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County Water Authority sends out fiscal sustainability task force recommendations - likely that rate structure will be revised
Tuesday, February 18th, 2014
Issue 08, Volume 18.
The CWA may approve some of the recommendations at the agency's February 27 meeting, although both Administrative and Finance Committee members and task force members called for sufficient time to allow for full review. "It's more important for us to get this right than to hurry through it," said Administrative and Finance Committee chair Javier Saunders, who is one of the City of San Diego's representatives on the CWA board.
The task force consisted of seven CWA board members. Task force chair Barbara Wight and CWA board chair Tom Wornham are also City of San Diego representatives on the CWA board, DeAna Verbeke is one of the Helix Water District board members, Gary Croucher is an Otay Water District representative, Mark Weston is the City of Poway's CWA representative, David Barnum is from the Ramona Municipal Water District, and Gary Arant represents the Valley Center Municipal Water District.
Wornham noted that the task force consisted of small and large agencies, agricultural and municipal and industrial (M&I) agencies, and agencies in various parts of the county. "I believe every constituency was well-represented by this task force," he said. "The process is probably the fairest we've ever come up with."
The task force first met on May 29, 2013, and met 11 times before the release of the recommendations to member agencies. The task force was supported by CWA staff as well as consultants Tom Chesnutt of A&N Technical Services, Robb Grantham of Carollo Engineers, and Doug Montague of Montague and DeRose.
"We did look at everything regionally," Verbeke said.
"This really is an approach to try to look at the fiscal sustainability of the wholesale agency at a regional level," Barnum said.
The task force recommended no changes to the CWA's debt service ratio and capacity charge structures while recommending changes to fixed-cost definition, Storage Charge structure, and offset policies. The task force also recommended the addition of a Supply Reliability Charge.
"The recommendations will help ensure that the long-term financial health of the Water Authority is sustained," Saunders said.
"We as member agencies have a stake in the health and financial sustainability of the Water Authority," Arant said.
The task force's initial consideration was guiding principles for fiscal sustainability. "We really needed to establish some guiding principles," Weston said.
The task force also considered the CWA's historical rate and charge structure. "The rate structure has served the Water Authority and its member agencies well," Weston said.
Another consideration, however, was emerging issues and changing environments which could impact fiscal sustainability. "We are trying to address some changed conditions," Weston said.
The historical data analyzed from 1989 to the present included not only water rates but also water sales and building permits (which involve a capacity charge). "Water sales tend to follow the economy," CWA water resources director Ken Weinberg said.
The water rate increases were lower during better economic times. "These water rates were supported by ever increasing sales revenue," Weinberg said.
"You also had a lot of building activity," Weinberg said. "There was less pressure on water rates to go up during that period."
The CWA seeks to avoid a situation where conservation resulting in a decrease in water usage leads to the need to increase rates. Other factors in rate increases are the cost of imported water and the CWA's Capital Improvement Program (CIP). Ironically, the CWA's willingness to raise rates to pay for large infrastructure investments along with a supply diversification strategy, a rate structure emphasizing fixed charges, and strong fiscal management policies led to the recommendation against raising the minimum debt service coverage ratio, or ratio of cash available to debt obligation, of 1.5:1. CWA finance director Tracy McCraner noted that the ratio was below the median of agencies with AA+ credit ratings but that other CWA policies would allow the agency to maintain the AA+ rating with a 1.5:1 ratio. "There are so many other factors that go into a rating," McCraner said.
The task force also recommended against changing the structure of the capacity charge while noting that the CIP on which the charge is based may change the amount of the capacity charge. The capacity charge, which was established by the CWA in 1990, is a one-time payment to purchase system capacity for new or upsized meters. The CWA's hybrid methodology recovers the value of available capacity in the existing system and the proportionate share of planned capital improvements. In 2013 the CWA updated the system capacity charge and treatment capacity charge to reflect revisions in the CIP, the value of current assets, and the total number of present and future users among whom the costs should be divided.
The recommendation to clarify the definition of fixed cost calls 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 a canal lining agreement for the All-American and Coachella canals.
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 task force recommended that energy and chemical costs of the desalination plant be considered variable costs. The QSA water transfer agreement also includes "wheeling" by the Metropolitan Water District of Southern California, and since the MWD wheeling costs vary by volume those charges are considered variable rather than fixed.
The CWA's supply, treatment, and transportation charges are considered variable costs. The current CWA fixed charges are the per-meter Infrastructure Access Charge, 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 Infrastructure Access Charge policy includes covering 80 percent of all operations and maintenance costs, and the task force recommended against a higher percentage. "The IAC is really more for capital projects," McCraner said.
The IAC recovers approximately 25 percent of the CWA's fixed costs. "It's served the Water Authority well," McCraner said.
The recommendation on the Storage Charge structure was to change the storage charge allocation from a three-year rolling average to a ten-year rolling average.
"The longer timeframe provides a better nexus to member agency demands," Weinberg said. "A longer timeframe gives you more data."
In addition to providing a more accurate reflection of member agencies' potential need for storage supply, a ten-year allocation also provides a better alignment with long-term benefits such as 40-year bonds or a facility's 100-year useful life.
Croucher opposed that recommendation, noting that the longer period would penalize efforts to develop local supply. "That is a major change in the way it impacts agencies," he said.
The recommended 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.
"It's just reallocation of costs against the treatment charge," Grantham said.
The task force also recommended an addition to the rate and charge structure which would establish a Supply Reliability Charge using a ten-year non-concurrent peak. "This is a way that we can capture some of the fixed charge for the ability to roll on and off," Weston said.
The CWA has developed emergency supplies which are available in the event of a shortage. "We have paid a premium to do that," Weinberg said.
The highest single-year volume of each agency's M&I purchases during the past ten years would be used to determine the allocation methodology. "It's the single highest year because that's what we believe we need to be prepared to serve," Weinberg said.
According to the CWA's sample chart of M&I water sales from Fiscal Year 2004 to Fiscal Year 2013, 12 of the 23 agencies including the Rainbow Municipal Water District had their greatest sales during Fiscal Year 2006-07. The Fallbrook Public Utility District and the Ramona Municipal Water District had peak sales in 2007-08, Camp Pendleton's highest year was 2008-09, and the Sweetwater Authority peaked in 2009-10. The San Dieguito Water District's peak year was 2005-06. Six agencies had their peak sales in 2003-04, although one of those was the Padre Dam Municipal Water District whose sales at the time included what is now allocated to the Lakeside Water District.
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 would be considered an "insurance policy" to ensure allocation from the CWA in case of a shortage.
The amount of revenue to be recovered by the Supply Reliability Charge will be developed by CWA staff and consultants in conjunction with member agencies. The charge must provide a nexus to each member agency's reliability benefit, and CWA staff will return to the board with recommendations.
"I think this will serve the Water Authority in the long term," Weston said of the task force recommendations.
During 2013 the CWA conducted the first phase of a "cost of service" study. Implementation of the task force recommendations will likely be done in conjunction with Phase 2. "We have some big projects still left to take on as a task force," Wight said.
"In some regards it's sort of the tip of the iceberg," Barnum said of the recommendations.
If resolution on any particular recommendation can be obtained early enough, the change may be incorporated into the CWA's 2015 rates and charges which are scheduled to be approved by the board at the CWA's June 26 meeting. If the board approval of changes is too late for staff to prepare the modifications in time to be considered this June, the changes could take effect for Calendar Year 2016.
"We want this to be an open transparent process and not a rushed process," Wight said.
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