Current Legal Developments on Ratemaking - A Primer on Budget-based Water Rate Structures

1. Current Legal Developments on Ratemaking - A Primer on Budget-based Water Rate Structures Paul D. Jones II, P.E. General Manager, Eastern Municipal Water District Presented February 20, 2014 Urban Water Institute

2. Presentation Topics – Budget-based Water Rate Structures • What is a Budget-based Rate Structure? • What are its Unique Features? • How does they work? • Indoor Allocations • Outdoor Allocations • Pricing Signals • Benefits and effectiveness of Budget-based Rate Structures • Defensibility of Rate Structure • Summary

3. What is a Budget-Based Rate Structure? • Commonly Used Names: • “Allocation-based Rate Structure” • “Water Budget Rate Structure” Same Basic Rate Structure • “Conservation-based Rate Structure” • “Sustainable Rate Structure” • Creates an “Allocation” or “Water Budget” for each customer account based upon reasonable needs and efficient use. • Uses Economic Incentives: Water is priced to customer lower for use within allocation – much higher for use over allocation • Are there other types of rate structures that encourage conservation?? Yes, but Allocation-based structures have several unique benefits that facilitate high levels of water use efficiency.

4. Unique features of a Budget-based Rate Structure • Individualized: based on land use specific uses (indoor needs) and landscape needs (weather adjusted). • Encourages Efficient Use Pattern: within allocation through a sharply tiered pricing system • Rewards efficiency • Communicates cost of water over-use • Uses Fair Premise: those who over-use pay more, those who use only what they need, pay much less

5. Unique features (cont’d.) • Identifies Over-use customers: water bill functions as a “report card” – focus staff resources • Provides Appropriate Nexus: Revenue from over-use tiers reinvested in water use efficiency programs and higher cost supplies Identifies excessive and wasteful water use Provides target for efficiency

6. How it Works – EMWD’s Individualized Allocations Allocation = Indoor Needs + Outdoor Needs (seasonal) + Variances EMWD may also apply an Indoor and/or Outdoor Drought Factor • Provides individualized allocations for a diverse customer base: • 80% of retail demand is residential • Old and new development • Variation in family size and irrigation area

7. EMWD’s Indoor Allocation Indoor Water Allocation = (Household Size x Consumption per Person) x Indoor Drought Factor + Indoor Variances • Indoor Use Allocations based upon: • 3 persons per household for single family residential • 60 gallons per person per day • 2 persons per household for multi-family residential • No indoor allocation for landscape customers • Variances available for additional occupants and special circumstances

8. EMWD’s Outdoor Allocations Outdoor Water Allocation = [(ET x Conservation Factor x Irrigable Area) + Outdoor variance] x Outdoor Drought Factor • Outdoor Use Allocations Based on: • Evapotranspiration data collected for separate zones • Irrigated area: • Estimated using parcel information, infrared aerial photography and field measurements Measured in the field • Adjustment (Conservation) Factor Applied for landscaping type: • 1.0 for accounts installed before 9/08 • 0.8 for accounts installed 9/08 to 1/10 • 0.7 for accounts installed after 1/10 ET Zones

9. Clear Pricing Signal Based Upon Efficiency • Tier 1: Indoor Use $1.62/unit* • Budget = Number of Persons x 60 Gallons Per Day Within “Allocation” • Tier 2: Outdoor Use $2.96/unit • Budget = Landscaped Area and Evapotranspiration • Tier 3: Excessive$5.31/unit • Up to 50% use in excess of Indoor and Outdoor budgets “Over-allocation” Usage • Tier 4: Wasteful$9.71/unit • Over 50% in excess of Indoor and Outdoor budgets * One billing unit equals 100 cubic feet

10. Rate Structure Funds Water Efficiency Programs • Residential Programs • Free Residential Survey • Turf Buy-back Program • Freesprinklernozzles.com • Smart Controller Direct Install Program • High Efficiency Clothes Washer Direct Install Program • Financial Incentives: • Smart Controllers • High Efficiency Nozzles • High Efficiency Clothes Washers • Commercial, Institutional, Industrial and Landscape • Turf Buy-back • Freesprinklernozzles.com • Financial Incentives • High Efficiency Nozzles • Weather Based Irrigation Controllers • Ultra Low and Zero Water Urinals • Connectionless Food Steamers • Air-Cooled Ice Machines • Cooling Tower Controllers • Dry-Vacuum Pumps

11. EMWD Water Use Efficiency Results Statewide Average: 198 GPCD Gallons per Capita per Day (GPCD) Baseline Average: 212 GPCD 2020 Compliance Target is 184 GPCD 25% reduction 155 GPCD

12. What do these Water Use Efficiency Efforts Translate To? Annual Savings • Residential Accounts • 30 gal/capita/day reduction • 16,085 af/yr savings • Landscape Accounts • 0.8 af/acre/year reduction • 3,557 af/yr savings • 38,604 Mwh • 5,724 tons/yr • C02e GHG • 8,536 Mwh • 1,266 tons/yr • C02e GHG Total Annual Water Cost Savings - $10,990,000 Total Annual Energy Cost Savings - $2,671,000 Note: Assumes MWD system Power rate of $136/af, Tier 1 untreated rate of $560/af (2012)

13. Studying the Efficacy of EMWD’s Budget-based Rate Structure • Ongoing Study (first results reported in 2013): “Average prices rose less than 4% under water budgeting, but would have had to rise 34% under flat rate pricing to achieve the same demand effect.” • Controlling for the effects of inflation, the recent economic downturn and other water use efficiency programs, EMWD’s Budget-based rate structure resulted in at least a 15% reduction in water use.

14. Legal Defensibility of Rate Structure “NO” “Yes” T3 • A clear nexus between costs associated with levels of usage (and over-usage) and the rates charged for those usage categories is essential. • Specific, detailed cost attribution by Tier(s) is most defensible. • Pricing differential between tiers should not be arbitrarily set to simply send a “pricing signal” (ex. Tier 2 is twice the rate of Tier 1). • Fixed expenses are best allocated to fixed (meter) charges and the base volumetric tier(s) which all customers consume. • Still provides substantial flexibility to agencies in rate design. $$$ T3 $$ T2 usage T2 $ T1 T1 Costs Revenue

15. Example: The IRWD Rate Model • Irvine Ranch Water District pioneered the allocation-based rate structure in 1991 • Motivated by the drought in late 1980s • Direct nexus between use and cost • Allocates costs funded by penalty tiers to the sales associated with the different levels of wasteful use • Split between fixed and volumetric costs insulates IRWD from potential negative financial impacts of reduced water sales. • Lower demands = Less highest cost water supply purchased

16. Summary • Budget-based Rate Structures: • Encourage efficient use and is fair to customers • Communicate the value of water • Identify wasteful use of water – two way communication • Allows reinvestment in water use efficiency programs • Can be designed to be legally defensible and still very effective. • Such rate structures will be important in addressing the drought and demand management.

17. EASTERN MUNICIPAL WATER DISTRICT Contact Information Paul JonesEMWD, General Manager(951) 928-3777 jonesp@emwd.org www.emwd.org