HomeMy WebLinkAboutF-1 Financial Impact of 20% Mandatory Water Use Reduction Information Item
Presented 4(21 I
F-1
INFORMATION ITEM
TO: HONORABLE CHAIRPERSON AND MEMBERS OF THE • -• •A UTILITY
BOARD
FROM: GEORGE F. MORROW,DIRECTOR OF UTILITIES
DATE: APRIL 27, 2015
SUBJECT: FINANCIAL IMPACT OF 20% MANDATORY WATER USE REDUCTION
Following the issuance of the Governor's April 1, 2015 Executive Order, the State Water Board
(SWRCB) issued draft regulations for implementing the 25% state-wide reduction for urban
water usage from a 2013 baseline year, including a tier system for water reduction targets by
water agency. Water reduction targets range from 8% to 36%. Placement in the water reduction
tiers was based on actual residential gallons per capita per day water consumption for the July
through September 2014 period. AL&W was placedin a 20% reduction target tier.
AL&W's consumption in the 2013 baseline year was 7,956,453 CCF. A 20% reduction from
2013 consumption amounts to annual sales of 6,365,162 CCF. Revenues generated from existing
water rates at this usage level will not be sufficient to maintain required debt service coverage,
credit ratings, and adequate cash reserves. Since the Water Fund budget is mostly fixed costs,
(i.e. little variable cost components), large reductions in consumption results in an under
recovery of revenues. Therefore, a rate mechanism needs to be put in place in order to the
preserve financial integrity of the Water Fund during periods of significantly lower water sales.
The projected revenue shortfall due to a 20% reduction in water sales from 2013 is $2,232,730.
There are some cost savings with reduced water production. Savings from water pumping and
treatment costs from the reduced sales level are estimated to total $300,000. To accomplish a
20%water usage reduction, enhancements to water conservation programs and education will be
necessary, including rebates, communication materials, and increased drought enforcement; Staff
estimates an additional$300,000 will be needed for this purpose.
Projected Revenue Shortfall $ 2,232,730
Drought Program Expenses 300,000
Less:
Reduced Pumping Costs (250,000)
Reduced Treatment Expenses (50,000)
Total $ 2,232,730
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Financial Impact of Drought ��..__. . ....- .
April 27,2015
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Recouping the $2,232,730 shortfall could be accomplished through a $0.381/CCF rate for all
CCF sales across all customer meter sizes. Customers that reduce consumption in the 2nd and 3rd
tiers potentially could reduce overall water costs, even with implementation of an additional
drought-related charge. This is because the per CCF commodity rates in tiers 2 and 3 are higher
than the potential drought charge.
Staff has been working with legal counsel to explore rate options to make up the revenue
shortfall —this work is ongoing. One option is to impose a drought charge in accordance with
Section E.2 of Water Rule No. 21. Without adoption of a rate mechanism to recover revenue
losses from high levels of conservation, debt service is projected to fall below the minimum
requirement of 1.25 as set forth in bond covenants. Failing to meet minimum debt coverage
requirements puts the Water Fund at risk of credit default.
Prepared by: George F. Morrow,Director of Utilities
Talika M. Johnson,Utilities Administrative and Financial Services Manager
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