Why are Beverly Hills water rates higher for West Hollywood customers?
The majority of West Hollywood residents and businesses get their water from Los Angeles, but many on the west side get their water from the City of Beverly Hills (“the City”). The City’s rates for West Hollywood customers are 25% higher than those for Beverly Hills customers.
New cost allocation study
California law (Proposition 218) requires water rates to be based on costs. In the past, the City explained the rate differential by pointing to the original Beverly Hills taxpayer investment in the system. Now the City has taken a fresh look at the rate differential. They commissioned a detailed cost-allocation study. This report is based on our reading of that study.
The new study doesn’t suggest that West Hollywood customers are inherently more costly to serve. Instead, it identifies:
- Contributions to the water enterprise from the Beverly Hills general fund, to be used to reduce rates only for Beverly Hills customers
- Additional costs currently borne by the Beverly Hills general fund that should be included in the rates for West Hollywood customers
The study doesn’t say whether the combined effect of these two factors justifies the current 25% rate differential.
Lease revenue contributions
According to the study, the biggest contribution from the general fund is $3 million in lease revenue. That’s less than 10% of ratepayer revenue, but potentially a big part of the rate differential.
The water enterprise owns two properties that are no longer being used for water purposes. They have been leased out. The City’s general fund pays the enterprise market value for the leases.
According to the study, the “lease revenue is credited only to the Beverly Hills customers because the land is leased for non-utility purposes.” We don’t know anything about the appropriate treatment of surplus property by enterprise funds, so we can’t explain further. We wonder whether taxpayers or water customers paid for the properties originally.
Other general fund contributions
According to the study, the City’s general fund has contributed $5 million in recent years to the development of alternative water sources. We don’t know if, when, or how the City is planning on recovering a share of those costs from West Hollywood customers.
Additional costs to be reimbursed
The study estimates that West Hollywood customers owe the Beverly Hills general fund about $425,000 per year to cover additional costs. Over half is for right-of-way maintenance. “Right of way” means streets and sidewalks. Almost a third is for public safety. The rest is for governmental facilities, namely City Hall/Civic Center.
Right-of-way maintenance costs
The study estimates how much West Hollywood customers should pay for the City’s right-of-way maintenance. The idea is that digging up a street to install or repair a water pipe creates long-term street maintenance costs.
The table below shows a simplified version of the calculation. The calculation starts with $11.7 million in annual street and sidewalk maintenance spending. The study assumes that 33% is due to subsurface activities (underground utilities). About a third of that is then allocated to the water enterprise. West Hollywood customers are assigned 17.4% of the enterprise’s share, or close to $235,000 a year.
We think there are some important assumptions implicit in the calculation:
- West Hollywood customers should help pay for the water enterprise’s impact on streets and sidewalks throughout Beverly Hills.
- Neither Beverly Hills customers nor West Hollywood customers should pay for the enterprise’s impact on streets and sidewalks in West Hollywood. West Hollywood customers shouldn’t get credit for their city’s general fund spending on right-of-way maintenance.
- Multiplying the street and sidewalk maintenance budget by 33% to get the impact of subsurface activities is apples-to-apples. The Lee-Lauter report quoted in the study says utility trenching reduced pavement lifetime by 32.4%, but that was just for the trenched areas. For the street network as whole, the reported impact was only 7.8%.
- Right-of-way maintenance costs should be allocated based on the number of connections rather than the volume of water.
Public safety costs
The study estimates the cost of fire and police services that protect water assets in Beverly Hills. The study starts with $125 million in Beverly Hills fire and police spending, allocates 0.59% to the water enterprise, and then 17.4% of that to West Hollywood customers, for a total of almost $130,000 per year.
We think the following assumptions are implicit in the calculations:
- West Hollywood customers should help pay to protect the enterprise’s assets in Beverly Hills, including the pipes and meters used to serve Beverly Hills customers.
- Neither Beverly Hills customers nor West Hollywood customers should pay to protect the enterprise’s assets in West Hollywood. West Hollywood customers shouldn’t get credit for their city’s general fund spending to protect the enterprise’s assets.
- All police and fire costs are for protecting property. This is implied by (a) using the full police and fire budgets and (b) allocating them based solely on property values.
- Public safety costs should be allocated based on the number of connections rather than the volume of water.
Governmental facilities costs
The City Hall/Civic Center complex houses 35 water enterprise employees. Water customers already pay a share of the facilities’ operating and maintenance costs through an overheard charge. However, they haven’t explicitly paid for the construction of the facilities. The study estimates that West Hollywood customers should pay a little over $60,000 a year to repay the City for building the facilities. We show a simplified version of the calculations below.
We see the following implicit assumptions:
- None of the 25% premium paid in the past by West Hollywood customers went to pay off their share of these facilities. Cost recovery is starting only now. Because of this assumption, the study adds inflation to the original building costs instead of subtracting depreciation.
- Facilities costs should be allocated based on the number of connections rather than the volume of water.