Water district prepares to launch new cost of service study

The Santa Fe Irrigation District (SFID) is embarking on a new cost of service study, which will analyze the district's costs and revenue needs for the next three years, paving the way for potential rate increases.

The district, which supplies water to customers in Solana Beach, Rancho Santa Fe and Fairbanks Ranch, generally commissions such a study every three years, which then allows the agency to establish a three-year rate plan, said Michael Bardin, Santa Fe's general manager.

A staff report prepared for SFID's Feb. 15 board of directors meeting estimated the cost of the study at $250,000.

Bardin said that in order to set its rates, the district must comply with a host of federal and state regulations, as well as court decisions. The study allows the district to determine how much money it needs for operations, capital improvements and other costs. If the district opts to raise rates, it must be able to show that the money is needed to cover costs.

"We have to establish rates that are legally defensible," said Bardin. "Rate-setting in California is extremely complicated."

The district last conducted a cost of service study in 2016, which led to a three-year rate plan and rate increases in 2016, 2017 and 2018.

A chart prepared for the board meeting lays out various steps the district must take before it can raise rates in January. Along with conducting the cost of service study, under state law the district must notify its customers of any planned rate increase by mail, receive comments and hold a public hearing.

Both Bardin and Michael Hogan, president of SFID's board of directors, said upward pressure on rates is expected to continue in the coming years. Among the factors are the cost of imported water purchased from water wholesalers, along with energy, labor and other expenses. The district also must consider increases in the cost of maintaining and replacing its infrastructure, such as its treatment plant, pump stations and pipelines, the officials said.

Another factor is a state push for residents and businesses to reduce their water use, which means lower water sales and less revenue for districts such as SFID. At the same time, the district's fixed costs remain the same or increase.

"The cost of water will continue to go up," said Bardin.

Hogan said the Metropolitan Water District of Southern California and the San Diego County Water Authority plan rate increases for 2019, increased costs which will be absorbed by SFID customers.

Bardin said that in spite of recent rate hikes, SFID is still in the bottom 25 percent in terms of rates among San Diego County water agencies.

In November, SFID's board voted to impose a 4 percent rate increase for 2018, although district staff had recommended a 9 percent increase. The decision meant the district had to reduce its capital improvement budget by 25 percent, pushing some projects further into the future.

As the district outlines the scope of its new cost of service study, officials plan to look at different rate structures, as well as their cost and revenue projections.

In 2016, SFID restructured its rates to create four tiers, meaning that as customers use more water, they are bumped up into higher tiers, with higher rates for each unit of water consumed. Some customers in the eastern portion of the district, where lots tend to be larger and water use higher, protested that they were being unfairly penalized with higher rates.

In response, the district plans to look at different rate structures during the upcoming cost of service study, including water budgets, in which each customer is allocated a set amount of water based on such factors as household size and the size of their property.

Bardin and Hogan cautioned that it is too early to tell if a water budget rate structure would work for SFID. But it is one option that will be studied. Water budgets are more complex than the current rate structure, and require more staff time to administer.

For example, when a water district in Riverside County began using water budgets, said Bardin, about half of the agency's 200,000 customers requested a variance from the rules that established their individual water allocations.

"We need to look at it and see if it's a fit for our district," Hogan said. "My intent is to look at all options and try to make the best decision for all of our customers."

As it moves forward with the cost of service study, the district will also consider whether to borrow money to finance some of its needed capital improvements, rather than the current "pay as you go" method. Bardin said financing the work would allow the district to spread out the payments over a longer period of time, thus reducing pressure on rates.

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