Jim de Bree: Through the labyrinth of SCV water rates

Jim de Bree
Jim de Bree

I read a lot about many local issues. One issue that I really have difficulty getting my arms around is Santa Clarita Valley water. There have been huge changes to our water delivery systems in recent years that are poorly understood by the community at a time when the cost of water has rapidly escalated.

In December 2012, the Castaic Lake Water Agency purchased the Valencia Water Company from what was originally the Newhall Land and Farming Co. in an eminent domain action. Castaic Lake, a wholesaler of Northern California water, incurred $73 million in debt that has to be serviced. Presumably those debt service costs are being passed on to the consumer in some form.

In recent years, we have seen a movement to consolidate water delivery throughout the Santa Clarita Valley under the premise that the consolidation will lead to economies of scale and a cheaper unified cost of water to all SCV residents.

The water companies would have you believe that the principal driver of increased costs is the drought. Ostensibly, Newhall Ranch and other developments are not responsible for the price increases.

With this as a backdrop, The Signal published an editorial on Oct. 20 entitled “Rate hike poor way to launch water agency” (see https://signalscv.com/2017/10/rate-hikes-poor-way-launch-water-agency/). In this editorial, The Signal appropriately voiced concerns expressed by many community stakeholders.

On Oct. 27 The Signal published a rebuttal by Matthew Stone, general manager of Castaic Lake Water Agency, entitled “Delivering Clean Water,” (see https://signalscv.com/2017/10/matthew-stone-delivering-clean-water/) defending the timing of the rate increase. He correctly stated that Valencia Water resets the rates every three years, and it is now time to undertake that regularly scheduled process.

Mr. Stone referred to “a period of three years, with an average increase of 4.3 percent per year.” It is not clear which three-year period he was discussing. In its recent letter to consumers, Valencia Water stated that it was seeking to increase revenues by 6.3 percent annually for 2018 through 2020.

I have attempted to evaluate the impact of the proposed rate increase on my own personal water usage.
I reviewed several of my 2017 water bills, first applying the 2013 rates to my 2017 water usage, and then looked forward to apply the proposed rates for 2018-2020 to my 2017 usage.

One wild card in this analysis is the “revenue adjustment,” which is revised periodically irrespective of rate increases.

The revenue adjustment is a surcharge that is added to customers’ bills to cover Valencia Water Company’s overhead costs. Costs are divided by the expected usage to compute rates. If the usage goes down, the existing rates charged do not provide sufficient revenue to cover Valencia Water’s overhead costs.

Therefore, a surcharge is added to increase the revenue to cover the costs in situations of reduced water usage.

Since I have read that overall water usage has remained low, in my analysis, I assumed the 2017 surcharge would be effective for 2018-2020.

After going through this exercise I noted the following:

The 2017 rates I was charged were about 137 percent of my 2013 rates. Given the drought and water shortages, I suppose this is not surprising. The biggest driver of the increase was the revenue adjustment resulting from increased conservation efforts.

When I looked at the proposed increases, I concluded that my 2018 water bills will be about 106 percent of the 2017 rates. The 2019 charges will be about 108 percent of what I paid in 2017. Finally, my 2020 water bills will be about 107 percent of what I was charged for 2017. This, of course, assumes that my water usage remains constant.

There is one other matter in the rate-increase letter from Valencia Water that can affect future rates. That is what the water company calls “pass-through payments.” To the extent that Valencia Water needs to purchase water from outside sources, and the cost of purchasing such water changes from year to year, it will adjust the consumer rates (upward or downward) to pass through the additional costs or savings to consumers.

Obviously, if we continue to experience a severe drought and water usage falls below expected levels due to conservation, those factors could result in additional increases through the revenue adjustment component of our bill.

The situation poses a troubling question. There has been a lingering perception that Valencia Water customers historically paid less for their water than other water users in the SCV. The concern is that Castaic Lake Water Agency’s acquisition of Valencia Water is one way of subsidizing water for those who are not served by Valencia Water.

If Castaic Lake raises rates for Valencia Water faster than for other customers, it presumably can use those incremental proceeds. In this context, the statement by Mr. Stone that the Santa Clarita Water Division rate increases are only 4.3 percent is troubling for Valencia Water customers because their stated rate increase is 6.3 percent, or 2 percent higher than the overall increase for Santa Clarita Water Division.

While I continue to experience difficulty understanding the nuances of SCV’s water delivery system, I have in this column tried to grasp the impact of the proposed Valencia Water Company rate increase.

Jim de Bree is a retired CPA who resides in Valencia.

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