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CONSIDERATION TO SUSPEND STAGE 1 DROUGHT SURCHARGE FROM FY 2018-19 WATER RATES
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RECOMMENDATION
It is recommended that the Council Water Committee consider the suspension of the Stage 1 Drought Surcharge from the FY 2018-19 Water Rates and forward a recommendation to the City Council for consideration and approval in the FY 2018-19 Budget.
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Summary
The City of Stockton (City) experienced greater than projected reductions in water use because of the conservation efforts mandated by the State to address drought conditions. The drought began in 2012 and accelerated in 2014 and 2015. In 2015, the Governor instituted California’s first-ever statewide mandatory water reductions, ordering the implementation of conservation measures. The City conducted a water rate study in 2016 to update and evaluate the Water Utility revenue requirements. In addition to evaluating the Water Utility revenue requirements on a regular basis, the 2016 study also evaluated the mandated conservation measures, which continued into 2016, and the subsequent Water Utility revenue loss. The City ultimately adopted new water rates in 2016 that recommended a 38.5% water rate increase over a five-year period. The water rate study also proposed implementing an additional charge, a Drought Surcharge, to offset the revenue loss resulting from decreased consumption due to conservation. While reduced consumption lessens some expenditures for water production, the Water Utility must meet significant fixed operation costs that do not vary with water production levels.
Use of the Drought Surcharge is evaluated on an annual basis, as part of ongoing monitoring of water consumption levels and associated water revenue as part of the annual budget preparation process. FY 2017-18 water consumption levels are projected to be 12% higher than FY 2016-17 and forecasted to continue for FY 2018-19. While there is a possibility of future mandated conservation measures that necessitate revisiting the Drought Surcharge in the future, consumption and revenue is projected to be sufficient in FY 2018-19. Staff recommends suspending the Stage 1 Drought Surcharge for FY 2018-19.
DISCUSSION
Background
The City of Stockton experienced greater than projected reductions in water use because of the conservation efforts prompted by the drought that began in 2012 and accelerated in 2014 and 2015. On April 1, 2015, the Governor instituted California’s first-ever statewide mandatory water reductions (Executive Order B-29-15), ordering the implementation of conservation measures. On November 15, 2015, those conservation measures were extended until October 31, 2016. Under the drought regulations established pursuant to the Executive Order, the City of Stockton’s water use reduction target was established at 28% below the 2013 baseline water use established by the State mandate.
The City conducted a water rate study in 2016 to update and evaluate the Water Utility revenue requirements. In addition to evaluating the Water Utility revenue requirements on a regular basis, the 2016 study also evaluated the mandated conservation measures, which continued into 2016, and the subsequent Water Utility revenue loss. The City ultimately adopted the 2016 Rate Study (Study) along with new water rates, recommending a 38.5% water rate increase over a five-year period. On August 1, 2016 and July 1, 2017 water rate increases were implemented at 18.5% and 11% respectively. Additionally, beginning July 1, 2018 the first of three 3% annual increases is being proposed with the adoption of the FY 2018-19 budget.
The revenue drop caused by a decrease in consumption significantly impacts the Water Utility. While reduced consumption lessens some expenditures for water production, the Water Utility must meet significant fixed operation costs that do not vary with water production levels. In addition to evaluating and recommending water rate increases, the Study proposed Drought Surcharges as part of the updated rate structure.
The Drought Surcharges are designed to provide sufficient revenues for the City to continue meeting its expenditures and debt obligations, as well as additional costs, including additional water supply pumping and conservation program related costs. Due to the drought and subsequent reduction on Water Utility Revenue, the City Council, along with approval of the Study, implemented a Stage 1 Drought Surcharge effective August 1, 2016. The Drought Surcharges are an additional per unit charge added to the rates of the Consumption Charge, activated by a declared water shortage stage pursuant to the City’s Urban Water Management Plan and caused by a drought, a statewide order mandating water use reductions, or other natural disaster or event that results in a water shortage and an unforeseen drop in water demand. The Drought Surcharge is, therefore, an additional charge to counterbalance a decrease in consumption due to conservation.
The implementation of the Drought Surcharge is evaluated on an annual basis, as part of ongoing monitoring of water consumption levels and the annual budget preparation process. At the end of FY 2016-17, staff evaluated consumption levels and determined they were projected to continue at below minimum baseline requirements. Therefore, as part of the annual FY 2017-18 budget development process, staff recommended, and Council adopted water rates that maintained the Stage 1 Drought Surcharge for FY 2017-18.
Present Situation
At fiscal year’s end for FY 2017-18, water consumption levels are projected to be 12% higher than FY 2016-17. The consumption trend is expected to remain constant in FY 2018-19. The revenue associated with the proposed 3% water rate increase and projected water consumption levels in FY 2018-19 will alleviate the need for the Stage 1 Drought Surcharge in FY 2018-19.
Significant precipitation in the form of rainfall and snowpack in the winter season of 2016-17 brought the State of California out of a severe multi-year drought. On April 7, 2017, the Governor issued Executive Order B-40-17, terminating the Drought State of Emergency. Although the Drought Emergency was declared over, mandates regarding water use reporting and prohibitions on wasteful practices remained in full force and effect, prompting the City Council to amend the Stockton Municipal Code on August 22, 2017 to reflect these mandated conservation measures. Although the winter season of 2016-17 brought California out of the drought, this past winter season’s rainfall has been below average. Per the California Department of Water Resources’ Water Conditions in California Report dated March 1, 2018, the Statewide precipitation is at 50% of average, with the Stockton region at 45% of average for the period of October 1, 2017 to February 28, 2018. With the variability of rain and snowfall in California and the ongoing development and emergence of State-mandated water conservation measures, it is unknown if future water use restrictions will occur. Should State-mandated restrictions be implemented in the future and water consumption curtailed, the Water Utility may again be impacted by a decline in revenue and therefore, recommend reinstating the Drought Surcharge.
Based on water consumption projections and the adoption of a 3% water rate increase, staff is recommending suspending the Drought Surcharge for FY 2018-19.
The staff recommendation to suspend the Stage 1 Drought Surcharge for FY 2018-19 was considered and approved by the Water Advisory Group on May 2, 2018.
FINANCIAL SUMMARY
As part of the 2016 Water Rate Study, the Drought Surcharge was developed to maintain sufficient revenues during drought or water shortage periods. The surcharge is not automatic and requires City Council action. This allows Council and staff to annually evaluate the need for the surcharge. Due to the anticipated 12% increase in water consumption in FY 2018-19, the Water utility can forgo the $2.7 million revenue from the Drought Surcharge expected in FY 2018-19.
There is no impact to the General Fund, or any other unrestricted fund, from this action.