Reasonable Ratio of M&I to AG Groundwater Extraction Charges
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1 Exhibit U422 Rodney T. Smith, Ph.D. President Reasonable Ratio of M&I to AG Groundwater Extraction Charges United Water Conservation District Santa Paula, CA May 28, 2015
2 Statement of Question Develop a quantitative method to determine a reasonable ratio of groundwater extraction charges Municipal & Industrial ( non-agricultural ) water to agricultural ( AG ) water Focus on the differential hydrological impact of M&I and AG groundwater usage and land use on the eight inter-connected basins within United How differential hydrological impact creates a need for replenishment water from United How the rate structure should reflect these differences 2
3 Economic Principles of Rate Structure 3
4 Principle 1: Components of Fee for Water User Class Fee = Variable Cost Component + Fixed Cost Component Variable Cost Component: replenishment costs that vary with the volume of replenishment water 10% of total replenishment costs) Fixed Cost Component: replenishment costs that do not vary with the volume of replenishment water 90% of total replenishment costs) 4
5 Principle 2: Variable Cost Component Based on Impact of Pumping on Overdraft Impact of pumping on overdraft: pumping less groundwater reuse AG Variable Cost Component: 75.9% of variable cost of replenishment M&I Variable Cost Component: 85.2% of variable cost of replenishment 5
6 Principle 3: Fixed Cost Component based on apportionment rules Rule 1: apportion fixed cost according to relative demands water user class places on United for replenishment Share based on groundwater pumping adjusted for reuse Rule 2: credit water user class based on amount of differential recharge on overlying lands relative to districtwide average Differential recharge per acre: AG (0.07 AF/acre); M&I (-0.14 AF/acre) adjusted by portion of recharge that benefits the inter-connected basins Annual cost of replenishment water 6
7 Consistent With Cost-of-Service, Rate-Making Principles United Water undertakes projects to mitigate the effects of groundwater pumping For a parcel, demand for United Water s services reflect water use and land use Stratecon s method United Water s variable cost: comparable to commodity charge United Water s fixed cost: comparable to demand charge 7
8 United Water s Cost of Replenishment Water 8
9 United Water Projects to Mitigate Effect of Groundwater Pumping Ferro/Rose (retirement of groundwater allocation) annual cost of replenishment activity:$1,276/acre-foot (firm replenishment) Ferro/Rose (recharge project) annual cost of replenishment activity: $820/acre-foot (non-firm replenishment) Desalination of brackish groundwater water (annual cost) For 10,000 acre-foot design capacity: $1,464 per acre-foot to $1,684 per acre-foot For 20,000 acre-foot design capacity: $1,315 per acre-foot to $1,488 per-acre foot Reasonable range for United Water s Annual Cost of Replenishment: $800 per acre-foot to $1,500 per acre foot Annual Cost of City of Ventura connecting to State Water Project: $1,500 per acre-foot 9
10 Reasonable Ratio for Groundwater Extraction Charges 10
11 Assumptions Groundwater Revenue : $9,995,885 Groundwater pumping and in-lieu: agricultural (141,860 acre-feet) and municipal & industrial (36,536 acre feet) Hydrologic Conditions Reuse of groundwater: agricultural (24.1%) and municipal & industrial (14.8%) Overlying recharge for lands: agricultural (0.56 acre-feet per acre) and municipal & industrial (0.35 acre-feet per acre) Acreage: Agricultural (80,078 acres) and Municipal & Industrial (40,918 acres) 11
12 Ratio of Municipal & Industrial to Agricultural Groundwater Extraction Charges (by Cost of Replenishment Water and Proportion of Potential Recharge on Overlying Lands Beneficially Reaching the Basin) Proportion of Potential Recharge on Overlying Lands Beneficially Reaching the 40 90% 75% 50% Statutory Minimum Ratio $200 $300 $400 $500 $600 $700 $800 $900 $1,000 $1,100 $1,200 $1,300 $1,400 $1,500 United Water's Annual Cost of Replenishment Water 12
13 Issues Raised by City of Ventura Before June 10, 2014 Issue about Stratecon Study Stratecon Response Not consistent with industry standard for cost-of-service study asserted conclusion with no supporting analysis Stratecon method consistent with commodity/demand method Opinion based on market value of water approach based on cost of replenishment market value not in any Stratecon document value of parameter: cost of replenishment Assigned an arbitrary value to replenishment water of $500 per acre-foot Agricultural water user assigned credits for rainfall recharge on open space areas which are not given to M&I users not true examines how ratio varies with the cost of replenishment defines a reasonable range for cost based on United Water s projects City does not challenge existence of credit Stratecon method applies credit to all lands used (not open spaces) for agricultural and M&I City consultant reports rebut Stratecon study consultant reports a compilation of assertions without supporting information and analysis 13
14 Issues Raised by City of Ventura June 10, 2014 Issue about Stratecon Study Approach looks at only half of the water balance consider recharge and reuse but not pumping Stratecon Response False Reuse and recharge only a portion of factors considered Pumping impacts apportionment of fixed costs Raftelis estimates lower cost of replenishment Stratecon s estimate based on projects United Water has undertaken or planning to undertake for replenishment activity Raftelis calculations based on cost of all historical projects Common practice for public agencies to distinguish between cost of all historical projects and newer projects (see discussion of July 14, 2014 letter) Raftelis can not replicate Stratecon s calculation Lacks any sense of proportionality Differences are small as Stratecon reported rounded inputs while actual calculations based on unrounded inputs (inputs calculated to 16 decimal places) Stratecon and Rafetlis calculate 3.7 ratio for example 14
15 Issues Raised by City of Ventura July 14, 2014 Issue about Stratecon Study Rafetelis asserts $700 per acre foot replenishment cost unreasonable. Stratecon Response Stratecon s estimate based on projects United Water has undertaken or planning to undertake for replenishment activity Raftelis calculations based on cost of all historical projects Common practice for public agencies to distinguish between cost of all historical projects and newer projects Stratecon approach consistent with approach taken by the Metropolitan Water District of Southern California in setting Allocation Surcharge for its Water Supply Allocation Plan Charged based on the marginal cost of water conservation under Metropolitan s turf removal program--$1,428 per acre foot 15
16 Issues Raised by City of Ventura July 14, 2014 Issue about Stratecon Study Rafetelis finds HF&H cost estimate of $54.53 per acre foot more reasonable Stratecon Response HF&H study disaggregates United Water projects and programs into three components Replenishment Supply reliability Overdraft mitigation United Water replenishment activities generate joint products a joint product is one of many products originating from a common production process Stratecon s approach focuses on the cost of the joint products which United Water pays for from groundwater revenues 16
17 Conclusion A ratio of at least 3.0 for M&I to AG groundwater extraction charges reasonably reflects the quantitative differences between the hydrologic impacts of the different water user classes 17
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