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Big Rate Increases Ahead at Many Water Agencies as Financial Pressures Grow

Drought adds to the pressures of aging pipes and slow growth, yet many agencies still intend to put off rate increases to appease customers.

Written by Matt Weiser Published on Read time Approx. 4 minutes

The drought has put California water agencies under an unprecedented variety of financial pressures, according to a new survey. This will eventually require significant rate increases in some communities.

Ann Bui, a managing director at the global water consulting firm Black & Veatch, said many water agencies are feeling the strain because they had already delayed imposing rate increases for a number of years due to the drought and a reluctance to strain ratepayers. The drought aggravates things because water conservation mandates reduce the amount of water they sell, thereby reducing revenues.

Other pressures include aging water infrastructure – as demonstrated by recent large water main breaks – and the water agencies’ slow recovery from the recent national economic recession, she said. Homebuilding is often a significant source of revenue for water agencies, both from new connection fees and the addition of new ratepayers to the service area. But housing construction still has not recovered to pre-recession levels in many communities.

“One of the things our industry as a whole is facing is just the number of different factors that we’ve never had to deal with all at the same time,” said Bui, who is based in Los Angeles. “A vast majority of the agencies can’t meet their existing expenses just through user charges (water rates) alone. It is a struggle for them to meet their basic needs.”

In the survey of more than 450 water agencies around the nation, only 36 percent reported having sufficient revenue to cover their long-term operating costs. That’s a surprisingly low number.

When asked what they required to do to raise revenues, 55 percent said they need to increase water rates by at least 5 percent annually over the next 10 years to meet their funding needs.

“Rates are going to continue to rise because we didn’t build into the cost of providing water to cities the cost of replacing infrastructure that’s in the ground,” said Chris Brown, a water industry consultant based in Sacramento and former executive director of the California Urban Water Conservation Council. “The water industry is really to blame for not having the foresight to build that into the rate structure.”

In recent weeks, a number of California water agencies have announced plans for rate increases. The size of these increases ranges all over the spectrum from a 57 percent increase proposed over two years by the city of Milpitas to about 3.4 percent annually for five years in Los Angeles.

But many water agencies are reluctant to increase rates. In the survey, although 55 percent said they need annual rate increases of at least 5 percent, a much smaller percentage said they actually plan to seek such increases. This was especially true among those agencies surveyed on the West Coast, where only 27 percent of water agencies said they plan to increase water rates.

Instead, Bui said, many water agencies are making ends meet by reducing staff, leaving vacant jobs open, deferring capital improvements (such as new pumping stations or storage facilities) and deferring maintenance.

The number of water main breaks across the state this summer bears this out. These can have significant ripple effects, like a recent main break in Redwood City that cut off water supply to a hospital.

“They’re depleting every source of revenue they have,” she said. “They’re trying to stretch what they’ve got as long as they can. That’s why we’re seeing more main breaks. There’s only so long you can defer maintenance. It’s unfortunate. It’s something we don’t want to see. But it is a reality.”

Why the reluctance to raise rates? Bui says there are two reasons.

One is that many water agency officials detect that their customers already feel pressured because of mandatory water conservation imposed due to drought.

“They say, ‘Well, how much do I have to pay while I’m sitting here conserving?’ Officials want to keep their customers happy for that reason,” she said.

Another is Proposition 218, approved by voters in 1996. The measure amended the state constitution such that agencies must obtain a favorable vote from property owners in their service area before they can raise rates. Staging such elections adds significantly to the cost of enacting a rate increase.

In addition, a number of water agencies have recently faced lawsuits challenging their rates structures. Some of these have come in the form of class-action lawsuits on behalf of many water customers. Defending against such cases only adds to the expense column for water agencies that may be already strapped.

“What we’re seeing is many municipal agencies are hiring outside attorneys – in addition to their own attorney – to review every step of the process,” Bui said. “There are some who are not budging on rate structure changes because they are afraid of challenges.”

So, what are water agencies to do amid the worst drought in recorded history?

Bui said they should not shy away from increasing water rates if they need to, because postponement will only compound the pain.

“Have the courage that if you need an increase, do that, because it is not helpful to wait,” she said. “I don’t have a problem as a ratepayer paying an extra 2 percent a year to keep my utility whole. I do have a problem if my bill goes up 10 percent a year. That’s a huge difference when it comes to personal household budgeting. It’s better to be consistent about it than all of a sudden just socking it to the ratepayer.”

Water customers need to get realistic as well, she said. Even with modest annual rate increases, water will remain far cheaper than the cable TV bill or the cellphone bill. Yet as thousands of Californians are finding out this year, it’s a lot more difficult to live without water.

“Think about how often and how much you need water in your life,” she said.

Top image: A man leaps over water flooding a side street after a water main break sent churning, muddy water down Sunset Boulevard and hilly side streets on the famed Sunset Strip in West Hollywood, Calif., on Friday, September 26, 2014. The Los Angeles Department of Water and Power said the break occurred in a 36-inch steel, riveted pipe that was constructed in 1916. (AP Photo/Nick)

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