DROUGHT:

Water cutbacks now might mean higher bills later

With California facing severe drought, Gov. Jerry Brown (D) has asked residents to voluntarily reduce water use. Some cities have imposed mandatory conservation.

Lawn watering is limited to one day per week in Sacramento. People face fines if they wash their cars on certain days or fail to use a hose with a shut-off nozzle. In Santa Cruz, residents can't drain and refill pools, restaurants can't give customers water unless it's requested, and grass watering is restricted to early mornings and after 5 p.m.

Conservation is necessary, water agency officials said, as the state faces acute scarcities.

But the side effect that many water officials are discussing -- and that most consumers are less aware of -- is that people who cut consumption now could face higher water rates in the future.

Most water agencies make their money based on consumers' water use. When residents cut back, there's less revenue for water companies. Meanwhile, about 70 percent of agency costs -- including payroll and infrastructure -- are fixed, said Jay Lund, director of the Center for Watershed Sciences at the University of California, Davis. Those that lack a healthy reserve to make up the difference might need to seek rate increases if the drought persists, he said.

"If you encourage people to conserve water too much during a drought, you're going to reduce your revenues," Lund said. "If you ask people to conserve, you're basically taking money out of your cash register."

He added, "You might be glad of that if next year is dry, but you still have to figure out a way to pay your bills. You have to raise your rates in a future year because you had people conserve."

It's a factor beyond California. A study released last month by the Denver-based Water Research Foundation noted that "water use for many utilities is the defining characteristic in revenue health" and that "national trends indicate that average water use per capita and per account is generally decreasing over time."

"It's happening across the nation even in places that aren't dealing with the drought," said Traci Case, research services manager at the foundation. Because of technological advances like low-flow fixtures and toilets, she said, consumption "definitely has declined over several years."

"It's definitely proven, and it definitely affects rates," Case added. "That and the changing economy are the probably biggest things."

How much conservation in California will bump up rates depends on a number of factors, experts said, including water agencies' long-term planning and the length of the drought.

But the state already has some knowledge about the effect of conservation, because former Gov. Arnold Schwarzenegger (R) in an executive order required California to reduce water use 20 percent by 2020.

"It has made rates go up," said Danilo Sanchez, program manager in the California Public Utilities Commission's consumer arm, the Office of Ratepayer Advocates.

Forecasting

Cities that have imposed new water reductions are grappling with what's ahead.

The San Francisco Public Utilities Commission, which services 2.6 million people in the Bay Area, has asked for a 10 percent voluntary reduction.

"If we get that 10 percent reduction, that's a 10 percent reduction in revenue," said Tyrone Jue, the San Francisco PUC spokesman. "The first place you always look is within your reserves to cover any deficits on your revenue side."

Jue said the agency believes it can get through the 10 percent conservation level by tightening spending and dipping into reserves.

"If conditions persisted and we went into a mandatory water restriction and we saw a decrease in revenues for an extended period of time," he added, "you would reach a point where you would have to enact some sort of emergency rate just to keep our operations going."

"If we get into 20 percent mandatory water rationing or even higher, those are very real revenue deficits that you might not be able to make up simply with fiscal austerity measures," he added.

Sacramento already has imposed a mandatory 20 percent cutback, and is analyzing what that means financially.

The agency has water rates that are locked in through 2105. It's running forecasts to look at how the drought-triggered conservation will affect revenues, said Jamille Moens, business services manager for Sacramento's Department of Utilities.

The city's water fund for fiscal 2014 has a $29.9 million balance on a fund with $96.1 million in revenue. But part of that reserve needs to be kept intact, she said, because it helps ensure bond requirements are met. The city also has to keep on hand 120 days' worth of operating capital.

"We do have a reserve. It's not a huge one," Moens said. The city just issued those revenue bonds to fund work on infrastructure, she said, and "it's going to take some time to build" the reserves.

"It's not like we have reserves that we set aside for a drought emergency," Moens added. The agency needs to see the effect if it had to tap into reserves. The situation should be stable for this year, she said, but could have a great impact next year if the drought continues.

The utility's customers pay a monthly service charge of $24.40 for the typical single-family home, before taking into account fees for water used. That provides a cushion against lower sales from conservation, she said.

"We've always known that as we do better at conserving, the per-unit rate of water is going to have to go up to cover the costs," Moens said. "This drought is just accelerating this, and it's unplanned, so most people who are having 20 percent reductions, we haven't planned for that impact to the revenues."

Other water agencies already have a mechanism built in that allows them to seek a surcharge when sales fall. Six agencies in the state -- serving about 4 million to 5 million people -- have what's known as the water revenue adjustment mechanism, or RAM.

The companies will track sales this year, and next March could apply to the California Public Utilities Commission for the adjustment to make up for lower consumption, said Sanchez with the Office of Ratepayer Advocates. When it's happened in the past, consumers haven't been happy, he said.

"They're saying, 'Look, we're cutting back, but my bill, now I'm paying more than what I was paying before I was cutting back,'" Sanchez said.

Tiered rates failed to prevent shortfall

The Los Angeles Department of Water and Power has experience with lower water sales during droughts. Five years ago, it adjusted rates to compensate for the effects of conservation. The shifts the utility made then have allowed it to have enough water to meet demand now.

The agency still came up short in revenue, however, and had to impose a billing surcharge.

LADWP, which serves about 4 million people, put policies in place in 2009 to deal with low water supplies in its aqueduct on the eastern side of the Sierra Nevada Mountains.

The agency uses a two-tiered structure. Before declaring emergency conditions, LADWP for the first level charged $2.983 per 100 cubic feet, which is about 748 gallons. Tier two ran $3.597 per 100 cubic feet.

To deal with the drought, LADWP cut by 15 percent the amount of water customers could use and remain in tier one. And if residents bumped up to tier two, they had to pay $5.190 per 100 cubic feet.

The rate structure -- originally drafted in 1993 -- was intended to be "cost neutral," so that money LADWP lost due to people cutting back in tier one would be captured through the higher tier-two price. The agency is still coming up short, however, said Julie Spacht, LADWP's water executive managing engineer.

In 2010, the City Council approved a surcharge aimed at collecting $18 million more, while the agency also put other cost-savings measures in effect. The surcharge added 6 cents per billing unit that year, and 10 cents the following year. It fell to 8 cents per billing unit in 2012.

The agency has kept the 15 percent quantity cutback within tier one in place. The tier one and tier two rates are now closer together.

LADWP believes its policies, along with education efforts on conservation, will be enough to get it through the drought without raising rates to compensate. It does plan to ask for a rate increase in coming months, but that is not driven by conservation, Spacht said. LADWP is looking to pay for infrastructure investments, its safe drinking water program and long-term investments in local water supply, she said.

Customers unhappy about water rates that rise as they've conserved need to view it differently, Spacht said.

"One concept in that regard is to think of it as a service and not a commodity," Spacht said. "We are providing a service, that service being adequate water supply and at a very high quality."

She added, "We not only provide drinking water, but we also provide fire supply. That is a part of their water supply they don't think of routinely."