2009 Water Rates and the Long-range Financial Plan

At its March 11 meeting, the Metropolitan Board approved a 14% increase in overall rates and charges effective Jan. 1, 2009. Under the new rate schedule, Metropolitan's Tier 1 rates for treated and untreated water will rise to $554 (9% increase) and $387 (10% increase) per acre foot respectively. In addition, a temporary $25/AF water supply surcharge will apply to all water sales, resulting in a treated Tier 1 rate of $579/AF and an untreated Tier 1 rate of $412/AF. The increases for 2009 come on top of a 6.3% increase in the treated Tier 1 rate that became effective at the beginning of 2008.

Under the 2009 rate schedule, Interim Agricultural Water Program (IAWP) rates for treated and untreated water will rise to $440 (12% increase) and $297 (14% increase) per acre foot respectively, plus the $25/AF surcharge on all water sales. IAWP rates are currently tied to the Tier 1 rate, whereby, any increase in Tier 1 rates results in a corresponding dollar for dollar increase in the IAWP rates. Currently, the cost differential between untreated Tier 1 and IAWP rates is $90/AF, while the differential between treated Tier 1 and IAWP rates is $114.

The concept behind the surcharge is that one of the main drivers of increased costs is the need to purchase additional water transfers to augment supplies from the State Water Project. At $25/AF, the surcharge is projected to generate approximately $50 million. As future water supplies become more certain, and Metropolitan acquires longer term sources (or reduces its demands), the surcharge could be eliminated, and costs would be recovered by increases in the Tier 1 and Tier 2 rates.

The primary cost factors causing the rate increases in addition to the water transfer costs are:

• Increased conservation efforts - also necessitated by the federal court ruling restricting pumping on the State Water Project.
• Establishment of a control program for the quagga mussel - current cost estimates for control of these invasive species amount to almost $5 million per year.
• Cargill Litigation Settlement - results from the district's use of temporary employees and consultants.
• Higher costs for SWP deliveries - SWP costs for FY 2008/09 are estimated to be approximately $53 million higher than in 2007/08.

Even with the increases, Metropolitan will not capture its true cost of service through the rates and charges and will need to dip into its reserves for up to $182 million.  Were Metropolitan to increase its rates to capture its true cost of service, rates would have risen by over 20 percent. In addition, the new rates and charges are based on maintaining payments to fund some portion of current capital improvement projects from current water sales revenues – known as pay as you go (PAYG) - at $95 million. However, in order to preserve liquidity, the Board elected to reduce the PAYG financing target to $30 million in the 2008/09 budget. If Metropolitan's financial condition improves because of higher sales (greater than 2.23 million acre-feet) or lower operating costs or water supply costs, staff will provide options for the Board's consideration regarding increasing PAYG amounts in the upcoming fiscal year.

Projected Rates Through 2011

Assuming that (1) the treatment surcharge remains at $167/AF and (2) the current cost differentials between Tier 1 and IAWP rates for both treated and untreated water remains the same, the estimated rates through 2011 are shown below:

* Tier 1 and IAWP rates include $25/AF surcharge

However, there is no guarantee that IAWP rates will continue to be pegged to Tier 1 rates. The IAWP is currently being reviewed as part of Metropolitan's Long Range Finance Plan (LRFP). The goal of LRFP update is to develop a revenue program for the next five years that balances the requirements of coverage ratios and reserve levels, while meeting future Capital Improvement Programs and O&M needs.

An LRFP Rate Structure Subgroup (the Subgroup) was formed to review the cost-of-service methodology and develop rate structure options and alternatives for the Board consideration regarding changes to Metropolitan's existing rate structure. The Subgroup will consider how Metropolitan can attain minimum reserves while dealing with lower water sales, the cost of water transfers, increased power costs, and the cost of a Bay-Delta fix. Staff recommendations on any changes to the IAWP resulting from the LRFP process will be considered by the Metropolitan Board in May.

Related Links:

• New Water Rates for 2007/08
• Projected Water Rates for 2008-2010
• 2006 Rate Structure
  
  
  

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