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Water Pipes

Let’s Fight for Affordable Water!

Take the Public Utilities Commission to Court Using Prop 218

Brian Browne__
Brian Browne

My research indicates an urgent need for regulatory reform at the San Francisco Public Utilities Commission (SFPUC). The most effective approach would be to challenge their current water rate increases through the court system.

On May 23, 2023, the SFPUC announced that its rate increase announcement complies with Proposition 218, also known as the "Right to Vote on Taxes Act." This act necessitates written notice to affected property owners, public hearings, and granting property owners the right to vote on proposed taxes or fees. Proposition 218 stipulates that taxes and fees must be based solely on the actual cost of providing services. The SFPUC's outreach to voters may have been necessary but was not sufficient to fulfill all Proposition 218 requirements. Concern exists that the SFPUC may not be aligning delivery costs with those permitted under Proposition 218.

Ratemaking obfuscation under Proposition 218 was facilitated by the 2009 renegotiated water agreement between the SFPUC and Bay Area Water Supply and Conservation Agency (BAWSCA). In this agreement, the estimation of debt service changed from the utility method to the cash approach. The utility method permitted a capital pass-through based on historical investments minus accumulated depreciation, multiplied by the allowed weighted average cost of internal and external capital. The cash method employs a mortgage-style approach, wherein the present value of generally consistent annualized payments, comprising both principal and interest, amounts to the total bond debt.

The utility measure is a more concise meter of what has been spent and, thus Proposition 218 compatible. The cash method does not have a quantification of work done. In 1997 the SFPUC issued water-related (seismic and water quality) A and B bonds for $307 million. These bonds were approved by the voters with promises of specific work to be done in a set period. That was the last time voters got to approve SFPUC bond debt.

I inquired with Charles Perl, Deputy Head of SFPUC Finance, during a 2020 meeting with then-GM Harlan Kelly about the progress made on implementing work promised by these bonds. He informed me that the bonds had been refinanced, but did not provide a clear answer to my question. Consequently, it remains unclear how we can determine which portion of our rates is specifically allocated for the implementation of the promised work. The constant churning of bond debt appears to circumvent Proposition 218's mandates. Therefore, it is crucial to thoroughly reexamine the entire issue of allowable Proposition 218 provisions (particularly debt service) under court jurisdiction.

quote marks

Retail water rates are set to increase at an annual 8.0 percent rise. Historically, from 1985 to 2022, the nominal SFPUC retail division rates have increased annually by an average of 10.1 percent, while the average per capita demand for SFPUC retail services has decreased by -1.9 percent.”

Retail water rates are set to increase at an annual 8.0 percent rise. Historically, from 1985 to 2022, the nominal SFPUC retail division rates have increased annually by an average of 10.1 percent, while the average per capita demand for SFPUC retail services has decreased by -1.9 percent.

Published water bills are complex due to factors such as customer class and meter size. These bills include costs for non-allowable items such as subsidized rates, synchronizing payments with depreciation, inflated salaries and benefits for unqualified personnel, and various other add-ons. Under the California Constitution (XIII c and d), only the actual costs for delivering retail water are permitted. And utility lore demands that these costs must be reasonable and allowable.

A multiple regression analysis was conducted using historical retail demand in physical units as the predicted (dependent) variable, with average constant dollars per water unit and San Francisco's population as the independent variables. A technical description of this effort can be found here. In summary, the variable p-values indicate statistical significance for equation acceptance, and the R-squared value suggests that the estimated equation is highly explanatory.

A reliable method for assessing the validity of an estimated equation involves incorporating observed data into the actual path of derived data (known as equation backcasting), as shown in Figure 1. The close fit increases confidence in the results. The demand elasticity for inflation-adjusted rates is -0.38, indicating that a 10% increase in real rates leads to a 3.8% decrease in physical demand. The positive population coefficient of 1.4 suggests that a 10% increase in population would result in a 14% rise in physical demand. During the 1985-2022 period, the price of water in inflation-adjusted terms increased by a real factor of 7.7, while the population grew by a factor of 1.2. This suggests that the negative effect of price on physical demand overwhelmed the positive influence of a growing customer base. These statistics should refute the SFPUC's worn-out claims that its conservation efforts decreased demand. A more plausible theory is that its failure to adhere to Prop 218 cost prohibitions resulted in increased rates and reduced physical demand.

Brian Browne was coauthor of 2002 Prop P and former member of the Revenue Bond Oversight Committee it created. Feedback: browne@westsideobserver.com

February 2023

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