30 Aug 2011

The wrong way to raise prices

Amanda Rice of Cambria (central California coast) gives us an excellent example/case study of how local water managers, price increases, and politics interact (she wrote after reading chapter 7 -- managers and politicians -- in my book):
I'd like to share one community's response to a serious rate hike:

In 2007, Cambria, CA residents undertook a protest against an increase in water and sewer rates, taking advantage of a recent ruling (at the time) that water rates are subject to Prop 218 (a constitutional amendment) rules.

The district didn't even know how to handle the first protest - the community response was amazing and indisputable: over 2500 letters of protest were delivered to the district and the rates could not be increased.

A second stab it an increase heightened controversy to the point that the two incumbents on the Board that year (2008) were tossed out and the increase was rescinded.

By the time the district put together the 3rd proposed increase, about 30% of the whole town of 6,000 were very familiar with the goings on, finances and water shortage issues of the Cambria CSD, about 50% knew more than just a little and the remainder either knew nothing except where to send the bill or was an employee (or family member). I started my blog back during the first protest campaign. Things have calmed considerably, but I think we are still a rarity in relation to prop218 success [in preventing a rate increase].

(The Howard Jarvis Association keeps an eye on these things and may know more that has happened since 2009 when our rates finally went up...barely $10 per month...)

It was a truly interesting time and Cambria remains quite water aware - especially relative to most Americans... even many Californians not in the industry or politics.
This history [PDF] gives many details, but here's a summary:
Cambria has a unique situation and could really use someone on our side in our current battle. The story is long and sordid and full of distrust on both sides (aren't they all.) I believe ours is one of the only "close call" majority protests under Prop 218 and could lead to an influential decision on a level near the Bighorn or Santa Clara decisions. At the least, it should prove that additional procedures must be specified for the process as it related to water and sewer rates. More communities are facing the prospect of organized and informed opposition. And this situation really blows.

In a nutshell:
Our town of about 6500 has just gone through the prop 218 rate increase less than a year ago and this time the vote is VERY close - and the way it has been handled makes it seem like the District worked HARD to manipulate the final tally, imposing rules "on the fly" that would cause more protests to be disqualified. The group campaigning against the rate increase made a public records request for the invalidated protests on what follows is some of the history of the past year... Please forward this on to anyone you think might be interested the possibility of a really influential case. We are a small community with big things happening.
In response to that history, Amanda and I had the following Q&A (her answers):
  1. Q: So, about 48% of customers protested. The number of total customers (and is there a difference between meters/customers/people?) is disputed. The rate increase was thus supposed to go ahead, but the rejection of two incumbents meant that it did not?

    Amanda: The total count was in dispute for a few reasons - mainly surrounding the definitions in the law. The district decided it would count one protest per meter (regardless of how many residents, but either the tenant OR the landlord/owner was eligible to protest. There was dispute over how many protests should be counted for the multi-family meters and who should be allowed to protest on behalf of a business. (One would think a small district with ~3,800 residential meters and ~220 commercial meters would know how many they'd have to count) Even though the count was close in July 2008 and many protest letters had been disqualified for dubious reasons, the Board did enact the increase. After three new board members were installed, the Board overturned the increase and directed the GM to refund amounts over $5 difference between in prior rate and the increase and credit amounts under $5 difference from the Sept/Oct and the Nov/Dec bills.

    According to the 2005 UWMP, the North Coast Area Plan (Local Coastal Program for SLO County) and US Census numbers there are currently 6,023 residents in Cambria. The density is about 1.6 per meter/household. There may be as many as 4,000 residential meters now, although I haven't checked recently.

  2. Q: What is per capita water consumption in Cambria? What's the price of water? Is there any surcharge for excess use or in times of shortage?

    Amanda: We are still awaiting the draft of our 2010 UWMP, which will answer these questions with a higher degree of accuracy (hopefully). Based on recent records, Cambria's wells on two aquifers have historically pumped between 650 and 800 acre feet annually. Commercial accounts use about 25% of the water that is billed for. Using the 1.6 density figure and 3900 meters, residential average use about 110 gallons per meter per day (about 9 "units" of 748 gallons every 2 months). Including commercial, the district averages 12 units per billing cycle (2 months).

    What's the price of water? On June 25, 2009 the CCSD Board of Directors adopted a 9.75% water (Ordinance 24-2009) and 15% wastewater (Ordinance 25-2009) rate increase.

    CategoryCurrent Proposed
    Water Base$ 21.70 $ 23.82
    Water Units$ 33.06$ 36.30
    Sewer Base $ 56.55 $ 65.03
    Sewer Units$ 18.59 $ 21.34
    TOTAL$ 129.90 $ 146.49
    There is no incentive to conserve or be more efficient if you are already using 6 units or less. Everyone with an active residential connection gets the first 6 units included with the base rate of ~$24.00 (billing cycle is two months). We have an increasing block rate (although it's really in name only and hardly makes a dent most folks notice in their bank account.)

    Units 7-15 = $6.05 each.
    Units 16-20 =$6.18 each
    21-30 = $6.30 each,
    31-40 =6.44
    41-50= $6.95
    51-60= $7.22
    61-70 = $7.47
    71- 80 = $7.73
    81 - unlimited = $7.86 each

  3. Q: Why was the rate increase called for? Was it going to increase water security?

    Amanda: There is an ordinance on the books to allow for enacting surcharges when it looks like the there's a real threat of saltwater intrusion or that we might exceed the amount allowed by permit in the dry season. The ordinance on the books has never actually been used. Twice when surcharges have been used, the penalty structure was developed on the fly by the elected board. The surcharges work on an increasing block schedule also: regular rate +25% of that rate for users of more than 12 units/billing cycle, 50% for the users of 20-30, 100% of users units over 30. Effective for the major wasters, but last time we had surcharges, nearly 70% of the customers were unaffected by them. I'm not sure how much water was "saved", but the district raked in the surcharge cash in an amount greater than the revenue lost because of reduced use.

  4. Q: Why was the rate increase called for? Was it going to increase water security?

    Amanda: Not really. There was a horrible case made for the initial increase in 2007. The one that finally succeeded used this:

    The proposed increases to water and sewer rates are necessary for the CCSD to continue to provide safe and reliable water and sewer services to the citizens of Cambria due to increasing operational, maintenance, and repair costs. Several factors have contributed to increasing costs, including, but not limited to, rehabilitation and replacement of water and sewer infrastructure and facilities, adequate revenues to cover operational expenditures, including existing debt service payments, the rising cost of electricity, natural gas, and other commodities necessary to operate water and sewer facilities, increased costs associated with operation of utility vehicles, pumps, generators, and motors, ongoing maintenance of infrastructure, increased labor costs, and increased costs associated with meeting more stringent State and Federal regulations."
    The prior general manager was basically inexperienced and very overpaid (Her total compensation and cost to the district when she was fired was ~$225,000/year. There are ~7 employees currently making salaries over $100,000 and with total compensation in the $175-$200,000 range. The admin staff was bloated and maintenance of the system had fallen victim to a low priority position in a budget that included hundreds of thousands of dollars spent on a SCADA system that is STILL not installed, a lobbyist to get Federal funding for our potential desalination plant, other costs of the desal project, legal costs associated with a failed attempt to adjudicate the aquifers, acquisition and maintenance of open space properties with their water rights "retired", numerous studies and environmental documents - including nearly $225,000 to Black and Veatch for the long term financial plan that called for the initial 2007 rate increase and was subsequently dumped. (Did this small town really need the largest water consultancy firm in the WORLD come do our long term financial planning?)

    There was certainly a lack of trust and transparency that developed through the whole rates thing. Even with an all new board and a brand new general manager - one who is competent and friendly (180 degrees from prior manager) making an effort to be open and responsive, the town still is suspicious. As I said in the brief essay, meeting attendance is back down to pre-controversy numbers. The next election (2012) will be a measure of how much Cambria is still paying attention. Like all CSDs, when interest is low, incumbents often are unchallenged. We shall see.

    And in the meantime, the Army Corp of Engineers is trying to get permission to do studies to determine a location for intake and outflow wells for a desalination plant we most likely don't need more than 1 year of 20.
My additional comments:

Question 2: Those IBRs are a joke. I discuss them in C1 of my book. They need to be narrower and taller to get people's attention but it's not necessarily a problem if only 30% of people (really meters, and that's ANOTHER story) face them.

Question 3/4: Looks like the rate increase was to pay staff salaries. That's a pity. I wonder what % of the budget goes to treatment and delivery (variable costs with use) compared to fixed costs (debt and PPE are legit, but not heavy office costs...)

B & V, et al. are a scam. I could do a rate case in 1 hr (real fixed costs as monthly charge plus two tiers (some for free, pay for more) and THEN rebate the excess. Rate studies are expensive b/c they try to exactly predict demand AND hit revenue targets -- and they are always exactly wrong...

Bottom Line: This example -- like this and this example -- demonstrate how a "community" water provider can waste money (and water), insist that customers pay for their failures, and get their way because customers do not have a good mechanism (institutions!) to defend themselves against the incompetence (and insolence) of their "representatives".


Jay said...

Please explain how the BV rate study was a "scam". The mechanisms used for such studies follow from scholarly economic work, notably James Bonbright, but also many others. Those same mechanisms are used in public utility regulatory proceedings as a standard, and have been used as such for roughly 120 years in the US. Those processes have endured the scrutiny of judicial and academic review numerous times and have prevailed. If the approach BV (et al.) used is a scam, are you saying that the entire US utility regulatory framework is a scam as well? If so, can you support that position with research findings or other evidence?

I'm very interested in your opinions on block rates. One of the factors that I normally consider is the degree to which water customers respond to the average cost vs. the marginal cost. Research by many economists (Shin, 1985) demonstrate that consumers cannot or do not optimize on marginal prices with respect to utilities in particular. What are your thoughts on Shin, and also Bushnell & Mansur (2005).

David Zetland said...

@jay -- they are a scam in the sense that they are always precisely wrong in their "scientific" attempt to guess at demand under a different price regime when many other factors affect demand (see the first two chapters of my book -- available as a free d/l on the website). I say scam b/c those studies cost a lot but cannot be relied upon. They are more CYA than a business plan (know any businesses that do rate studies -- and stick with them for 2-3 years?)

I have not read Shin et al., but I've noticed that some people pay attention to IBRs while others pay more attention to their entire water bill (there are many posts under "conservation pricing" on this blog). The big issue is how relevant the price is (quarterly bill that's hard to read vs smart meters with real time pricing) and how expensive the bill is relative to, say, a latte.

Check out Chapter One. Feel free to email me more ideas, opinions and those papers. I will read/review them.

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