CONSERVATION PRICING, PROPOSITION 218 AND REAL-TIME DATA
While customers will react to customer engagement that is based on a combination of behavioral comparisons and social nudging, one of the strongest motivators for behavioral changes is cost. Now, historically, that cost for water has been low enough that in most cities the impact does not register in the monthly budget of most citizens. As an industry, we were enormously successful in taking what was a dangerous commodity in the 19th century and creating a fabulously engineered system of public health protection that made clean, safe and inexpensive water readily and abundantly available. Unfortunately, we have been so successful at this that most people in the developed world now take this service for granted or even feel that the service should be free. As a result, much needed proposals to increase water prices are often met with intense opposition, public outcry and legal challenges.
The days of cheap water are coming to a close however, as the reality of water volatility floods over the world. Circle of Blue noted in 2014 that in the United States, “since 2010, average prices rose 33 percent […], the equivalent of adding $15 per month to a $45 water bill.”1 In fact, the cost of water has been increasing at more than twice the Consumer Price Index for more than 30 years.2
Increased water rates also provides the additional benefit of encouraging conservation. In a recent NPR interview, the Mayor of Santa Fe, Javier Gonzalez noted:
“We’ve got to recognize that in Santa Fe, people know that there isn’t an unlimited supply of water. We live in a highdesert community. We know that climate change is real. Year over year, our temperatures are rising, our forests are getting dryer. And we have to implement strong measures to mitigate the threats of climate change. Water conservation is key to that. And having the tiered pricing model that promotes conservation is important.”3
To address their water reality, Santa Fe adopted perhaps the most expensive water rates in the country: $6.06 per thousand gallons for the first 7,000 gallons plus $21.72 per thousand gallons thereafter for residential users. The direct benefit of this tiered structure is undeniable for Santa Fe – they have seen a reduction of per capita demand from 162 gallons per day to 96 gallons per day, a 40 percent reduction.
THE CALIFORNIA CONDITION
Despite the clear impact of price on water use, setting the cost of water directly proportional to the marginal cost of delivering an increased supply has historically been difficult. Cost setting has also recently run afoul of California’s Proposition 218, the “Right to Vote on Taxes Act”4, passed in 1996. In April 2015, the Fourth District Court of Appeals issued its decision in Capistrano Taxpayers Association, Inc. v. City of San Juan Capistrano5, which considered a challenge to the City’s tiered rate structure under Proposition 218.
Under this ruling, the superior court found6 that the tiered rates proposed by the City did not comply with Proposition 218’s requirement that charges reflect “the cost of service attributable to” a parcel because there was a lack of support for the discrepancy between the rates assigned to the price tiers. The key flaw in the City’s position was summed up by David Aladjem and Amanda Pearson of Downey Brand:
The Court of Appeal upheld the trial court’s conclusion that the City improperly failed to calculate the cost of actually providing water at the various tier levels, and so could not show that its water charges did not exceed the costs of service attributable to various parcels. The Court found that to comply with the mandate that charges not exceed the costs of service, a water provider must do more than simply balance its costs and total revenues – it must also correlate tiered prices with the actual costs of providing water service at those tiered levels [emphasis added]. As the City had not even attempted to make this showing, the trial court was correct to find that the rate structure violated Proposition 218.7
Most importantly, the court’s finding was not that tiered rates were unconstitutional, but rather the methodology of determining rates must be based on the costs of service for each class and tier. That is, rates cannot be arbitrary and that the agencies setting water rates must be able to demonstrate that price reflects the cost of service.
The actual cost of delivering water is a function of many parameters: the cost of water, the cost of treatment, the cost of power, labor costs, chemical costs, compliance costs, debt-service costs associated with infrastructure and more. The challenge is correlating that cost to usage. In many cases, these costs are variable and highly dynamic – that is, there is a time component to the costs that cannot be reflected using monthly billing. The cost of power, for instance, is typically charged to most water utilities on a time of use basis where the costs vary as a function of just minutes. Labor costs can vary as well when staff are required to work overtime. Chemical costs increase as volume and demand increase. From the utility’s perspective, there is insufficient granularity of water use data – that is the customer’s demand – to reliably align with the utility’s costs.
FATHOM solves this problem in a number of ways. FATHOM MDM, our meter data management software, offers the opportunity for the utility to obtain and use Advanced Metering Infrastructure (AMI) data to substantially increase the granularity of customer demand. FATHOM CIS, our customer information system, allows for real-time rate engines driven by AMI data to create rate structures that are completely reflective of demand. FATHOM U2You, our customer portal, allows customers to see and respond to consumption and cost signals, providing incentives for conservation and facilitating an understanding of their usage-driven cost. Finally, with the FATHOM Revenue Assurance Program, missing revenue is found in the data, ultimately improving the financial sustainability of utilities.
With the requirement to justify rates based on actual use, California utilities must adopt technologies and tools that can align their costs to use. This will most certainly drive many utilities to move toward AMI projects which substantially improves the understanding of water demand. When employed with information systems that can use this data, utilities will be able to rapidly and effectively demonstrate the cost implications of use, and thereby comply with Proposition 218 while incentivizing conservation.
2J. Beecher, “Trends In Consumer Prices (CPI) for Utilities Through 2013”, January 2014, http://ipu.msu.edu/research/pdfs/IPU%20 consumer%20Price%20Index%20for%20Utilities%202013%20(2014).pdf
4Proposition 218 approved a constitutional amendment that limits the methods by which local governments can create or increase taxes, fees and charges without taxpayer consent. Proposition 218 requires voter approval prior to imposition or increase of general taxes, assessments, and certain user fees. ( http://www.californiataxdata.com/pdf/proposition218.pdf)
54th DCA No. G048969
6The superior court also found that the City’s inclusion of charges for recycled water violated the requirement that the services for which a Proposition 218 charge is imposed be “immediately available” to property owners, because the City’s residential customers did not and for the most part would not use recycled water.
7D. Aladjem and A. Pearson, “Court of Appeals Gives Guidance on How to Implement Tiered Pricing”, April 21, 2015 (http://www. downeybrand.com/Resources/Legal-Alerts/95102/Court-of-Appeals-Gives-Guidance-on-How-to-Implement-Tiered-Pricing)