Driven by rate increases from the Metropolitan Water District of Southern California and the Water Authority’s investments in more reliable water supplies and infrastructure projects, the San Diego County Water Authority staff Wednesday proposed an “all-in” 9.6 percent increase in the cost of untreated water purchased by its 24 member agencies in 2013. The Water Authority Board of Directors is scheduled to hold a public hearing and vote on the proposal at its June 28, 2012 meeting.
The total cost for municipal and industrial untreated water would rise to $1,003 per acre-foot on January 1, 2013, up $88 per acre-foot, or 9.6 percent from the current rate. The proposed treated water rate for 2013 is $1,259 per acre-foot, up $111 per acre-foot, or 9.7 percent. (An acre-foot is 325,900 gallons, enough to meet the needs of two average single-family households of four people for a year.)
The Water Authority posted its proposed 2013 rates online at www.sdcwa.org/sites/default/files/files/board-memo-rates-and-charges-2012-0516.pdf, opening a six-week public review period. The Water Authority Board is scheduled to receive a presentation on the proposed rates at its meeting May 24, at which time it is scheduled to set a public hearing for its June 28 meeting.
The proposed rate increases are driven primarily by three factors: 1) increased costs from MWD, the region’s largest imported water supplier; 2) increased debt service costs necessary to pay for the Water Authority’s $3.5 billion investments in major new water infrastructure projects; and, 3) an increase in the quantity and price of the Water Authority’s purchases of supplies from the Imperial Irrigation District.
The largest single driver of the proposed rate increase is rate increases approved April 10 by MWD. MWD’s Board of Directors approved an “average” 5 percent rate increase for 2013 that actually results in an estimated 8.5 percent increase in MWD-related costs to the Water Authority. This accounts for about 48 percent of the Water Authority’s proposed rate increases for next year.
This spring, the Water Authority, its member agencies, and members of the public were successful in persuading MWD to lower its 2013 rate increase. Instead of adopting an average 7.5 percent increase, as it originally proposed to do in March, MWD ultimately approved a 5 percent rate increase, 33 percent lower, on April 10. The Water Authority estimates the smaller increase will save the San Diego region’s ratepayers $5 million in 2013.
“Without that reduction, the increased MWD costs we would have been forced to pass through would have resulted in a proposed 2013 rate increase of about 11 percent,” Water Authority General Manager Maureen Stapleton said.
Payments for major water infrastructure investments made over the last two decades account for about 26 percent of the proposed untreated water rate increase and about 31 percent of the proposed treated water rate increase. This includes paying an additional $21 million in planned debt service costs to finance large-scale infrastructure projects such as the San Vicente Dam Raise (the largest single expansion of local reservoir storage in the county’s history, currently under way), the Olivenhain Dam and Reservoir, Twin Oaks Valley Water Treatment Plant, and additional pipelines, pump stations, and other projects necessary to operate and maintain the region’s water delivery and storage system.
“By making these long-planned investments in major infrastructure projects, we are improving the region’s water supply reliability now, and for generations to come,” Stapleton said.
The Water Authority has reduced the costs of financing its capital projects. Recent bond refunding sales are expected to save $19 million in financing costs (on a present-value basis over the life of the bonds). This lowers debt service costs in fiscal year 2013 by $2 million, compared to previous estimates.
The Water Authority is taking additional steps to mitigate the impact of increasing debt service costs on the proposed 2013 rates. The most significant of these is reducing the senior lien debt service coverage ratio from the current fiscal year estimate of 1.47 to 1.35 in fiscal year 2013. The reduced coverage ratio will continue to meet all bond covenants, and coverage is projected to meet the Water Authority Board’s 1.5 coverage policy target in 2014.
“This one-year reduction in coverage is a measured and reasonable step to mitigate rate increases,” Stapleton said. “Without this measure, the necessary rate increase in 2013 would have been 17.5 percent.”
Another portion of the proposed rate increases is related to supplies from the Water Authority’s water conservation and transfer agreement with the Imperial Irrigation District. IID supply costs account for about 26 percent of the Water Authority’s proposed untreated water rate increase, and about 21 percent of the proposed treated water rate increase, with nearly half of these increases attributable to the 10,000 acre-feet of increased supplies. The IID transfer will provide 100,000 acre-feet of water in 2013, up from 90,000 acre-feet in 2012. The cost of this water will increase 10 percent in 2013 under the terms of the agreement; a lower, 5 percent rate increase is scheduled for 2014.
In addition, investments by the Water Authority in lining the All-American and Coachella canals in the Imperial Valley desert provide approximately 80,000 acre-feet of water annually to the Water Authority under a 110-year agreement with the U.S. Secretary of the Interior.
“Our growing supply from the IID transfer and canal-lining projects provide vital water supply reliability benefits for our region and are much more reliable than MWD supplies,” Stapleton said.
During the latest supply cutback from MWD, from July 1, 2009 to mid-April 2011, the Water Authority received approximately 264,000 acre-feet of supplies from the IID water transfer and the canal-lining projects.
“These supplies reduced MWD’s 13 percent cutback in our imported water to an overall 8 percent shortage for the Water Authority,” Stapleton said.
In addition to the water supply reliability benefits, Stapleton said the IID and canal-lining agreements improve the Water Authority’s control over the cost of a significant and growing portion of the region’s imported water supply. MWD’s rates are set annually or biennially by MWD’s Board of Directors and have proved to be both unpredictable and far higher than MWD’s own projections. In contrast, the price of supplies from IID is set according to an agreed-upon schedule through 2015. From 2016-2034, IID supply increases are tied to the Gross Domestic Product Implicit Price Deflator index. Over the most recent 10-year period, the GDP-IPD index has a compounded annual growth rate of 2.3 percent per year. In comparison, MWD’s Tier 1 untreated water rate rose at a compounded annual growth rate of 7.3 percent between 2004 and 2014.
The Water Authority filed suit in June 2010 challenging MWD’s 2011 and 2012 water rates. MWD is overcharging the Water Authority for transporting the Water Authority’s IID transfer and canal-lining supplies from the Colorado River. The Water Authority estimates the gross amount of transportation overcharges will increase in 2013 by $17 million, to $57 million. The gross overcharges in 2011 and 2012 were $38 million and $40 million, respectively. For more information on the rate litigation, visit www.sdcwa.org/mwdrate-challenge.
The Water Authority has taken aggressive steps to cut its own costs. The Water Authority’s current two-year budget (fiscal years 2012 and 2013) is 16 percent lower than its previous two-year amended budget. Spending reductions include:
- Executing the largest workforce reduction in the agency’s history. The Water Authority is reducing the number of employees by 16 percent between 2008 and 2014. This includes the elimination of 31.33 full-time employee positions in the current budget period.
- Deferring 14 construction projects totaling $150 million to July 2014 or later.
- Reducing the budget of the water conservation program by 60 percent to right-size conservation spending in light of significantly reduced water use in the region since 2007.
- Providing no new local supply development funding, decreasing school education and small-contractor outreach programs, and reducing internal support services for finance, human resources, and information technology.
- Cutting back 15 percent on office supply, travel and similar costs. These efforts alone save almost $1 million from the previous two-year budget.
- Managing labor and benefit costs by increasing the employees’ cost share of retirement benefits.
“Like many businesses and government agencies, the Water Authority has taken the difficult, but necessary steps to cut spending and reduce our workforce to keep our costs down where we can for our ratepayers,” Stapleton said. “Unfortunately, we did not see MWD demonstrate the same kind of cost-cutting commitment during its recent budget and rate-setting process. We will continue to aggressively advocate for spending reductions at MWD that will not only benefit our ratepayers, but ratepayers throughout Southern California.”
More information on MWD is available at www.MWDFacts.com.
To learn more about the services provided by the San Diego County Water Authority and its member agencies to ensure regional water supply reliability, read the Water Authority’s fact sheet at: www.sdcwa.org/sites/default/files/files/publications/reliablewatersupply_fs.pdf.