Setting Davis water rates in the most fair manner

The City of Davis adopted an innovative rate structure in 2012 to fund a new surface water supply project. The new framework, called “consumption-based fixed rate” or CBFR, originally was structured to provide a stable revenue source for recovering debt costs while allowing customers to reduce their bills when conserving. Instead of having a fixed, constant readiness to serve or demand charge, the summer demand charge would be recomputed each year by dividing the fixed debt service (about $10M per year) by the total summer usage of all customers. When a customer reduced their share of overall summer usage, their bill would go down. However, the total revenue would remain stable year to year because the summer demand charge would be recomputed to ensure meeting the overall revenue target. The CBFR mutated to a more standard fixed demand charge for various political and legal reasons and it lost some of its revenue stability features.

The City has faced several challenges to the water project and the rates. All had lost up until June 3 when Measure P passed by a small margin and rolled rates back to 2011. The Utility Rates Advisory Committee (URAC), of which I am a member, is redesigning rates on an accelerated schedule to ensure viability of the water project. The Measure P proponents missed several key facts in their arguments, so the URAC will need to ignore some of those errors. However, the most important factor in the defeat of the proposed water rates was in the lack of simple communication and understanding by the public. “CBFR” just doesn’t cut it as a simple saleable concept.

I believe that Davis needs to move toward a more efficient water pricing scheme that signals consumers when they should be using water given costs and environmental impacts. The first fairness criterion is that people should pay prices that best reflect the cost to serve them so there are no unjustified subsidies flowing among customers.  The second fairness criterion is that those with less means can receive a subsidy from those with more if the subsidy can be structured to minimize misallocations of resources.

What doesn’t meet a fairness criterion is having everyone pay a single average annual price that doesn’t reflect how the cost of water varies over the year.  Someone who uses the same amount of water year round should not pay the same average annual rate as someone who uses much more water during the summer, even if they use the same total amount for the year. There are several reasons for this.

The most important centerpiece of the Woodland-Davis water project is the 10,000 acre-foot a year (or 3.25 billion gallons) water right acquired from Conaway Ranch. Based on terms of that agreement and depending on the period used to recover the investment, this water supply costs at least $0.50 per CCF.  But the most important fact is that this cost is only for water delivered in the summer. The purchased water right only runs from April 1 to October 31. Water used in the winter is free. That means that customers using water in the summer should pay at least $0.50 per CCF more just to cover the ongoing costs of the water supply.

Further we need to consider how to allocate the costs of delivering that water to Davis. The reason why Sacramento River water is expensive in the summer and free in the winter is that water is scare and in high demand during the summer. How best to allocate costs when most of the demand happens over a short period can be best illustrated by looking at parking in downtown San Francisco. Parking structures are built with capacity to meet demand during work hours on weekdays. Work hour parking can cost upwards of $30 per day, but on a weekend night when the area is empty, parking typically costs $5. These rates are set by private operators who are recovering their investments as efficiently as they can.

For the same reason, Davis must recover most of its investment in the water conveyance facilities from summer users—the plant capacity was built to meet their demand.  A plant built to an annual average capacity won’t be sufficient in August. The current rate structure properly recovers those costs from those individuals who create the need for such a large investment.

Fortunately, the second fairness criterion of reducing costs for those of lesser means can be met through higher summer pricing because they tend to live in multi-family dwellings or have lower irrigation needs.

Summer water bills could increase dramatically, but a solution is to create an Easy Pay plan where a large portion of the summer water bills are spread over a 12-month period. PG&E offers its Balanced Pay Plan to achieve the same ends. Customers should be placed in this bill payment plan on an opt-out basis, as that opt-in options are usually undersubscribed even when the opt-in benefits are large.

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2 thoughts on “Setting Davis water rates in the most fair manner

  1. mcubedecon Post author

    Robert Glennon refers to a provision in the SWRCB’s drought order that allows for “allocation based rate structures” that he then extends to discuss “tiered rate structures.” (http://www.sacbee.com/2014/08/24/6647989/sensible-tiered-water-rates-needed.html). As I discussed in my blog post, tiered rate structures have been shown to be no more effective than average rates to induce increases conservation. In addition, it’s not clear that tiered rates are useful in inducing different amounts of conservation in dry versus wet years. The answer to how to design the right mix of rates, that generally affect long term efforts, and resources to ride through drought conditions is a more complex problem that choosing a rate structure.

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  2. Pingback: My thoughts on how Davis should set water rates | M.Cubed: Outside the Box

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