Studying the Restoration of Tiered Water Rates for the SLVWD
Prepared by Friends of San Lorenzo Valley Water (FSLVW)
July 15, 2021
Introduction
The San Lorenzo Valley Water District (SLVWD) currently charges its customers (roughly) in direct proportion to the amount of water they use. In contrast, so-called “tiered water rates” impose higher per-unit charges for higher levels of water use. This promotes both water conservation (by making excessive water consumption disproportionately costly) and equitable access (by allowing the wealthiest and/or most profligate users to shoulder an appropriately larger share of the cost burden as compared to customers restricting their water consumption to only their basic needs).
Until 2015, tiered water rates were the norm for SLVWD and across California. This unexpectedly changed when a state court ruled that Proposition 218 (passed in 1996) effectively prohibited the routine use of tiered water rates (although it did leave the door still partially ajar). In the wake of this ruling, many California water districts (including SLVWD) reverted to a flat-rate pricing structure. Certain other districts, though, were not so quick to abandon their preferred approach. For example, both Santa Cruz and Scotts Valley were able to devise legal strategies to preserve the use of tiered rates.
This topic is worth revisiting today because the SLVWD budget for the upcoming fiscal year includes funding for a rate study (as a necessary prerequisite for potential pending rate changes). The default plan is to maintain the District’s current flat rate structure, but the tiered rates in neighboring communities suggest that this assumption may be premature. FSLVW believes that the responsible course of action for the District is to require the upcoming rate study to include a thorough assessment of the benefits and challenges of restoring a tiered rate structure for the SLVWD. In this document, we seek to briefly identify the key issues that should be addressed.
Benefits of Tiered Rates
Everyone agrees that the SLVWD needs to establish a rate structure that generates sufficient revenue to cover its various operating costs. But the District also has a responsibility to promote both water conservation and affordable access, and different rate structures have different impacts on these underlying objectives.
Water Conservation. The SLVWD’s water comes entirely from either local surface water (e.g., streams like Fall Creek) or groundwater (which is pumped from wells in months when too little surface water is available). The groundwater is a scarce resource, and it is in everyone’s best interest for the District to use as little of this as possible, particularly as intensifying drought conditions diminish the flow of surface water. Both careful research studies and considerable real-world experience have established tiered water rates as the preferred tool for promoting this kind of water conservation. The key is simply to make excessive water use substantially more expensive than baseline water use. This turns out to deter profligate consumption far more effectively than mere messaging, and it also avoids the rigidity and added enforcement costs of mandating specific conservation measures.
Affordable Access. Another important consideration in determining water rates is the State of California’s 2015 recognition of access to safe water as a fundamental human right. To quantify this, the Environmental Protection Agency (EPA) recommends that California households not spend more than 1.5% of their income to meet their basic water needs. Roughly one quarter of the San Lorenzo Valley has a household income below $50,000, and about half of these households have incomes below $25,000. For most of this latter group, a monthly water bill of $30 exceeds the EPA guidance. Tiered rates provide an indispensable tool for keeping baseline charges as low as possible because they typically result in higher costs for higher-volume users. This is justifiable because higher-volume users are disproportionately driving infrastructure maintenance costs. In addition, however, it may be necessary for the District to significantly expand its current trial Ratepayer Assistance Program which provides monthly discounts to low-income customers who qualify for the PG&E CARE program.
Challenges of Tiered Rates
The benefits of tiered rates are substantial, but there are also valid concerns associated with restoring tiered rates in the San Lorenzo Valley. One unavoidable issue is simply that returning to a tiered rate structure now involves change, and change inherently introduces additional demands on Staff and potential exposure to both new costs and new customer complaints.
Proposition 218 Compliance. The most potentially concerning complaint would come in the form of a lawsuit challenging the District’s legal basis for reestablishing tiered rates. Nothing can prevent an aggrieved ratepayer from filing a lawsuit, but the District can minimize its legal exposure by crafting a new tiered-rate plan with maximum care and by paying particular attention to the strategies that have worked for other districts across the state.
Conveniently, the District’s rate study is likely to be handled by the same firm, Raftelis, employed by the City of Santa Cruz and by Scotts Valley Water District. These rate studies show that Raftelis has experience performing detailed explorations of different rate structures. The three base rate can be calculated based on the cost of supplying the amount of water currently readily available to the District. The rate study can then identify infrastructure improvements such as new or improved treatment facilities, new sources of water, new pipelines and leak repairs, for instance, to justify the higher tier rate, with the costs divided among the higher volume users.
The experiences of other districts further suggest that another important strategy for the District to pursue in conjunction with a tiered-rate structure is an effective public outreach program that maximizes customer understanding and support for this initiative.
Unwelcome Side Effects. There may be special cases in which customers do not fit neatly into the baseline assumptions of tiered-rate pricing. For example, the San Lorenzo Valley Unified School District consumes a lot of water, but it does this as an integral part of serving our local community, and its financial resources are severely limited by the state. It would make sense, therefore, for the District to investigate potential mitigations: perhaps there is a way to offer the school district a special rebate (funded by property tax revenue to avoid additional Prop. 218 constraints), or perhaps there is a way to define an exempt category of heavy users whose usage is primarily due to aggregating the demands of a large number of individual water consumers. This latter strategy could also be potentially applicable to scenarios like a mobile home park where the per capita water consumption is relatively low.
It is also possible for the tiered rates themselves to alter the baseline assumptions upon which they were originally formulated. For example, if the tiered rates are sufficiently effective in encouraging further water conservation, the District will experience a decrease in the total volume of water consumed, and it may then need a higher unit rate in order to achieve its target revenue. There may also be increased demands on Staff associated with administering the tiered rates, and these should be identified, understood, and adequately planned for.
Conclusion
Taken together, the above considerations lead FSLVW to view tiered rates not as any sort of panacea but, rather, as a potentially beneficial pricing tool that the District should carefully assess as part of its upcoming rate study. A responsible assessment may not only reveal that a tiered-rate structure is perfectly feasible, but it may also help the District to identify the most effective strategies for both crafting and rolling out this potentially improved pricing plan.
References
The following resources provide additional relevant background on the topic of tiered rates:
Scotts Valley Water District:
https://www.svwd.org/sites/default/files/documents/boardmeetings/agendas/07_08_21_Agenda_Packet.pdf
City of Santa Cruz (see Attachment 1 for the rate study analysis):
https://www.cityofsantacruz.com/home/showpublisheddocument/83948/637553000078670000
Berkeley study of Proposition 218 cases and solutions in other water districts:
https://escholarship.org/uc/item/9d19z2f8