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About Vernonia's voice. (Vernonia, OR) 2007-current | View Entire Issue (March 13, 2012)
6 march13 in other words 2012 Vernonia’s Impending Water Rate Decision: A Personal Perspective By Jim Tierney households with different economic and personal circumstance. Differing use patterns and sensitivity to As described in a previous article, Vernonia cost inform each owner’s price sensitivity. This creates has not systematically set aside funding to repair and a zero-sum rate setting game between household types; replace its very valuable water and sewer infrastructure. that is a better deal for one household type is likely to In addition, our water system has been relying on funds be worse for another. carried over from previous years to meet operating Like many things in life, a middle ground for costs; all without a rate increase. Both the Public Works utility rates makes the most sense. In this case, there are Committee and the City Council have acknowledged two good reasons, one ethical and the other practical. that a significant rate increase must be imposed to keep First, public utilities are virtually impossible to live the system solvent. Both groups also believe that the without. This fact makes the health club model an rate increase should include reconsideration of how our unreasonable burden for low income households, large current charges are calculated. families and seniors struggling to maintain a budget. Within both the Public Works Committee and The other reason to adopt the middle ground is that the City Council there is disagreement about how our utility systems are an enterprise and can lose money. water rates should be structured. The disagreement It is possible to structure rates to encourage too much falls along opposite views of how we should pay conservation (reduction in use), making the pure price for public utility services. In order to understand the per unit (gasoline model) too risky for the city. If disagreement, consider two other common household too much conservation is triggered it hurts the utility expenditures as models for the two perspectives systems bottom line. involved. The first model would be gasoline. You pay The City of Vernonia hired the Oregon the same price per gallon at the pump as everyone else. Association of Water Utilities (OAWU) to help us Now, imagine a health club membership. With health develop our rate system. These experts informed us that clubs you pay a monthly or annual fee and use that the water rate “sweet spot” is collecting 60 to 75% of club as often or as little as you care to with no change system income as a base rate. In their experience, base in cost. In a nutshell, essential utility systems (water, rates in this range do not trigger excessive conservation. electric and sewer) attempt to navigate a middle ground The “health club” model I will label here as between these two extremes. the “Fixed Cost” view. This idea suggests The capital-intensive nature of public utilities that every user who connects to the system has two significant real world impacts which policy should pay an equal amount for the privilege makers must consider. First, it leaves utility systems of having the first drop of water or the first that build too much of their costs into the per-unit kilowatt of electricity provided to their rate making them vulnerable to a downward spiral home or business. The essential assumption of conservation (reducing the units used.) Secondly, here is that all users benefit equally from communities are made up of a wide variety of being connected and should therefore pay the same for that privilege. In this view, after the base rate, a user Why not pay off your mortgage before should pay the actual “wholesale” he heads off to college? cost to produce or provide that service, excluding that base rate which covers the shared “fixed costs”. This is essentially the model we use for our current water rates. In the “gasoline” model all users pay strictly on a “Consumption Basis.” For example, any homeowner using 4,000 gallons of water each month should pay twice as much as a homeowner using 2,000 gallons. You can substitute kilowatts of electricity or wastewater flowing into the sewer. The concept is the same. As noted above, there is a corresponding, but different practical U.S. BANK problem with the strict adherence SMART REFINANCE Pay off your home faster with a U.S. Bank Smart Refinance. to a consumption rate. 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This leaves even fewer 503-429-6271 consumers to share the increased cost usbank.com | 888-444-BANK (2265) burden that triggered the rate increase in the first place, requiring further 4.25 rate increases. As you can imagine, this can lead to an economic death spiral for the utility. In most cases, cities balance these tensions by selecting base rates in the 60 to 75% range mentioned above. This is considered safe because it protects the community system from the death spiral effect discussed earlier. For many communities this safe harbor does not provide sufficient incentives for conservation and means that the rates have a “regressive” quality that is seen as hurting households occupied by elderly and low income families. Sometimes these communities set rates using a “tiered” system which increases the cost per gallon as households use larger and larger quantities of water. These tiered systems are often modified to account for extra water usage for lawns and gardens. Sometimes this modification reduces the charges for such summertime usage. Other times communities actually increase charges for the summertime in order to create a disincentive. This is often done in drier climates where water shortages are chronic. The City Council has already rejected the idea of a tiered rate, a decision that I support. Within the Public Works Committee the two poles would make two different arguments (among others.) First, one side would say that users who use less than 2,000 gallons a month are getting “hosed,” to paraphrase one of the Committee’s members. I fall into this camp. The other perspective is concerned that the increased revenues needed to balance our budget will be disproportionately shouldered by the larger users of the system. I fall into this camp as well – both in what I believe and in what I will have to pay. I have included two charts with this article that prove both of these points. The line graph shows that the average household using less than 2,000 gallons pays more than twice as much per gallon as the highest use households. At the same time, as shown by the bar graph, even the highest suggested base rate ($40), the 20% of users who continued on page 19 * *4.25% fixed Annual Percentage Rate (APR) is available for 15-year first position home equity installment loans $40,000 to $250,000 with loan-to-value of 70% or less or 80% or less depending on market. U.S. Bank Package required. Higher rates apply for higher LTV or other loan amount. Automatic payments required. Loan payment example: on a $40,000 loan for 180 months at 4.25% interest rate, monthly payments would be $300.91. No customer paid closing costs, APR is 4.25%. Payment example does not include amounts for taxes and insurance premiums. 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