CWA fiscal sustainability implementations expected during 2015

In May 2013, the San Diego County Water Authority (SDCWA) convened a fiscal sustainability task force to develop a revised rate structure to help the SDCWA avoid a situation where conservation resulting in a decrease in water usage leads to the need to increase rates. The CWA released the task force’s report to member agencies in January 2014, allowing for member agency input. The task force recommendations were discussed in February 2014 and March 2014, although action was deferred so that outstanding issues could be addressed.

The CWA board and the agency’s Administrative and Finance Committee expressed a preference for addressing the entire group of recommendations after additional rate allocation calculations are obtained, so the only action taken prior to the June 2014 adoption of calendar year 2015 rates and charges was a March 27 board approval that any 2015 costs of the Carlsbad seawater desalination plant will be part of the CWA’s supply charge rather than a fixed cost.

The target date for full action on recommendations is now the CWA’s March 26 board meeting, which would allow CWA staff to incorporate the decisions into the draft calendar year 2016 rates and charges.

“There has been some consensus in managing revenue volatility,” CWA director of finance Lisa Marie Harris said during the Jan. 22 Administrative and Finance Committee meeting. “There also has been a focus on the enhancement of fixed revenue for supply.”

The task force consisted of seven CWA board members. Task force chair Barbara Wight and 2013-14 CWA board chair Tom Wornham are also City of San Diego representatives on the CWA board; DeAna Verbeke is one of the Helix Water District board members; Gary Croucher is an Otay Water District representative; Mark Weston is the City of Poway’s CWA representative; David Barnum is from the Ramona Municipal Water District; and Gary Arant represents the Valley Center Municipal Water District.

Wornham noted that the task force consisted of small and large agencies, agricultural and municipal and industrial (M&I) agencies, and agencies in various parts of the county.

The task force first met on May 29, 2013, and met 11 times before the release of the recommendations to member agencies. The task force was supported by CWA staff as well as consultants Tom Chesnutt of A&N Technical Services, Robb Grantham of Carollo Engineers, and Doug Montague of Montague and DeRose.

The initial recommendations included no changes to the minimum debt service coverage ratio, or ratio of cash available to debt obligation, of 1.5:1 or to changing the structure of the capacity charge (the Capital Improvement Program on which the capacity charge is based may change the amount of the that charge). The task force recommended changes to fixed-cost definition, Storage Charge structure, and offset policies. The task force also recommended the addition of a Supply Reliability Charge.

The recommendation to clarify the definition of fixed cost calls for fixed costs to include all CWA payments towards the cost of debt service associated with the Carlsbad seawater desalination project, fixed operations and maintenance costs for the Carlsbad desalination project, fixed operations and maintenance costs associated with the All-American Canal and Coachella Canal lining projects, and the take-or-pay purchase price of conserved Colorado River water associated with the 2003 Quantification Settlement Agreement (QSA) which included a water conservation and transfer agreement with the Imperial Irrigation District and a canal lining agreement for the All-American and Coachella canals.

The threshold between fixed and variable costs sometimes depends on the timeframe; fixed costs do not directly vary with the volume of water produced in the short term while commodity costs such as pumping costs, electricity, and chemicals vary with water production. A cost can be fixed for the life of a contract and then become variable.

The task force recommended that energy and chemical costs of the desalination plant be considered variable costs. The QSA water transfer agreement also includes “wheeling” by the Metropolitan Water District (MWD) of Southern California, and since the MWD wheeling costs vary by volume those charges are considered variable rather than fixed.

The CWA’s supply, treatment, and transportation charges are considered variable costs. The current CWA fixed charges are the per-meter Infrastructure Access Charge (IAC), the Customer Service Charge allocated among member agencies based on a rolling average of all deliveries, the Storage Charge which recovers costs related to emergency storage programs and is allocated based on a pro-rata share of non-agricultural deliveries, and a Standby Availability Charge of $10 per acre or $10 for a parcel under one acre. (The CWA also passes along MWD’s Readiness to Serve Charge and Capacity Charge.) The property tax the CWA collects is also part of the agency’s fixed revenues, which account for approximately 22 percent of total CWA revenue.

The recommendation on the Storage Charge structure was to change the storage charge allocation from a three-year rolling average to a 10-year rolling average. In addition to providing a more accurate reflection of member agencies’ potential need for storage supply, a 10-year allocation also provides a better alignment with long-term benefits such as 40-year bonds or a facility’s 100-year useful life. The recommendation faces concerns that the longer period would penalize efforts to develop local supply.

The recommended change to apply non-commodity revenue offsets to all rate categories adds the treatment rate, which allows fixed treatment costs to pay for themselves. Property tax and interest earnings are also part of offset calculations, as are capacity charges and the IAC.

The task force also recommended an addition to the rate and charge structure which would establish a Supply Reliability Charge using a 10-year non-concurrent peak. The highest single-year volume of each agency’s M&I purchases during the past 10 years would be used to determine the allocation methodology.

“The group has really been grappling over this issue,” Harris said.

Although some member agencies have local supplies such as brackish groundwater desalination and recycled water, those local supplies could be subject to mechanical or regulatory interruption and the Supply Reliability Charge would be considered an “insurance policy” to ensure allocation from the CWA in case of a shortage.

“We do want to take into account that the Water Authority provides a reliable source of water,” Harris said. “The challenge is also what is the value of reliability.”

The amount of revenue to be recovered by the Supply Reliability Charge will be developed by CWA staff and consultants in conjunction with member agencies. The charge must provide a nexus to each member agency’s reliability benefit, and CWA staff will return to the board with recommendations.

Proposals being considered are one with no additional fixed charge and all QSA and desalination costs included in the supply rate, a new fixed charge for the desalination plant only with the cost difference between the MWD rate and the desalination plant cost being allocated on a three-year rolling average, a new fixed charge for the desalination and QSA costs with the cost differential between the MWD rate and the melded desalination and transfer rates allocated on a five-year rolling average, and a new fixed charge for 15 percent of the desalination and QSA costs based on a supply reliability metric and allocated on a 10-year rolling average.

“We’re down to four scenarios,” said CWA water resources director Ken Weinberg. “All four of those are still being looked at.”

During the June 2014 rate approval the supply discount for the CWA’s Special Agricultural Water Rate was extended to the end of 2015; the single-year extension allowed that program to be considered in the task force activities and a decision on the SAWR will also be part of the final recommendations for the CWA board to consider.

“This has been a very intense process,” Arant said. “I see progress, and I see the mixture of perspectives coming together.”