The Long Beach Water Department’s (LBWD) Board of Commissioners explored what the next decade of water rates in the city could look like as it nears a vote on a long-term plan, one that hinted at steady rate increases, as the department tries to build its reserve fund.
While the board didn’t adopt a specific plan, and any plan eventually approved would be subject to annual adjustments based on the climate of the water industry and overall costs of service, the two proposed plans had rates increasing by a minimum of four percent each year. The cost of service study served as a type of workshop for the commissioners to feel out an appropriate strategy for both setting a goal for its reserve and how to adjust rates to increase revenues.
The presentation was delivered by Sanjay Gaur, a consultant for the LBWD, who laid out the early options for the board. One plan was based on “smooth” increases of four percent each year through 2024 with the other, aimed at minimizing deficits for the department, would include two 7.5 percent increases from 2018-2019 with the rest of the 10-year plan, including the annual four percent raise in rates.
Last month, the board voted to pass a four percent increase for the next fiscal year, and it's not expected to adopt any long-term plan for at least another month. That rate increase, which takes effect in October, will raise the average Long Beach customers' bill by about $1.83 per month for water and their sewer charge by just under $.50 per month. Even with the rate increase, Long Beach customers still enjoy lower rates than other major cities in the state, including San Francisco, Los Angeles and San Diego.
Gaur said the reserve goal, which includes a range of somewhere between $35 million and $55 million, was industry standard and modest and takes into account projected sales, future sales, costs associated with price increases from the Metropolitan Water District of Southern California—the city’s importer of water—and debt obligations.
“These are targets; it’s not an annual amount we’re trying to fund,” Gaur said. “Once we reach the target then we’re good. So if you think of a savings account, this is how much money we want in our savings account to deal with all these different risks.”
The amount of increases and the large reserve goal was troubling for some on the board. The board’s vice president Art Levine questioned how so many variables could be projected so far into the future, given the fluctuating nature of the water industry. Commissioner Harry Saltzgaver, former president of the board and Executive Editor of Gazette Newspapers, noted the hard sell that such a large reserve fund would be.
“If I were to go to anybody in the city today and say ‘Ten years from now we want to have $55 million in reserves, I don’t think I’d get out of the room,’” Saltzgaver said. “I’m a little concerned about the political impacts of what we’re talking about here.”
An October 2012 audit of the department’s reserves touched on the subject, but did not identify the then- $6 million reserve level as appropriate or not; rather, it noted that it was not consistent with its projected budgets and left it up to the department to establish a higher reserve goal to have future monitoring based off of.
LBWD General Manager Chris Garner said the department currently has a reserve of just over $20 million, with an additional $10 million in reserves for its sewer systems. Garner said the $6 million figure in the audit was much too small for a utility the size of the LBWD, but future discussions by the board would determine how much larger than the current $20 million figure the department’s goal needs to be.
Having those reserve funds can help pay for unexpected costs like equipment breakdowns, water main breaks and capital improvements to the department's networks, Garner said. However, he mentioned that an element adding to the size of the proposed plans was aimed at stabilizing rates, something that is both bad and good for the customer.
He characterized it as masking the true market for the commodity that the customers are buying, with the department essentially taking money up front to minimize the future rate hikes. Garner said doing this could negatively affect water consumption patterns by customers if they’re not aware of the true cost of the product, but a positive of that practice is that rates stay relatively level.
“If the price of the commodity is going up, by you buffering that rate increase, the customer doesn’t really feel that impact and they don’t have the full realization of what the current price of the product is and they don’t adjust their usage accordingly,” Garner said. “If the price of the commodity is going down, like it has with natural gas, the customer should realize the full benefit of that.”
Whichever long-term plan the board eventually adopts will surely include rate increases. Persistent drought and a dwindling supply statewide could inevitably raise the cost of water that the city imports, but Garner reiterated that even with a long-term plan in place the rates are not bound by the plan, and can be adjusted downward if the market calls for lowered rates.
“I would expect that we will have small increases,” Garner said. “We won’t have the large increases that other water utilities that have gotten some negative press, we won’t have that. Long Beach is so far ahead of the game as far as conservation we’re not being hit to the extent as others are as far as reduced sales.”