Update on Metropolitan's Projected Water Rates for 2010 

When Metropolitan adopted rates for 2009, it projected that the Tier 1 rates would increase by approximately 5% in 2010. Last September, Metropolitan began to develop estimates for "average" water rates for 2010 that projected increases ranging from 15% to 21%. With additional impacts from greater Bay-Delta pumping restrictions, continuing drought and increasing supply and operational costs, Metropolitan has developed two alternative rate proposals that would increase 2010 Tier 1 rates for treated water from 20% to 35% depending on the level of water sales. The major factors driving these increases include:

• State Water Contract Costs – projected to rise by approximately 10% to over $500M in 2010
• Water Supply Programs – includes the Drop 2 reservoir for Colorado River supplies  Colorado River Power – required to move greater amounts of supplies
• Debt Service – bond payments on recently completed capital projects
• Demand Management programs – includes increased conservation programs to address drought

Under Alternative 1, a 20% increase would raise the treated, Tier 1 rate from $412/AF for untreated water and $579/AF for treated water to $503/AF and $695/AF respectively. These levels are based on assumed total sales of 2.12 million acre-feet. Given the rate and sales assumptions, it is estimated that about $139 million would still be withdrawn from Metropolitan's reserves to meet obligations during 2009/10. Due to the continuing need to acquire water transfers, Metropolitan will maintain the Water Supply Surcharge to fund these purchases. It is anticipated that the Water Supply Surcharge will be in effect at least through 2010. Metropolitan has stated that the Water Supply Surcharge can be expected to decrease over time if a near-tem Delta solution is realized which results in increased SWP deliveries, however, any drop in the water supply surcharge may be offset by an increase in supply rates to pay for the costs of near-term Delta improvements.

An analysis of water supply conditions entering 2009 suggests a potential need to declare an allocation in April 2009. If a supply allocation is declared in 2009, water sales will likely be lower than the 2.12 million acre-feet projection mentioned above. In the event that an allocation is declared, it is possible that an additional rate increase would be required to collect fixed costs which are not recovered due to the reduction in sales caused by the allocation. The 35% increase in Tier 1 rates under Alternative 2 illustrates the need for a greater rate increase, effective January 1, 2010, if water sales are 100 thousand acre-feet lower than projected. It is conceivable, however, that dry conditions and Delta pumping constraints due to regulatory action to protect species could force Metropolitan to declare an allocation, effective July 1, 2009, resulting in significant demand reductions. As an example, if sales dropped to 1.8 million acre-feet, then it may not be feasible to wait until January 1, 2010 to implement a water rate increase. In order to maintain the same reserve levels as mentioned above, then Metropolitan could implement a rate increase that would be effective in conjunction with the water supply allocation. A mid-year rate increase of 14.4 percent effective on July 1, 2009, followed by a second increase of 14.2 percent on January 1, 2010 would generate enough revenues to leave reserves at $103 million at the end of 2009/10, consistent with Alternative 1. This total rate increase would be 28.6 percent, but a large portion of the increase would occur on July 1, 2010, resulting in higher revenues for all but two months of fiscal year 2009/10. While staff does not expect water sales of 1.8 million acre-feet, this example illustrates the potential impact of low water sales that could result from a water supply allocation. Tier 1 and IAWP water rates from 2008 through 2010 are summarized below.

With the revisions to the Interim Agricultural Water Program (IAWP) approved by the Metropolitan Board in June 2008, growers now have a choice to (1) continue participating in the IAWP and receive a progressively decreasing discount with a corresponding reduction in cutback obligations through 2012, (2) opt-out of the program immediately and pay the full-service, Tier 1 rate at the same reliability level as municipal and industrial customers or (3) continue in the IAWP, but opt out at the end of 2010 or 2011. IAWP rates are based on set discount from Metropolitan's Tier 1 rates, which is set to progressively decrease over the 4-year phase-out of the IAWP. The following are the discount levels for the IAWP throughout the phase-out period.

Future Water Rates

As part of the 2010 rate setting process, Metropolitan has also provided preliminary estimates of future increases in "average" rates and charges. The most recent estimates call for a 12% increase in 2011, 10% in 2012, 7% in 2013 and a 3% increase in 2014. The following table shows projected Tier 1 and IAWP rates through 2014 assuming these levels of rate increases.

Rate Setting Schedule

The following is the schedule for the Metropolitan rate-setting process:

January 6

– Initial Board budget workshop

January 12 & 13

– Board sets public hearing date for rates and charges
– Initial Board review of proposed group budgets and rates

January 16

– Member agency manager meeting to discuss budget and rates

March

– Public hearing on rates & charges

March

– Budget & rates workshop

April

– Board considers budget, 2010 rates & charges, LRFP reserve policy

Historically, the public hearing takes place in February and the Board considers the rates and charges in March. However, with the water supply picture unclear and such large rate increases proposed, the Board has extended the schedule to evaluate the need for a supply allocation and review the individual department budgets.

A detailed look at the proposed 2010 rate increases is shown below:

Related Links:

• Metropolitan projects rising rates (February 2009; PDF file, 722 K)
• An Early Look at 2010 Metropolitan Water Rates
• New Water Rates for 2007/08
• Projected Water Rates for 2008-2010
• 2006 Rate Structure
  
  
  

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