Understanding the New SLVWD Rate Structure
Water district rate structures are complex. To deal with this complexity and comply with legal requirements, water districts usually hire an expert consulting firm, often costing on the order of $100,000. Consequently, water districts typically develop new rate structures at five-year intervals. The last rate study took nearly a year from start to finish.
Determining Revenue Needs
During the 2023 rate study, the first critical question for SLVWD to answer was how much revenue it would need to generate in the next five years to cover escalating operating expenses, enable critical infrastructure development, and ensure adequate cash flow and cash reserves to cope with emergencies. Operating expenses for water districts in general have been increasing significantly faster than inflation, so the District was ultimately forced to make some educated guesses on how much revenue it would need to remain solvent. Director Fultz argued persuasively that the District probably underestimated the amount it would actually require. The District separately estimated that it would need to secure $19 million in loans for its planned infrastructure development and to manage cash flow while awaiting FEMA reimbursements. This funding has the virtue of being repaid over a thirty-year time period, thus spreading the cost across generations of customers.
Determining a Rate Structure
The second critical question for SLVWD to answer during the rate study was how to generate this revenue from its ratepayers. Roughly 90% of SLVWD’s regular annual revenue comes from ratepayers, and over 90% of SLVWD’s annual costs are fixed and independent of how much water customers use. What customers are really paying for is all the infrastructure and staff support that makes the water available in the first place—both at home and for fire-fighting.
SLVWD could have opted to charge most residential users approximately the same flat monthly fee, with maybe only 15% of the bill dependent on the amount of water consumed. However, this approach would have placed an extreme burden on low-volume users, many of whom are low-income ratepayers. It would also have only minimally encouraged water conservation. The excessive burden might have been addressed by using some of SLVWD’s revenue to partially subsidize low-income ratepayers, but Proposition 218 (which was enacted in 1996 to protect ratepayers from undue rate increases) forbids this.
At the other extreme, SLVWD could have decided to make as much as 85% of its revenue dependent on the amount of water consumed. This would have maximally encouraged water conservation, but it would have made the District’s revenue stream highly variable, necessitating a complicated mechanism for escalating rates whenever water consumption declined. The consulting firm strongly advised against this.
In the end, SLVWD accepted the recommendation of the consulting firm to derive roughly half of its ratepayer revenue from a “fixed” monthly charge and the other half from “water rate” charges that are proportional to the amount of water consumed. SLVWD also established a tiered-rate system in which the unit cost of water is substantially higher for high-volume customers. This was done to encourage conservation and to further shift the financial burden from low-volume customers to high-volume customers. However, conforming to Proposition 218 requirements turned out to be quite complicated. Also, low-volume customers are not necessarily low-income customers; in fact, most SLVWD customers are relatively low-volume consumers in the winter months.
Even though SLVWD succeeded in placing the heaviest burden on the heaviest users, the percent increase for low-volume users was substantial. It is worth noting that the actual dollar increase for low-volume users was far less dramatic: the first year’s increase of $12.41/month is attention-getting, but the five-year increase of $28.19/month equates to an annual increase of less than $6/month.
Involving the Public
Proposition 218 required SLVWD to provide multiple opportunities for public input into the rate restructuring process, and the District complied. It sent out mailers, held a special community meeting, and heard over 50 public comments in seven separate Board meetings. At the same time, the District’s efforts to engage the public were limited by critical staff departures and also by the sheer complexity of the process. As a result, many members of the public took notice only in the first two months of 2024 when the new rate structure was well on its way to being enacted. As a result, some people came away feeling that their questions and concerns had not been adequately addressed.