For years I have been at odds over how the San Juan Water District (SJWD) set their daily and metered rates for water in the Granite Bay area. Finally, SJWD is proposing a five-year rate structure that addresses the long term capital improvement needs of the district. The unfortunate 8% and 9% increase in the rates is a reflection of past Board decisions not to implement a stable rate structure for future maintenance, operations, and system upgrades.
Granite Bay Rate Structure
When I first moved to Granite Bay I was shocked to learn that SJWD had a tiered rate structure that rewarded large water consumers. The maximum per unit cost (ccf or hundred cubic foot) of the Tier 3 was less than the Tier 2 price. When I approached the Board and General Manager about the counter-intuitive rate structure, I was given a twisted rational about not penalizing large water consumers. As far as I could determine, SJWD was the only water utility in California that had a tiered rate structure that benefited potentially wasteful water use.
At that time, the underpinning of the rate structure was that water sales would provide a substantial portion of the maintenance, operations, and generate funds for long term capital improvement projects like replacing water mains and reservoir covers. If demand is fairly constant over the years, the supposition of the metered water sales contributing a relative stable revenue source is warranted. However, in the real world, demand can change. People use less water for a variety of reasons.
The Failure Of Water Sales To Generate Critical Revenue
The Great Recession of 2008 hit the SJWD from two angles. First, water sales decreased as people just cut back on landscaping, pools, and no new homes were being built. In addition, many homes sat vacant as they went into foreclosure. Second, in a bow to public pressure, the Board mitigated a scheduled 2011 rate increase, based on a 5-year rate study, by reducing it from 5% to 2%. Even though the Board froze salaries and cut programs in 2009 to reduce expenses, the infrastructure of the water system did not stop getting any older.
As we came out of recession, and water usage started to return to normal, California was hit with a drought. SJWD was under a mandate to reduce water consumption by 35%. Again, the revenue stream, leaning heavily on water sales, was pinched. The Board had a hard time raising rates when at the same time they were encouraging people not to use water. They did implement a 10% drought surcharge to help cover the revenue shortfall, rejecting a much higher surcharge to cover current and future financial needs.
In 2015, the Board finally jettisoned the tiered rate structure and went to one metered water rate for all residential consumers. The tiered water structure had failed SJWD. Over the past several years dealing with reduced water sales from recessions and droughts, the district was chewing through their reserve funds just to keep up with the costs of running the district. The current 5-year rate schedule creates a stable revenue source with more emphasis on the daily rate for funding the district instead of metered water usage.
SJWD Treats All Folsom Lake Water For Granite Bay Consumers
It’s important to understand what SJWD does and how it is different from other water utilities in the area. SJWD must treat all the water they receive from Folsom Lake. They have no ground water wells. The treatment of surface water to state and federal standards is costly. Water districts with ground water wells only need to flip the switch on the pump to send water to their consumers. SJWD does not have this luxury. SJWD also sells treated surface water to Orangevale, City of Folsom, Citrus Heights, and Fair Oaks. The wholesaling of this water is separate from the retail side where they sell water to Granite Bay residents. Consequently, it is not always easy to compare salaries and benefits between SJWD and other water utilities because
- SJWD can have more trained and technical staff to manage the water treatment facilities than other districts in order to produce 30,000 acre feet of treated water annually.
- More than two-thirds of the water produced is sold to other districts. In other words, Granite Bay consumers use less than a third of the water that is treated at the SJWD facilities.
In the latest rate structure proposal, the daily rate increases, while the metered price stays constant. While we all think of water for drinking and irrigation, it has an equally important role in fire suppression. SJWD has an obligation to keep the system pressurized, with available flows far beyond residential consumption, to fight fires. I view the daily rate as a companion to my home insurance. If my water utility can keep the pressure and supply at the necessary levels, my homeowners insurance will not increase. Insurance companies do rate areas and consider the fire suppression capabilities of the water system and fire district. A poor water system, relied upon for fire suppression, can cause homeowner insurance to increase to cover the risk.
Rate Increases To Fund Infrastructure
That leads into the very heart of the rate increases, capital improvements. While the SJWD Board has been dithering about, appeasing overly vocal residents about proposed rate increases through the years, the infrastructure has been getting older. The district has not been saving enough money to fund critical repairs and upgrades to the water system. We have pipes in the ground that are over 50 years old. There are surface water covers on reservoirs that need to be replaced along with pumping stations to maintain pressure.
The Curse of Granite Bay
When it comes to funding expensive upgrades to any utility infrastructure in Granite Bay, we are cursed with low density housing. There are approximately 10,500 retail water connections in the Granite Bay service area. We have approximately 400 homes per square mile. Other areas like Rocklin and Folsom have housing densities of over 1,000 home per square mile.
The cost to replace a major water transmission line is virtually the same in all regions. But water districts with higher densities and more service connections can spread the cost to replace that water main line over many more homes. Consequently, Granite Bay retail water consumers must shoulder a larger share of the cost for replacing the water pipe than other districts with higher housing densities.
One of the reasons people to live in Granite Bay is because of the lower housing density. Unfortunately, that comes with the burden of higher utility rates because the costs to maintain and replace the infrastructure most be borne by fewer people than other areas.
Pay-Go Or Loans
The district has two options. They can pay-as-you-go or take out loans to fund the need capital improvements. With the capital reserve funds severely depleted from leaning on them to fund daily operations, the district can’t pay-as-you-go for many imminent upgrades to the system. SJWD can take out loans in the form of municipal bonds, but without a long-term approved rate structure, the interest rates will be higher as the district looks riskier to investors.
I would much rather see SJWD try to pay for as much as the necessary capital improvements as possible out of accumulated reserve funds. I’m not much of guy who wants to see utilities lean heavily on debt to finance improvements or daily operations. You want to limit financing to those projects that are very expensive and have a very long life expectancy.
The Rates Will Increase Sooner Or Later
The latest rate proposal is created to pay for many of the capital improvements out of reserve funds that accumulate over time. Public opposition to any rate increases in the past has led SJWD to this unhappy situation today of rate increases that are triple the rate of inflation. I guarantee that if the Board does not approve this rate structure, and is forced to borrow money for capital improvements, the exact same rate increase, if not higher, will have to be levied to pay for the interest on those loans. I would rather have a portion of my water bill going to capital reserve funds than pay interest to bond holders.
The SJWD is not perfect. There probably is some fat or unnecessary proposed expenditures in their long term budget forecast. I’m not keen on the Board spending money to stop the Delta Twin Tunnels project or flying back east to Washington D.C. to lobby for the resurrection of the Auburn Dam. But these are political decisions that the elected Board has chosen to make. However, I do concur with the retail rate study and financial plan proposed that the Board commissioned.
As an elected body, the Board can disregard the financial plan for capital improvements and rate increases like they have done in the past. But the costs of maintaining the water system will not go away. Past decisions to kick the proverbial can down the road have now come back to haunt the district. Eventually, Granite Bay water consumers will have to pay for critical maintenance on the water system. We can start today with a rate structure to accumulate capital improvement reserves or we can do it tomorrow when the district must take out a loan and the rates increase to cover the debt service.
2017 SJWD Retail Financial Plan and Rate Study
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Historic SJWD Rate Increases
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