Current Legal Developments on Ratemaking - A Primer on Budget-based Water Rate Structures 1 Paul D. Jones II, P.E. General Manager, Eastern Municipal Water District Presented February 20, 2014 Urban Water Institute

Presentation Topics – Budget-based Water Rate Structures 2 What is a Budget-based Rate Structure? What are its Unique Features? How does they work? o Indoor Allocations o Outdoor Allocations o Pricing Signals Benefits and effectiveness of Budget-based Rate Structures Defensibility of Rate Structure Summary

What is a Budget-Based Rate Structure? 3 Commonly Used Names: o “Allocation-based Rate Structure” o “Water Budget Rate Structure”Same Basic Rate Structure o “Conservation-based Rate Structure” o “Sustainable Rate Structure” Creates an “Allocation” or “Water Budget” for each customer account based upon reasonable needs and efficient use. Uses Economic Incentives: Water is priced to customer lower for use within allocation – much higher for use over allocation Are there other types of rate structures that encourage conservation?? Yes, but Allocation-based structures have several unique benefits that facilitate high levels of water use efficiency.

Unique features of a Budget-based Rate Structure 4 Individualized: based on land use specific uses (indoor needs) and landscape needs (weather adjusted). Encourages Efficient Use Pattern: within allocation through a sharply tiered pricing system o Rewards efficiency o Communicates cost of water over-use Uses Fair Premise: those who over- use pay more, those who use only what they need, pay much less

Unique features (cont’d.) 5 Identifies Over-use customers: water bill functions as a “report card” – focus staff resources Provides Appropriate Nexus: Revenue from over-use tiers reinvested in water use efficiency programs and higher cost supplies Identifies excessive and wasteful water use Provides target for efficiency

How it Works – EMWD’s Individualized Allocations 6 Allocation = Indoor Needs + Outdoor Needs (seasonal) + Variances EMWD may also apply an Indoor and/or Outdoor Drought Factor Provides individualized allocations for a diverse customer base: o 80% of retail demand is residential o Old and new development o Variation in family size and irrigation area

EMWD’s Indoor Allocation Indoor Use Allocations based upon: o 3 persons per household for single family residential o 60 gallons per person per day o 2 persons per household for multi- family residential o No indoor allocation for landscape customers o Variances available for additional occupants and special circumstances 7 Indoor Water Allocation = (Household Size x Consumption per Person) x Indoor Drought Factor + Indoor Variances

EMWD’s Outdoor Allocations Outdoor Use Allocations Based on: o Evapotranspiration data collected for separate zones o Irrigated area:  Estimated using parcel information, infrared aerial photography and field measurements Measured in the field o Adjustment (Conservation) Factor Applied for landscaping type:  1.0 for accounts installed before 9/08  0.8 for accounts installed 9/08 to 1/10  0.7 for accounts installed after 1/ ET Zones Outdoor Water Allocation = [(ET x Conservation Factor x Irrigable Area) + Outdoor variance] x Outdoor Drought Factor

Clear Pricing Signal Based Upon Efficiency 9 Tier 1: Indoor Use $1.62/unit* o Budget = Number of Persons x 60 Gallons Per Day Within “Allocation” Tier 2: Outdoor Use$2.96/unit o Budget = Landscaped Area and Evapotranspiration Tier 3: Excessive$5.31/unit o Up to 50% use in excess of Indoor and Outdoor budgets “ Over-allocation” Usage Tier 4: Wasteful$9.71/unit — Over 50% in excess of Indoor and Outdoor budgets * One billing unit equals 100 cubic feet

Rate Structure Funds Water Efficiency Programs 10 Residential Programs o Free Residential Survey o Turf Buy-back Program o Freesprinklernozzles.com o Smart Controller Direct Install Program o High Efficiency Clothes Washer Direct Install Program o Financial Incentives:  Smart Controllers  High Efficiency Nozzles  High Efficiency Clothes Washers Commercial, Institutional, Industrial and Landscape o Turf Buy-back o Freesprinklernozzles.com o Financial Incentives  High Efficiency Nozzles  Weather Based Irrigation Controllers  Ultra Low and Zero Water Urinals  Connectionless Food Steamers  Air-Cooled Ice Machines  Cooling Tower Controllers  Dry-Vacuum Pumps

EMWD Water Use Efficiency Results 11 Gallons per Capita per Day (GPCD) Baseline Average: 212 GPCD 2020 Compliance Target is 184 GPCD Statewide Average: 198 GPCD 155 GPCD 25% reduction

What do these Water Use Efficiency Efforts Translate To? Residential Accounts o 30 gal/capita/day reduction o 16,085 af/yr savings Landscape Accounts o 0.8 af/acre/year reduction o 3,557 af/yr savings Note: Assumes MWD system Power rate of $136/af, Tier 1 untreated rate of $560/af (2012) 38,604 Mwh 5,724 tons/yr C02e GHG 8,536 Mwh 1,266 tons/yr C02e GHG Total Annual Water Cost Savings - $10,990,000 Total Annual Energy Cost Savings - $2,671,000 Annual Savings 12

Studying the Efficacy of EMWD’s Budget-based Rate Structure Ongoing Study (first results reported in 2013): “Average prices rose less than 4% under water budgeting, but would have had to rise 34% under flat rate pricing to achieve the same demand effect.” Controlling for the effects of inflation, the recent economic downturn and other water use efficiency programs, EMWD’s Budget-based rate structure resulted in at least a 15% reduction in water use. 13

Legal Defensibility of Rate Structure A clear nexus between costs associated with levels of usage (and over-usage) and the rates charged for those usage categories is essential. o Specific, detailed cost attribution by Tier(s) is most defensible. o Pricing differential between tiers should not be arbitrarily set to simply send a “pricing signal” (ex. Tier 2 is twice the rate of Tier 1). o Fixed expenses are best allocated to fixed (meter) charges and the base volumetric tier(s) which all customers consume. Still provides substantial flexibility to agencies in rate design $$$$$$ $$$$$$ $$ $ $ T3 T2 T1 Costs Revenue “Yes”“NO” T3 T2 T1

Example: The IRWD Rate Model Irvine Ranch Water District pioneered the allocation-based rate structure in 1991 o Motivated by the drought in late 1980s Direct nexus between use and cost o Allocates costs funded by penalty tiers to the sales associated with the different levels of wasteful use Split between fixed and volumetric costs insulates IRWD from potential negative financial impacts of reduced water sales. Lower demands = Less highest cost water supply purchased 15 TierCost Basis Low VolumePumped Water BaseMelded Cost of Budgeted Supplies InefficientImported Water Tier % of Programs/ Inefficient Usage ExcessiveImported Water Tier % of Programs/ Excessive Usage WastefulImported Water Penalty Rate + 33% of Programs/ Wasteful Usage

Summary Budget-based Rate Structures: o Encourage efficient use and is fair to customers o Communicate the value of water o Identify wasteful use of water – two way communication o Allows reinvestment in water use efficiency programs Can be designed to be legally defensible and still very effective. Such rate structures will be important in addressing the drought and demand management. 16

Contact Information Paul Jones EMWD, General Manager (951) EASTERN MUNICIPAL WATER DISTRICT