CITY OF ORANGE PROPOSED INCREASE OF WATER RATES AND CHARGES FREQUENTLY ASKED QUESTIONS (FAQ) REGARDING ORANGE S PROPOSED WATER RATES AND CHARGES

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1 CITY OF ORANGE PROPOSED INCREASE OF WATER RATES AND CHARGES On Tuesday March 27, 2012, the Orange City Council will hold a public hearing to consider a rate adjustment for water service rates and charges. Notices about the hearing were mailed to all property owners on or about February 9, The hearing will begin at 7 p.m. at Orange City Hall, City Council Chambers, 300 East Chapman Avenue, Orange, CA There are links below for specific information regarding water rates. All persons interested and/or owning property in the City may appear and be heard as to the reasonableness of the proposed rates. Property owners may file a written protest against these rates with the City Clerk at the above address up to the time of the hearing. Please note that owners must include their property address in the written protest. These rates only recover the City s actual costs. The City does not include a profit margin in these rates. The proposed rate adjustment will enable the City to balance its water service revenues and expenditures, and retain sufficient funds to maintain and replace its aging water infrastructure to ensure water system reliability and water quality on a 24/7/365 basis. The City of Orange has historically had among the lowest water rates in Orange County. If the increases are approved, the City s water rates and charges will continue to be among the lowest in the County. FREQUENTLY ASKED QUESTIONS (FAQ) REGARDING ORANGE S PROPOSED WATER RATES AND CHARGES FAQ No.1 Q. What are the basic water service charges? A. All water customers have a service capacity charge, which is a flat rate based on the size of their meter. Over 72% of all water meters are 5/8-inch by 3/4-inch, which includes most residences and small businesses. Each customer also has a water usage charge. The City has a three-tiered rate structure to promote conservation and support additional operating costs to pump and/or purchase additional water. This charge is based on units of water used, with one unit of water equal to one hundred cubic feet (hcf). FAQ No. 2 Q. Why does the City use one hundred cubic feet as its measure for water units? A. One hundred cubic feet (hcf) is a common water industry unit of measure for water consumption equivalent to 748 gallons. FAQ No. 3 Q. What are the other water service charges listed on the proposed rate changes? A. The other charges include elevation, private fire service, and construction meter charges. An elevation charge is assessed on meters located in one of two higher elevation zones within Orange s service area. Affected customers pay for the added costs associated with pumping water, including increased electricity costs and additional infrastructure (e.g. pump stations), to these zones. A private fire service is a separate meter for those customers requiring additional water for fire fighting purposes. The construction meter

2 charge is a temporary consumption charge for construction water needs. Additional information on the proposed pass-through charge is provided in FAQ number 14. FAQ No. 4 Q. The City increased its water rates in January Why do the City s water rates need to be increased again? A. The proposed rate increase is needed to complete the recovery of the City s actual increased costs of operating a safe and reliable public water system. Approximately 62% of the City s water related expenditures in any fiscal year are water charges and power costs paid to regional agencies including the Metropolitan Water District of Southern California (MWDSC), Municipal Water District of Orange County (MWDOC), Orange County Water District (OCWD), and Southern California Edison (SCE). The City purchases imported water from MWDSC (through MWDOC), electricity from SCE, and pays OCWD for water pumped out of the ground. In addition to increases in the cost of imported and well water supplies, operational expenses must also be considered including pumping, chemicals, insurance, electricity, fuel, regulatory agencies, and routine capital improvement projects. In 2007, the Orange City Council approved rate increases of 3% in 2007, 4% in 2008 and 4% in At the time, these increases were felt to be sufficient based on data obtained directly from MWDSC, OCWD, and SCE. However, a statewide drought combined with judicially imposed limits on imported water from Northern California and other factors caused MWDSC to significantly increase its rates during the period of At the same time, the OCWD decreased the allowable amount of less expensive groundwater that the City could purchase, while SCE substantially raised its rates. As a result, the Water Division s expenditures were much higher than revenues in FY , and In January 2011, the Council approved two-year rate increases of 14% effective March 24, 2011 and 14% effective January 1, These increases were conditioned on Water Division staff retaining professional consultants to complete a cost of service rate study which would: (1) develop a Proposition 218 compliant formula that would enable the City to pass-through future MWDSC, OCWD and SCE rate increases; (2) look at the ratio of fixed and variable charges for water service; (3) formulate a Proposition 218 compliant option for multi-family tiered rates; and (4) revise the City s existing water rate model to incorporate the cost analysis of items 1, 2 and 3. The recently completed rate study shows that the costs of inflation, fuel, maintenance, construction materials (asphalt, concrete, and pipe), chemicals, parts and supplies, and regulations have continued to increase, and exceed the water rate revenue currently received by the City. Therefore, rate increases of 3% effective January 1 st 2013, 3% on January 1 st 2014, 3% on January 1 st 2015, 3% on January 1 st 2016, and 3% on January 1 st 2017 will be needed to provide the critical funding necessary to cover the City s essential operating and maintenance requirements while meeting the legal requirements of Proposition 218. FAQ No. 5 Q. What is Proposition 218? A. In 1996, the California electorate passed Proposition 218, which amended the California Constitution to provide that the amount of a city s property-related fee (which includes

3 the City s water rate) shall not exceed the proportional cost of the service attributable to the parcel and that revenues from the fee shall not exceed the funds required to provide the service. Cal. Const. Art. XIIID, 6. The City has reviewed its water rate structure to determine that it complies with Proposition 218 s requirements. Proposition 218 also provides every property owner subject to paying water rates an opportunity to protest any changes in rates. If written protests against the proposed rates are presented by a majority of property owners, the City cannot impose the new charges. FAQ No. 6 Q. How do other Agency s rate increases affect Orange s water rates? A. Water agencies in northern and central Orange County, like the City of Orange, have two major sources of water: Groundwater pumped from the groundwater aquifer via water wells. This is the primary source of water and makes up the majority of the water produced for Orange. Imported water (purchased from MWDSC and locally administered through the Municipal Water District of Orange County [MWDOC]), which comprises the remaining water produced for Orange. Water agencies in south Orange County depend exclusively upon imported water supplies. Groundwater is typically the more cost-effective water supply source. However, the amount of groundwater that can be pumped from the aquifer is regulated by the OCWD who manages the groundwater for the Orange County. The aquifer cannot solely support all of Orange County s water needs; therefore, imported water must be purchased (from MWDOC) to supplement water demands for the City. Approximately 62% of the City s water related expenditures in any fiscal year are rates, charges and assessments paid to outside agencies including MWDOC (for purchased imported water), OCWD (for groundwater replenishment), and SCE (for electrical power to pump and pressurize the water distribution system. Orange has no control over these external costs; the rates and charges of these regional agencies are set by their decisionmaking bodies. Since the last time the City reviewed water rates in 2010, the cost per acre-foot (AF) to replenish groundwater has increased from $249/AF to $254/AF (note that 1 AF of water is equal to 328,851 gallons). In the same time period, the cost of imported water has risen from $707.50/AF to $750.75/AF. Imported water costs were just increased again by MWD on January 1 st, 2012 to $798.25/AF. For FY , the City provided approximately 28,788 acre-feet of water to all customers. While the increase in groundwater cost is not as substantial as the imported water increases, groundwater costs are further magnified by the reduction in the amount of cost-effective groundwater, which can be pumped. Every one (1) percent reduction in the basin production percentage (BPP) increases the Water Division s expenditures by about $170,000. The City maximizes its pumping of groundwater but is presently limited to 65% of its overall water demand based upon the BPP established by OCWD for the current fiscal year. Additionally, MWDOC s above average rate increases between 2007 and 2010, combined with OCWD s decrease in BPP until this year had an extraordinarily large

4 impact on the City s water expenditures. Collectively, these factors were taken into consideration when developing the proposed water rates for the City of Orange. The table below illustrates the rate increases for the City s two sources of water, along with the allowable percentage of groundwater that could be produced as set by OCWD: Year City of Orange MWDOC/MET OCWD BPP % 7% 5% 65% % 6% 2% 62% % 18.5% 0% 62% % 14.4% 0% 69% % 8.1% 5.1% 80.2% % 5.5% 6.3% 69% % 1.6% 8.8% 64% % 4.9% 19.2% 66% % 3.1% 15.4% 66% % N/A 17.3% 75% % N/A 9% 75% % N/A 9% 75% In addition to the increases outlined in the table above, MWDOC is proposing rate increases of 5.0% in 2013, 5% in 2014, 5% in 2015, 5% in 2016 and 6% in OCWD is proposing rate increases of 5% in 2013, 5% in 2014, 6% in 2015, 8% in 2016 and 5% in OCWD is also projecting a BBP of 65% in 2012, 68% in 2013, 62% in 2014, 64% in 2015, 70% in 2016 and 62% in The City also anticipates rate increases by SCE estimated at 4% in 2012, 4% in 2013 and 4% in Collectively, these proposed increases were also considered in the development of Orange s proposed water rates. FAQ No. 7 Q. How much will the average customer pay as a result of the proposed initial water rate increase? A. An average single-family residential customer uses about 40 hcf every 2 months. Currently, the total water charges for an average residential customer with either a 5/8 or ¾-inch meter are $ After January 1, 2013, this amount will increase $2.55 to $86.96 for a 2- month billing cycle. The increase in cost averages out to about $0.04 per day over a 2- month period. FAQ No. 8 Q. When was City s last water rate and charges increase? A. The City s last water rates and charges increase occurred January 2012, and was 14.0%. FAQ No. 9 Q. When would the proposed rate increase become effective? A. If the City Council approves the proposed rates, the initial increase would become effective January 2013 with subsequent increases as shown below. Following is a schedule of proposed increases:

5 Current Charges 1/1/2013 1/1/2014 1/1/2015 1/1/2016 1/1/2017 Proposed Proposed Proposed Proposed Proposed 3 % 3 % 3 % 3 % 3 % Service Capacity Charge a fixed 2-month charge based on meter size. 5/8" Meter $22.95 $23.64 $24.35 $25.08 $25.83 $ " Meter $32.88 $33.87 $34.89 $35.94 $37.02 $ " Meter $57.68 $59.41 $61.19 $63.03 $64.92 $ " Meter $87.48 $90.10 $92.80 $95.58 $98.45 $ " Meter $ $ $ $ $ $ " Meter $ $ $ $ $ $ " Meter $ $ $ $ $ $ " Meter $ $ $ $ $ $ " Meter $1, $1, $2, $2, $2, , Water Usage Charges water consumption charge based on units of one-hundred cubic feet (748 gallons) hcf unit $1.150 $1.185 $1.221 $1.258 $1.296 $ hcf unit $1.923 $1.981 $2.040 $2.101 $2.164 $ hcf unit $2.073 $2.135 $2.199 $2.265 $2.333 $2.403 Private Fire Service Charge fixed fee for customers with fire service connections. 4" Service $68.90 $70.97 $73.10 $75.29 $77.55 $ " Service $ $ $ $ $ $ " Service $ $ $ $ $ $ " Service $ $ $ $ $ $ Multi-Family Residential Water Usage Charges water consumption charge based on units of one-hundred cubic feet (748 gallons) hcf unit $1.150 $1.185 $1.221 $1.258 $1.296 $ hcf unit $1.923 $1.981 $2.040 $2.101 $2.164 $ hcf unit $2.073 $2.135 $2.199 $2.265 $2.333 $2.403 FAQ No. 10 Q. Will the proposed rate increase affect a customer s service capacity charge? A. Yes, the proposed rate will increase a customer s service capacity charge because of the City s costs as described in FAQ No. 4. FAQ No. 11 Q. If a customer has a private fire service, will this particular charge increase? A. Yes, for those customers required to have this service, there will be an increase based on the costs as described in FAQ No. 4.

6 FAQ No. 12 Q. Will my elevation and construction meter charges increase? A. No, there will be no change from the current rate. FAQ No. 13 Q. Why is the City proposing a multi-family residential (MFR) water usage charge? A. Multi-family residential customers have always paid a water usage charge. The multifamily residential will continue to have inclining tiered rates but the tiers will base on the number of dwelling units associated with the meter. For example, an apartment complex might have four dwelling units yet only have 1 meter. To allocate the usage to the tiers, the total usage will be divided by the number of dwelling units and then allocated to the tiers. The tier breaks for MFR units follow general recommendations for basic, efficient, and inefficient use of water. MFR units share a common outdoor area, and for some complexes, shared laundry facilities. Consequently, water needs for MFR units are generally lower than those for SFRs due to the lack of outdoor use and shared facilities as demonstrated in the AWWA Water Conservation Measurement Metric Guidance Report published January The reasoning is to more equitably incorporate the multiple dwelling drawing usage from a single meter. FAQ No. 14 Q. The City is proposing a pass-through charge. What is it, and why is it necessary? A. The City does not have control over the cost of water purchased from MWD through the City s wholesale water supplier MWDOC. Likewise, the City does not have control over replentishment costs generated from OCWD for ground water produced. The purpose of the pass-through charge is to provide the City with a mechanism whereby annual increases from MWDOC or OCWD are passed directly through to ratepayers. This enables the City to keep pace with water and power cost increases from their suppliers. This mechanism provides for the automatic adjustment of the commodity charges whenever the cost of water fluctuates due to the change in cost of pumping or purchasing the City s water supply. These costs are dependent on the charges from Metropolitan Water District (MWD), the Orange County Water District (OCWD) and the electrical utilities. In a similar manner, the City has no control over cost increases charged by Southern California Edison (SCE). The proposed pass-through will also include any power increases from SCE related to the pumping and distribution of water to customers. FAQ No. 15 Q. What is a cost of service analysis, and why is this study necessary? A. The revenue requirements derived from rates charged for water service reflect the cost of providing water service to all customers. To ensure the accuracy of the City s water rate structure, revenue requirements are determined for each customer classification served [e.g., residential, commercial, industrial, etc.] according to the specific service rendered. Allocations of these revenue requirements to each customer class reflect various factors including but not limited to the quantity of water consumed, peak rates of water flow and the number of customers per class. The cost of service study matches the expense of providing water to each customer class based on the demand characteristics of each class.

7 FAQ No. 16 Q. What factors influence MWDSC s and MWDOC s water rates, and why are these agencies forecasting future increases in their rates? A. During 2004 to 2007, MWDSC s rates increased at a modest level primarily due to implementation of major capital improvement projects within its 700-square mile service area. Examples included the conversion of their five regional water treatment plants with ozone and the construction of the Inland Feeder Project to serve 18 million southern Californians. In addition, MWDSC incurred significant increases in chemical and power costs associated with the deliveries of more expensive water supplies from Northern California, plus additional costs to replace Colorado River Aqueduct water lost to other states because of court decisions. All of these costs were passed onto MWDOC, who in turn, passed these costs onto Orange and other local Orange County retail water agencies. From 2008 to 2011, MWDSC s rates rose sharply as a result of: court ordered Bay-Delta pumping restrictions; costly engineering and environmental studies of Bay-Delta projects designed to ensure the reliability of future Northern California water supplies; the costs of water use efficiency efforts to manage limited Northern California supplies due to Bay- Delta pumping restrictions; significant cost factors associated with securing supplemental water supplies from Northern and Central California; additional purchases of unused farm water allotments along the Colorado River; higher spot market power costs for delivering Colorado River water; and expensive chemical treatment of MWDSC s Colorado River facilities to eradicate foreign Quagga mussels impacting MWDSC s water diversion operations. Today, the biggest issue impacting MWDSC s water rates for the immediate future will be the loss of water sales, which are at record lows. Key factors contributing to this new challenge include the difficult economy, the impact of lower water use by Southern California water consumers, cooler than expected weather patterns and increases in Bay- Delta water facility improvement costs. This drop in sales revenue will require MWDSC to further draw on its limited budgetary reserves, and create pressure to increase its rates to cover improvements to its aging [84-year-old] water system infrastructure. Looking out approximately eight to ten years [to 2022], MWDSC is projecting gradual increases in its water rates equal to the cost of inflation [about 3-4%/yr] in anticipation of incurring major expenses associated with construction of its share of Bay-Delta improvements to ensure habitat protection and provide an assured supply of Northern California water to MWDSC customers. Specific MWDSC estimates for capital project costs for Bay-Delta improvements average approximately $3.6 billion dollars plus $83 million per year in ongoing operations/maintenance/energy costs for conveying water from this key supply source to Southern California. FAQ No. 17 Q. Are rates being raised primarily because of increases in salaries and benefits? A. No, the water rate increases are not being proposed because of higher salaries and benefits. The City of Orange is raising water rates and charges to recoup increases in purchased water costs from MWDSC, OCWD plus some increases due to power hikes incurred from SCE. By law, under Proposition 218, the City can only charge for the actual cost of providing water service to its customers. It is worth noting that the City of Orange Water Division has not increased staffing levels over the last two decades. However, during the same time period, the number of customers using City of Orange water along with the

8 amount of water supplied has increased significantly (i.e., more customers and water are being served with fewer staff in 2012 than 1991). FAQ No. 18 Q. What steps has the City taken to improve service and minimize costs since the last rate increase? A. A number of measures have been implemented by the City to improve service delivery and reduce operating costs, including but not limited to the following: Reduced electricity costs at City facilities by enhancing operational procedures (e.g., pumping at night, etc). The City started an automated meter-reading program to expedite the reading of residential customer meters. This has reduced meter-reading costs and provided faster staff response to customer service requests. The City has implemented many electronic payment choices, providing customers more payment options and minimizing staffing. The City has implemented electronic work orders, which have saved staff time and reduced costs. The City has implemented staffing changes to reduce its administrative and operating expenses. The City has implemented a payment lock-box service for customers that reduced staff time and costs. FAQ No. 19 Q. What can I do to help keep my rates down? A. Water conservation is key to lowering water bills in most cases. In the long run, if all customers use less water, the City will not have to purchase as much and can keep its costs down. Conservation will also keep your other billed City services that are based on water usage down (e.g., sanitation charges). Below are a few conservation tips and other related website links for your information: Fix leaky faucets, plumbing joints and your sprinkler system. Install a new smart sprinkler controller that figures out the right amount of water for your landscape. Proper adjustment of outdoor watering cycles can significantly reduce unnecessary water use, and reduce costs. Run only full loads in the washing machine and dishwasher. Shorten your showers, and turn off the faucet while brushing your teeth or shaving. Visit for their current rebate information for water-saving devices, such as sprinkler controllers, washing machines and toilets. Visit for useful indoor and outdoor conservation tips. FAQ No. 20 Q. Why is the City referred to as a Class 1 Water Utility? A. The water system has been designated as a Class 1 Water Utility because it meets strict fire insurance rating criteria established by the Insurance Services Office. This is an indirect benefit to property owners living within the City of Orange. Typically, insurance companies review the Fire Service and Water classification when developing insurance

9 rates for property owners. A Class 1 Water Utility rating may, in certain cases, help to reduce insurance rates. FAQ No. 21 Q. How does investment in the City s water infrastructure support the City s mission? A. The City Council has outlined Orange s mission for the future within its General Plan. Repairing and replacing aging infrastructure supports the following elements: It facilitates economic development by ensuring sound assets for redevelopment and business expansion; It promotes fiscal strength through more efficient water system operations, and a controlled investment program which minimizes burdens on customers; and It protects and maintains neighborhood quality by minimizing damage to streets and other public works, enhancing fire protection and continues the City s tradition of reliable and dependable water service.