Flawed Cost of Service Study
FLAWED
REPRESENTATION:
EID’s Board appointed to the
FIVE-member Cost of Services Study (COSS)
Citizen’s panel the following:
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TWO citizen members from the Agriculture community (out of EID’s 38,100 Water customers),
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TWO citizen members with heavy Developer connections, and
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Just ONE citizen member was appointed whose first concerns were 20,600 Sewer customers and 36,400 non-Irrigation Water customers.
SECRET MEETINGS:
The COSS meetings were NOT open to the Public. Substantial policy
discussions and analytical debates were held “outside the eyes and ears
of the public”. If “walls could talk”, the Public would learn that
the COSS Panel’s considerations were disproportionately directed toward
special rules and cost exclusions for just 1,700 Irrigation customers of
EID.
PROPOSITION 218
LARGELY IGNORED:
At the first meeting with the
Cost
of Services Consultant (go to
Consultant site), when queried about how he would resolve
discrepancies between
Proposition
218 prohibitions against subsidization and EID Principles
to be used in the COSS process, the Consultant responded that he knew of
no successful legal challenges to Proposition 218 because of the
practical improbability of achieving the “50% +1” ratepayer protest
requirement. Emboldened by the Consultant’s lack of concern
regarding Proposition 218, the Cost of Services Study was
effectively acquitted of the requirement to adhere to
Proposition
218 non-subsidization prohibitions.
COST ALLOCATIONS VS.
DETAILED STUDY OF COSTS:
Just $19 million (32%) of
EID’s costs were directly assigned between Water and Sewer customers.
Instead of conducting a detailed Cost of Services Study for the
majority $40 million of costs, over two-thirds (68%) of EID’s $59
million of operating costs were generally allocated 60% to Water and 40% to
Sewer (based on parameters conceived of and proposed by EID’s General
Manager).
But, allocating more than two-thirds of costs by “broad-brush” 60%/40%
allocation parameters certainly constitutes neither a “bona fide” Cost
Study, nor a Proposition 218-compliant Cost Study. In turn, absurd
anomalies resulted whereby Sewer customers pay MORE THAN DOUBLE (what a
Water-only customer pays) for billing expenses, press releases,
consultants, legal expenses, and a plethora of other items amongst EID’s
$18 million of Overhead expense items. Additionally,
although less than 15% of EID’s Capital Projects are for Sewer, 40% of
Engineering expenses are charged to Sewer customers, and 40% of
Debt-related expenses are charged to Sewer customers. These non-cost
consistent allocations, in turn, violate
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common logic,
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Proposition 218, and
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a landmark 2006 California legal ruling (Howard Jarvis Taxpayers Association vs. City of Roseville).
DIFFERENT DEBT
COVERAGE RATIOS:
The Draft Rate Models presented to
EID’s Board on January 24, 2011 included materially different
Debt
coverage ratios for Water and Sewer. The net impact of these
differences on rates is that 2011 Sewer customer rates are $ 2.0 million
higher than cost or legally justified and are subsidizing a shortfall in
Water Debt coverage ratios… contrary to Proposition
218 (Sec. 6.(b)) proportionality requirements. Combined with
the 2011 Sewer Operations budget’s 3.6% DECREASE while the 2011 Water
Operations budget SURGED 36%, this is further evidence that there should
NOT have been a 15% 2011 Sewer rate increase. Instead, Water rates
should have increased $2 million more so both Water and Sewer provided
the same 1.25 standard debt coverage ratios.
SOPHISTICATED RATE
MODELS:
The good news from EID’s
COSS/Rate Model development is that EID now has highly sophisticated
rate apportionment models. The bad news is that EID skipped over the
“Cost of Services” portion of the project and, as the COSS Consultant
himself acknowledges, “Garbage-in, Garbage-out”. It further is
instructive that, despite the Panel supposedly “voting” on COSS matters,
the COSS Consultant repeatedly stated “I do what Jim tells me (to do).”
(go to
Consultant site)
COSS REWORK NEEDED…
TO COMPLY WITH PROPOSITION 218:
To provide a fair,
legal, and Proposition 218-compliant Cost of Services Study (see
HJTA v Roseville), EID must:
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substantially increase the percentage of costs directly assigned, (see Roseville)
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substantially improve and document the allocation methodology of non-direct costs,
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ensure that the debt costs reconcile to audited financial statements (unlike presently),
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“true-up” costs and revenues (bewtween Water and Sewer Enterprise Funds) instead of commingling funds (another “No-No” under the Roseville ruling),
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utilize same “conservation” assumptions and base years for Irrigation and all other Water accounts,
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correct for invalid 35% Small Farm rate reduction in 2009… and then,
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insert those COSS results into the sophisticated Rate Models EID now has. All of this should be done under the watchful eye of the Public, in meetings open to the Public.