Flawed Cost of Service Study
EID’s Board appointed to the FIVE-member Cost of Services Study (COSS) Citizen’s panel the following:
TWO citizen members from the Agriculture community (out of EID’s 38,100 Water customers),
TWO citizen members with heavy Developer connections, and
Just ONE citizen member was appointed whose first concerns were 20,600 Sewer customers and 36,400 non-Irrigation Water customers.
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.
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
Proposition 218, and
a landmark 2006 California legal ruling (Howard Jarvis Taxpayers Association vs. City of Roseville).
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.
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)
substantially increase the percentage of costs directly assigned, (see Roseville)
substantially improve and document the allocation methodology of non-direct costs,
ensure that the debt costs reconcile to audited financial statements (unlike presently),
“true-up” costs and revenues (bewtween Water and Sewer Enterprise Funds) instead of commingling funds (another “No-No” under the Roseville ruling),
utilize same “conservation” assumptions and base years for Irrigation and all other Water accounts,
correct for invalid 35% Small Farm rate reduction in 2009… and then,
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.