San Diego water rates going forward

By now most San Diego water customers have heard that the City Council last Thursday approved water rate increases for the years 2014 and 2015 (Item-620 on the docket).

The main reason for the increase was that the price of imported water keeps going up and the Public Utilities Department (PUD), as we know, needs to purchase that high-priced water to supply over 80% of the city’s needs. PUD buys imported water from the San Diego County Water Authority (SDCWA) which in turn buys its water from the Metropolitan Water District of Southern California (MWD) and from the Imperial Irrigation District (IID).

Compared to price hike hearings in previous years, this time relatively few people were up in arms. Even though several of the 37 people who submitted protest slips at the meeting seemed quite indignant, many who spoke expressed disappointment and unhappiness but appeared resigned to the fact that PUD has little choice but to recover the price it pays for imported water. Even U-T San Diego, normally happy to throw gasoline on smouldering embers, refrained from inflammatory editorializing.

Still, there are some valid reasons for general dissatisfaction with the situation.

A seemingly abrupt and large price increase

In 2011 former San Diego Mayor Jerry Sanders directed PUD to absorb the higher price of imported water in 2012 and shield city customers from the rate increase. PUD managed this by cutting staff, creating new “efficiencies” in operations, and by drawing more water reserves that originated from local watersheds so that less imported water would need to be purchased.

In 2012 Sanders ordered PUD to continue absorbing higher imported water costs when imported water rates went up again for 2013.

For 2014 PUD was faced with serious financial and operational difficulties if forced to continue under the above constraints as the imported price continued to rise. Further, it appeared likely that the city’s credit rating could be downgraded as a result. Thus, the proposed rate increases.

At Thursday’s meeting before casting the only vote against the new rates, Councilmember Scott Sherman complained: “we’ve said all along that we’ve absorbed the rate increases on ratepayers for the last two years, but in this case we’re going back and trying to recover those rate increases” — as if to suggest that PUD absorbing the rate increase over the previous two years meant that in the future customers should never have to pay the true cost of imported water (or perhaps it was just political posturing).

In truth, Public Utilities did absorb the rate increases, to the tune of some $35 million in added water costs over those two years. But it should have been clear to all that by absorbing the rate increase for two years PUD was postponing the day when customers would have to pay the full price, not exempting customers from ever paying the real price.

PUD obviously cannot continue paying the full price for imported water as the price continues ever upwards while reselling it to city customers at below cost.

It’s wrong for Sherman and others to try to paint this situation as PUD covertly trying to recover the $35 million that it absorbed over 2012-2013.

Unfortunately it’s true that after being shielded from the rising price of imported water for two years, customers will feel the impact more acutely than if the price had incrementally increased in smaller steps over that period.

Reservoir storage impacted

PUD hasn’t publicized which reservoirs it has been drawing down as a result of the Sanders directive, but one can view the monthly report of reservoir storage published by SDCWA to see the general picture. In the city reservoirs that depend solely on local watershed and cannot be replenished with imported water (Barrett, El Capitan, Morena, Sutherland), storage levels are clearly low. Actually El Capitan does have a small capacity connection for imported water but it is rarely used — June 2009 was the last time a small amount of imported water was delivered to El Capitan. The other reservoirs have connections to receive infusions of imported water so their higher levels aren’t the best indicators of local conditions.

City of San Diego reservoir storage data October 2013 (source: San Diego County Water Authority)

The city intends to withdraw even more water from Lake Morena reservoir in December in an attempt to save an additional $5 million in avoided imported water purchases. According to PUD Deputy Director of External Affairs Brent Eidson, the city will draw down and use water from the 50,694 acre-foot capacity Morena reservoir (now only 13% full with about 20,000 acre-feet of usable water left) until it reaches a virtual dead pool of 2,000 acre-feet, the point at which the intakes can no longer remove the water.

Miriam Raftery describes the resulting Lake Morena controversy in this East County Magazine report.

Still, while the city avoided buying some imported water over the last two years and will squeeze the last drops out of Morena, it cannot indefinitely draw down its other supplies without jeopardizing the reserves maintained for emergency (and I don’t think higher prices for imported water constitutes an emergency). Plus, the staffing cuts and other cost-cutting moves have surely taken a toll on the department’s morale and well-being. And, to the extent that the city may need to buy extra imported water in the future to compensate for the local reserves used up over the last two years, new imported water at much higher prices will be the cost.

During the public hearing, Council President and Interim Mayor Todd Gloria said that forcing PUD to absorb those costs undermined the city’s creditworthiness and negatively impacted maintenance of water infrastructure.

Councilmember David Alvarez said “we basically underfunded the system for a couple of years and cannot continue to act in this irresponsible manner going forward.”

Bottom line: Mayor Sanders’ politically motivated directive only set up the water customers for a rude awakening, put PUD in a difficult financial position & jeopardized the city’s bond credit rating, and gambled with the city’s water reserves.

New pricing tiers

In addition to higher prices for imported water, the existing 3-tier pricing system will be replaced by a new 4-tier price structure (see chart). A somewhat confusing U-T San Diego story tried to explain the new structure. News 8, San Diego 6, La Jolla Patch, and 7 San Diego also weighed in.

Put simply, the intent behind the new tiers was to minimize rate increases for those who conserve and to penalize excessive consumption.

Existing and proposed monthly pricing tiers. HCF=hundred cubic feet (source: City of San Diego Notice of Public Hearing for the water rate increase).

PUD’s Brent Eidson informed me via email that 20.1% of water customers are expected to fall into the lowest first tier, 51.6% will be in the second tier, 16.6% in the third, and 11.6% in the highest tier.

The problem is that as a means to encourage water conservation the tiered pricing structure can seem rather arbitrary.

At the public hearing Councilmember Mark Kersey sounded off about this, saying he thinks a tiered structure “is archaic and crude.” He suggested that San Diego should consider a water budget based billing system that takes into account various household sizes and needs, similar to the successful Irvine Ranch Water District’s billing system.

Kersey may have forgotten it was only recently (July) that the City Council’s Natural Resources and Culture Committee (NR&C) reviewed PUD’s Water Budget Based Billing Report. After considering the report, NR&C decided to rule it out for residential customers because the report projected $5.7 million in one-time expenditures to design and implement the system, $3.6 million annually in ongoing costs for billing system enhancements, and unspecified labor and expense for handling individual variance requests from users who would seek adjustments to water budgets assigned to them.

The report also indicated that water budget based billing would also not be worthwhile because it would change the usage habits of only a small percentage of customers.

Note that Irvine Ranch’s customer base is much smaller than San Diego’s and implementing a water budget based system was less daunting than it would be for San Diego.

Still, water budget based billing remains attractive to many other people (myself included) and the idea is likely to be revived in the future. My earlier report on water budget billing discusses this billing method and related issues in more detail.

More rate increases in the forecast

It’s still unknown what effect Poseidon’s Carlsbad Desalination Plant under construction next to the Encina Power Plant will have on San Diego water rates.

It’s not over. Not only are more rate increases for imported water certain in the future, two other factors will push water prices even higher:

• Desalinated water. While San Diego normally purchases only less expensive untreated imported water because it has its own water treatment plants, it definitely wants to be able to purchase treated desalinated water if the need arises. Therefore the city will need to pay “availability” fees to SDCWA for access to desalinated water, plus the price of desalinated water itself. Desalinated water will be much more expensive than the present cost of imported water, although SDCWA has not yet announced exactly what those prices will be. Presently the imported price is about $800 per acre-foot while desalinated water is expected to be in the vicinity of $2,000 per acre-foot.
• The upcoming July 31, 2015 expiration of the EPA Point Loma waiver. The waiver allows the Point Loma Wastewater Treatment Plant to discharge partially treated wastewater into the ocean (“advanced primary treatment”) instead of upgrading to secondary treatment as required by the Clean Water Act. The current waiver was granted on condition that the city recycle more water and greatly reduce the amount of wastewater discharged at Point Loma. So far not enough recycling is being done. In order to avoid steep financial penalties and be forced to upgrade the Point Loma facilities at great expense, the city will try to negotiate for yet another waiver by demonstrating its commitment to divert ever-larger amounts of wastewater from Point Loma into a large-scale potable reuse program. Regardless of how this all plays out, it will end up raising water and/or sewer rates. Click here for a detailed examination of this issue.

There WAS something to chuckle about at Thursday’s public hearing: Councilmember Sherri Lightner said “Some day we will get to the point where our city is selling water, not buying it. That’s my vision.”