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«June 18, 2014 Attention: Administrative and Finance Committee Adopt the Water Authority’s rates and charges for calendar year 2015 and extend the ...»

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June 18, 2014

Attention: Administrative and Finance Committee

Adopt the Water Authority’s rates and charges for calendar year 2015 and extend the

Transitional Special Agricultural Water Rate Program. (Action)

Purpose

To establish rates and charges sufficient to meet the Water Authority’s revenue requirements in

conformance with state law and board policies and to extend the Transitional Special Agricultural

Water Rate (TSAWR) program.

Staff recommendations

a. Conduct the Public Hearing b. Accept Carollo Engineers’ San Diego County Water Authority Desalination Cost Allocation Cost of Service Rate Study dated May 13, 2014 and letter amending the study, included in Attachment A of this report.

c. Adopt Ordinance No. 2014-__ an ordinance of the Board of Directors of the San Diego County Water Authority setting rates and charges for the delivery and supply of water, use of facilities, and provision of services;

d. Adopt Ordinance No. 2014-__ an ordinance of the Board of Directors of the San Diego County Water Authority extending the Transitional Special Agricultural Water Rate Program through December 31, 2015; and e. Find the actions exempt from CEQA pursuant to Public Resources Code § 21080(b)(8) and authorize the General Manager to file a notice of exemption.

Alternative Do not set the rates and charges at the recommended increased amounts or set the rates and charges at some lesser amount than recommended. Setting rates and charges at lower than the recommended amount may result in larger rate increases in future years.

Fiscal impact The proposed water rates and charges, in combination with existing taxes, the System Capacity Charge, the Water Treatment Capacity Charge, the Infrastructure Access Charge (IAC), investment income and the Standby Availability Charge are expected to raise revenues sufficient to meet the Water Authority’s revenue requirement, bond covenants and other key fiscal policy goals.

Administrative and Finance Committee June 18, 2014 Page 2 of 13 Background Metropolitan Water Rate Increases On April 8, 2014, MWD’s Board of Directors adopted rate and charge increases for calendar years 2015 and 2016 resulting in a 1.5% annual “average” rate increase in each year. Based upon MWD’s adopted CY 2015 rate and charge schedule, the cost of treated and untreated water to the Water Authority will increase by 3.7% and decrease by 1.9%, respectively (excluding the impact of MWD’s fixed charges). The increase in the treated rate is being driven by the 15% increase in MWD’s treatment surcharge.

2013 Comprehensive Cost of Service Review In 2013, the Board of Directors retained Carollo Engineers (Carollo) to perform a comprehensive cost of service review of the Water Authority’s rates and charges. That review along with the General Manager’s recommended budget and staff’s recommended revenue requirement allocation formed the basis for setting the CY 2014 rates and charges.

Drought Messaging and Water Demand Uncertainty With ongoing extreme drought conditions in California, a ramp-up in conservation messaging across the state, and the National Oceanographic and Atmospheric Administration predicting the chances of El Niño increasing during the remainder of the year - exceeding 50% by the summer, water demand forecasting for CY 2015 was especially challenging. Additionally, current drought conditions and a historically low 5% State Water Project Table A allocation have caused MWD to rely heavily on its storage supplies to meet the needs of its customers in 2014. As a result, consideration was given to the possibility of the drought continuing into 2015 and potential for MWD to implement water supply allocations to protect its storage reserves in projecting CY 2015 water sales. While water sales to-date in CY 2014 have trended above forecasted estimates, the Water Authority took a conservative approach in its forecasting and is projecting that the current demand trend will subside and drop next year – resulting in a 1% decrease in CY 2015 sales due to conservation messaging, a strong probability of an El Niño event, and the potential for MWD mandatory supply allocations.

Special Agricultural Water Rate Program In October 2008, faced with a prolonged drought, rising water costs and the realization that in the future, any “surplus” water should be stored in its own regional storage portfolio in order to meet variable municipal and industrial water demands, the MWD Board voted to terminate the Interim Agricultural Water Program (IAWP) through a five-year phase-out of the program resulting in termination December 31, 2012.

In response to MWD’s phase-out of IAWP, the Water Authority’s Board approved the TSAWR program in October 2008 and made it available to IAWP participants. The TSAWR program enables participants to purchase water at MWD’s full service Tier 1 rate, which is at a discounted rate from the Melded Supply Rate, in return for a lower level of water supply reliability. TSAWR deliveries are also not included in the Storage Charge allocation to member agencies. At that time, the Board also formed a Special Agricultural Water Rate (SAWR) Board Workgroup to develop a recommended permanent program when IAWP terminated at the end of 2012. In March 2010, the Board approved the Workgroup’s recommendation for a permanent SAWR program that began January 1, 2013 and only continued the Storage Charge exemption. With the SAWR program set to Administrative and Finance Committee June 18, 2014 Page 3 of 13 switch from the transitional program to the permanent program on January 1, 2013, members of the agricultural community raised concerns over the financial impacts of the change. In response, on April 26, 2012, the Board voted to extend the TSAWR program for two additional years ending December 31, 2014. This action not only provided agricultural customers with additional time to prepare for the higher cost of water, but also provided time for important water supply issues that could affect the rate structure to be resolved.





On April 24, 2014 in response to stakeholder requests, the Board directed staff to provide the CY 2015 rates and charges with and without an extension of the current TSAWR Program at the May Board meeting. Additionally, the Board directed an analysis of the TSAWR program as part of the A&F Committee’s future work on fiscal sustainability. After reviewing and discussing the CY 2015 rate and charge alternatives prepared by staff, the Water Authority’s Board of Directors, on May 22, 2014, directed staff to prepare the CY 2015 rates and charges to include the continuation of the TSAWR program through December 31, 2015 and to mitigate the rate impact of this action by reducing the CY 2015 Rate Stabilization Fund (RSF) support by $7.1 million.

May 22, 2014 Board Meeting At the May Board Meeting, the Water Authority staff gave a report on the proposed rates and charges for CY 2015 including alternatives for continuation of the TSAWR program. Carollo also presented on their findings as well as provided a summary of its report on the San Diego County Water Authority Desalination Cost Allocation Cost of Service Rate Study. The report was provided to the Board as part of the agenda materials. The Water Authority’s May Board report also highlighted the drivers of the CY 2015 rate and charge increases. The highlighted drivers

are summarized below:

• Increasing MWD treatment costs – With MWD’s treatment rate increasing by 14.8%, the Water Authority’s treatment costs are expected to increase by approximately 1.5% in CY 2015.

• Cost of desalinated water – With the construction of Carlsbad Desalination Project moving ahead of schedule, the Water Authority expects to take delivery of approximately 16,000 acre feet in CY 2015 with a net increase in water costs of approximately $22 million.

• Securing a prudent financial position and advancing towards Board policy targets – The RSF is currently below the established maximum funding level that provides 3.5 years of protection against wet weather. The Water Authority is targeting a RSF deposit of approximately $22 million in FY 2015 which will bring the RSF to approximately 79% of its established maximum funding level.

Based upon the Board’s direction to prepare rates and charges to include the continuation of the TSAWR program through calendar year 2015, the proposed water rates and charges would result in an Municipal and Industrial (M&I) “all-in” 1 increase of 2.9% in the untreated water rate and a The “all-in” water rate is the estimated average cost of water that includes the Water Authority’s Melded Supply, Melded Treatment (if treated rate) and Transportation rates along with the Storage and Customer Service charges expressed as a $/AF estimate. The actual average cost will vary for each member agency depending on their Customer Service and Storage charge allocations.

Administrative and Finance Committee June 18, 2014 Page 4 of 13 2.6% increase in the “all-in” treated water rate for CY 2015. These increases are within the high/low guidance previously provided by staff to support member agency financial planning efforts. The proposed rates and charges balance the increased costs discussed above against the financial policies adopted by the Water Authority’s Board of Directors and prudent financial management to minimize the rate increases and mitigate near term rate and charge volatility.

Previous Board Action: On May 22, 2014, the Board received the detailed cost of service study and the detailed adopted Resolution 2014-09 setting the time and place for the public hearing on June 26, 2014 to receive comments on the proposed rates and charges.

Discussion The Water Authority Board and staff continue to actively manage costs, focus on projects with a long-term quantifiable payback and search for improved efficiencies and opportunities for consolidation or outsourcing. The Water Authority’s M&I “all-in” rate for untreated water is increasing by 2.9% and the rate for treated water is increasing by 2.6%. It should be noted that the actual cost of water will vary by member agency based upon each agency’s fixed charge allocations.

Setting Water Rates and Charges On an annual basis, the Water Authority staff develops proposed water rates and charges, which it presents to the Board of Directors for adoption. Water rates and charges include the Melded Supply, Melded Treatment, Transportation Rates and the Customer Service and Storage Charges.

Each year the Water Authority undertakes the following cost of service analysis to determine water rates and charges.

• Step 1. Establish the revenue requirement—determine the total amount of revenue needed to recover the Water Authority’s annual operating (operations and maintenance of facilities, cost of water, treatment costs, etc.) and capital expenditures (cash and short and long-term debt)

• Step 2. Allocate the revenue requirement and offsetting non-commodity revenues (i.e.

investment income, property tax, IAC, etc.) to rate categories (Melded Supply, Melded Treatment, Transportation, Storage and Customer Service) to determine the net revenue requirement for each rate category

• Step 3. Determine rates and charges based upon the net revenue requirements, water sales projections and other key financial management metrics (i.e. senior lien debt service coverage, fund deposits and withdrawals)

• Step 4. Allocate fixed charges (Storage and Customer Service) to member agencies based on specified allocation methodologies Integration of Desalination Costs into Calendar Year 2015 Rates and Charges In addition to the direction provided by the Board with regards to the Fiscal Sustainability Task Force’s recommendations, a Desalination Cost of Service Study Phase II Member Agency Workgroup (Workgroup) was formed to assist staff in developing the desalination cost recovery methodologies. The methodologies were then provided to an independent cost of service consultant, who conducted an analysis to ensure the desalination cost recovery proposed by the Workgroup for rates and charges is consistent with the formalized cost of service based Administrative and Finance Committee June 18, 2014 Page 5 of 13 methodologies. An open and transparent process was conducted and the activities performed are described below.

Desalination Cost of Service Study Phase II Member Agency Workgroup Process The Workgroup was tasked with assisting Water Authority staff in identifying the methodology to be used for incorporating the costs of the Carlsbad Seawater Desalination Project into the Water Authority’s rate and charge structure. In October 2013, the Workgroup began meeting to discuss the specifics of allocating Carlsbad desalination costs to their functional rate service categories. The Workgroup included up to two representatives from each member agency, Water Authority staff and Dr. Thomas Chesnutt of A&N Technical Services as an independent expert and facilitator of the process. The Workgroup met monthly through February of 2014 and

covered the following:

• Rate setting principles, cost allocation and ratepayer equity

• Water Authority’s rate and charge structure and process

• Application of the cost of service principles to Carlsbad desalination including the 9 desalination rate structure alternatives that were presented to the Board in 2012 Ultimately, the Workgroup discussion resulted in the following proposed allocation of Carlsbad

desalination costs:

1. Pipeline costs connecting the desalination plant to the Water Authority’s system are allocated to Transportation a. Costs associated with required modifications to the Water Authority’s existing Pipeline #3 due to desalination are allocated to Transportation b. Improvements for delivering desalinated water to Twin Oaks Valley Water Treatment Plant for blending and to redistribute water through the aqueduct are allocated to Transportation c. The new Desalinated Product Water Pipeline between the Carlsbad Desalination Plant and the Second Aqueduct is allocated to Transportation

2. Because its primary function is to produce water, the primary cost allocation of the desalination plant is to Supply, but with an allocation of the incidental treatment benefit resulting from the fact that produced desalinated water meets all state and federal drinking water regulations being allocated to treatment



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