4 May 2009

Redesigning Some for Free

In this post, I mentioned that my favorite rate structure ("some for free, pay for more") may have a problem.

Because it requires that the "pay for more" prices be high enough to choke demand to the point where it is less than supply, the prices may exceed the cost of delivering that water, which would (in California) violate the requirement (under state Proposition 218) that price reflect the cost of delivery and the requirement (under state law AB2882) that price reflect the "cost of service".*

It seems that there is an easy -- if legalistic -- way to implement my pricing system without violating Prop 218 or amending AB2882. It is this:
  • Set variable prices in a tiered (increasing block rate) structure.
  • Make sure that the first three tiers (e.g., "lifeline," "basic" and "normal" blocks) recover ALL costs associated with service. Put differently, set revenues (price x quantity for all tiers) to equal costs.
  • Implement fourth and fifth tiers ("wasteful" and "god-awful") that are far more expensive. Anyone who uses water in this range will pay 200-300% of the prices in the lower tiers.
  • Since revenue in Tiers 4 and 5 are NOT in the budget, they do not need to reflect the "cost of service."
  • Those excess revenues can be deposited into the "rate stabilization reserve" account (RSRs are widely used today) until they are refunded to customers (per capita), invested in water conservation, etc.
These "conservation rates" will choke demand so that it's less than supply AND be legal.

Bottom Line: If water is too cheap, we run out. If we run out, we're all in trouble.

* In an earlier post, I suggested that AB2882 be amended to reflect the "cost of reliable service," which implies that the price should be high enough to avoid rationing. I got this comment from Dennis O'Connor (Principal Consultant to California's Senate Natural Resources & Water Committee):
The problem with your suggestion re AB 2882 is that it is very likely unconstitutional; i.e., conflicts with the amendments to Articles XIII C & XIII D as approved by the voters in Proposition 218.

The relevant part is Article XIII D, Section 6, subdivision (b)

(b) Requirements for Existing, New or Increased Fees and Charges. A fee or charge shall not be extended, imposed, or increased by any agency unless it meets all of the following requirements:
  1. Revenues derived from the fee or charge shall not exceed the funds required to provide the property related service.
  2. Revenues derived from the fee or charge shall not be used for any purpose other than that for which the fee or charge was imposed.
  3. The amount of a fee or charge imposed upon any parcel or person as an incident of property ownership shall not exceed the proportional cost of the service attributable to the parcel.
  4. No fee or charge may be imposed for a service unless that service is actually used by, or immediately available to, the owner of the property in question. Fees or charges based on potential or future use of a service are not permitted. Standby charges, whether characterized as charges or assessments, shall be classified as assessments and shall not be imposed without compliance with Section 4.
  5. No fee or charge may be imposed for general governmental services including, but not limited to, police, fire, ambulance or library services, where the service is available to the public at large in substantially the same manner as it is to property owners.
Reliance by an agency on any parcel map, including, but not limited to, an assessor's parcel map, may be considered a significant factor in determining whether a fee or charge is imposed as an incident of property ownership for purposes of this article. In any legal action contesting the validity of a fee or charge, the burden shall be on the agency to demonstrate compliance with this article.

The language in AB 2882 was the result of pain staking review by the staff of a number of senate committees of both the plain language of the law and various court decisions; e.g., Bighorn-Desert View Water Agency v. Verjil. As you might imagine, the Howard Jarvis folks were keenly interested as well.

Also, I believe the suggested change is unnecessary. The language of AB 2882 was based in large part on the experienced of the Irvine Ranch Water District. They shifted to a tiered rate structure that significantly reduced water demand, lowered the water bill for most users, and provided a reliable funding stream for their conservation efforts from the charges to the higher water users.
I will note (again) that my system is even easier to implement than IRWD's budget rates for two reasons:
  1. My system is based on the number of PEOPLE, not land area. It's easy to count heads to know your blocks.
  2. Because it's based on people, not land (we're talking urban, not ag rates here), Prop 218 does not apply, since 218 is based on PROPERTY taxes.
How ya like dem apples? :)


Eric said...

In stock investing, an investor calculates the net present value of earnings in order to calculate a credible price for the stock now.

For water, if the supply diminishes as predicted, the net present value and the current price of water would be increased to reflect this anticipated scarcity.

Is water priced to reflect predicted scarcity or is it priced solely based on today's availability?

Richard McCann said...

Your proposal for higher Tier 4 and 5 rates will violate Prop 218 unless they are cost justified. Trying to skate around it with using "people" vs. "property" won't fly.

David Zetland said...

@Richard -- then say "cost" is the cost of shortage or getting new water supplies and DO NOT refund the money. Spend it anyway you want :)

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