When San Diego County residents, employees, and visitors conserve water the San Diego County Water Authority does not need to purchase as much water to meet the demand. That increases the chance that water will be available for drinking, cleaning, irrigating, and other purposes, but the reduction in SDCWA water sales to CWA member agencies decreases revenue for the agency which has fixed costs.
In an effort to avoid a situation where conservation resulting in a decrease in water usage leads to the need to increase rates, the CWA convened a fiscal sustainability task force to develop a revised rate structure.
On March 26, nearly two years after the task force was convened in May 2013 and more than a year after the initial recommendations were released, the CWA board unanimously approved several recommendations while also extending the CWA’s Special Agricultural Water Rate program through the end of 2020.
“Through a truly collaborative process we took some steps to stabilize the financial future of the Water Authority,” said Valley Center Municipal Water District general manager Gary Arant, who is the Valley Center district representative on the CWA board.
“It will provide for more stable financial planning for the Water Authority,” said CWA board chair Mark Weston, who is the City of Poway representative on the CWA board.
The March 26 adoption allowed CWA staff to incorporate the decisions into the calendar year 2016 rates and charges which were approved June 25. The changes add a Supply Reliability Charge, allocate non-commodity revenues to all rate and charge categories including treatment, and apply the debt and equity payments for the Carlsbad seawater desalination plant to the supply rate.
The CWA held a March 12 Administrative and Finance Committee meeting, and the committee unanimously recommended that the full board adopt the revised recommendations while also directing that the recommendations be forwarded to Carollo Engineers, which conducted a cost of service analysis to ensure compliance with the CWA’s cost of service principles and with the state requirements for a nexus between fee charges and service.
The task force consisted of seven CWA board members including Arant and Weston along with two City of San Diego representatives on the CWA board and one board member apiece from the Helix Water District, the Otay Water District, and the Ramona Municipal Water District.
That composition allowed for representation from small and large agencies, agricultural and municipal and industrial (M&I) agencies, and agencies in various parts of the county. The task force met 11 times to develop its recommendations.
Prior to issuing the recommendations, the task force also developed a set of guiding principles which included maintaining the CWA’s credit rating, adhering to cost of service principles and state law requiring a nexus between charges and service, encouraging member agency local supply development, and consistency with Metropolitan Water District of Southern California (MWD) policy position.
The initial recommendations included no changes to the minimum debt service coverage ratio, or ratio of cash available to debt obligation, of 1.5:1 or to changing the structure of the capacity charge (the Capital Improvement Program on which the capacity charge is based may change the amount of that charge). The task force recommended changes to fixed-cost definition, Storage Charge structure, and offset policies. The task force also recommended the addition of a Supply Reliability Charge.
The CWA released the task force’s report to member agencies in January 2014, allowing for member agency input. The task force recommendations were discussed by the CWA board in February 2014 and March 2014, although both the CWA board and the Administrative and Finance Committee expressed a preference for addressing the entire group of recommendations after additional rate allocation calculations were obtained and action was deferred so that outstanding issues could be addressed.
The CWA board sunsetted the task force in March 2014 and the Administrative and Finance Committee directed CWA staff to work with member agency general managers and finance officers to develop a comprehensive recommendation.
The managerial staff addressed enhancing the CWA’s existing fixed charges to provide revenue stability for long-term fixed supply cost obligations, ensuring that the costs of supply reliability are shared equitably by member agencies, allocating non-commodity revenues to the treatment rate, and the future of the Transitional Special Agriculture Water Rate (TSAWR) program.
The managers noted that increasing the CWA fixed charges solely to moderate revenue volatility would result in increased revenue volatility for the member agencies who collect CWA fixed charges on volumetric rates, so the managers in general felt that basing the need for enhanced fixed revenue solely on the need to mitigate revenue volatility was not justified and other methods could be used to address that volatility.
Although the managers did not believe that revenue volatility itself would justify the need for a new fixed charge for supply cost, they generally believed that all member agencies should pay for the reliability benefit all agencies receive from the CWA’s investment in regional supplies such as the transfers from Imperial County and the Carlsbad seawater desalination plant. The managers then focused on developing an appropriate method to measure and pay for that reliability benefit.
The recommendation to clarify the definition of fixed cost originally called for fixed costs to include all CWA payments towards the cost of debt service associated with the Carlsbad seawater desalination project, fixed operations and maintenance costs for the Carlsbad desalination project, fixed operations and maintenance costs associated with the All-American Canal and Coachella Canal lining projects, and the take-or-pay purchase price of conserved Colorado River water associated with the 2003 Quantification Settlement Agreement (QSA) which included a water conservation and transfer agreement with the Imperial Irrigation District and the canal lining agreement.
The final proposals considered were one with no additional fixed charge and all QSA and desalination costs included in the supply rate, one with a new fixed charge for the desalination plant only with the cost difference between the MWD rate and the desalination plant cost being allocated on a three-year rolling average, one with a new fixed charge for the desalination and QSA costs with the cost differential between the MWD rate and the melded desalination and transfer rates allocated on a five-year rolling average, and one with a new fixed charge for 15 percent of the desalination and QSA costs based on a supply reliability metric and allocated on a 10-year rolling average.
The final decision chose the Supply Reliability Charge alternative which utilized a fixed charge to recover a portion of the QSA and Carlsbad desalination plant costs. The charge is set equal to the difference between the supply cost of desalination and the Imperial County purchases (including MWD’s “wheeling” charge to transport the water through the MWD aqueduct system) and a like amount of water purchased at MWD’s Tier 1 rate multiplied by 25 percent.
The charge is allocated to CWA member agencies on a pro-rata basis utilizing a rolling five-year rolling average of M&I deliveries for each member agency. Although some member agencies have local supplies such as brackish groundwater desalination and recycled water, those local supplies could be subject to mechanical or regulatory interruption and the Supply Reliability Charge is considered an “insurance policy” to ensure allocation from the CWA in case of a shortage.
The CWA fixed charges in addition to the new Supply Reliability Charge are the per-meter Infrastructure Access Charge (IAC), the Customer Service Charge allocated among member agencies based on a rolling average of all deliveries, the Storage Charge which recovers costs related to emergency storage programs and is allocated based on a pro-rata share of non-agricultural deliveries, and a Standby Availability Charge of $10 per acre or $10 for a parcel under one acre.
(The CWA also passes along MWD’s Readiness to Serve Charge and Capacity Charge.) The property tax the CWA collects is also part of the agency’s fixed revenues, which account for approximately 22 percent of total CWA revenue. The CWA’s supply, treatment, and transportation charges are considered variable costs.
The threshold between fixed and variable costs sometimes depends on the timeframe; fixed costs do not directly vary with the volume of water produced in the short term while commodity costs such as pumping costs, electricity, and chemicals vary with water production. A cost can be fixed for the life of a contract and then become variable.
The change to apply non-commodity revenue offsets to all rate categories adds the treatment rate, which allows fixed treatment costs to pay for themselves. Property tax and interest earnings are also part of offset calculations, as are capacity charges and the IAC.
The original recommendation to change the storage charge allocation from a three-year rolling average to a 10-year rolling average was not adopted. The recommendation drew concerns that the longer period would penalize efforts to develop local supply. The rationale for a 10-year period was to provide a more accurate reflection of member agencies’ potential need for storage supply and to provide a better alignment with long-term benefits such as 40-year bonds or a facility’s 100-year useful life.
“I think it was well debated at both the staff level of all member agencies and at the board,” Weston said.
“After over 18 months of collaboration with our member agencies and through the board process we received a unanimous vote on the fiscal sustainability recommendation,” said CWA general manager Maureen Stapleton.
In 1994, MWD implemented the Interim Agricultural Water Program (IAWP) which provided surplus supplies to agricultural customers at a discounted rate with the condition of cutbacks in a drought of up to 30 percent prior to implementing any mandatory reductions to M&I customers. MWD imposed such a cutback at the beginning of 2008, and in October 2008 the MWD board voted to phase out the IAWP over a four-year period through the end of 2012.
The CWA responded by creating the TSAWR program for agricultural users. The CWA’s October 2008 action created a two-year transitional program for customers opting out of the IAWP while also creating a workgroup to provide the CWA board with options after that transitional period. In March 2012, the CWA board extended the TSAWR through the end of 2012 while calling for a revised program from 2013 to 2015 and a review of the program prior to 2016, although in April 2012 the CWA board extended the TSAWR itself through the end of 2014.
When the CWA adopted its 2015 rates and charges in June 2014 the TSAWR was extended through the end of 2015; the extension for a single year allowed the program to be considered as part of the final fiscal sustainability implementation.
The Special Agriculture Water Rate for calendar year 2015 is $582 per acre-foot for untreated water and $860 per acre-foot for treated water while the 2015 municipal and industrial rates per acre-foot are $764 for untreated water and $1,042 for treated water.
“I think it gives them some financial stability and some way to plan for the future,” Arant said.”The discount is fairly significant.”
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