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”
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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
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burden that triggered the rate increase
in the first place, requiring further
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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
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