Water & Drought

How revenue losses played into decision to relax conservation rules in California

As water use plummeted during California’s yearlong conservation orders, many local water agencies found themselves struggling to cover operating costs.
As water use plummeted during California’s yearlong conservation orders, many local water agencies found themselves struggling to cover operating costs. Bigstock

It wasn’t just generous spring rains filling north-state reservoirs that had California’s urban water districts pushing back so hard against mandatory water cuts this year.

All those brown lawns and shorter showers have cost them millions in customer revenue.

As water use plummeted because of the statewide conservation orders implemented last summer, many water agencies found themselves struggling to cover operating costs. Less water use has meant lower monthly utility bills, and for most utilities, there has been no correlating decline in basic operating costs, such as payroll, debt obligations and maintenance of pipes and treatment plants.

“We have to pay that whether we sell one drop of water or a million drops of water,” said Carol Margetich, business services administrator for Roseville’s environmental utilities department.

The state’s yearlong mandatory conservation targets, issued in June 2015, required water agencies across the state to cut usage by 25 percent on average over 2013. In the Sacramento region, where most agencies had to cut usage by at least 28 percent, the financial impact was significant and compounded by the fact some residents were cutting back even before the state order.

The Sacramento Regional Water Authority reported that from January 2015 to September 2015 local water districts lost $25 million to conservation, representing a 12 percent drop in revenue. That includes the city of Sacramento, which saw revenue fall by about $4 million in fiscal year 2015; the San Juan Water District, serving Granite Bay, which reported losses of almost $1 million in fiscal year 2015; Roseville, which lost $1.6 million during that period; and Placer County Water Agency, which saw a $3.8 million decline.

As state regulators debated this January whether to extend the mandatory conservation orders through October, the potential financial hit to local water agencies was part of the discussion. An analysis commissioned by the State Water Resources Control Board estimated that, if the orders were extended into fall, urban districts would lose $673 million in revenue from water sales.

Ultimately, the board opted to loosen the conservation targets for the first half of 2016, and as of June, to allow districts to set their own targets based on the health of their local water supplies.

Environmental groups contend financial pressures factored too heavily into the water board’s decisions.

“We’re seeing that the desire to sell more water far exceeds the desire to conserve and do what’s best for their ratepayers,” said Tracy Quinn, a water policy analyst at the Natural Resources Defense Council. “They want to make up the revenue they lost in the mandatory conservation period.”

Water board chair Felicia Marcus acknowledged the revenue issue played a role in the decision to relax the state’s regulations, but said it was not the primary factor. The chief reason, she said, was that water conditions have improved. While the south state continues to experience unusually dry conditions, the north state saw a near-average winter that bolstered the major reservoirs that help supply irrigation and drinking water throughout California.

“The most important thing was just the hydrology had changed substantially,” Marcus said. “We wanted to give folks a chance to factor in water supplies and the extra amount they saved because they conserved. It just seemed the responsible thing to do. We’ll see how it plays out.”

Still, she didn’t offer a lot of sympathy for the water districts’ financial plight.

She said the state’s historic drought, now in a fifth year, should have prompted local water boards and ratepayers to confront a new reality: With the state facing longer, more frequent droughts, she said, local districts need to devise rate structures that take into account prolonged conservation.

“It’s certainly a challenge for some of them, but not one that can’t be overcome,” Marcus said. “The right answer can’t be that we can’t save water in the worst drought in modern history because we haven’t gotten around to changing our rate structures, or because somebody might yell at us.”

In the April 2015 drought declaration that prompted the statewide conservation mandate, Gov. Jerry Brown urged creation of innovative rate structures that encourage conservation. The state water board built a website and started a working group to promote adoption of new rate structures.

One method Marcus promotes is a “budget-based” rate structure, a system in which a property is allocated a set amount of water based on weather, landscape, home size and terrain. Water use that exceeds the set allocation is billed at increasingly higher tiers.

For their part, water agency officials say financial worries weren’t the main reason they chafed against the mandatory cutbacks.

Ross Branch, a spokesman for the Placer County Water Agency, offered a typical response: “Our major concern, in terms of why we were kind of pushing back, is because we wanted to have local control over local resources.”

But water managers don’t dispute that the drought regulations caused them budget headaches. Local districts say they cut costs, adopted drought surcharges, raised rates or dipped into reserves to make ends meet.

Adding to the challenge, they say, was the pushback from ratepayers who bristled at the perception they were being punished with higher rates because they did the right thing and conserved.

California law gives ratepayers substantial sway over rates through Proposition 218, a 1996 statewide ballot measure that said municipalities can’t charge fees that exceed the cost of providing a service. The protections built into the initiative have complicated efforts in several water districts to adjust rate structures in response to drought.

Roseville is a prime example. In that city, customers are charged fixed fees for half their monthly water bill. The other half is based on the volume of water used. Years ago, the city had approved a surcharge that would add a 15 percent increase onto the water-use portion of the bill in the event of drought.

In June 2014, the surcharge went into effect. A year later, the state ordered the district to meet a 28 percent conservation target. Even with the surcharge in place, the district faced a $1.6 million budget shortfall, and the city planned to offset the gap with a rate hike that would have billed the district’s biggest water users at higher rates.

The plan came to a crashing halt in April 2015 after a state appellate court ruled unconstitutional a four-tiered rate system in San Juan Capistrano that charged substantially more per gallon for its highest users. In a unanimous decision, the 4th District Court of Appeal said the city’s method violated Proposition 218.

Under the ruling, agencies still can charge tiered rates, but only if they can prove that the top tiers reflect the cost of having to tap into a more expensive supply of water to meet the higher demand.

Amy Talbot, water efficiency program manager for the Sacramento Regional Water Authority, said the ruling made tiered rates a less effective conservation tool for utilities such as Roseville, where water sources are relatively close and fairly inexpensive to deliver to customers.

Instead of adopting tiered rates, Roseville raised rates across the board, resulting in increases of about $9.50 on a typical customer’s monthly bill.

Roseville’s rate increase didn’t generate strong opposition, but the Orange County suburb of Yorba Linda continues to deal with a ratepayer rebellion over its recent efforts to recoup revenue lost to conservation.

The district, with its large suburban lots and a history of liberal water use, was ordered to cut usage by 36 percent from June 2015 to June 2016, the top rung of the state’s mandatory conservation tiers. The subsequent declines in revenue from water sales left the utility with a $9 million shortfall in its $28.6 million operating budget, district officials said. Fearing a default on its bonds, the district increased its fixed monthly charge on customers’ bills by about $25.

A local taxpayer group tried to overturn the fee hike, saying they didn’t believe the district’s shortfall was as large as administrators claimed. But the group was unable to get a majority of property owners to protest the fee, as required under Proposition 218. So, they started a recall drive against some of the district’s board members, and gathered signatures to put a referendum before voters to overturn the service charge.

“We’re not arguing against (water) conservation,” said Jeff Decker, chairman and co-founder of the Yorba Linda Taxpayers Association. “We’re arguing against the deception, or bad accounting.”

The district fought back, saying the referendum process isn’t covered under 218. The issue has landed in Orange County Superior Court, where a judge is expected to issue a final ruling in the coming days.

Numerous municipal governments have filed legal briefs supporting Yorba Linda in the case. Legal experts say a ruling in favor of the tax group could further complicate the situation for local water agencies as they work to balance their budgets.

Meanwhile, the service charge increase that caused all the acrimony in Yorba Linda may be going away. The district is among many in the state that have eased watering restrictions under the state’s newly relaxed conservation rules.

District spokesman Damon Micalizzi said the hope is that as “customer water consumption begins to rise,” there will no longer be a need for the increase.

Bee staff writer Phillip Reese contributed to this report.

Ryan Sabalow: 916-321-1264, @ryansabalow