Affordability: More Important Than Ever
SummaryPublic water agencies and publicly owned electric utilities (POUs) consistently strive to make services safe, reliable, sustainable, and affordable. However, a variety of factors — such as legal restrictions, state mandates, and adaptation to climate change — make it challenging to achieve this balance. The ability of California residents to afford these essential services has become even more crucial as the impacts of COVID-19 have financially challenged POUs, community water agencies, and local communities by stretching system costs and eroding customers’ ability to pay.
Public Water and Electric Rates are Carefully Developed Through a Public Process Subject to Local Oversight and State LawRates of public water agencies and POUs are set through a civic process and are approved in public hearings by members of the community: local elected city councils or boards. Rates are crafted with customer input and consider local needs and policies, while also balancing the requirements of state law.
The state Constitution and state law require that all POU and water rates be no more than the cost of providing the electric or water service, and that there be no subsidization from one customer to another. While there are a variety of laws governing the development of rates, there are two voter-approved initiatives that have a significant impact: Proposition 218 and Proposition 26.
Proposition 218 (1996) governs “property-related” fees or charges. Public agency retail water rates are a property-related fee or charge, and Proposition 218 effectively limits how a public agency sets retail water rates. It requires that the rates be set proportionally, be no higher than what it costs to provide the service, be for a service immediately available to the customer, and not be for any general governmental service.
Contrastingly, fees and charges for electrical or gas service are not property-related fees. Instead, these rates, along with wholesale water rates, are governed by Proposition 26.
Proposition 26 (2010) expanded Proposition 218’srestrictions on fees and charges by reclassifying “any levy, charge, or exaction of any kind imposed by the State. . . [and] local government” as “taxes” requiring voter approval unless the fee or charge falls into one of seven narrow exceptions. One of the exceptions under Proposition 26, to avoid being a tax, requires POUs and wholesale water agencies to show that their rates reflect the reasonable cost of service and bear a reasonable relationship to the service being provided to the customer.
As a result of the public process, and the need to prove and be based on cost of service, among other issues, water agencies and POUs must meet a complex series of requirements when setting rates. For some, these requirements, and their community’s composition, put constraints on raising revenue for infrastructure improvements, for increasing reserves, or for offsetting regulatory implementation costs. COVID-19 has had an even greater impact on these already struggling POUs and water agencies.
Moratoriums on Utility Disconnections Protect Customers During a Difficult Time, but Place New Cost Pressures on Electric and Water AgenciesTo address the negative financial impacts of COVID-19 on retail water customers, in April 2020 Governor Newsom issued Executive Order N-42-20 to prohibit all urban and community water systems from discontinuing water service for nonpayment until the moratorium is lifted. This moratorium is in addition to the requirements in SB 998 (2018), which puts in place significant customer protections for water disconnections.
Electric POUs, under the authority of their elected governing boards, have voluntarily enacted local restrictions on customer disconnections and are required by executive order to report those actions to the state.
Restrictions on shutting off water and power protect customers during trying times, but over time they also present budget and revenue constraints on the utility and its community. The inability to disconnect customers for nonpayment means unpaid bills are growing. This, combined with less demand for utility service due to closed businesses, has negatively impacted water agencies’ revenues. In fact, a State Water Resources Control Board’s (SWRCB) survey on household debt accumulation found there is a large amount of water-related household debt resulting from COVID-19. These financial losses, even if they are temporary, mean less funding is available for utilities to improve, upgrade, or replace infrastructure and to implement state climate change policies.
CMUA applauds the federal government for providing funding in its December 2020 stimulus bill to help customers pay their utility bills. CMUA urges the state of California to distribute the funding as soon as possible.
State Mandates and Climate Change Have Increased Costs to POUs and Water SystemsBased on an analysis of data from the U.S. Department of Energy, between 2009 and 2019 monthly electricity costs for businesses and homes rose in California at twice the pace of the national average, although POUs have been able to maintain rates that are lower than their investor-owned counterparts. A similar trend applies for water service in California. While water agencies and POUs consistently work to keep rates affordable, state-imposed unfunded mandates and regulatory requirements continue to push rates higher.
There is a relationship between the increasing number and complexity of regulations and the cost of service. State funding would help water systems and POUs implement mandates and regulatory requirements without imposing additional burden on customer rates. For example, the Legislature could strive to allocate funds before passing bills, which would reduce the need for State Budget change proposals.
Additionally, while policy efforts to reduce greenhouse gas emissions and to reach zero-emission carbon goals have been enacted to help the state stem the tide of climate change, they have rising-cost impacts on customer affordability. State laws require POUs to procure increasing amounts of renewable energy and, in some cases, specific resource types or emerging technologies — whose costs are passed on to customers through rates. Similarly, wildfires are growing in their frequency and severity, which has caused POUs and their customers to incur new costs to mitigate fire in their communities.
Investments supporting existing infrastructure and natural resources could alleviate the burden on the electric sector in achieving the state’s climate goals, while putting the ecosystem back in balance.
For the state’s water agencies, recently passed water conservation laws and impending new requirements to reduce water loss in their systems will create similar upward cost pressures.
Regulations that are based on sound science, use an effective cost-benefit analysis, offer exemptions and offramps, and include flexible terms would help POUs and water systems to properly implement them without stretching their financial limits or imposing pressure to increase rates to cover the costs.
Customer Affordability ProblemsAs water systems and POUs experience financial strain, some California households and businesses struggle to pay for utility service. For example, disadvantaged communities across the state sometimes find it difficult to get reliable, clean water due to inability to pay or pressures on smaller systems to deliver the utility service.
The SWRCB issued the AB 401 report to offer solutions for those customers, including rate assistance for water service and a plan for funding a statewide low-income rate assistance program. Along those lines, many water systems have taken the initiative by offering Low-Income Rate Assistance (LIRA)-related programs to their customers, such as alternative rate structures, fixed credit, emergency discount programs, flexible terms on timing and level of payment, and temporary assistance.
In the energy sector, POUs fund low-income services, including rate discounts, as well as energy efficiency and renewable energy investments. POUs strive to maintain low-income services for impacted customers.
While water systems and POUs have made efforts to alleviate the financial burden on customers, continued legislative efforts are necessary to provide direct financial relief to bill-paying customers.