Why the MMWD needs to implement huge rate increases
The MMWD needs to raise rates for several reasons:
- It is operating below break-even;
- It has a huge backlog of infrastructure assets it needs to replace;
- Initiatives to improve operations; and
- Financing water supply projects.
The MMWD recently disclosed the following operating performance forecast if it does not increase rates. The growing operating losses are not sustainable.
As shown, absent any rate increases the operating losses would rise from - 21.0% of revenues in fiscal 2024 to - 38.0% in fiscal 2027. The MMWD reserves would already turn negative in 2024.
To remedy this financial situation, the MMWD released the following financial plan.
By fiscal 2027, this financial plan would raise revenues by 92.2% or $91.9 million. Revenues would increase from the baseline of $99.7 million to $191.6 million.
The MMWD to spare ratepayers such a dramatic rate increase is proposing to implement a milder rate increase as shown below.
Figures are in $million.
By fiscal 2027, this rate scenario would raise revenues by 71.0% or $70.8 million. Revenues would increase from the baseline of $99.7 million to $170.5 million.
The MMWD proposed 71% rate increase is still inadequate
The 71% rate increase has material implications. Let's compare the financial plan vs. the recommended 71% rate scenario.
As shown above, the proposed rate scenario cuts corners relative to the financial plan in several ways:
- It cuts in half the necessary funding to stabilize the backlog ($12 million vs. $23.9 million in the financial plan);
- It cuts by an estimated 28.7% the funding for water supply & large infrastructure projects;
- It cuts the funding for service enhancements by 40%;
- It cuts reserves and systems upgrades by 33.5%.
The inadequate backlog funding lets the backlog grow indefinitely. For every year that this rate scenario is in place the backlog lengthens by 6 months. The current backlogs for pipes, pump stations, and tanks are already extremely long (please refer to the attached pdf for excellent visual data on the backlogs). If we keep this rate scenario for a decade, the backlogs lengthen by five years.
The much lower funding for water supply & large infrastructure has material water supply implications. The latter is difficult to quantify. My $14.6 million estimate includes $3 million of unallocated funds to this specific line item. Even so, the estimated shortfall of close to $6 million between the rate scenario and the financial plan could be associated with a reduction in added water supply measured in the hundreds of acre-feet per year.
Even the financial plan with a 92.2% rate increase is insufficient
That is because even the financial plan does not include any funding for the large water supply infrastructure projects necessary to shore up our 4-year water supply security. All the contemplated projects you have heard about (expanding reservoirs, desal, etc.) are not included in the financial plan.
Jacobs Engineering (JE) and I have independently estimated that we would need an extra 8,500 acre-feet per year (AFY) to shore up our 4-year water supply security. JE estimates that we could generate close to 3,000 AFY by optimizing the amount of water we purchase from Sonoma and improving the precision of our stream releases. JE also estimates that we could increase our reservoir capacity by 500 to 600 AF (electrification of Soulajule reservoir and connecting Phoenix Lake to Bon Tempe). The financial plan covers the related expense to implement these strategies. Meanwhile, the rate scenario does not fully cover these items.
Even if following the financial plan, the MMWD still needs at least 5,000 AF generated by the new large water supply projects. These projects' costs typically range from $2,000 to $2,800 per AF. They would be financed by bonds that are associated with a debt service coverage of 1.25 times.
Thus, the yearly increase in revenues to undertake a project that generates 5,000 AF for $2,000 per AF would be:
5,000 x 2,000 x 1.25 = $12.5 million
The amount considered could be greater if the cost per AF is higher or if the MMWD needs more AF in case the strategies to generate the first 3,500 AF do not work out as well as estimated.
When factoring the large water projects the MMWD rates will have to double
Below I am exploring how much of an overall rate increase the MMWD needs when including the financing of large water projects.
Remember the starting point is the financial plan associated with a 92.2% increase in rates over baseline. As shown above, in all the contemplated scenarios of AFY and $AFY combinations, the MMWD revenues would more than double by fiscal 2027. The table below shows the resulting MMWD revenues by fiscal 2027.
Thus, even though the MMWD is proposing a cumulative rate increase of 71.0% by fiscal 2027, the actual increase may well have to be over 100%. That's if the MMWD wants to stabilize its huge backlog and implement an adequate water supply increase so that ratepayers do not live in a constant state of water scarcity.