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Another Rate Hike for East Bay MUD -- What Are the Options? (News Analysis)

By Stuart Flashman
Wednesday May 11, 2011 - 11:30:00 AM

Once again, East Bay MUD’s more than two million water customers in the East Bay are facing a rate hike. This time, the staff proposal is for a six percent across-the-board increase in water rates. EBMUD’s explanation is, essentially, that we customers have been too good at saving water. As a consequence, the water district has been getting less revenue, while its costs haven’t decreased accordingly.


There’s some truth to this explanation. Many of EBMUD’s costs are relatively independent of water use. For example, the costs for maintaining EBMUD’s reservoirs, treatment plants, and pipelines stay pretty much the same regardless of whether we’re using water like crazy or letting our lawns turn brown. Also, the interest costs on EBMUD’s capital improvement bonds don’t change regardless of water use, nor does the cost of salaries and benefits for EBMUD’s employees. Some of EBMUD’s costs do reflect water use; for example electrical costs for pumping and the costs for chemicals used in treatment, but overall, much of EBMUD’s costs are fixed. Since East Bay MUD’s charges for water on a per-gallon basis, and especially because EBMUD’s “inclined block” rate structure means that when you use more water, your per-gallon rate goes up, when people save water, their water bills go down,. That’s good for the homeowner, but bad for EBMUD’s finances.


That being said, there are many possible ways to deal with this beyond the across-the-board increase EBMUD staff has proposed. Here are a few of them:


1) Shift more of the bill to a fixed-cost element (i.e., a monthly fixed administrative fee) -- essentially a component reflecting fixed costs. That would give more income stability, but would decrease the effectiveness of the pricing message in EBMUD’s current rate structure. In essence, it would tell customers, “Use as much water as you want. We don’t care.”


2) Do what staff proposes -- raise all rates by a fixed percentage across the board. This is a relatively regressive approach, because everyone gets penalized equally regardless of water use, and there's no way to avoid an increase.


3) Raise rates, but with a higher rate of increase for the upper tiers of the rate structure. This would be a more progressive approach. It would shift the extra cost onto the heavier users. The risk/downside (as it were) is that the higher rates would send a stronger message to high-water-users to decrease their use. To the extent they did, the revenue problem could come back or even get worse. On the other hand, however, if usage decreased significantly over the long-term, capital improvement costs and associated bond interest charges would also decrease, decreasing the revenue need.


4) Shift the rate tiers lower, so that maintaining the same water use would put you into a higher tier and increase your water bill. If you wanted to keep your bill low, you’d need to find ways to save even more water. This would have the advantage of providing a continuing incentive for customers to shift towards higher and higher conservation. It would also give customers a way to avoid an increased water bill. One way to adjust the tiers and stabilize income would be to base them on district-wide average use -- e.g., the lowest tier could be for use less that 50% of average use; the next tier, from 50% to 150% of average use; and the third, and highest tier, more than 150% of average use. (EBMUD could also add back the fourth "water waster" tier, starting at, say twice the average use. That tier was eliminated after the last drought ended. It was VERY unpopular East of the Hills, and in Piedmont.) If average use decreased, the tiers would "float" downward. This would guarantee a stable income flow, but would make the tiers less stable, and some people might find it demoralizing -- kind of like running on a treadmill; you keep going faster, but you don't gain any ground.


Each of these approaches has its pluses and minuses, but each sends a message to customers that goes beyond EBMUD’s current mantra of, “We need more money.”


Stuart Flashman is an Oakland attorney specializing in environmental, land use, and natural resources law. He was an East Bay MUD board member from 1990 to 1994, and served as board president in 1994.