Drought’s Impact on Fiscal Planning Highlights PPIC Report
Suppliers need “proactive” drought pricing to prevent cash crunch
During drought, people conserve water. That’s a good thing for public water agencies and the state as a whole but the reduction in use ultimately means less money flowing into the budgets of those very agencies that need funds to treat water to drinkable standards, maintain a distribution system, and build a more drought-proof supply.
“There are two things that can’t happen to a water utility – you can’t run out of money and you can’t run out of water,” said Tom Esqueda, public utilities director for the city of Fresno. He was a panelist at a June 16 discussion in Sacramento about drought resiliency sponsored by the Public Policy Institute of California (PPIC).
Part of PPIC’s recent report, “Building Drought Resilience in California’s Cities and Suburbs,” covers the revenue aspect associated with reduced water use. Among other things, the report found that the drought of 2012-2016 caused more than 60 percent of all suppliers to experience declines in their net financial positions because ratepayers used less water, reducing utilities’ income.
“Water suppliers need to improve their fiscal resilience during drought,” said David Mitchell, co-founder and principal at M.Cubed and one of the report’s authors, at the briefing. “If we were to assign grades to water suppliers during this drought, I think they would all get pretty good marks for their supply planning. But I’m not sure we could say the same for their fiscal planning. Fiscal vulnerability remains widespread among public water agencies in particular.”
The cash crunch associated with drought “is a perennial problem for public water agencies in California, which generally lack the ability to swiftly implement drought surcharges and hold adequate reserves to cover their fixed costs when sales decline,” the report said. “The lack of fiscal preparedness among public water agencies is somewhat surprising, given how much utilities prepare for droughts in other ways.”
Suppliers need “proactive” drought pricing and communication, and pre-approved drought rate mechanisms, Mitchell said, adding that agencies must be prepared to navigate through Prop. 218, the 1996 law that put constitutional restrictions on water rate setting “that make adjusting rates more complicated and harder to do quickly.”
Fresno was forced to reconfigure its water rate plan after a successful Prop. 218 challenge in 2015. Esqueda praised the City Council for tackling the issue head-on through its approval of a $429 million plan to build drought resiliency into its system
“When the rates got rescinded we had to start over from scratch,” Esqueda said. “We went from rates rescinded Aug. 1 to new rates effective six months later.”
The city adopted a new plan that raised rates to fund drought resiliency while assuming a 30 percent reduction in water use. “We built our rate plan knowing our people were going to conserve, they did conserve and we are still generating the cash we need to keep the utility going.”