Report 2013-126 Summary - July 2014

Antelope Valley Water Rates:

Various Factors Contribute to Differences Among Water Utilities

HIGHLIGHTS

Our audit concerning Antelope Valley water rates revealed the following:

  • Of the four water utilities we reviewed—Los Angeles County Waterworks, District 40 (LA District 40), Palmdale Water District (Palmdale), Quartz Hill Water District (Quartz Hill), and California Water Service Company (Cal Water)—water rates differed considerably based on the various costs they incur.
    • Cal Water, an investor-owned utility, incurs costs that government-owned utilities (public utilities) do not, which include property and franchise taxes.
    • Public utilities—LA District 40, Palmdale, and Quartz Hill—receive revenues, primarily from property taxes, that help cover costs and contribute to lower rates.
    • A utility's source of water contributes to cost variations.
  • Processes are in place to protect consumers from unreasonable rate increases and each of the water utilities generally followed these processes.
  • In some cases, the water utilities could not quantify their efforts to reduce water rates.
  • Cal Water offers two rate assistance programs while the three public utilities do not offer discounts to their customers.

RESULTS IN BRIEF

The Antelope Valley region (valley) occupies northeastern Los Angeles, southeastern Kern, and western San Bernardino counties, and its water customers are served, depending on location, by four main water utilities: Los Angeles County Waterworks, District 40 (LA District 40), Palmdale Water District (Palmdale), Quartz Hill Water District (Quartz Hill), and California Water Service Company (Cal Water), and by several smaller utilities. Water rates differ considerably among these four water utilities. For example, in April 2013 a typical residential customer of Cal Water paid just over 304 percent more than a customer of LA District 40 with similar water usage. Although there are legal and other differences among the four water utilities, the primary explanation for the differences in rates and rate increases is the difference in the costs paid by each water utility. Also, the four utilities can pass through inflation and increased costs of purchased water as rate increases to their customers.

One major factor that contributes to the dissimilarity in costs among the utilities is the inherent difference between investor owned utilities (investor utilities), such as Cal Water, and government owned utilities (public utilities), such as Palmdale, Quartz Hill, and LA District 40. For example, investor utilities incur costs that public utilities do not, including property and franchise taxes. In addition to the dissimilarities in costs, each water utility has access to different revenue sources due to the legal distinctions between public and investor utilities. For example, as an investor utility, Cal Water can receive revenues only through monthly water rates, which includes a return on its investments in capital improvements. Public utilities receive revenues from monthly water rates and from additional sources, primarily taxes based on the assessed value of properties in their service area. These additional revenue sources help public utilities cover their costs, and therefore can contribute to lower monthly water rates for their customers. Other factors specific to each water utility can also contribute to variations in their costs, including the sources of water and energy costs to pump water. We grouped these costs into the major expenditure categories of personnel, operations, water purchases, power, water treatment, and, where applicable, taxes. Although the four water suppliers have similar types of expenditures, the costs they incurred varied.

Furthermore, processes are in place to protect consumers from unreasonable rate increases, and each of the water utilities generally followed these processes. The investor utility we reviewed, Cal Water, must file a general rate case every three years with the California Public Utilities Commission (commission) for review and approval before adjusting rates. The three public utilities we reviewed also must adhere to an approval process. Proposition 218, a constitutional provision that limits the authority of local government agencies to impose property-related assessments, fees, and charges, requires public utilities to provide parcel owners with written notice of any proposed rate increase at least 45 days in advance of a public hearing, and to explain the purpose for any increase. However, although Quartz Hill included the basis for calculating its rate increase in this notice, we believe it could have included more detail for the basis of its fee methodology. We noted that the requirements for the level of detail contained in the notice could be clarified by the Legislature to provide further guidance to public utilities. Furthermore, Quartz Hill and LA District 40 followed Proposition 218's public notice requirements, but they lacked documentation showing that they followed statutory provisions requiring them to notify parcel owners of automatic increases in water rates to pass through inflation and increased costs of purchased water for all three years we reviewed. Additionally, Quartz Hill did not adopt a schedule of fees showing the effect of its pass-through increases, as required by law. Proposition 218 also prohibits public utilities from increasing rates if a majority of parcel owners submit written protests; however, due to the number of property owners served by each public utility, we believe it is unlikely that a majority of them would protest.

In an effort to keep rates reasonable, the four water utilities shared with us examples of their efforts to reduce their costs. Because of concerns expressed by valley water customers regarding increasing water rates, we would expect that the water utilities would be able to quantify these efforts. However, in some instances this was not the case. For example, Palmdale suggested that the annual efficiency audit of the electrical usage for its groundwater wells, conducted by its electricity utility, was a cost-saving effort. However, because the electricity utility performs this annual audit, we did not consider this to be an effort that Palmdale took outside the normal course of business to keep its water rates reasonable. In contrast, LA District 40 will begin a five-year effort in fiscal year 2014-15 to replace its vehicle fleet with more efficient vehicles, which it was able to demonstrate could save $148,000 a year once completed.

As an investor utility, Cal Water is authorized by the commission to offer rate assistance programs and currently offers two different types of assistance to certain demographics of valley water customers. For example, the Low Income Rate Assistance program provides a monthly discount of 50 percent of the water customer's service charge, up to a maximum of $12 per month, for water customers whose annual income for a family of four is at or below $47,700. The public utilities we visited do not currently offer rate assistance, nor are they required to do so. In fact, Proposition 218 prohibits public utilities from using revenues from water rates to offer rate assistance programs to any one water customer demographic. However, the public utilities are not prohibited from using revenues from other sources to offer rate assistance programs.

RECOMMENDATIONS

To ensure that water customers are able to have a better understanding of how rate increases are determined, Quartz Hill should include information in its public notices providing reasonably sufficient details regarding the basis of its fee methodology.

To provide guidance to local public agencies in implementing the notice requirements of Proposition 218, the Legislature should enact legislation that provides guidance to public utilities regarding the level of detail to include in the public notices required by Proposition 218.

LA District 40 and Quartz Hill should ensure that they can demonstrate compliance with the statutory requirements of Proposition 218 when adopting any future pass-through rate increases. Furthermore, Quartz Hill should ensure that it adopts a schedule of fees showing the effect of its pass-through rate increases.

To show water customers that they are attempting to keep rates reasonable, each water utility should ensure that it can demonstrate any savings expected or achieved as a result of its cost saving efforts.

The three public utilities should work with their respective governing bodies to consider the feasibility of offering rate assistance programs for low-income water customers.

AGENCY COMMENTS

LA District 40, Palmdale, and Cal Water generally agreed with our conclusions and recommendations. However, Quartz Hill disagreed with our concerns regarding its compliance with the notice requirements of Proposition 218.


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