Pasadena Chamber of Commerce

Here is the text of a letter to the Pasadena City Council regarding the substantial water rate increase proposed by Pasadena Water and Power.  (Rate increases that are being used to add to reserves, build up the capital reserve and then compensate for increased water costs from the Metropolitan Water District.  Be aware, only a small portion of these increases cover the added cost of water.)

June 19, 2009

Mayor Bill Bogaard

Pasadena City Council

100 North Garfield Avenue

Pasadena, CA 91109

Dear Mayor Bogaard and Council Members,

The Board of Directors of the Pasadena Chamber of Commerce reiterates its concerns about the current proposal to increase the cost of water service to customers over the next two years. As you are aware, our concerns fall into these areas: 1.) the potentially devastating impacts dramatic increases in water cost could have on your business and residential customers who are already suffering the effects of our stagnating economy; 2.) the lack of serious efforts by the Pasadena Water Department to reduce its own internal expenses before imposing substantial increases on customers; 3.) only a fraction of the proposed increases are the result of additional costs of purchased water from the Metropolitan Water District; 4.) the inequities in rate increases that impose penalty costs on customers who do not waste water; and 5.) the fact that the proposed rates are designed to increase revenue and will not result in water conservation.

We do recognize that neighboring communities are raising their water rates as a result of the MWD increases. However, those communities are really just recouping the additional costs, so none is raising rates to an extent, and over as short period of time, as Pasadena’s proposed increases. South Pasadena, for example, is raising its rates by about 5% on July 1^st and then by an average of 13% until July, 2012. California American Water is seeking increases for its customers that average $17 per month. Alhambra will raise its rates by about 15% per year for the next five years. Burbank is raising its rates by 8.5% per year for the next four years and Glendale plans a 7.7% increase. It should also be noted that each of these are starting at an average rate lower than Pasadena’s, according to the Redoak cost of service study data. Five years from now, none of our neighboring communities will have experienced increases equaling Pasadena, and their customers will still pay lower overall water rates, on average.

We have examined the Cost of Service Study performed for the Water Department by Redoak. Interestingly, that study recommends against imposing new pricing tiers and suggests that would further create inequities within and between customer classes. It is also interesting to note that the study shows Pasadena commercial customers pay much more than commercial customers in nearby cities, as much as 50% more than their counterparts in Burbank, Los Angeles and Glendale while our residential customers pay somewhat less than those in other cities, indicating that in Pasadena commercial customers significantly subsidize the water rates for residential uses.

Again, the Chamber of Commerce makes these recommendations:

The Chamber Board of Directors would prefer to see any immediate increases strictly limited to an amount that only recovers increases in the cost of water from the Metropolitan Water District. Other costs could be recovered through efficiencies within the water department or by postponing or foregoing some capital projects and an entire rate restructuring performed in conjunction with budget-based billing for water service.

If the Council is unwilling to take a harsh stance to contain departmental costs, it is the recommendation of the Board that the increases be reduced by half each year and phased in over a four year period. We also find it appropriate to reward those who have conserved water by exempting anyone who has saved 10% from 2006 use levels from tier 4 and 5 pricing levels.

The Chamber Board finds it difficult to accept any increase beyond the cost of water when the department itself has clearly not done anything to reduce its costs. Employee reductions claimed by the department have turned out to instead merely an accounting trick, moving some employees to the power department, a clever clerical deception.

Recognizing that commercial water customers pay significantly higher rates to subsidize residential users, the Chamber Board recommends restructuring the rates so that each customer class pays its fair share of all costs evenly. We have concerns about the amount of the “hook up” charge imposed by Pasadena that again weighs much more heavily on commercial customers than residential. Some neighboring water companies impose no such fee, while those that do charge significantly less than Pasadena.

Finally, the Board suggests that the department use billing and collections technology to discern water wasters and impose higher costs on those customers who are actually incurring the additional costs by wasting the commodity. It should be a simple matter to discern who is using significantly high amounts of water and then audit those accounts. That focus should be on both residential and commercial customers. For commercial customers, there are about 300 customers who will fall in the tier 4 and tier 5 pricing categories.  It will be a simple matter to check the bills and audit those customers.  For the more than 3000 residential customers in those pricing tiers, it may take more work, but it is a safe assumption that most of those are using water unnecessarily and should pay the higher price, if they fail to conserve water at the 10% level.

It is also clear from the Redoak cost of service study commissioned by PWP that many of the assertions made by department staff justifying the additional 25% charged to customers outside of Pasadena are inaccurate. Those inaccuracies could lead to a successful Proposition 218 challenge. For example, despite staff assertions to the contrary, the study makes no claim that there are additional costs to deliver water to customers outside Pasadena, nor does it offer any justification for the additional charges, beyond the claim that Pasadena owns the commodity and can charge more for it. Also, left out of the discussion is any mention that those customers outside Pasadena have been paying for infrastructure and water for as long and at higher rates than those within the city limits, thereby having an equal “ownership” stake in the company. This distinction could possibly undermine the assertions that the additional charges are warranted and legal. There is also no mention of the fact that these customers already pay a dividend of nearly 8% as their portion of the transfer to the general fund. In order to ensure the premium paid by those outside Pasadena withstands a Proposition 218 challenge, the Chamber recommends reducing that 25% premium by the amount of the general fund transfer to 17%.

One of the challenges in examining these rate increases is the disturbing lack of consistency in the staff reports. It has been asserted that these additional charges are the result of increases in the cost of water that must be bought from MWD, but on even a cursory examination, the department is using higher fees to increase its reserves and capital projects fund. The department claims its rates will be competitive with surrounding municipalities, yet the Redoak study shows that Pasadena’s commercial customers pay significantly more than commercial customers of any other local water utility. The department claims to have reduced its workforce when in fact it has only moved those employees to the power side of the company. Finally, we note that the amount Pasadena Water Company staff assert is the “penalty pricing” level imposed by MWD is different in these reports than what has been published by MWD. Pasadena Water claims the added costs is $1600 per unit, but MWDs staff and board reports put the penalty amount at $1468 per unit, 10% lower than department figures. All of these inconsistencies warrant a very close examination by the council before any rate increase, especially one so substantial and potentially devastating.

Please listen to your constituents, both commercial and residential, and reduce the amount of the water cost increases by either charging only as much as the increased costs from MWD or by extending the phase in period of these increases to at least four years, not the two years recommended by the department.

Thank you,

Paul Little

President and Chief Executive Officer

Cc: M. Beck, M. Jomsky, Chamber Board