Background:
The increasing cost and scarcity of water has been in the news more and more over the past several years and the City of Newport Beach has not been immune to the effects of this situation. The City does not have its own water source within the city boundary, so we rely on imported water from the Metropolitan Water District and City owned wells in Fountain Valley for our supply. Complications with the Northern California conveyance system and increased energy costs have significantly increased the cost of the import supplies. Our groundwater supply is managed by the Orange County Water District. Each member agency pays for the water extracted from the basin as well as other fees such as an Annexation fee and pumping costs. Currently we pump approximately 64% of our water from our wells and the remaining 36% is purchased from our import supplies.
These cost increases in water supply, chemicals, repair materials, and infrastructure replacement, necessitated a rate increase in 2010. Revenue that was received from the previous rate increase in 2005 was not enough to balance the budget. The city’s water enterprise reserves were near depletion. In 2009, the City conducted a competitive RFP (request for proposal) process to hire a rate consultant, whereas Red Oak Consulting was hired to conduct an in-depth study of our rates and prepare a five year financial plan.
At the conclusion of the study, Red Oak developed a five-year financial plan (FY 2010-2014). To see the full financial plan click on the following link: Financial Plan. This plan includes an estimate of the annual projected operating expenses, a funding plan for the updated Water Master Plan (on September 8, 2009 study session agenda) and recommended Reserve Policy revisions for City Council consideration. The Financial Plan revealed that anticipated operating expenses will increase from $16.7 million in 2009 to $24.1 million by 2014, an increase of approximately 45%. The City has developed a 30-year capital improvement plan as part of the 2009 Water Master Plan. The contemplated CIP totals approximately $168 million, which includes a project cost escalation assumption of 4% per annum. Due to the long-term funding demands of an improvement plan of this magnitude, the financing plan contemplates a capital charge (assessed by meter size) as the primary source of revenue for the capital plan.
On September 25, 2009, in accordance with Proposition 218, the City sent almost 32,000 notices to property owners and customers notifying them about a water rate increase. At the Council meeting on November 10, 2009, the City Council held a public hearing to discuss the rate increase and to call for protests. Protests that were submitted to the City Clerk were tabulated on November 24, 2009 and only a small amount (60) submitted a protest to the rate increase. Council approved the increase, and it took effect January 8, 2010.
Rate Structure:
There are three elements to the water rates: 1) the commodity or “variable” charge, 2) the meter or “fixed” charge, and 3) the capital charge. The rate study looked at each of these charges and determined jointly at what level they should be set, and how they should be structured, in order to fairly and equitably recover the cost of providing water to our customers. As directed by the Finance Committee, the rate study also includes means of mitigating “rate shock” to customers.
The commodity or “variable” charge is geared primarily towards recovering the cost of the water itself; this charge currently generates about 90% of the water enterprise’s revenue. The rate study revealed that not only does this charge need to increase from the current rate of $2.08 per hundred cubic feet (HCF or 748 gallons), but the percentage of revenue generated by this charge needs to decrease from 90% to 70% of total revenue. This means that the commodity charge would increase to $2.20 immediately, and then, so as to avoid “rate shock”, continue to increase each year until it reaches $3.08 in 2014 as follows:
The meter or “fixed” charge was designed to recapture the costs associated with operating and maintaining the water system. Prior to 2010, 10% of the revenue received from this charge did not cover these costs. As a result of the rate study, staff recommended a significant restructuring of the fixed charge structure. This structure would shift an additional 20% of the revenue requirements onto the fixed charge. After a slight decrease in 2010 in order to mitigate “rate shock”, customers would see an increase in the fixed charge.
The rate study also identified costs associated with capital improvement projects (capital charge). These are costs associated with infrastructure replacement such as pipelines, pump stations, wells, and reservoirs. It is important to systematically replace infrastructure annually to avoid catastrophic failure of the system. Prior to 2010, these projects were approved and funded from the water enterprise reserves annually. Effective July 1, 2009 the City created a subsidiary Water Capital Fund (budget) to more fully segregate the resources dedicated to water capital improvements from Water Division operating activities. The City spends approximately 3.5 to 4.0 million dollars a year on replacement projects. As a result of the rate study, staff proposed the establishment of a “capital charge” as part of the combined fixed fee rather than a separate fee. The fee amount is established by the size of the customer’s meter.
Below is the summary table of the combined fixed rates:
Proposition 218 Requirements:
Proposition 218 amended the California Constitution, Articles XIIIC and XIIID, to require property owner notification of proposed increases in property related fees and give property owners the right to protest. On September 25, 2009 the City sent rate increase notices to all property owners and customers. The notice provides background information regarding the proposed water rates, notifies property owners and customers of the public hearing, and describes the protest procedures. To see an example of the water rate increase notice sent to property owners and customers, click on the following link: Proposition 218 Notice
For more questions regarding the rates or financial plan, please contact George Murdoch, Utilities General Manager at: (949) 644-3011 or email at gmurdoch@newportbeachca.gov