Los Angeles Department of Water and Power: Water Rates for the New Future

While the water industry has established best and common practices for rate setting; leading edge practices will give a look into the future. The Los Angeles Department of Water and Power (LADWP) has leveraged the best of both water industry and power utility practices to provide flexible and transparent leading-edge water rates.California has rate challenges similar to those which will affect much of the rest of the country in the coming years. Voter initiated constitutional limitations and requirements, 25% conservation, economic growth and swings, and need for infrastructure investment would individually challenge any rate setting process. LADWP took on all of these and more in its most recent rate action and after a year of implementation, the results are very positive. Cost based, 100% volumetric, tiered rates that are de-coupled from sales volume and which fund programs on a flexible and responsive manner provide nearly $6 billion to fund a capital and O&M budget of $7.1 billion over 5 years.This presentation will highlight how LADWP water rates promote water conservation, comply with cost of service requirements and provide confidence to stakeholders that rates are appropriate and expenditures provide results. The presentation of recently re-structured rates will describe components of integrated rates which can be parsed and applied to other utilities facing the approaching challenges of the future.The LADWP is the largest municipally owned utility in the nation. It is a semi-automatous city department governed by an appointed Board of community, civic, business and stakeholder leaders. Most decisions of the Board can be reviewed by the elected City Council and Mayor. In 2009, in the midst of the economic downturn and in the second year of significant drought, the ratepayers of Los Angeles were skeptical of government and sensitive to higher rates for anything. The LADWP had an aggressive compliance schedule to meet the water quality regulations and the need to promote unpopular conservation measures. In the summer of 2009, a spike in water main leaks which may have resulted from conservation measures, flooded the news for weeks and further eroded the public’s confidence in the Water System and spotlighted the need for infrastructure investment.Any of a number of the individual issues would be topical for a presentation on water rate restructuring and setting. Building trust with stakeholders, a prolonged economic downturn and the impact of under employment with resultant decrease in property values, 25% decrease in water sales due to essential water conservation, and a significant change in California water rate case law (in the middle of process) all impacted the process. The result is a robust and flexible rate structure capable of meeting the future.The objectives of the water rate restructuring included simplifying an already complicated structure; provide adequate revenue to support necessary investments and confidence to the investment community to maintain bond ratings; garner the support of ratepayers and stakeholders with the reality and perception of fairness including affordability; support conservation goals; provide flexibility to allow response to changing needs and uncertainties; and comply with California law. We met all of these objectives- with the possible exception of simplification.Major elements of the restructured rates are as follows:Cost-of-service based- In compliance with California constitutional requirements, the rates are based on the cost of serving similarly situated customers.Tiered rates- to promote conservation, individual parcels are allocated water on a tiered basis (budgeted) which includes consideration for customer class type (i.e. single dwelling or multi-dwelling residential, commercial), property size, and temperature zone. The rate per tier is directly related to the cost of service for each tier – the marginal cost.100% volumetric- To further promote conservation; Los Angeles has a long history of 100% volumetric pricing.Programmatic “Pass Through” components 84% of the total tier 1 rate is comprised of flexible charges based on projected expenditures in the coming period. These rates, similar to PUC programmatic tariffs, fund specific defined programs with reportable metrics to ensure the objectives of the programs are met. Pass-Through programs include water supply costs, water quality improvements, infrastructure investments, and regulatory compliance projects.Symmetric decoupling- The concept of “decoupling” is borrowed from the electric power utility industry. Revenue targets are established as part of the rate setting process based on a projected sales volume. In the event sales are either lower- due to conservation or economic downturn - or on the chance higher, an adjustment factor raises or lowers the rate to meet the revenue target. This feature provides a level of certainty for water managers to plan and execute programs and certainty for customer to know they are no over charged to provide that certainty.This restructuring and unprecedented 5 year water rate increase allows LADWP to manage the Water System in an efficient manner and plan for the future with assurance of the revenue to accomplish established goals. The ratepayers of Los Angeles have confidence their needs will be met in the future at the lowest responsible rate. Los Angeles is well placed for the future.