 and the consequent intrusion of
S.F. Bay Salt Water into the Delta, produced local quality conditions the Contra
Costa Water District and all exporters experienced. All those users have continued
to use .Delta water ever since. CCWD is building its Los Vaqueros Reservoir to
utilize water at periods of highest quality, and EBMUD declined to participate in
its expansion which would have provided a West Delta storage facility without the
environmental and seismic problems of Buckhorn Reservoir.
Thus, EBMUD has done everything possible to provide a self-fulfilling
prophecy of a Sacramento source. That source now is, however, not the pristine
American River at Nimbus as represented, but to be taken 25 miles downstream in
the sewage discharge area of Sacramento, at the downtown I Street Bridge,
adjacent to the Sacramento River and its cargo of agricultural chemical wastes.
Curiously, that new source that requires immediate expensive treatment, a
circumstance originally totally rejected in the American River Project. Right of
access to this new source is being "negotiated" by EBMUD and Sacramento Public
agencies, none of whom have any power or authority to determine upon water
rights or entitlements. The sole authority to establish a new water right is the
State Water Resources Control Board. The sole right of the EBMUD is its contract
with the Bureau of Reclamation for 150,000 AFY at Nimbus 25 miles upstream.
How that right is to be transferred to a right for substantially less water to be
secured only within limited periods of time and of inferior quality, remains to be
determined but not by the EBMUD or the political jurisdictions of Sacramento.
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Unfortunately, as in the case of Delta Water quality in which it ignores the
Delta water quality to be improved by restraint of tidal flows and channel
improvements, incident to the Cal-Fed program and a cross-Delta transfer facility.
EBMUD has established comparatives which rely upon present Sacramento-
American River conditions. These are irrelevant to the circumstances which will be
in place when and if this project proceeds. Future Sacramento Sewage increases,
treatment costs, relative flows and mingling of the American and Sacramento River
and many other factors presently unknown will determine the viability of this
project not present conditions uninfluenced by the Project operations, and changing
circumstances in Sacramento.
To obscure the memory of a once described "essential element" of the
American River Project, a West Delta Reservoir, several alternative storage
improvement projects have been publicized. One, enlarging Pardee Reservoir with
its fundamental flaw of seismic integrity discovered during its original excavations,
and second, the proposal to pump into and pump out of the presently overdrawn
and contaminated San Joaquin underground pool. Even if these proposals had
merit, they are still subject to aqueduct failures which could easily have been
avoided by simply enlarging CCWD's Los Vaqueros and securing its improved
water quality.
The important factor is project cost and its financing. The serious potential
of an expanded discriminatory rate structure, placing the principal burden of costs
on political minorities as is the case of the present rate structure for single family
domestic consumer. If the additional American River costs are to be borne by a
political minority of consumers who require, not waste, a larger consumption, that
future inequitable burden should be recognized in the evaluation of the American
River Project itself.
The indifference of the EBMUD Board to a fair and principled rate structure
can best be measured by a currently considered $450,000 study proposal to add the
multi-family consumer class, another numerically small group, to the single family
group that currently and exclusively is charged higher rates for larger use. All
other classifications, industrial, commercial, public agency and irrigation, which
individually or collectively would have an effective political force to oppose such an
extension currently remaining excluded from higher unit costs for larger volumes of
use, simply because they have the financial and political power to resist it.
One may well note the curious relevance of this EBMUD Board psychology to
the turbid mind-set of the Vietnam War, where moral and rational judgment was
stilled by a programmed habit pattern which no one in the decision process had the
courage to challenge.
John A. Nejedly
Chair, Concerned Citizens for Improved Quality Water ne_22.doc
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THE EAST BAY MUNICIPAL UTILITY DISTRICT
RATE STRUCTURE
Worldwide attention has been directed in the last decade to the compounding
and menacing problems of planet . air quality. The accelerating effects of
contamination and reduced natural melioration have given the world serious cause
for concern.
Increasing discharge of life inhibiting gasses and reductions in the earth's
green cover of vegetation, rain forest removal, clear-cutting of timber, loss of
environmental reservoirs and other induced changes have taken their toll.
Nature's capacity to sustain present life systems is obviously in question.
While man is slow to correct abuses, one remedy at least is immediately available to
us. That is our own amelioration of loss of plant life by encouraging replacement
vegetation and it's life preserving natural process conversion of one element of
contamination to essential oxygen and the element carbon.
Despite this growing problem, the majority of the Board of the East Bay
Municipal Utility District has adopted, as a matter of policy, a discriminatory rate
structure that subsidizes a political majority of low volume domestic customers by
providing water to that group at a rate far below the cost of service, while charging,
at a higher level, more substantial users with larger families, engaged in animal
husbandry or other necessary uses, or maintaining more extensive vegetation. In
one rate structure, larger users were required to pay over 315% of the lower volume
user cost for the same amount of water
These domestic customers who use larger amounts of water are found
throughout the District, but constitute a political minority. This is not a west
county-east county circumstance, or an example of waste, as the District Board
majority alleges. It is simply a fact that some domestic customers require more
water than others. The charge of "waste" is a deliberate fiction. No matter how
water efficient they are, they have paid rates far higher than a low-volume
consumer, as much as $3.44 for a water unit that cost a low-rate domestic consumer
only $1.09. Not only does this create a huge rate differential to attract political
support, that high rate provided revenue to subsidize the political majority who
obtained water far below the cost of delivery, $1.45 per 750 gallons, and even
further below the $3.44 once charged to a high volume user for the same amount of
water.
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It is also absolutely contrary to the State Public Utility Commission
requirement that fixed system costs be a principal rate element. Thus, a private
public utility would never secure approval of such a politically oriented subsidized
rate structure which includes delivery below cost to a political majority.
Thus, the EBMUD plan goes directly against years of public policy and public
support to establish parks and other greenbelts to increase the quality of life for all
citizens.
Aside from community aesthetics and comfort, for example, the citizens of
Detroit recently rated urban tree programs second only to education. The Lawrence
Laboratory has demonstrated that air conditioning costs can be reduced by as much
as 57 percent by maintaining three appropriate trees around a dwelling. Two
thousand acres of tree canopy will remove six tons of particulate from the air we
breathe every day. A single tree will absorb 48 pounds of carbon dioxide annually,
and release enough oxygen to sustain two human lives.
The City of Sacramento has experienced a 10 percent drop in ambient
temperature with 35 percent citywide canopy cover. Just 120 acres of that tree
canopy will absorb 5.5 pounds of carbon monoxide, 127 pounds of sulfur dioxide, 24
pounds of nitrogen dioxide and 170 pounds of miscellaneous particulate.
Still, the EBMUD policy, brands larger use of water to maintain vegetation
as "waste", and claims higher rates will reduce consumption. While it is patently
clear that when water is necessarily required to maintain essential uses such as
vegetation, a lesser use will obviously result in lesser vegetation maintenance.
Even more serious is the fact that the increased unit charges for larger consumers
applies to no other class than single family dwellings, while if conservation were a
concomitant fact of higher unit of use charges, higher unit charges for larger uses
would be made applicable to all classes of users. It is not.
One single section of land devoted to vegetation will provide air cleansing
capacity that otherwise would cost $30,000 in scrubbers, filters and mechanical air
cleaning. In a Salt Lake City Study, a 20 percent citywide tree canopy retained 19
million gallons of water during a 1-inch rainfall, eliminating the need for expensive
catch basins and storm channels.
Nationwide, wind break and soil erosion control programs have provided and
continue to contribute to an understanding of the critical importance of vegetation.
A tree canopy substantially reduces vegetation watering. But, these lessons are lost
to the interest of political support not quality water management, and "outside"
vegetation is a "waste" of water to be taken advantage of by charging a higher price
for such use, so that water may be provided below cost to a political majority.
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Landscaping can increase property values by at least 10 percent. Each tree
has been found to produce $73 in energy conservation, $75 in erosion control, $75 in
wildlife shelter, and $50 in air quality benefits. Each tree produces four times the
cost of planting and maintenance during its lifetime.
The message of Frank Lloyd Wright, that landscaping is the "stage of
architecture" obviously has escaped the attention of the majority of the Board of the
EBMUD.
Even if vegetation played a lesser role, the tragedy of that conclusion is
obvious for all improvements in any degree, even in carbon dioxide alone, is clearly
vital in our diminishing air quality, and vegetation plays many roles in addition to
carbon dioxide conversion as pointed out before. But the facts are far different.
Studies, particularly by the National Oceanic and Atmospheric Administrator and
the University of Colorado, demonstrate the error of the EBMUD decision as
vegetation is known to complement the capacity of the oceans to absorb carbon
dioxide, a principal contributor to the greenhouse effect.
In order to divert attention from the inclined rate structure, the EBMUD
paid $175,000 to secure a consultant report on water rates. The EBMUD gave
orders that higher rates should be imposed for larger volumes of use. Given those
parameters, the consultant, as requested, presented a study with a built-in
prejudice against those with larger needs.
But even that report gave reluctant notice that larger water use does not
translate into waste.
When dealing with multi-family owners, the consultant noted, "Direct
applications of inverted block rates for multifamily customers would
merely penalize large users for being large instead of penalizing those
who use water inefficiently." "A small user might be very inefficient and
yet pay only the 1st block rate."
This logic does not extend to single-family homeowners, however. A small
family with little landscaping is presumed to be water-use efficient. A large family
or one with substantial landscaping is presumed to be a water waster, no matter
how efficiently its water is used. A large volume water user maintaining vegetation
is a "waster", but a low-volume user with a smaller family and less vegetation to
maintain washing a car is not.
If, as the EBMUD suggests, conservation is universally generated by higher
rates, then subsidized lower rates below cost of delivery must obviously generate
unnecessary use. The fact is, the Board majority really is not interested in
equitable rates or conservation, but in political support.
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Conservation was effected before the imposition of higher unit charges for
single families was initiated.
For Example:
• The total consumption of water in those areas where larger water use is termed
`waste"was 11.2 billion gallons in 1986. In 1994, the total consumption in that
same area was only 10.8 billion gallons, while the number of single family
customers had risen from 54,484 to 66,246.
• Thus in the areas portrayed as wasting water, total consumption actually has
been reduced, even with the addition of 11,762 families.
What EBMUD either does not understand or fails to consider is if higher
prices do in fact limit essential use, then income from deliveries at the inflated
prices would be reduced. Will EBMUD then protect that political security blanket
by again increasing the prices required of larger essential-need users, who then
must repeat the tragic cycle that continues until loss of vegetation and termination
of other essential needs occurs?
Not only will larger consumers who require larger volumes of use continue to
pay higher rates to subsidize consumers who require only lesser use, but with these
rates in affect which provide subsidy by the sale of water at far less than cost to the
political majority, the larger consumers who require larger consumption for
essential uses, will be paying an increasing disproportionate share of system
earthquake renovation and renovation.
The Board majority promoting this preferential and discriminatory rate
structure that provides water at far less than cost of delivery to low volume users
who constitute a political majority, and hence the support for their re-election to
conceal that obvious intention, the majority claims that the corollary, higher prices
to necessary larger users, constitutes conservation.
Given a moments thought, the sophistry of this argument becomes obvious, and
Adam Smith in the Wealth of Nations and lectures at the University of Glasgow
pointed out that supply, demand and prices, even in the simpler dynamics of the
eighteenth century, did not manage market price realities. For example, that
demand for necessities can be maintained even with substantial price increase and
a myriad of other factors affect demand as well as price.
As pointed out in this paper, over 11,000 new dwelling units were added to
consumers in the larger required use zones of EBMUD, but that in that period of
time, even with those new families, consumption decreased simply because of a
general public awareness of the drought effects of 1976 and 1977, and, particularly
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the Iarger users, more efficiently utilized water by low consumption devices and
practiced water saving methods. Discriminatory rates were not in effect during
that period, so, pricing was obviously not a determinate of consumption.
Even more clear is the experience that everyone reading this paper will
recall, the effect of a recent sudden 20% increase in automotive fuel prices. No
decline in fuel consumption occurred and in fact, the normal seasonal use change
developed and sales increased over 18%, and remains today with the higher prices.
BART recently cumulatively increased rates 45%, but as pointed out by
Robert Oates of the Times, for June 13, "BART ridership has dropped only a tiny
amount compared with previous months." And "the system carries more passengers
than an average of about 256,800 daily last year".
The real story is that price may have little impact upon consumption for
necessities so long as spendable income is available, and less essential spending
restricted. Real conservation is a matter of ethics, and if water necessary to
continued maintenance of vegetation is withheld, then the life support system for
man is to that extent reduced. Witness the homeowner in Blackhawk who removed
all vegetation and covered the property with multi-colored gravel to avoid higher
prices.
The final evidence of sophistry of the Board majority conservation argument
is that if the argument had validity, it should apply to all classes of consumers and
all consumers in the same class. Higher costs for larger consumption, however,
only apply to larger users in the single family class. If higher rates for larger
consumption produced conservation, higher rates should be made applicable to all
classes of consumers.
Should these comments strike you less than numb, consider the Stanford
comments of John Browne, the CEO of British Petroleum. "The climate is getting
warmer and carbon dioxide is the main culprit." So what converts carbon dioxide to
oxygen and carbon...Vegetation! And the Board majority of EBMUD finds
vegetation maintenance a"waste".
These comments upon rates are but a brief review of the essential nature and
purposes of the current Board majority of the East Bay Municipal Utility District.
Their agenda is to establish a financial management plan that secures a
disproportionate income from a political minority. The process not only is served by
higher rates for necessary, larger volumes of use, but by increased connection
charges, system improvement requirements, charges for so called earthquake
improvements through which targeted areas pay to improve service facilities for
older areas requiring replacement independent of seismic considerations, imposing
unnecessary construction requirement to particular areas and generally increasing
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charges and service costs to politically limited sections of the District. These issues
will be addressed in other discussions.
THE REAL PROBLEM OF THIS SINGLE-CLASS DIFFERENTIAL RATE
STRUCTURE LIES IN THE ENORMOUS FUTURE COSTS OF A NOW
EMASCULATED INTENT TO SECURE.AMERICAN RIVER WATER.
The effect of the discriminatory single family classification rate structure of
EBMUD is not limited to the securing of funds to maintain the present system and
its renovation. It has been made clear that the discriminatory rate structure which
has been made to apply only to the single family consumer class, has obviously
taken advantage of the numerical minority of that class, thus, those requiring the
larger volume of users paying an inequitable share of District expense.
To that unconscionable circumstance, must now be added the enormous
potential expense of securing an American River source, and the fact that if this
subsidy oriented rate system is continued, it is the larger single family consumer
who will be burdened with an inequitable share of the cost of the project, and its
operation. While those so affected are found in all areas of the District, those whose
larger use is occasioned by larger property sizes and consequent vegetation
maintenance, are substantially found in the warmer areas of Alameda and Contra
Costa Counties, and newer areas with larger lot sizes required by zoning.
This potential is quite evident and equally serious, and the American River
project must continue to be viewed, in terms of its approval, with a full disclosure of
its financing, its costs, and the manner in which those costs are to be secured. To
illustrate this point: In order to obscure the subsidy base of its rate structure in
providing service below cost to the political majority and not establishing costs
upon, primarily, a fair distribution of fixed costs, EBMUD prepared a list of charges
by its selected utilities in California distributing water.
This list included the .Contra Costa Water District, which, by reason of
present system capital improvements, has been required to dramatically increase
rates. EBMUD making the point that however excessive EBMUD rates are, they
are lower than those of the CCWD.
Obviously, this is not the issue, but EBMUD made it out to be, publicizing
the comparison widely throughout the District. A realistic comparison would
require EBMUD to presently project American River and all attendant costs and
expand the present rate structure in its present configuration to include payment of
these costs. This it has declined to do. Until the American River Project and its
financing is made public, no serious determination of its.feasibility can be made.
In addition to the potential expansion of the discriminatory subsidy of the
present rate structure to extend to American River costs, one should carefully
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review that proposed in the light of its present dimensions compared to its original
form.
When first outlined in the early `60's, and, in fact in the regional system
project of the 1920's, the additional supply of 150,000 acre feet per year was to be
secured at an area of water quality equal to that of the Mokelumne, on the
American River, at Folsom-South Canal, so that consistent system water quality
could be maintained with no source treatment required. To this absolutely
essential quality element, was added the provision of an essential West Delta
Reservoir to avoid potential aqueduct failure in the shifting peat soils of the Delta,
at the proposed Buckhorn Reservoir.
The American River original project has never materialized. Litigation has
limited the times and amounts of water availability through the contract with the
Bureau of Reclamation. The essential West Delta Reservoir was eliminated and the
capacity of the Walnut Creek Treatment Plant consequently indispensable to
provide an adequate water supply to San Ramon Valley has not been developed.
The alternative of a direct access to a Delta supply eliminating the enormous
costs of a delivery system from Sacramento has been abandoned along with the
pumping facilities at Middle River, and Bixler. The justification being given that
the Delta water quality is not acceptable to EBMUD. A quality acceptable to the
Contra Costa Water District and nearly half of the domestic water market in
Southern California. EBMUD never effectively promoted a combined reservoir
facility with the Contra Cost Water District which it easily could have done by
requesting inclusion in the Water District's E.I.R. and permit process.
EBMUD cites the water quality circumstances of September 1977, the second
year of a drought when the EBMUD did pump Delta water. Those quality
conditions are irrelevant to present or future planning. The minuscule flows of
both the Sacramento and San Joaquin Rivers in 1977 and the consequent intrusion
of S.F. Bay Salt Water into the Delta, produced local quality conditions the Contra
Costa Water District and all exporters experienced. All those users, however,
continued to use Delta water ever since. CCWD is building its Los Vaqueros
Reservoir to utilize water at periods of highest quality, and EBMUD declined to
participate in its expansion which would have provided a West Delta storage
facility without the environmental and seismic problems of Buckhorn Reservoir.
Thus, EBMUD has done everything possible to provide a self-fulfilling
prophecy of a Sacramento source. That source now is, however, not the pristine
American River at Nimbus as represented, but is now proposed to be taken 25 miles
downstream in the sewage discharge area of Sacramento, at the downtown I Street
Bridge, adjacent to the Sacramento River and its cargo of agricultural chemical
wastes.
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Curiously, that new source that requires immediate expensive treatment in
Sacramento, and even later second treatment in the District, a circumstance
originally totally rejected in the American River Project. Right of access to this new
source is being "negotiated" by EBMUD and Sacramento Public agencies, none of
whom have any power or authority to determine upon water rights or entitlements.
The sole authority to establish a new water right is the State Water Resources
Control Board, or legislative revision of Board authority or direct legislative action.
The sole right of the EBMUD is its contract with the Bureau of Reclamation for
150,000 AFY at Nimbus 25 miles upstream. How that right is to be transferred to a
right for substantially less water to be secured only within limited periods of time
and of inferior quality, remains to be determined but not by the EBMUD or the
political jurisdictions of Sacramento.
Unfortunately, as in the case of Delta Water quality in which it ignores the
Delta water quality to be improved by restraint of tidal flows and channel
improvements, the reduction of chlorine use in local water treatment facilities and
consequent reduction in trihalomethane and the Cal-Fed program with its cross-
Delta transfer facility. EBMUD has established comparatives which rely upon
present Sacramento-American River and Delta conditions. These are irrelevant to
the circumstances which will be in place when and if this project proceeds. Future
Sacramento Sewage increases, treatment costs, relative flows and mingling of the
American and Sacramento River and many other factors presently unknown will
determine the viability of this project not present conditions uninfluenced by the
Project operations, and changing circumstances in Sacramento and the Delta.
To obscure the memory of a once described "essential element" of the
American River Project, a West Delta Reservoir, several alternative storage
improvement projects have been publicized. One, enlarging Pardee Reservoir with
its fundamental flaw of seismic integrity discovered during its original excavations,
second, the proposal to pump into and pump out of the presently overdrawn and
contaminated San Joaquin underground pool, and third, an entirely new reservoir
below Pardee, a project once put aside upon selection of the Comanche Reservoir
site. Even if these proposals had merit, they are still subject to aqueduct failures
which could easily have been avoided by simply enlarging CCWD's Los Vaqueros
and securing its improved water quality.
The important factor is project cost and its financing. The serious potential
of an expanded discriminatory rate structure, placing the principal burden of costs
on political minorities as is the case of the present rate structure for single family
domestic consumer. If the additional American River costs are to be borne by a
political minority of consumers who require, not waste, a larger consumption, that
future inequitable burden should be recognized in the evaluation of the American
River Project itself.
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It is difficult, as Adam Smith pointed out, to establish firm relationships
between commodity or service prices and their use. In the present day
circumstances of water use, precipitation, even in previous years, temperatures,
quality, winds, prices, times of billings vis-a-vis actual consumption, are but a part
of consumption levels. However, keep in mind that the sole and claimed
justification of the Board majority of EBMUD, for higher prices for larger use
regardless of need and appropriate use, is that it produces conservation.
The entire single family residential consumption for 1986 through 1996 in La
Morinda, Region 6 and Pleasant Hill, Walnut Creek, and San Ramon Valley,
Region7, has been carefully reviewed.
Nothing in the record supports the Board's gratuitous conclusion. To the
contrary, consumption has clearly followed essential need. As the drought of the
late eighties confirmed the need to conserve demonstrated in the droughts of 1976
and 1977 and long before the discriminatory rate structures were imposed, Zones 6
and 7 had voluntarily found ways to conserve water as previously pointed out in
this paper, even after adding over 11,000 new homes to the areas' total
consumption decreased. This being, and it is repeated, without price increases.
The best evidence to demonstrate the absence of conservation incident to
higher rates in the record shows that in 1993, with a uniform rate ($1.10) in place,
the average consumption in that class in Zone 6, La Morinda, was 17.61 units per
month. In 1996, after the imposition of higher rates for larger use, at one point
being$3.44 per unit, the average consumption had risen to 19.32 units or 9.8% with
the discriminatory higher charges in place.
In Pleasant Hill, Walnut Creek, and the San Ramon Valley, the average
monthly use in 1993 was 18.68 units. In 1996, that average use had risen to 19.87
or 6.4%. Clearly, conservation has not been the purpose of draconian increase in
water prices for only one class of consumer. Its purpose is now starkly revealed to
be simply charging higher prices to a political minority of consumers so sales can be
made to a political majority below cost, an attraction to political aspirations of the
Board membership that provided the most important of inducements to political
support, financial advantage.
Again, one should keep the enormous costs of the American River Project in
mind. A project now contemplated as not providing for an election, with charges to
future water users and later, system connectors, to pay project costs together with
the discriminator higher costs to larger single family consumers. Keeping in mind
the fact that if future new connections do not occur as projected, the sole remaining
source of additional alternative revenue will be the political minority, the single
family larger consumer.
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The indifference of the EBMUD Board to a fair and principled rate structure
can best be measured by a currently considered proposal to add the multi-family
consumer class, another numerically small group, to the single family group that
currently and exclusively is charged higher rates for larger use, a decision which
will require multi-metering as well. All other classifications, industrial,
commercial, public agency and irrigation, which individually or collectively would
have an effective political force to oppose such an extension currently remaining
excluded from higher unit costs for larger volumes of use, simply because they have
the financial and political power to resist it.
The most interesting aspect of this tale of two countrary economic interests in
which a basic moral issue degenerates immediately into a decision based entirely on
self-interest. The provision of a basic necessity to a political majority at less than
cost of service requiring a political minority to pay for more than cost of service to
substitute for the consequent loss of revenue presents a clear moral subject. The
oppression of a minority, one if raised in other social circumstance, would produce
violent reaction.
Yet those who ostensibly raise that issue in other arenas become silent when
its execution produces for them an economic advantage.
What has been demonstrated before is briefly repeated. This is not a matter
of conservation. Conservation nowhere has been demonstrated by this subsidy rate
structure. What conservation is evident was produce long before the discriminatory
rate structure. Application of excessive votes had no effect on consumption.
Examine the record. While proponents of higher unit charges for larger use
incident to legitimate needs for larger use repeatedly refer to conservation, nowhere
in their rhetoric appears any evidence of use being reduced by higher charges for
larger use. Even more dramatic increases in BART fares, toll charges, and gasoline
prices, did not reduce consumption, and even if the discriminatory price of water
did in fact produce lower consumption, the cheaper water below cost of service at
the other end of the spectrum would obviously produce waste.
Proponents and beneficiaries of this subsidy speak to increasing utilization of
inclined rate structures as evidence of their propriety. The non sequitur is obvious.
Differential rates incident to imparity in cost of service may be appropriate. Here
that fundamental factor is not present. The growth of evil does not change its face.
Electric chair executions, cancer, domestic violence, drug use, and many other social
criteria are unfortunately expanding as well.
Popularity is no evidence of propriety. The level of integrity of argument in
support of the specific discriminatory rate structure here present may best be
measured by these illusions of logic.
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One may well note the curious relevance of this EBMUD Board psychology to
the turbid mind-set of the Vietnam War, where moral and rational judgment was
stilled by a programmed habit pattern which no one in the decision process had the
courage to challenge.
John A. Nejedly
Chair, Concerned Citizens for Improved Quality Water
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REPORT ON EBMUD MARGINAL COST
AND
RATE DESIGN OPTIONS
Dr. Carl R. Danner
December 5, 1995
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Introduction and Summary
Q. What is your name and business address?
A. My name is Carl R. Danner. My business address is Wilk & Associates, Inc.,
Suite 1650, 100 Bush Street, San Francisco, CA 94104. I am an EBMUD customer,
and my family and I live in Alamo.
Q. What subjects will you address in your presentation?
A. I will cover three areas.
First, the EBMUD Board majority has contended that the fourth tier rate of $3.44 per
unit reflects the marginal cost of new water supplies. I will describe the applicable
theory of marginal cost pricing, and show how EBMUD's own studies show that the
actual marginal cost for long-term, non-drought pricing is one-quarter of that amount,
or 86 cents per unit. The $3.44 rate cannot be justified except during a critical
drought; this punitive fourth tier rate has no basis in economics or good public policy.
Second, I will review the economic definition of price discrimination, and show that
the present fourth tier rate of $3.44 is highly discriminatory. What's worse, this
excessive rate was explicitly targeted at customers in the warmer, eastern portion of
the EBMUD service area.
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 1
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Finally, I will briefly review the economics of utility pricing for EBMUD's
circumstances, i.e. where virtually all costs are fixed but there is also a concern about
water conservation. Contrary to what the current rate structure would seem to imply,
using extra water actually costs EBMUD very little in extra expenses. Thus, it is
clearly unfair to collect most fixed costs through variable water use charges, as
EBMUD does now, because such rates force large water users to subsidize small
water users while potentially harming the District's financial stability.
/Instead of the present rate design including the punitive $3.44 charge, EBMUD should
transition to pricing all water usage at its true marginal cost, 86 cents/unit, with
remaining District revenue needs to be met through fixed, monthly customer charges.
This rate design will be fair, will preserve correct water conservation price signals,
will improve EBMUD's financial stability, will meet the conservation rate design
standards set by the California Urban Water Conservation Council MOU, and will
conform to the statewide rate design policy that the California Public Utilities
Commission (CPUC) enforces for its regulated water utilities -- to collect half of water
utility fixed costs through corresponding fixed monthly charges. /
Finally, while the new water rate design alternatives proposed by the District General
Manager are less discriminatory than the current rates, they do not appear to change
the present recovery of most fixed costs through variable water use charges, or to
send the proper long-term marginal cost water conservation price signal. While these
proposals are a step in the right direction, they would properly be viewed as only an
initial step in a transition towards the fairer, more appropriate rate design described
above. Of the two choices the General Manager presents, Option 2 is less
discriminatory and includes usage prices closer to long-run marginal cost; thus, it is
clearly the preferable choice.
EBMUD WATER RATE REPORT DECEMBER S, 199S PAGE 2
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�. What qualifications do you bring to these issues?
A. I am a professional consultant in public' utility regulation. I have broad experience
with regulation, having researched it, taught it, served as a regulator, and also served
as.an expert witness for both consumer and utility interests. I spent eight years as a
professional staff member at the CPUC, including five years as Advisor to
Commissioner G. Mitchell Wilk. My assignments at the CPUC included an
evaluation of the CPUC's water conservation rate design policies, as well as several
years of responsibility for all CPUC water issues in my role as a Commissioner's
Advisor. I hold a Ph.D. in public policy from the Kennedy School of Government at
Harvard University, where I also co-taught or served as head teaching assistant for
graduate courses in government regulation of business, microeconomics, econometrics,
and managerial economics.
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 3
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I. Marginal Cost Pricing
Q. What will you establish in this section of your report?
A. I will explain how to calculate the correct marginal cost for EBMUD water
supplies, and show that it is no more than 86 cents/unit except (and only during) times
of severe drought. I will also explain how proper marginal cost pricing answers an
important question -- what price to charge customers to encourage them to conserve
water appropriately.
Q. What is a marginal cost?
A. A marginal cost is how much it would cost to produce one more unit of something
-- for example, the marginal cost per gallon of water is how much extra money
EBMUD would have to spend if a customer turned on the tap and filled a gallon jug.
Marginal cost is very different from average cost, which is the total cost of producing
all units divided by the total number of units. In EBMUD's case, the average cost of
water would be the total system costs per year divided by the total number of gallons
(or water units) the system served in a year.
Q. What is a fixed cost?
A. A fixed cost is a cost that does not change depending on how much of the product
is produced. For EBMUD, important fixed costs include those associated with its
dams and pipelines, water treatment plants, reservoirs, the salaries of most or all of its
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 4
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staff, the cost of customer meters, and the costs of the local water distribution system,
including the standard-sized pipes that presumably go to most residences. All costs
that do not vary with the volume of water delivered are fixed (including operation and
maintenance costs not dependent on water volume). I am informed by Director
Coleman that fixed costs represent about 93 percent of EBMUD's overall expenses.
Q. Why are fixed costs important for understanding marginal cost pricing?
A. Fixed costs are important because they generally are not included in a marginal
cost calculation, because customers do not cause fixed costs to increase when they
demand an extra unit of a product (such as filling that gallon jug I mentioned above).
On the other hand, fixed costs are included in an average cost calculation.
Q. Can the marginal cost of a utility service be zero, or close to zero?
A. Very easily -- in fact, for a water utility with a free source of supply (such as
rainfall and runoff into a reservoir), the marginal cost of using extra water may
involve only the additional costs of transmitting and treating it, using existing pipelines
and existing water treatment facilities whose per-gallon cost of processing extra water
may be very low.
Q. Why is marginal cost an important concept in economics?
A. When a price equals marginal cost, then the price that customers pay for an extra
unit of something fully reflects the extra cost that would be needed to produce it. By
contrast, if the price is below the marginal cost, customers are encouraged to use too
much -- because they are effectively told by the price that the good is less costly to
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 5
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make than it really is. In the opposite case, where the price is above the marginal
cost, customers are effectively told that the item is more costly to make than it really
is, which forces customers to cut back their purchases for no good reason. These are
basic economics concepts that are firmly established.
Q. Do EBMUD's actual expenses for providing water service include such marginal
costs?
A. Yes and no. The out-of-pocket costs of treatment and delivery are now incurred
for all delivered water. But the marginal costs of developing new water supplies (such
as are at issue with regard to the punitive rate structure) are a fiction for most of the
water EBMUD delivers. They don't exist, and are not incurred. This can be an
important equity concern for customers who may not wish to pay a water bill based on
a hypothetical cost structure, rather than the real pattern of costs and cost-causation
that the District experiences.
Q. How does marginal cost pricing help conservation efforts?
A. A marginal cost price gives customers the proper incentive to conserve. All
customers have the ability to use more or less water as a result of suffering different
amounts of inconvenience, or spending varying amounts of money on conservation-
type investments. But customers need some signal as to when they are not conserving
enough, or, conversely, to tell them when further conservation efforts would not be
cost-effective.
A marginal cost price gives these signals in an effective way. The customer who is
not conserving enough gets the right signal because he can profit by making
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 6
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conservation investments (or suffering a reasonable inconvenience) and then seeing a
reduced water bill. The customer who has already made appropriate conservation
efforts will realize that the additional conservation efforts she could undertake would
not save enough additional water for the bill reduction to offset the extra cost. Thus,
by setting a marginal cost price, a utility can give all customers the right conservation
signal in a way they can recognize, and to which they will respond.
Q. Is a different marginal cost price appropriate for large and small water users?
A. No. As I noted above, all water users have the ability to save water by making
investments or by putting up with varying degrees of inconvenience. While setting a
marginal cost price only to large users will create many of the associated conservation
benefits, it will also forego the benefits that could be obtained from charging the same
kind of price for all usage. And while large users are likely to be more price-sensitive
than small users (leading to perhaps a greater per-customer savings from large
customers), if small users are more numerous, their collective conservation efforts
could also make a significant difference.
All customers, both large and small, may conserve because they think it is a good
thing to do; indeed, as I will discuss below, voluntary conservation remains perhaps
the best drought management tool EBMUD has. But to the extent conservation is
caused by paying a certain price for water, it will not occur unless customers pay that
price -- it's as simple as that, and it's true for any size of customer.
Q. Can a water utility recover all of its needed revenue by charging a marginal cost
price for water usage?
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 7
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A. Usually not, if that is the only charge that is imposed. As I described above, the
marginal cost of extra water can be very low, and typically will not (by definition)
recover fixed costs. This is an obvious reason to question the $3.44 figure, which the
Board majority has claimed is based on an appropriate marginal cost -- because if
charged for all water use, $3.44/unit would recover much more than EBMUD's total
costs. That's very uncommon for a marginal cost price in a utility industry.
Q. What is a short-run marginal cost, and how is it different from a long-run marginal
cost?
A. A marginal cost can be calculated for a variety of different circumstances. By
contrast to the short run (use one gallon now), over the long run (e.g. use one gallon
every day for ten years), it is often true that extra use will cause a need for more
supply, which could involve some new facilities, investments, need for water rights,
etc. For such reasons, short and long run marginal costs are often different.
Q. How does the difference between short and long run marginal costs relate to
conservation?
A. If a customer is making a one-time or short-run decision to use more water, then
the proper conservation price signal is the short-run marginal cost. If a customer is
making a decision that will require more water over an extended period, then the
proper conservation price signal is the long-run marginal cost. That's essentially the
difference, for example, between watering a lawn a little more during a wet year
(because the water happens to be available) and building a new housing development
that will require water year-in, and year-out. Those are two entirely different
EBMUD WATER RATE REPORT DECEMBER S. 1995 PAGE 8
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conservation situations, and they may have two entirely different marginal costs for
the water involved.
Q. For EBMUD, what is the short run, and what is the long run?
A. The short run is a year to year proposition -- each year can be different based on
weather and rainfall. The long run involves actions that permanently increase demand
(or provide conservation) over many years.
Q. Can the EBMUD system hold or use all of the water that is available?
A. No. Most years, extra rainfall and runoff needs to be spilled because the system
cannot hold it, and because customers will not use it. In that case, the short-term
marginal cost of water is essentially zero. More water is available than can be used --
so when a customer uses extra water during a year like this year, he causes EBMUD
to incur virtually no additional cost (beyond the variable costs of treatment and
distribution, which as I described above should be very small).
Q. But how can a zero short-run marginal cost of water be reconciled with
conservation?
A. It makes perfect sense in the right short-term context. Essentially, what this means
is that using extra water in a year when there is a surplus is acceptable and causes no
problem with supply, nor any additional supply cost for the District. That is a fairly
obvious and intuitive proposition, and one which I believe many customers
understand. I expect that the tremendous customer harm caused by the $3.44 rate was
in part related to this -- because many customers understood that this was a very wet
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 9
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year, during which it should be acceptable to use somewhat more water than they
would normally.
Q. What about sending the proper price signals to a customer who is going to make a
long run water usage decision -- such as how to landscape her yard?
A. Over the long run, extra water usage will occur during both periods of water
surplus and drought. For example, while a new yard may use only surplus water
most of the time, during some years it will also increase demand during a drought.
For these kind of long run decisions, the right marginal cost price reflects both kinds
of situations -- that there will be years when the right marginal cost is about zero,
along with other years when the right marginal cost price could be quite high because
of shortage and the need for extra supplies.
Q. Before turning to the marginal cost calculation details, is there another simple
comparison that should cast immediate doubt on the $3.44 figure?
A. Yes. There are 435.6 water use units in an acre foot. At $3.44 per unit, each
acre foot would cost $1500, which is approximately what it costs to perform
desalinization -- a very costly water supply option usually reserved for unusual
situations. Given that the overwhelming majority of California's developed water
supplies are priced to their agricultural customers at around $50 per acre-foot or less,
it immediately strains credulity to assert that the next reasonable supply option for
EBMUD would be something that costs $1500 per acre foot.
Admittedly, in public policy I've learned that almost nothing is literally impossible
but a claim that the only available water would come at this cost would have to be
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 10
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pretty close to impossible. The far more likely explanation, which of course has
proven to be true, is that such a figure either resulted from a calculation error or the
misuse of a number calculated for another purpose.
Q. Turning to the numbers, what are correctly-calculated marginal costs for EBMUD?
A. From the District's Water Supply Management Program (WSMP) studies we can
find values for all three of these marginal costs. Since the WSMP calculations do not
appear to have included variable treatment and delivery costs, I will leave them out
here to be consistent with the WSMP numbers (while noting again that these variable
costs are almost certainly quite small):
Short-run marginal cost during a surplus = $0.00 / unit
Short-run marginal cost during a critical drought = $3.44 / unit
Long-run marginal cost for all years = $0.86 / unit
These numbers are developed from the Board-adopted "Composite Program II"
scenario, whose costs are summarized on page F24 from Volume Six of the WSMP.
I have included this cost summary as an attachment to this report.
Q. Did you independently verify the costs and feasibility of these new supply options?
A. No. I assumed that the WSMP had properly identified the correct sources of
potential new supply and their costs. What I did was to calculate appropriate marginal
costs based on those figures.
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 11
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I have also made no investigation of the extent to which EBMUD's total system
expenses are reasonable and prudent. This report addresses how best to collect the
District's revenue need, not whether a given level of revenue need is justified or not.
Q. How is the long-run marginal cost of water properly calculated?
A. As I described above, the long-run marginal cost is the cost of providing a new
supply that will be available on a year-in, year-out basis, through drought and surplus.
Composite Program II identifies a program to develop additional water supplies
through a variety of means. Table 1 reproduces those calculations, showing that the
exact long-run marginal cost answer is 88 cents per unit. I have used 86 cents per
unit to be consistent with the rounding that was done by the WSMP study in
calculating the short-run marginal cost during a critical drought, as I will describe
next.
Q. But the WSMP calculations also include an annual loss of 24,700 acre feet of
water due to Incremental Spill/Release/Storage. How should that enter into a marginal
cost calculation?
A. As the WSMP Technical Appendix describes, this loss of water reflects the fact I
noted above -- that most years, the EBMUD system spills a considerable amount of
water because it can't be used or stored. Thus, the WSMP "marginal cost"
calculation is based on assuming that all extra water supplies produced would be
spilled in three out of four years -- numerically, the listed annual loss of 24,700 acre
feet reflects 3/4s of the new supply. In other words, the WSMP analysis effectively
presumes that extra supply and conservation efforts are of no benefit during years
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 12
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Table 1
Correct Long-Run Marginal Cost Calculation
Based on WSMP "Composite Program II"
Item Water Produced (Acre Feet/Year) Gross 30-
Year Cost
Conservation Level II 14,800 118,000,000
Reclamation Al 7,800 137,000,000
Groundwater Themes AB 10,300 85,000,000
Aqueduct Security -0- 44,000,000
Incremental Spill/Release/Storage (4,000,000)
--------- ----------------
Annual Total 32,900
30 Year Totals 987,000 $380,000,000
Cost Per Acre-Foot = $380 million / 987,000 = $385 / acre foot
Water Use Units/Acre Foot = 435.6
Cost Per Unit = . $389 / 435.6 = $0.88
EBMUD WATER RATE REPORT DECEMBER 5, 1995
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when surplus EBMUD water is spilled. That is the essential result of the computer
modeling whose results form the basis for these calculations.
However, by assuming that 3 out of 4 gallons produced are simply lost, and in
essence don't count, the WSMP marginal cost analysis attributes all of the new supply
costs only to water produced during that fourth, critically dry year. The WSMP
analysis therefore assumes that there is no value to new supplies during all other
years. That is the correct approach if what one wants to calculate is the short-run
marginal cost of water during a critically dry year, but it is not the proper basis for a
long-run marginal cost for year-in, year-out pricing.
From that assumption the math in the WSMP is straightforward -- since four years of
costs are attributed to one year of usage, the marginal cost is four times higher for
that critically dry year. But of course, since no cost is attributed to the three out of
four years when water is spilled, the WSMP analysis also values water during all non-
drought years at zero.
Q. Is there another way to explain the problem with using the WSMP calculation
improperly, as the Board majority did, for year-in year-out water use pricing?
A. Yes. Another way to understand marginal cost pricing is to think about the actions
a customer might take, and how much money it might cost EBMUD to offset the
impact of that customer's action. When the two are exactly equal (the price for the
action equals the extra cost the action causes), we have found the correct marginal
cost.
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 13
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Let's go back to the WSMP scenario, and think about a customer who might use one
extra unit of water every single year. Each year, the WSMP new supply options can
produce a unit of water for 86 cents. If a customer were to use an extra unit of
water, he would exactly offset the extra water the WSMP would produce, whether in
some years that extra water would then have been spilled, or whether it might have
stayed in the reservoir during a drought. This shows again how 86 cents is the correct
price on that long-term basis.
Now, on the other hand, imagine two other customers. The first customer uses an
extra unit of water only once, during a non-drought year. That extra usage would be
water that would have been spilled anyway -- so there is no need for any offsetting
action by EBMUD, and the short-run marginal cost of water use is again zero in non-
drought years. By contrast, let's assume the second customer uses an extra unit of
water only once, but during a critical drought. That drought-time usage does reduce
EBMUD's supply in a way that EBMUD would have to spend $3.44 to replenish, by
implementing the WSMP new supply options permanently just to get that extra unit of
water during drought years (when no excess water would be spilled). With regard to
the first customer, there is no supply impact to remedy, since all he does is reduce the
spill by one unit -- so his actions impose no marginal cost, and the appropriate
marginal cost is zero. But the second customer causes an impact by reducing
available supplies during a severe drought, for which the offsetting cost (and hence
marginal cost price) is $3.44.
These calculations also help us understand the long-run marginal cost price from yet
one more perspective. Three out of four years (in non-drought times), using an extra
unit causes a zero marginal cost; the fourth year (during the drought), it causes a
$3.44 marginal cost. Those average out to 86 cents per unit over the entire four-year
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 14
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cycle of rainfall and drought. By contrast, were EBMUD to charge $3.44 per unit
each and every year, by the fourth year EBMUD would have collected $13.76 -- or
four times the true cost to EBMUD to offset the use of an extra unit of water, each
year, over a four-year period. Thus, using the $3.44 rate on a permanent basis would
charge customers four times the actual cost their extra use would impose -- which
again shows that $3.44/unit is the wrong figure for permanent marginal cost pricing.
No matter how you look at it, the answer is always that correct marginal cost
principles show that the $3.44 figure is incorrect as used in the punitive rate design.
Q. Suppose every year was a drought year -- how would that affect the WSMP
calculation?
A. If every year was a drought year, then there would never be any spill. In that
case, the "Incremental Spill/Release" figure in the WSMP table would be zero, and
the entire production of "Composite Program II" would be kept and used every year.
However, that just brings us back to my calculations above in Table 1 -- the marginal
cost per unit is then 86 cents, because the total cost would be divided by the total 30-
year production of 987,000 acre feet.
Intuitively, that calculation might seem odd -- why would a short-run marginal cost be
less if droughts were permanent? But the reason is simple, and helps show how a
quirk in the analysis produced the $3.44 result to begin with. If you assume that all
extra water is simply lost in three out of four years (due to spill), then four years of
effort are required to produce that extra unit of water for the one out of four years
that it is needed. But if the water is needed every year, then every year's production
is valued, and each year of use only has one year of production cost attributed to it --
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 15
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leading right back to 86 cents. Indeed, you can perform this calculation by assuming
that droughts occur every other year, every third year, every-tenth year, and so on. .
The less frequent the drought, the higher the short-run marginal cost comes out during
the drought year, because more and more years of non-drought effort are factored in
to calculate that short-run marginal cost. But for all such scenarios the proper long-
run marginal cost remains 86 cents per unit.
It's just common sense. The WSMP examined permanent solutions to providing extra
water by making 30-year investments. If we allocate all of those investment costs
only to the years when the water turns out to be needed, then the fewer such years
there are, the higher the per-year costs will appear to be during droughts. But the
result of such an exercise says nothing about how much it would take to pay off the
30-year investment in the equivalent of 30 annual payments -- which is what needs
being done in setting a long-run marginal cost price to be applicable in every one of
those 30 years. That long-run marginal cost price is 86 cents.
Q. How could these various short and long-run marginal costs be used for pricing
water use by EBMUD customers?
A. If the Board wishes to use simple marginal cost pricing, it has two basic choices.
Using short-run marginal cost pricing would leave all water use priced at
approximately zero for all years when water is spilled, and at $3.44 during a critical
drought year.
Using long-run marginal cost pricing would leave all water use priced at 86 cents per
unit during deluge and drought alike.
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 16
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But what the Board majority did, and what correct marginal cost pricing says it cannot
do, is to price all usage for the fourth tier at $3.44 per unit either in a non-drought
year, or permanently.
Now, to be somewhat more practical, there are ways to use these pricing principles in
a more intuitively sensible fashion, while also setting prices to properly reflect the fact
that most EBMUD costs are fixed. I will return to those approaches in the final
section of my presentation. But it is clearly unsupportable and wrong to price any
water usage at anything like $3.44 during a non-drought year, or on a permanent
basis.
Q. To step back from the numbers again, what are some disadvantages of marginal
cost pricing for EBMUD?
A. There are two that I would focus on in this context.
First, for the most part EBMUD does not actually have to spend the marginal cost of
water to obtain its supplies -- these costs probably relate only to a small portion of the
water EBMUD serves. Thus, in terms of the overall system as it operates today,
marginal costs are hypothetical for the most part. Some customers may feel that
pricing based on hypothetical costs, no matter how justified by economic principles, is
unfair or inappropriate.
Second, there is an important political risk associated with marginal cost pricing in
this context, especially because it is for the most part a hypothetical exercise. There
are a great many ways that one could think of expanding the water supply available to
the District. Presumably these various alternatives have a range of possible costs.
EBMUD WATER RATE REPORT DECEMBER S, .1995 PAGE 17
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The EBMUD Board has the ability to choose selectively among the range of
possibilities to produce a "result" designed to produce a desired usage rate outcome.
For example, advocates interested in subsidizing small water users could adopt an
analysis producing a very high "marginal cost," while advocates for large user
interests could err in the other direction by looking for a low result. This political
risk is intensified because such new supply options do not appear to be very significant
in terms of today's water supply, thus, there may be little of an actual operational
reality check on new supply "options" that may in truth be unrealistic.
Fortunately, as I will discuss below, there are other principles to which we can refer
aside from the choice of a potentially arbitrary "marginal cost" supply scenario. As it
turns out, those principles independently support a long-run usage rate of about 86
cents for all customers.
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 18
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II. Price Discrimination
Q. What is economic price discrimination?
A. It is setting different prices that vary in ways not related to underlying differences
in the cost of service.
Q. Is the current fourth tier rate discriminatory?
A. By any reasonable benchmark, the answer has to be yes. Here are the current
water use charges:
Usage Price Per Unit Marginal Cost Markup
Up to 172 gallons/day $1.09 $0.86 27%
Next 221 gallons/day $1.35 $0.86 57%
Next 345 gallons/day $1.50 $0.86 74%
All additional use $3.44 $0.86 300%
By comparison to marginal cost (which is the most appropriate benchmark), it is
obvious that the fourth tier rate is highly discriminatory. Another possible benchmark
would be to compare customer bills with the total cost of service that might be
allocated or assigned to customers on some basis. I do not have enough information
to perform such a calculation; however, it would be very difficult to imagine any
genuine cost differences that could possibly justify such a dramatic increase between
the third and fourth tier rates (going immediately from a 74 percent markup to a 300
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 19
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percent markup). Of course, as I will return to later, in reality the present costs of
the EBMUD system are almost entirely fixed. Therefore, large differences in bills
based only on total usage are also discriminatory based on current system costs, which
vary only slightly on that basis.
Q. But don't large water users cause more system peaking costs? Could that justify
the fourth tier rate?
A. Page 3-8 of the CH2M HILL study shows information on how residential usage
contributes to peak demands. It shows the following peaking factors for residential
customers:
Single Family West Single Family East
Max-Day Factor 2.26 2.64
Max-Hour Factor 4.53 5.28
We know that the average per-customer residential consumption is just over twice as
high in the east area as compared to the west (from Table 3-2 at page 3-3 of the
CH2M HILL report). The above figures show that contribution to peak per unit of
use is somewhat higher for these higher usage customers, although not dramatically
so. While this information in itself is not enough to settle the issue with certainty,
there is no difference in these figures large enough to suggest that the difference
between the $3.44 rate and the other usage rates is genuinely proportional to
differences in peak fixed cost responsibility (leaving aside, for the moment, the
question of the proper way to collect rates to reflect peak demand fixed costs, which is
through fixed charges and not usage rates). And the Board majority's statements do
not reflect any effort to try to justify the fourth tier rate on that basis.
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 20
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Q. Was this discriminatory rate targeted at customers in the warmer east area only?
A. Yes, according to the EBMUD General Manager's November 27, 1995 Report and
Recommendation on Revisions to the Water System Schedule of Rates and Charges.
At page 4, the report states that the usage cutoff for the $3.44 rate was selected
purposefully to target summer consumption for only those customers "East of the
Hills," which I understand not to include any of the constituents who vote for those
Directors in the Board majority. I found this rather striking -- that the Board majority
would candidly admit its discriminatory intent.
Q. Is all price discrimination wrong?
A. Although all 50 states have laws prohibiting undue or unreasonable price
discrimination by regulated public utilities, in general there are no precise guidelines
or limits as to what discrimination is unlawful. In some cases price discrimination is
considered appropriate, as in charging residential customers less than businesses for
basic utility services that cost no more to provide; there is also an economics literature
on efficient price discrimination through means such as Ramsey pricing. Competitive
firms that have high fixed costs may attempt to use price discrimination to help cover
their overheads by charging "what the market will bear" to different customers,
although the competitive process also tends to limit such practices. And there is no
reason why all overheads should be the same percentage in any business.
But regardless of the nuances of the issue, there is no way to avoid the conclusion that
the current fourth tier rate is egregiously discriminatory, targeted only at customers
not residing in the election districts of the Board majority. Notwithstanding statements
about conservation, the genuine cost and supply circumstances of EBMUD make it
I
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clear that the only apparent basis for the fourth tier rate was a misunderstanding or
fallacy regarding the appropriate marginal cost price related to additional water
supplies, or perhaps a desire to create cross-subsidies through punitive pricing. This
cannot be characterized as reasonable price discrimination.
Q. How do the General Manager's proposed rate alternatives compare to the
discriminatory impact of the present rates?
A. Both move in the proper direction, but are still discriminatory:
Option 1 Option 2
Usage Price/Unit Markup Price/Unit Markup.
Up to 172 gallons/day $1.09 27% $1.09 27%
Next 221 gall ons/day $1.35 57% $1.41 64%
Next 345 gallons/day $1.65 92% $1.69 97%
All additional use $1.95 127% $1.69 97%
Both alternatives still discriminate against large water users, and in favor of low water
users. And as I will discuss below, neither alternative addresses the imbalance
between fixed and usage charges -- instead, they merely redistribute the existing usage
revenues among usage rates. However, Option 2 at least eliminates the explicitly
targeted discrimination now directed at customers east of the hills, while Option 1
would retain that discriminatory intent with a fourth tier rate that would still reflect a
substantial increase over prior usage rates. So, of these choices, Option 2 is clearly
less discriminatory, and therefore more appropriate.
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Q. How do the General Manager's rate options compare to proper marginal cost
pricing?
A. While both retain usage prices well in excess of long-run marginal cost, Option 2's
usage rates are closer to marginal cost and therefore will give better conservation price
signals. So Option 2 is also preferable on these grounds.
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 23
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III. Appropriate Rate Design Principles
Q. What will you present in this section of your report?
A. I will review broader principles of appropriate water utility rate design, including
the CPUC's statewide rate-setting policy for utilities comparable to EBMUD. I will
show how a rate structure based on fixed customer charges plus an 86 cents/unit usage
price would comply with statewide CPUC rate design standards, send appropriate
conservation price signals while meeting the conservation rate guidelines of the
California Urban Water Conservation Council MOU, and be far more fair than the
present rate design.
Q. Is there a single proper method for setting good water rates?
A. No, because there are a variety of public policy goals related to water rate design,
and a good rate design will take appropriate account of each in reaching a balanced
result. I have already touched on several such considerations -- appropriate
conservation in the short and the long term (which, as we have seen, can even conflict
with each other to some extent), the absence of unfair price discrimination with regard
to the costs customers impose on the system, or pricing water to provide the greatest
value in use for all customers and the economy as a whole -- which would mean very
low water usage charges. The financial stability of the utility is another concern
closely related to rate design, because outside water use is largely driven by the
weather, which varies unpredictably. By placing most of EBMUD's high fixed costs
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 24
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in variable water usage charges, the District is almost guaranteeing that variations in
the weather will cause wide, and potentially undesirable fluctuations in revenues.
Q. How do excessively-high water usage prices cause harm to the economy?
A. Excessively-high water usage prices artificially prevent reasonable uses of water
that can benefit customers and the economy. Residential customers are affected
directly, as when high water bills presumably reduce the value of their homes. For
example, the value that landscaping creates for homes (especially in locations where
zoning rules require large lot sizes) is genuine, quite substantial, and also adds to the
value of the community generally. Businesses that depend on supplying related goods
and services can be harmed if excessive water prices stunt demand for their products.
These economic values are genuine, and should not arbitrarily be damaged or
destroyed.
Indeed, it would be ironic, and wrong, for the same water District that increases the
costs of many new homes through large initial service connection fees to turn around
and destroy part of the value of the same homes through unjustifiably high water
usage prices.
Q. Aside from the goals you just mentioned, what important economic principle
appears to have been overlooked in the EBMUD rate design process?
A. The basic principle of cost causation appears to have been overlooked with respect
to fixed and variable costs. Cost causation in pricing means charging customers for
the specific consequences of their actions. With respect to fixed and variable costs,
this means charging customers for fixed costs when they make demands on the
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 25
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EBMUD system that cause the District to incur a fixed cost, while charging customers
for variable costs when they take an action that causes variable costs to be incurred.
If a pricing scheme does not respect cost-causation, then subsidies are created from
one type of customer to another.
Q. How does the EBMUD rate structure ignore this principle?
A. Most EBMUD costs are fixed, yet most EBMUD revenues come from per-unit
pricing of water use. This is the big disparity, because extra customer water use does
not cause fixed costs to be incurred, and fixed costs would not be saved if water use
was cut back.
In other words, based on the rates you might think that it is very costly for EBMUD
to deliver extra water to a customer. That's clearly untrue, and just about opposite of
the reality of the situation. As a result, the present EBMUD pricing structure
subsidizes small volume water users at the expense of large volume water users.
Q. How did EBMUD's water rate design study handle this issue?
A. The CH2M HILL study does not appear to distinguish between fixed and variable
costs in its cost allocations or pricing recommendations. Cost allocations are
presented on an aggregate basis that does not identify which components vary with
usage, and which do not. And the six rate options presented do not include an
alternative that would significantly reduce per-unit water charges to recognize this
principle.
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 26
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Q. Given EBMUD's costs, how would the distinction between fixed and variable costs
be reflected in designing rates if it were the only consideration?
A. The only costs that would be factored into per-unit water usage charges would be
variable costs that are actually caused by using more water. Fixed costs would be
recovered either in flat monthly charges, or as a one-time fee for starting service (such
as to a new development).
This structure would result in water usage charges only a fraction of their current
level. But such charges would reflect the reality of the District's economics -- that a
substantial fixed cost is incurred to provide a customer with any service at all. It is
the decision to have water service to a given location that causes such costs, not how
much water a customer then asks for through those facilities. And customers who
don't pay the full costs they impose on the District are being subsidized.
Q. Does the distinction between fixed and variable costs necessarily dictate the rate
design?
A. No. But it is an important principle that must be factored in to help promote
efficient pricing, and to help avoid or minimize subsidies from large water users to
lower-volume water users who impose similar costs on the District despite their
different use patterns. It's not fair to charge dramatically different water bills to
customers who impose similar costs on EBMUD, yet that's exactly what happens
when fixed costs are loaded into usage charges as they are now.
Q. What is the statewide policy of the California Public Utilities Commission (CPUC)
on the allocation of costs between fixed and variable charges in water rate design?
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 27
-A. The CPUC regulates all investor-owned water utilities in California, including
setting their rates. For its largest, Class A water utilities, CPUC policy is that fixed
monthly customer charges should recover up to 50% of the fixed costs of the system.
This policy was established in 1986 following a comprehensive review of water utility
rate design, which up to that point had been recovering only 30-35% of fixed costs
through monthly fixed charges. Here are excerpts from the Commission's decision
that established this policy:
"Conclusions of Law
1. The current water rate design policy does not provide a realistic or
appropriate distribution of revenues between the service charge and consumption
charge.
2. Staff's flatter rate proposal provides a realistic distribution of revenues
between the service charge and consumption charge.
3. Staff's proposal for a statewide policy, subject to certain conditions, is a
reasonable balance between utilities' interests and customers' needs and should be
adopted as policy to the extent provided by the following order.
ORDER
IT IS ORDERED that:
I. A flatter rate design policy shall be adopted as statewide rate design
policy for water utilities.
2. The flatter rate design policy shall incorporate the following guidelines:
a: Service charges shall be set to allow utilities to recover up to 50%
of their fixed cost.
b: Lifeline rates shall be phased out.
c: There may be multiple commodity blocks, with the number of
commodity blocks to be limited to no more than three blocks.
d: Seasonal rates may be applied in resort areas.
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3. The new policy shall be implemented in future general rate proceedings.
4. Fixed cost as it relates to service charge shall be defined as those direct
costs that are necessary to provide customers access to water, including:
a: Maintenance expense
b: Transmission and distribution expense
c: Customer account expense, excluding uncollectibles
d: Administrative and general expense
e: Rent expense
f: Depreciation expense
g: Property tax expense
h. Gross return on investment (rate base)
5. The need and appropriateness of conservation shall be addressed as a
part of all future rate applications. "
(CPUC Decision 86-05-064, May 28, 1986)
This policy was reexamined in a 1994 CPUC decision, and reaffirmed by rejecting
proposals to increase the proportion of fixed cost recovery to 100%:
"Utilities argue that chronic water shortage is a generic problem requiring a
generic solution. In the sense that `generic' implies a condition equally affecting all
members of a group, that has not been shown, Even if chronic water shortage requires
cutbacks in sales at the retail level, our record shows that not all Class A water
utilities will be affected equally, and some will not be affected at all. Indeed, the
recent six-year drought, while devastating in some areas, had little or no effect on
many of the Class A water districts. We agree with DRA that if an ERAM or similar
device is to be considered, it should be done on a specific basis upon a showing of
need, rather than on a generic basis without such a showing.
"The same reasoning applies to utilities' proposal that increased sales risk be
dealt with by authorizing up to 100% recovery of fixed costs in the service charge.
Since fixed costs include a return on investment, this regulatory tool can all but
eliminate financial risk. In Phase One of this proceeding, we found that many small
Class D water companies were likely to simply go out of business without economic
relief. That is not true for the Class A water companies. A chronic water shortage
may one day present severe financial risk for one or more of the Class A companies,
EBMUD WATER RATE REPORT DECEMBER S, 1995 PAGE 29
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but that day has not arrived. If and when it does, an affected utility should seek
and we will consider -- an appropriate increase in the fixed-cost component of the
service charge. Because the subject was not addressed in this proceeding, we leave
open the question of whether increasing recovery of fixed costs in the service charge
should one day replace sales forecasts as the basis of rate design."
(CPUC Decision 94-06-033, June 22, 1994, pages 42-43)
As noted in the latter decision excerpt, for its smaller, Class C and Class D utilities,
the CPUC has modified this policy to require that even greater proportions of fixed
costs be recovered from flat monthly charges. But the appropriate comparison is with
the CPUC's Class A utility standard. If it were regulated by the CPUC, EBMUD
would be a Class A water utility.
Q. To return to broad rate design principles, please review the cost characteristics of
EBMUD's system that are relevant to rate design.
A. Once again, there are three types of costs that can be factored in.
First is the cost of actually providing additional water to customers -- the costs caused
by turning on the tap once a customer already has service. I have focused primarily
on these, because it is here that the Board majority made its mistake in setting the
current rates. Just to summarize, the actual cost of delivering extra water should be
close to zero, including only the variable costs of pumping and treatment. The year-
by-year marginal cost of using water varies widely depending on whether there is a
drought, or not. The long-term marginal cost of water is 86 cents/unit based on
EBMUD's own studies.
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Second is one type of fixed cost -- the costs that every customer imposes on the
system simply by asking for any water service whatsoever. These costs include a
standard size meter and water line to one's premises, along with some proportion of
the overall system fixed capacity costs for water storage, transportation, treatment and
delivery. These costs are incurred regardless of how much water a customer actually
puts through these fixed facilities.
Third is another type of fixed cost -- the costs that are required in addition to baseline
requirements to serve the peaking needs of the system. Many facilities must be sized
to meet the highest peak demand that the system will incur, even if portions of those
facilities will sit idle at other times. To the extent that customer usage contributes to
peak demands above and beyond baseline use (which is also a part of the peak), the
system incurs additional fixed costs. Note, however, that these costs are not
necessarily proportional to total water usage -- because a customer who happens to use
a large amount of water only at the time of peak demand will cause as much
additional cost of this type as another customer who uses that same amount of water
constantly throughout the year.
Q. How can these costs be assigned to customers and water usage to produce a good
rate design?
A. There are two logical baselines to start from. One is cost-based pricing focusing
entirely on EBMUD's current cost structure -- charging customers separately for the
specific costs they impose on the District by subscribing to service, contributing to
peak demand, and using water. That would involve collecting all fixed costs through
fixed charges, and only usage-sensitive costs through variable charges. The results
would be much higher fixed monthly charges for all customers (with those who
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 31
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contribute highly to peak demand paying the most), and water usage fees possibly on
the order of about 10 - 15 cents/unit (based on the assumption that about 93 percent of
District costs are fixed).
The other logical baseline would involve putting conservation first by levying marginal
cost-based usage charges and then collecting only the remaining revenue need through
fixed charges. On a long-term basis, that would involve charging 86 cents/unit for all
water use, and then collecting the remainder through fixed charges that are somewhat
higher than those collected today (with the possibility of making those fixed charges
higher still for those customers whose use contributes the most to peak demands).
Note that both of these alternatives involve lower usage charges than even the previous
rate structure, before the unfair fourth tier was added. This is because current and
prior rate structures have overloaded fixed costs on usage charges, and therefore
inadvertently set water use charges too high for long-term conservation purposes.
Even the lower tier prices are too high for appropriate conservation price signals.
Q. Can these two rate design alternatives be pursued simultaneously?
A. Only by compromising with regard to one or the other. If all fixed costs are
collected from fixed charges, charging the full long-run marginal cost of water in the
usage charge will collect too much money. So either fixed costs have to be under
collected in fixed charges, or the usage price of water must be set below marginal
cost.
Q. What do you recommend?
EBMUD WATER RATE REPORT DECEMBER S, 1995 PAGE 32
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A. I would recommend putting conservation first by charging the full 86 cents for
each unit on a long-term basis. I think customers need to see that price signal for the
purposes of their long-term decisions, even if it will encourage them to save too much
water when conservation is not really required, such as this year. While it is less fair
to large users for fixed charges not to cover all fixed costs, I think that tradeoff is one
that can be reasonable if not pursued to excess.
Q. How would your recommendation distribute the recovery of fixed and variable
costs?
A. This pricing policy would comply with CPUC water rate design policy regarding
the recovery of fixed and variable costs from appropriate customer charges.
Using only approximate numbers based on what was included in the General
Manager's Report (which would need to be verified if precise calculations were
required), current residential fixed monthly charges now recover about 27% of total
residential revenues ($21.7 million out of $79.4 million, Report page 4), while water
usage charges recover the remaining 73%. And as noted earlier, I understand that 93
cents out of every dollar of District costs are fixed, while 7 cents out of every dollar
are variable costs. Applying the 93% fixed cost proportion to the $79.4 million in
revenues produces an approximate result that residential rates include something like
$73.8 million in fixed cost recovery (assuming that a single fixed cost proportion
would apply across customer classes). Therefore, residential fixed charges now
recover only about 27% of fixed costs, which is less than the PUC's water utilities
were recovering in their fixed charges before the Commission ordered the proportion
raised.
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 33
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My alternative would raise approximately $33.8 million in usage charges ($0.86 times
the total single-family sales shown in the Report, page 3), as compared to the $52.2
million now reported a ort, page 4). I would apply the difference of $18.4 million
to increased fixed monthly charges, which would increase them to a total of $40.1
million, which is just over half (54%) of the $73.8 million in fixed cost recovery
approximated above. However, the reduced usage rate should stimulate some increase
in usage that would thereby increase the revenues that the 86 cent rate would raise
(from $33.8 million to some higher figure). I would take any expected stimulation of
this kind and use the expected revenue increase to reduce the fixed monthly charges,
which would probably bring the proportion of fixed cost recovery in the fixed monthly
charges close to 50%. Again, I would emphasize that all these numbers are just
approximate and would need to be verified.
Thus, in round numbers, my recommended rate design would fit rather well with the
CPUC's policy of recovering 50 percent of fixed costs through fixed monthly charges
for regulated water utilities.
Q. How do the options proposed by the District General Manager compare on this
basis?
A. Both rate options retain the present over collection of fixed costs through variable
water use charges -- they are no improvement. Thus, while they are less
discriminatory, as I indicated above such options should only be the first step towards
an improved, much fairer rate design consistent with economic principles and CPUC
rate design policy.
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 34
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Q. Is your recommendation consistent with the conservation rate design principles
contained in the California Urban Water Conservation Council MOU, to which
EBMUD is a signatory?
A. Yes. As the General Manager reported, the MOU provides that conservation
pricing should have a cost of service basis for metered water rates, as these rates
would. Additionally, conservation pricing should fulfill at least one of five objectives
specified in the MOU. My proposed rate design meets this standard by satisfying two
of those objectives:
• "Rates in which the unit rate is constant regardless of the quantity used
(uniform rates) or increases as the quantity used increases (increasing block
rates);
• "Rates based on the long-run marginal cost or the cost of adding the next
unit of capacity to the system." [Emphasis added]
(General Manager's Report, November 27, 1995, page 2)
As I highlighted in the above excerpt, the California Urban Water Conservation
Council also appears to recognize the role of an appropriate long run marginal cost
price for conservation rate design, as I have explained.
Q. What about managing a critical drought?
A. As I stated earlier, much higher usage prices can be justified during a critical
drought. But I would also offer a few important observations about the role of price
alone in managing droughts.
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 35
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First, our water shortages are not permanent, but occur from time to time and then
end. It is easy, and harmful, to overdue permanent measures in an effort to address
an ongoing series of unpredictable, but temporary problems. Second, economists have
calculated the extent to which customers will reduce consumption strictly as a reaction
to price. It turns out that the price elasticity of demand for water is not high enough
to manage severe droughts solely by price without imposing punitive price increases
on customers. However, voluntary conservation does work, and is a primary means
by which droughts have been managed in the past, and will be managed in the future.
Californians are willing to do a great deal to save water when conservation is critically
needed. Therefore, while some form of short-term drought pricing is a helpful signal,
it cannot substitute for (or be fully effective without) the kinds of voluntary efforts we
have seen in the past, and which I understand continue in part today even during times
of plentiful supply.
So I share the Board's concern about managing droughts. Pricing has a role. But
when the Board's own consultants' historical studies lead them to assume that water
surpluses will be available roughly three out of four years into the future, we need to
recognize that solutions should be tailored to the real nature of the problem -- that
droughts are the exception, not the rule.
Q. How do your recommendations affect EBMUD's financial stability?
A. Moving towards a greater use of fixed monthly charges is not only fair and
efficient, but will also reduce somewhat the revenue swings that the District
presumably suffers due to weather-induced usage changes. That will benefit the
District, including improving its financial stability in ways that could be well received
by the rating agencies that influence the District's bond financing costs.
EBMUD. WATER RATE REPORT DECEMBER S, 1995 PAGE 36
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Q. Is the information now available to implement your full recommendations?
A. We have a long-run marginal cost estimate -- 86 cents/unit -- that could be used to
price all water use. I have also calculated that an 86 cents/unit water use price would
collect about half of the District's fixed costs (the exact proportion depending on
precise calculations, and how usage stimulation is factored in), leaving about half of
the fixed costs to be collected through fixed monthly charges. These rates would be
consistent with the CPUC's statewide policy for its regulated water utilities.
The remaining information that would be needed to set equitable fixed monthly
charges would be an understanding of the relative fixed costs that different customers
impose on the District, so that the remaining part of the revenue need could be
collected from fixed monthly charges pro-rated in some fair proportion among
customers.
Depending on how elaborate the Board may wish to be in setting such fixed charges, a
wide variety of potential factors could be considered to assess each customer's
contribution to baseline and peaking fixed costs. I will not repeat here the various
cost estimates and allocations contained in the CH2M HILL study, except to note that
such information could be of some value in this process if its potential applicability
were reviewed. In particular, it would be important to understand exactly how CH2M
HILL allocated costs to various customer demand characteristics. Reading at page 5-6
of the report:
"Allocations to Customer Classes
"Allocation of the costs by customer service characteristic (Tables 5-1 and 5-3)
to customer classes is based on the proportionate use levels of each
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 37
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characteristic by each class. Joint costs are shared proportionately by all
classes. East and west costs are allocated only to the customers in each region
on the basis of their respective proportions for each characteristic." [Emphasis
added]
In the above excerpt, I have emphasized the references to a kind of proportional
allocation of costs. If that allocation was done in proportion to water usage, then the
cost allocation process itself would already have effectively assigned fixed costs to
various customer groups based on water usage, rather than the extent to which those
customers actually impose fixed costs on the system. If that was the method used, the
resulting "cost" figures would not be an appropriate basis for understanding how fixed
costs might be related to the three critical cost factors I identified -- fixed costs related
to obtaining basic water service, fixed costs related to satisfying peak demands, and
variable costs actually incurred as a result of additional use of water.
This is not to imply that there is anything "wrong" with the CH2M HILL study.
Rather, by these observations I wish to highlight the essential point that before one can
say that particular cost figures can be used for a particular purpose, one needs to
understand fully how the figures were developed and what they represent. There are
many ways of preparing perfectly appropriate cost estimates that may be well-suited to
some potential uses, but not others. I would expect that CH2M HILL could verify
and/or develop the appropriate fixed and variable cost figures if given direction to do
SO.
I would also note that peak demand pricing may or may not be a viable approach with
regard to customers whose meters measure only total volume of water use (and are
presumably read only once a billing period). There are other potential concerns also
related to the practical application of peak demand pricing, such as the need to define
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 38
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the peak (CH2M HILL examined peak day, hour, and season demands), the fact that
the peak can shift because of weather or in response to peak demand pricing, and the
possibility that any peak demand price could effectively become an inappropriate
increase to the usage price if it must ultimately be based on usage (the only thing the
meters can measure). And finally, we must not forget that large water users would
already be subsidizing fixed costs fairly substantially through paying marginal cost-
based usage charges that still greatly exceed the current District cost of delivering
additional water.
In any event, the Board could direct its staff to investigate options for an equitable
allocation of fixed costs based on cost causation and equity. A reasonable resulting
schedule of fixed monthly charges might include a few simplified categories of
customers, each of whom might be charged a somewhat different fixed monthly fee in
recognition both of their fixed cost responsibility, as well as the amounts of fixed costs
they would already pay through a usage rate set at 86 cents. For example, while large
water users will tend to contribute more to peak demand, without looking at the facts
we cannot know the extent to which a given usage rate (be it 86 cents or some other
number) might tend to cover (or exceed) some estimate of peak fixed costs for a
customer using a given amount of water with an assumed peaking factor.
Q. Is your recommendation fair?
A. Yes. It is eminently fair for customers to pay rates to reflect the actual costs they
impose on the District, and in that respect the current rate design is grossly unfair
towards large-user customers. It's just not true that extra water use imposes enormous
costs on EBMUD, and charging as it if does is wrong. My recommendation would
preserve the correct long-term conservation price signal while making the overall rate
EBMUD WATER RATE REPORT DECEMBER 3, 1995 PAGE 39
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design much more reflective of the costs customers impose on the District -- the most
fundamental fairness benchmark there is.
Q. What about the potential impacts of revised rates on poor customers?
A. I don't know what relationship there is between water use and economic status.
Even if we make a reasonable presumption that more wealth leads to higher water
usage, we would not know how strong or consistent that relationship is, and there
would doubtlessly be exceptions (such as wealthy cool area condominium owners as
compared to poorer families in warm-area rental properties). And without entering
into a broad philosophical debate about what's reasonable and what isn't in terms of
poverty programs, it is a virtual certainty that broad water rate subsidies are a weak
and ineffective way to achieve any kind of focused impact.
The best way to assure that no group of customers is disproportionately harmed by
changing rates is to advise the public of exactly what is being considered, and then to
move rates only gradually -- which I understand to be the opposite of what the Board
majority did in adopting this punitive new rate structure. In that way adverse impacts
can be recognized before they cause great harm, and moderated, where necessary, by
ongoing adjustments to the process.
Q. What is the appropriate next step for the Board?
A. Obviously, the new rate must be rescinded, at least with regard to the fourth tier.
It is clearly discriminatory, punitive and unjustified. Of the options presented,
implementing the General Manager's Option 2 would be a reasonable first step.
Having taken this step, I would recommend that the Board direct its staff to develop a
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 40
s y •
1
transition plan towards the rate design I recommended, where all usage is priced at
long-term marginal cost while remaining fixed costs are collected through flat monthly
charges in some proportion to the fixed baseline and peaking costs that are the
responsibility of various customers.
Q. Does that complete your report?
A. Yes.
EBMUD WATER RATE REPORT DECEMBER 5, 1995 PAGE 41
H E CONS
IDER WITH � _r5 rYLk
a�F RcG
�R1 CITY OF HERCULES —
V y 111 CMC DRIVE, HERCULES, CA 94547
PHONE: 510 . 799 • 8200 O'T C 0 1g 7
September 30, 1997 �` U�tK,,l`�Lk UILKEMA
Supervisor Gayle B. Uilkema
Contra Costa County
Supervisorial District Two
County Administration Building
651 Pine Street, Room 108A
Martinez, CA 94553-1293
Dear Supervisor Uilkema:
We are in receipt of your letter of September 23, 1997 with respect to the proposed
Ad Hoc Committee's work relative to the issue of EBMUD's tiered water rate
structure.
Thank you for your personal efforts to insure that your local jurisdiction served by
EBMUD has an opportunity to express their position regarding the proposed tier
water rate structure.
At this time Hercules has not taken a formal position with respect to EBMUD's
proposed tiered water rate structure. I expect that the item will be on our upcoming
October 14, 1997 City Council meeting agenda for discussion of a possible
position. Regretfully, we are unable to provide you with information prior to your
October 6, 1997 meeting. However, upon our consideration of this issue I will
quickly convey the position taken by our City Council.
Thank you again for your request for input.
Sincerely,
Ken S. Hobbs .
City Manager
cc: Mayor& City Council
Connie Jackson, Asst. City Manager
KSH/sjm
Request to Speak Form
( THREE (3) MINUTE LIMIT) /
Complete this form and place it in the box near the speakers,' Fostrt
before addressing the Board,
Name; L L ! LJ phone: 2 T12
/address: .,D 31 Z atn .t A- /J
I am speaking for myself_..i or organization: —'� .
Owns of oianisatioN
Gi -ONE
I wish to speak on /agenda Item #.LL. Daft
My comments will be: general ijor_,again'st .
_ 1 wish to speak on the subject of
_ I do not wish to speak but leave these comments for the Board
to consider:
Gayle B. Uilkema, Supervisor 10-8-47
District 11, Contra Costa County CEIVED
651 Pine Street, Rni. 108 A 7
Martinez, California 94553-1229 - 1997
QCT
Dear Gayle, R UIL EMA
At the Crockett Improvement Association's Board of Directors
Meeting, 10/7/97 , there was a discussion about water rates. The
culmination of this was a Board authorization to issue this letter.
There was a consensus opinion that we in Crockett should not be
fiscally penalized by the water rate structure. Areas where there are
drier and hotter conditions should pay for additional usage.
We did, however, have a compromise lower tier pay level suggested
for any homeowner who applies for an exemption from accelerated
rates. To qualify the District would set guidelines for drought
resistant species and low water use irrigation ( drip systems as an
example). The applicants would have to pay for a district audit
certifying their exemption compliance.
This compromise would allow conscientious water users to avoid
excess charges, while allowing rates to have an appropriately higher
level for excess use. Unnecessary capacity expansion is a capital
expense that is avoidable.
Ja G elman, Director
IrA nviroire
C nmental Affairs Committee
P.O. Box 13 2
Crockett, California 94525