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CPUC to Consider Changes to Water Utility Rate Structures

By Kristin Withrow posted 08-17-2020 04:53 PM

  

On August 27, the California Public Utilities Commisison (CPUC) will meet to vote on a proposal  affecting private investor owned water utilities and the rates they may charge customers, including special districts. The proposal before the CPUC would eliminate the practice of “decoupling” through a water revenue adjustment mechanism or “WRAM.” This practice is currently implemented by five of the state’s “Class A” water companies.

 

ISSUE BACKGROUND

 

One of the objectives of the CPUC’s 2005 Water Action Plan is “to strengthen water conservation programs to a level comparable to those of energy utilities.” The plan sought to remove the inherent financial disincentive for private investor owned utilities (IOUs) to promote the conservation of water. To that end, the CPUC adopted a decoupled revenue recovery system which would remove the need for water utilities to generate company revenue growth through water sales growth. Water companies could instead rely upon a rate of return from a revenue stream separate from water sales that would cover the cost of delivering water.

 

The CPUC authorized IOUs to use a water revenue adjustment mechanism as a means to account for the difference between revenue forecasts and actual revenue collected. The five IOUs allowed to implement WRAMs include the California Water Service Company, California-American Water Company, Golden State Water Company, Liberty Utilities (Park Water) Corp., and Liberty Utilities (Apple Valley Ranchos Water Company).

 

If forecast revenues exactly matched actual revenue, WRAM balances would be exactly zero. Over the seven years of the WRAM program, however, utilities have consistently experienced under-collection. This has led to years of these IOU customers paying higher and higher rates under the WRAM in addition to increased water rates due to scheduled water rate increases. This situation has created confusion for those customers that make efforts to conserve increasing amounts of water only to experience ever-increasing water bills.

 

One explanation for the increased water rates under WRAM is that the balancing account under-collections are surcharged through general water rates. The declining use of water through the WRAM mechanism then results in shortfalls in revenue, which includes a portion of fixed costs that must be then surcharged to customers for recovery. As this shortfall in revenue is then surcharged to customers in the general water rates, the quantity rate increases and customers conserve further by using even less water at these higher rates, triggering the WRAM under-collection increases.

 

In addition to creating customer confusion, WRAMs have yet to prove an effective means of promoting water conservation. In reviewing the efficacy of WRAMs, the CPUC cited evidence that the IOUs which had implemented WRAMs experienced water conservation rates similar to those water utilities without such mechanisms. In fact, those water utilities without WRAMs had managed to conserve slightly more water. The CPUC found that customer conservation was accomplished independently of whether a utility does or does not maintain a WRAM, in part because of the confusing price signals to water customers. Given this, the CPUC believes that a WRAM is not necessary to promote water conservation, leading it to consider whether or not to abolish the type of WRAM implemented by the five “Class A” water companies and instead shift to a different type of mechanism.

 

NEXUS FOR SPECIAL DISTRICTS

 

The California Special Districts Association (CSDA) has not yet weighed in on this upcoming decision by the CPUC. Given that the WRAM discussed above is specific to five of the state’s biggest private IOUs rather than public water agencies, no special district is at risk of having its revenue structure altered at the August 27 meeting of the CPUC. However, the decision rendered at that meeting may nonetheless be important to special districts that are customers of IOUs, particularly recreation and park districts and cemetery districts that consume significant amounts of water. In the near term, water districts that procure their water supply from these private water companies may also be impacted as a result of changes to the companies’ water rates.

 

Public water agencies, such as special districts, are governed by elected boards that must approve rate increases during open and public meetings that are subject to Proposition 218 protest proceedings. While the CPUC does not regulate water districts, those districts with cost recovery mechanisms similar to a WRAM, which allow the district to account for fixed costs independently of water sales, may wish to monitor this issue from a general public policy and public relations standpoint.

 

If you believe your agency is or may be affected as a result of the CPUC’s pending actions to abolish the WRAM for California Water Service Company, California-American Water Company, Golden State Water Company, Liberty Utilities (Park Water) Corp., and Liberty Utilities (Apple Valley Ranchos Water Company), CSDA would like to hear from you. Your feedback may be instrumental in whether or not CSDA engages on this issue, and to what end its involvement may be. Please share your feedback with CSDA’s Legislative Analyst Marcus Detwiler at marcusd@csda.net.


#Water
#Revenue
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