How will proposed changes in water rates affect West Hollywood customers?
The City of Beverly Hills provides water to the western side of West Hollywood. They’re proposing changes to their water rates that will affect West Hollywood customers. They’re redistributing the rate burden among customer classes, service areas (Beverly Hills versus West Hollywood), services, and levels of water use. Their City Council will consider the changes on January 15, 2019.
Water use is typically measured in hundreds of cubic feet (HCF). One HCF is 748 gallons.
Size of the West Hollywood premium
Beverly Hills currently charges West Hollywood customers a 25% premium for water service. The proposed changes will reduce the effective premium. The size of the reduction will depend on the customer, because the premium will now be $0.97 per HCF of water used, not a percentage. Most of it ($0.82) will be incorporated into the the water charge. The rest ($0.15) will be part of the new water reliability charge.
On a percentage basis, the total bill premium will be somewhere around 15% for many West Hollywood single-family customers. For example, our estimates are 14% for 15 HCF of water usage, 17% for 30 HCF, and 16% for 48 HCF. The percentages are roughly the same in 2022. We believe the percentage premium will also be in the teens for many West Hollywood multi-family customers.
Justification for the West Hollywood premium
Is the smaller West Hollywood premium the correct amount? California’s constitution limits water rates to the actual cost of service. That means a West Hollywood rate differential can only be justified if (1) West Hollywood customers are more expensive to serve, which no one is arguing, or (2) Beverly Hills subsidizes water rates for Beverly Hills customers by using taxpayer money for water-related costs.
The City’s consultant did a study that estimated:
- Taxpayer investments in water infrastructure: They are the basis for the $0.15 per HCF West Hollywood premium in the water reliability charge
- Taxpayer-funded public safety, street maintenance, and office-related costs: They are the basis for the $0.82 per HCF premium in the water charge
- Revenue from leasing out two water properties: The study argued for crediting this only to Beverly Hills customers, but Beverly Hills has decided that all customers should benefit
The City of West Hollywood has publicly raised questions about several aspects of the consultant’s study. We share the City’s questions about some of the assumptions, which we flagged in an earlier WeHo by the Numbers analysis. For example, the study assumed an asymmetric allocation of public safety costs: West Hollywood customers were allocated a share of costs for protecting all water assets in Beverly Hills — including assets used exclusively to serve Beverly Hills customers — while Beverly Hills customers weren’t allocated any costs for protecting similar assets in West Hollywood.
Size of the multi-family premium
The Beverly Hills consultant’s rate-setting approach results in many (perhaps most or all) multi-family households being charged more for the actual water than single-family households using the same amount. It’s true under the current rates (see the last section of our earlier report). We believe the premium will grow under the proposed changes. It puzzles us, because multi-family water demand is less variable and, therefore, less costly to serve.
We’ll illustrate the multi-family premium with a hypothetical four-unit apartment building or condominium in West Hollywood and a single-family home next door. The chart below shows estimated per-household water charges for a unit in the apartment/condo building versus the single-family home, if each household uses the same amount of water. The multi-family household is charged more at any normal level of multi-family water use. By our math, the households would need to use 225 HCF each before the multi-family premium would disappear. We doubt there are any multi-family households in West Hollywood using 225 HCF.
We can also compare building to building. If the four apartment/condo households combined used only as much water as their single-family neighbor, their combined water charges would still be higher.
Single-family bill impact
For many West Hollywood single-family customers, we believe the rate changes will result is smaller bills. That’s due to a combination of the reduced West Hollywood premium and changes that benefit the low-to-moderate usage levels that are common among West Hollywood single-family customers.
The chart below shows an example for a West Hollywood single-family home that uses 15 HCF. We estimate the bi-monthly bill would shrink by 16% or $22. It would be 14% higher than a similar house in Beverly Hills, a reduction from today’s 25% premium. The bill would edge up each year due to across-the-board rate increases. By 2022, the West Hollywood premium would still be 14% and the total would remain below the current bill. That’s not true for customers using more water.
Our bill estimates assume that water-shortage-related rate increases — called “revenue stabilization factors” — haven’t been triggered. Beverly Hills has a tool on their website that can be used to estimate the impact of the proposed changes, including revenue stabilization factors, on an individual customer’s bill.
Mutli-family bill impact
In general, the rate burden appears to be shifting to multi-family customers. In many of the scenarios we tested, multi-family bills would go up in Beverly Hills. The overall impact on West Hollywood multi-family is more mixed, because the West Hollywood premium is shrinking at the same time that the multi-family burden is increasing.
The chart below shows one example. It’s for a West Hollywood four-unit apartment building or condominium that uses 10 HCF per unit. We estimate the total bill would rise 7% or $21, even with the West Hollywood premium shrinking from 25% to 13%.
Rate increases during a water shortage
During water shortages, the enterprise may require customers to reduce their water use. Lower water use means less revenue for the enterprise. To make sure revenue continues to cover costs in such situations, the rate changes include new “rate stabilization factors.”
For example, if the City Council declared a Stage D water shortage, single-family customers would be required to cut their water use by 36%. To make up for the lost revenue, the enterprise would increase the per-unit water charge by 33%. Multi-family customers wouldn’t be expected to cut back as much, because less of their water is used for landscaping. In Stage D, multi-family customers would face a 16% cut in water use and an 11% increase in the per-unit water charge.