HF&H CONSULTANTS, LLC Managing Tomorrow s Resources Today

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1 HILTON FARNKOPF & HOBSON HF&H CONSULTANTS, LLC Managing Tomorrow s Resources Today 201 North Civic Drive, Suite 230 Robert C. Hilton, CMC Walnut Creek, California John W. Farnkopf, PE Tel: (925) Laith B. Ezzet, CMC Fax: (925) Richard J. Simonson, CMC hfh-consultants.com Marva M. Sheehan, CPA Robert D. Hilton, CMC TECHNICAL MEMORANDUM To: From: Shana Epstein, Public Works Director, City of Beverly Hills John Farnkopf, Sr. Vice President, HF&H Consultants Rick Simonson, Vice President, HF&H Consultants Date: Subject: Water Rate Study Policy Recommendations EXECUTIVE SUMMARY At the May 10, 2018 Public Works Commission meeting, a number of policy issues were presented including the options, preliminary recommendations, rationales, and expected outcomes. Based on the input received, subsequent analysis, and further meetings with the Ad Hoc Committee, the recommendations were developed further. The purpose of this Technical Memorandum is to summarize these recommendations. The subsequent analysis that was performed focused on developing cost allocation factors based on meter reading data produced by the City s new Water Tracker system. With Water Tracker data, it is possible to itemize peak demands for each customer class, which was not possible using customer billing data. Customer billing data provides a customer class breakdown for average demands; estimates were required to determine the peak demands for each customer class. The Water Tracker data was used to replace the previous estimates based on customer billing data, which resulted in improved cost allocations. The recommendations are organized into four categories: Customer Classes, Service Charges, Quantity Charges, and Other Rate Issues. The Technical Memorandum concludes with a summary of the recommended rates in Section V.. The rates are

2 Page 2 of 29 preliminary at this time, pending further direction on the policy issues. The final rates will be documented in a comprehensive cost-of-service rate study. It should be noted that the policy issues in this report are related to restructuring rates that will generate the same revenue that was approved by the City Council. These policy issues will determine how that rate revenue is recovered from customers through the revised rate structure without increasing the total amount of revenue that was previously approved. The following table summarizes the recommendations. Figure ES-1. Summary of Recommendations Policy Recommendation I. Customer Classes A. Single Family, Multi family, Commercial Maintain separate classes B. Irrigation Create Single Family, Multi Family, and Commercial Irrigation customer classes II. Service Charges A. Water service charges Maintain current 15% fixed revenue Maintain current structure B. Fire service charges Maintain current revenue from charges Provide greater budget detail III. Quantity Charges A. Single family Maintain a four-tier structure Set rates for each tier based on cost of service Adjust four tiers to current demand patterns B. Multi family Reduce from four to two tiers Set rates for each tier based on cost of service Adjust two tiers to current demand patterns C. Commercial Maintain uniform rate based on cost of service D. Irrigation Apply same rates as Single Family, Multi Family, and Commercial customers Require higher reductions during water shortages IV. Other rate issues A. Water supply reliability charge Create new rate component called Water Reliability Charge Add charge to all quantity charges Use revenue to pay for improved supply reliability

3 Page 3 of 29 Policy B. Water shortage revenue stabilization adjustments Recommendation Expand the Water Shortage Contingency Plan to include staged reductions during declared water shortages Implement factors that adjust rates during declared shortage reductions Adopt the revenue stabilization process as part of the next Proposition 218 rate process C. Outside city rates Replace multiplier with cost per HCF Apply the costs to the quantity charges only Charge equal service charges to both Inside City and Outside City customers I. CUSTOMER CLASSES IA. Single Family, Multi Family, Commercial Customer Class Issue. A comprehensive rate study should evaluate whether the appropriate customer classes have been identified. The City has had separate classes for single family, multi family, and commercial customers for many years. Are these classes still appropriate? Recommendation. The following is recommended: The City should continue to maintain a separate single family, multi family, and commercial customer class. Rationale. As an industry practice, it is common to see at least residential and commercial classes for water systems. Sometimes institutional, industrial, irrigation, and agriculture classes are present, depending on whether there is a sufficient number of customers to warrant a separate class. For Beverly Hills, it is appropriate to have single family, multi family, and commercial classes. The multi family class presents unique issues because the occupants are residential but the customer is commercial (i.e., a landlord). As an industry practice, sometimes multi family is a separate class and in other cases multi family is treated as commercial.

4 Page 4 of 29 The City has maintained a separate multi family class (for wastewater rates, too) for many years because the number of accounts, dwelling units, and amount of water use for multi family customers is significantly different compared to the other two classes. Multi family demand patterns are also distinct. Average bi-monthly water use for multi family customers is 9 HCF per dwelling unit and is 48 HCF per residence for single family customers. The average multi family apartment account is 10 dwelling units, which is 90 HCF bi-monthly. Because there is a significant multi family customer base that has been treated as a separate class by Beverly Hills for many years whose water demand patterns are significantly different from single family customers, it is appropriate for the City to continue to maintain a separate customer class. We would not recommend combining the multi family customers with either the single family or commercial classes despite the fact that the use is residential and the customer is commercial. Expected Outcome. Maintaining the current customer is consistent with the City s longstanding practice. IB. Irrigation Customer Class Issue. Irrigation is a significant component of total water use in the City, particularly among single family customers. It is a discretionary water use that warrants special attention because it may need to be curtailed at higher levels during shortages. The issue facing the City is whether the creation of separate irrigation customer classes would further the City s water management objectives while ensuring that the charges for water service do not exceed the proportional cost of providing service to each parcel. Recommendation. The following is recommended: Create separate single family, multi family, and commercial irrigation customer classes. Rationale. Meeting the needs for irrigation is an increasing challenge in California. Legislation has been in place that calls for a 20% reduction in urban water use by The Governor recently signed SB 606 which places further conditions on urban water suppliers to eliminate excessive water use. Irrigation is one of the easiest types of water use to eliminate excessive use. Improving irrigation efficiency is facilitated by separately metering irrigation. This is recognized by the City, which is requiring new

5 Page 5 of 29 customers with potentially significant irrigation to install separate irrigation meters. Requiring the installation of separate irrigation services leads to creating an irrigation class or classes. It is not uncommon to see a single irrigation class. This class is typically for large turf irrigation at municipal parks, industrial parks, and commercial sites such as golf courses. Residential irrigation is usually not included. In Beverly Hills case, separate irrigation meters can be mandatory for any class single family, multi family, and commercial (which includes municipal irrigation). In this case, it is appropriate to establish irrigation classes within the single family, multi family, and commercial classes. Expected Outcome. The City will be able to improve the management of irrigation water use as part of complying with State regulations. At present, only 3% of water use is separately metered irrigation water use. Over time, this will grow because of the City s mandatory requirements that new development is subject to. The number of irrigation accounts could also increase voluntarily with existing single and multi family customers. These two classes pay tiered quantity rates. When both indoor and outdoor water use is combined on a single service, more water demand is billed at the higher tiers. If the outdoor water demand is billed separately, the outdoor and indoor water demand is lower and billed in the lower tiers. The sum of the bills for the outdoor and indoor accounts may be lower than the bill for the single account that combines outdoor and indoor water demand. 1 This is appropriate because irrigation services will be subject to higher reductions during shortages. In other words, the cost may go down but the level of service will not be as high because irrigation water use will be subject to greater curtailment. IIA. Water Service Charges II. SERVICE CHARGES Issue. The current rates generate 85% of the revenue from the quantity charges, which vary depending on climatic influences. The remaining 15% of rate revenue comes from the fixed water and fire service charges. While 15% of the revenue comes from fixed 1 Bear in mind that irrigation accounts will pay a service charge as well as the quantity charge.

6 Page 6 of 29 charges, approximately 65% of the expenses are fixed. Should the 15% of revenue from fixed charges increase to close the gap with the 65% of fixed expenses? Recommendation. The following is recommended: Maintain the existing balance between fixed charges and fixed costs. Maintain the existing water service charge structure. Rationale. Discretion is allowed in determining how much of the fixed costs to recover from the fixed service and variable quantity charges as long as the resulting rates are proportionate to the cost of providing service. In striking the balance between the two, it helps to compare the fixed costs with the revenue from the fixed service charges plus the revenue from the variable quantity charges associated with non-seasonal water demand. Recently in Beverly Hills the revenue from base, non-seasonal demand was 62% of total rate revenue (see Figure II-1). Figure II-1. Revenue From Fixed and Variable Charges When added to the 15% of revenue from fixed charges, 77% of the revenue is relatively fixed. Given that the amount of revenue from fixed charges and non-seasonal quantity charges exceeds the 65% of costs that are fixed, a reasonable balance has been struck between revenue stability and the conservation price signal (i.e., the responsiveness of the bill to changes in water use).

7 Page 7 of 29 The conservation price signal is accentuated as the revenue from the fixed charges is reduced. With a lower amount of fixed revenue, more of the revenue comes from the variable charge, which more effectively rewards customers for conserving and discourages excessive use. It is possible for Beverly Hills to have fairly stable rate revenue with only 15% of the revenue coming from the fixed charges because the amount of non-seasonal demand is comparatively high. The City has taken other steps to improve revenue stability by having a fairly high operating reserve balance requirement and more recently by introducing the adjustment for variations in the cost of MWD purchased water, which can be made without triggering a full Proposition 218 protest process. In addition, it is recommended that the City add the revenue stabilization adjustments during shortages (see IVB below), which will allow for adjustments during shortages to make up for revenue lost due to rationing. Expected Outcome. By holding the revenue from fixed charges at the current level, the City can continue to provide an effective conservation signal. Bills will more readily reflect changes in efficiency than they would if the fixed charges were increased. In particular, low-use customers would not feel that their bills are too heavily dominated by a fixed charge and that their efforts to conserve show little benefit, which improves the affordability of the City s service. Revenue stability can be provided by maintaining higher reserves and incorporating mechanisms that allow for responsive adjustments to unexpected increases in the pass-through costs and rationing during shortages, both of which are otherwise beyond the City s control. IIB. Fire Service Charges Issue. Revenue from fire service charges covers about 3% of the total revenue requirement. Is there any reason to adjust the fire service charges? Recommendation. The following is recommended: Maintain the current amount of revenue generated by fire service charges. Provide greater budget detail that will improve the allocation of fire service costs. Rationale. The hydraulic capacity in the transmission and distribution facilities that is needed to suppress fires is integral with the capacity to meet other peak demands. In

8 Page 8 of 29 other words, the same pumps, storage tanks, and pipelines are used to suppress fires as are used to meet daily and hourly peak demands. In denser, commercial zones, fire flows may determine how much capacity is needed; in other zones, maximum hour demand may be the determinant. Overall, however, fire flows and maximum hour flows are similar and can be met with the same facilities. In deciding how much of the cost of capacity that should be recovered from fire service charges as opposed to water service and quantity charges, it is important to consider the difference between fire service and water service. Whereas water service is provided constantly, fire service is a standby service. And whereas water service is only of benefit to the customer using the water, fire service provides a community-wide benefit. Given these considerations, it is reasonable to cover the costs of fire service capacity from the water service and quantity charges as well as from fire service charges. By doing so, a portion of the cost of capacity that is used for fire suppression will be shared by those who receive the community-wide benefit of fire services even though they may not have fire services. The cost-of-service analysis is currently limited in deriving the full cost of fire service because costs directly related to fire service are not identified in the budget. As a result, the allocation is limited by the level of detail in the budget s cost breakdown. For that reason, it would be appropriate to freeze the fire service charges at their current level. Expected Outcome. The cost of capacity required for fire suppression will continue to be recovered through a combination of fire service charges and water service and quantity charges. IIIA. Single Family Quantity Charge III. QUANTITY CHARGES Issue. The single family quantity charges comprise four tiers. The size of each tier was derived over ten years ago. Is this structure still appropriate? Recommendation. The following is recommended: Maintain a four-tier structure. Set the rates for each tier based on the cost of providing service.

9 Page 9 of 29 Adjust the breakpoints between the tiers based on current customer demand patterns. Rationale. Tiered quantity charges depend on water demand patterns to derive the size of each tier. Tiered rates are well suited for single family residential customers because that is a fairly homogenous class of customers that require water for similar indoor and outdoor needs. A four-tier structure is also appropriate because it aligns well with cost allocations that are related to levels of usage ranging from base, nonseasonal demands to peak hour demands. A preliminary cost-of-service analysis has been conducted using the American Water Works Association s base/extra capacity methodology to allocate the revenue requirements between the service and quantity charges and among the customer classes. The analysis reflects the policy recommendations that are discussed in this technical memorandum. Because the analysis will be changed to reflect the adopted policies, the rates and bills that are presented herein should be viewed as preliminary. The preliminary single family rate structure is shown in Figure III-1. The graph compares the proposed with the current quantity charge structures. 2 The graph also shows the percent of bills falling within each tier. The proposed tier structure has lower rates in Tiers 1 and 4; the proposed Tiers 2 and 3 are higher. The proposed breakpoints between tiers reflect recent customer demand patterns. Overall, the tiers are smaller. The size of the proposed tiers is based on meter readings produced by the City s advanced meter infrastructure (Water Tracker), which allows the City to read meters on an hourly basis. Access to data of this precision is very unusual in rate studies. The resulting bi-monthly bills are shown for low, average, and high water use in Figure III-2 based on the current and proposed rates. The service charges increase on nearly the same percentage basis at all levels of demand. The quantity charges increase on a percentage basis with increasing water use. Expected Outcome. The rate design is fully compliant with the San Juan Capistrano decision. Customers with below-average demand will experience slightly lower bills and those above average will see increasingly higher bills. 2 These rates do not include the Water Reliability Charge discussed in Section IVA.

10 Page 10 of 29 Figure III-1. Preliminary Inside City Single Family Quantity Charges Single Family Figure III-2. Preliminary Inside City Single Family Bills Meter Water Service Charge Quantity Charge Size Use (HCF) $/Bill % of tot $/Bill % of total Total Low Water Use 1" 24 Current $ % $ % $ Proposed $ % $ % $ $ Difference $4.31 -$ $32.33 Average Water Use 1" 48 Current $ % $ % $ Proposed $ % $ % $ $ Difference $4.31 -$ $12.03 High Water Use 1.5" 200 Current $ % $2, % $2, Proposed $ % $2, % $2, $ Difference $8.47 $11.54 $20.01

11 Page 11 of 29 IIIB. Multi Family Quantity Charge Issue. The multi family quantity charges comprise four tiers. The size of each tier was derived over ten years ago. Is this structure still appropriate? Recommendation. The following is recommended: Reduce the number of tiers from four to two. Set the rates for each tier based on the cost of providing service. Adjust the breakpoints between the tiers based on current customer demand patterns. Rationale. The current multi family quantity charges are derived from the current single family quantity charges. There are four tiers with the same rate for each tier. The size of the multi family tiers is smaller however. In applying tiered quantity charges to apartments, the meter reading is divided by the number of dwelling units. The demand per dwelling unit is used to calculate the quantity charger per dwelling unit, which is then multiplied by the number of dwelling units to derive the quantity charge for the apartment. Analysis of the current multi family demands using Water Tracker data indicates very narrow separation between the different levels of demand on a per dwelling unit basis. The difference between the proposed Tiers 2 and 3 is only one HCF, which is too small to warrant a separate tier. As a result, it is recommended that the current Tiers 1 and 2 be consolidated and that the current Tiers 3 and 4 be consolidated. With this consolidation, the proposed breakpoint between Tiers 1 and 2 occurs at 9 HCF, which is the average demand per dwelling unit. Figure III-3 shows the result of this consolidation. The resulting bills are shown for an apartment of ten dwelling units (i.e., average size) for low, average, and high water use in Figure III-4. The service charges increase on nearly the same percentage basis at all levels of demand. Bills for low and average water use hardly change; apartments with high water use will see increasingly larger bills.

12 Page 12 of 29 Expected Outcome. The rate design is fully compliant with the San Juan Capistrano decision. Multi family customer bills, which reflect the Water Tracker data, will not vary greatly for average use or less. Figure III-3. Preliminary Inside City Multi Family Quantity Charges Figure III-4. Preliminary Inside City Multi Family Bills Multi-Family 10 Dwelling Units (DU) Meter Water Use Service Charge Quantity Charge Size (HCF/DU) $/Bill % of total $/Bill % of total Total Low Water Use 1" 5 Current $ % $ % $ Proposed $ % $ % $ $ Difference (total bill) $4.31 -$5.80 -$1.49 $ Difference per DU $/DU -$0.15 Average Water Use 1" 10 Current $ % $ % $ Proposed $ % $ % $ $ Difference (total bill) $4.31 $6.40 $10.71 $ Difference per DU $/DU $1.07 High Water Use 1.5" 20 Current $ % $1, % $1, Proposed $ % $1, % $2, $ Difference (total bill) $8.47 $ $ $ Difference per DU $/DU $28.13

13 Page 13 of 29 IIIC. Commercial Quantity Charge Issue. The commercial quantity charges are a uniform, untiered rate that does not vary depending on the level of consumption. This structure has been in place for over ten years. Is this structure still appropriate? Recommendation. The following is recommended: Maintain the current uniform quantity charge. Rationale. The commercial class is not homogeneous the way the residential classes are. The types of customers, the amounts of their water use, and the seasonality of their water use is so diverse as to make it problematic to determine the location of breakpoints. For that reason, tiered rates are not well suited for the commercial customer class. Untiered, uniform quantity charges are recommended. Figure III-4 shows the current and proposed rates. The preliminary results of the costof-service analysis indicated that the proposed rate is slightly lower than the current rate. The resulting bills are shown for low, average, high and very high water use in Figure III-6. The service charges increase by nearly the same percentage. The quantity charges decrease by the same percentage as a result of the cost-of-service analysis. Expected Outcome. The rate design is fully compliant with the San Juan Capistrano decision. Commercial customer bills are slightly lower under the proposed rates as a result of the updated cost-of-service allocations, which reflect the Water Tracker data.

14 Page 14 of 29 Figure III-5. Preliminary Inside City Commercial Quantity Charges Commercial Figure III-6. Preliminary Commercial Bills Meter Water Service Charge Quantity Charge Size Use (HCF) $/Bill % of total $/Bill % of total Total Low Water Use 1" 20 Current $ % $ % $ Proposed $ % $ % $ $ Difference $4.31 -$6.60 -$2.29 Average Water Use 1.5" 126 Current $ % $ % $ Proposed $ % $ % $ $ Difference $8.47 -$ $33.11 High Water Use 2" 300 Current $ % $2, % $2, Proposed $ % $1, % $2, $ Difference $ $ $85.55 Very High Water Use 4" 5014 Current $ % $34, % $34, Proposed $ % $32, % $33, $ Difference $ $1, $1,612.90

15 Page 15 of 29 IIID. Irrigation Quantity Charges Issue. If a new set of irrigation customer classes is created, what are the appropriate rate structures? Recommendation. The following is recommended: Charge irrigation customers the same service and quantity charges as the nonirrigation customers in the same class. Require higher reductions during water shortages. Rationale. As part of creating irrigation customer classes, it is recommended that the rates be equal within the class. In other words, single family residential irrigation customers should be charged the same service and quantity charges as the single family customers. Creating a separate irrigation class does not change the cost of water; rather, it improves the ability to identify and manage irrigation, which is subject to higher curtailment during shortages because irrigation is a lower beneficial use. Billing irrigation water use separately will help customers understand how much of their water use is potentially interruptible, which could assist them in landscape design. Expected Outcome. The City will have reasonable, proportional rates to charge this new class of customers that has been created by the mandatory requirements for new construction. IVA. Water Reliability Charge IV. OTHER RATE ISSUES. Issue. The Water Reliability Charge will pay for the cost of developing local water supplies that will augment existing water supplies, thereby improving reliability by reducing the impact of water shortages. This new charge would be created so that customers will understand and help pay for the improved level of service that will lessen the level of cutback during shortages.

16 Page 16 of 29 Recommendation. The following is recommended: Create a new rate component in the form of a uniform quantity charge called a Water Reliability Charge. The Water Reliability Charge would be added to the other quantity charges for all customer classes. Revenue from the Water Reliability Charge would be used to pay for improved supply reliability provided by the Water Enterprise Plan (WEP). Rationale. The City Council is considering the development of local water supplies in order to diversify and expand its sources of supply. By doing so, reliability will be improved during shortages. In addition, the need to rely on purchased water from Metropolitan Water District will be reduced. In return for these benefits, a new, separate Water Reliability Charge is proposed that would provide a steady source of funding over the lifecycle of the WEP project. Current water supply operating and capital costs comprise the cost of Metropolitan Water District (MWD) purchased water and the City s groundwater. These costs are embedded in the cost-of-service model, which allocates them among the customer classes where they are blended with other costs that become service and quantity charges. As such, these costs are indistinguishable from any other individual cost and are part of the charges for each class. By creating a new component in the rate structure for a Water Reliability Charge, customers will directly see the cost of providing additional reliability. Based on current estimates of the net present value of the capital and operating costs for the WEP, the average unit cost equals $0.29 per HCF in 2018 dollars. It is recommended that a Water Reliability Charge of $0.29 per HCF be added uniformly to the quantity charges for all classes (regardless of whether the charges are tiered or untiered) over the next 30 years, indexed to inflationary rate increases in the future. The effect of applying an equal, uniform $0.29 per HCF to the quantity charges is that the same cost of additional reliability is paid for all water used by all customers. The principle is that all customers get the same benefit of improved reliability regardless of their customer class or their level of water use. However, paying the Water Reliability Charge does not guarantee that customers will be unaffected during water shortages. Paying the Water Reliability Charge is not perfect immunity from water rationing during shortages. Indeed, during shortages, the level of water rationing will differ by

17 Page 17 of 29 customer class if the Shortage Stabilization Adjustments in Section IVB are adopted. However, paying the Water Reliability Charge will lessen the intensity and duration of water rationing that would otherwise have occurred in the absence of the WEP. The decision was made to create a separate Water Reliability Charge that acts as a new uniform rate rather than blending it with the other water supply costs. If the WEP costs were treated like other water supply costs, they would be blended into the quantity charges and would be paid in slightly different proportions by each customer class that reflect their respective levels of demand ranging from non-seasonal to peak hour demands. Although blending the WEP costs into the rates in this fashion is analytically defensible, the concept is that the Water Reliability Charge is insurance paid by all for reliability at any level of demand. The potential is being explored whereby the City of Beverly Hills general fund would cover the Water Reliability Charge for Inside City customers. For example, a $10 million general fund contribution would cover the Inside City Water Reliability Charge for about nine years. Figures IV-1, IV-2, and IV-3 compare the proposed bills without the Water Reliability Charge with bills that include the Water Reliability Charge for each of the customer classes. Expected Outcome. Customers will see 3 the cost of the City s commitment to improved reliability and appreciate its value in direct proportion to their water demand; with higher water demands come the increased cost of improved reliability. Higher water users will pay proportionately more for reliability. Lower water users will also see that they also need to pay for reliability because it is a benefit they receive nonetheless; however, their cost of reliability is also in direct proportion to their demand. 3 For this to be clear, customer bills should separately itemize the Water Reliability Charge.

18 Page 18 of 29 Figure IV-1. Proposed Single Family Bills With and Without WRC Single Family Inside City 1 Outside City Low Water Use 24 hcf No Water Reliability Charge $ $ With Water Reliability Charge $ $ Bi-monthly $ Difference $6.96 $6.96 Average Water Use 48 hcf No Water Reliability Charge $ $ With Water Reliability Charge $ $ Bi-monthly $ Difference $13.92 $13.92 High Water Use 200 hcf No Water Reliability Charge $2, $2, With Water Reliability Charge $2, $2, Bi-monthly $ Difference $58.00 $ Water Reliability Charge for Inside City customers may be covered by the General Fund for a period of time Figure IV-2. Proposed Multi Family Bills With and Without WRC Multi-Family (10 Dwelling Units) Inside City 1 Outside City Low Water Use 5 hcf per dwelling unit No Water Reliability Charge $ $ With Water Reliability Charge $ $ Bi-monthly $ Difference $14.50 $14.50 Average Water Use 10 hcf per dwelling unit No Water Reliability Charge $ $ With Water Reliability Charge $ $ Bi-monthly $ Difference $29.00 $29.00 High Water Use 20 hcf per dwelling unit No Water Reliability Charge $2, $2, With Water Reliability Charge $2, $3, Bi-monthly $ Difference $58.00 $ Water Reliability Charge for Inside City customers may be covered by the General Fund for a period of time

19 Page 19 of 29 Figure IV-3. Proposed Commercial Bills With and Without WRC Commercial Inside City 1 Outside City Low Water Use 20 hcf No Water Reliability Charge $ $ With Water Reliability Charge $ $ Bi-monthly $ Difference $5.80 $5.80 Average Water Use 126 hcf No Water Reliability Charge $ $1, With Water Reliability Charge $ $1, Bi-monthly $ Difference $36.54 $36.54 High Water Use 300 hcf No Water Reliability Charge $2, $2, With Water Reliability Charge $2, $2, Bi-monthly $ Difference $87.00 $87.00 Very High Water Use 5014 hcf No Water Reliability Charge $33, $41, With Water Reliability Charge $34, $42, Bi-monthly $ Difference $1, $1, Water Reliability Charge for Inside City customers may be covered by the General Fund for a period of time IVB. Water Shortage Revenue Stabilization Adjustments Issue. During shortages, customers are required to conserve, which reduces water sales revenue from quantity charges. Reserves may be able to cover the revenue shortfall during brief rationing periods. For longer rationing periods, rate increases are needed to offset this revenue shortfall. Although the rate increases may be revenue neutral (i.e., customer bills may not change significantly if they cutback on average), they must be implemented in compliance with the Proposition 218 protest process. Revenue stabilization adjustments can be implemented that would eliminate the need for a Proposition 218 process every time revenue-neutral adjustments are needed during shortages.

20 Page 20 of 29 Recommendation. The following is recommended: Expand the Water Shortage Contingency Plan to include staged reductions for single family, multi family, commercial, and irrigation (if this class is created, see IB above) customer classes during declared water shortages. Implement factors that adjust rates during declared shortage reductions that offset the revenue lost due to conservation. Adopt the Water Shortage Revenue Stabilization process as part of the next Proposition 218 rate process so that the subsequent revenue adjustments can be made without triggering a full Proposition 218 protest process. Rationale. Water rate increases must comply with the procedural and substantive requirements of Proposition 218, which include mailing notices to rate payers informing them of the need for the rate increase and their right to protest. Since the passage of Proposition 218, water shortages have occurred that have led an increasing number of water suppliers to adopt revenue stabilization adjustments that do not trigger the Proposition 218 protest process each time an adjustment is made. This is accomplished by including the Water Shortage Revenue Stabilization Adjustment procedure in the Proposition 218 notice at the time rates are adopted in compliance with Proposition 218. The notice describes the process, which rate payers have the right to protest. Barring a majority protest, the adjustment process is adopted as part of the rate increase and can be implemented as needed during the term of the adopted rate increases. The adjustment process includes factors by which quantity charges are adjusted in conjunction with the reduction stages in the Water Shortage Contingency Plan. The current Water Shortage Contingency Plan is based on the same reduction in water use for all classes in each of the five stages. As part of the recommended Water Shortage Revenue Stabilization Adjustments, it is proposed that the shortage reductions will vary by customer class. Each class reduction will be determined by reducing outdoor water use (seasonal water use) six times more than indoor (average winter water use) water use. 4 It is assumed that seasonal outdoor water demand is primarily for irrigation, which is a lower beneficial use than non-seasonal indoor demand, which is primarily related to health and safety needs. Based on calendar year 2017 water use data from Water Tracker, the resulting reductions are shown in Figure IV-4. The reductions shown represent the overall city- 4 This 6-to-1 reduction formula was implemented by the San Francisco Public Utilities Commission during the drought.

21 Page 21 of 29 wide reduction associated with each stage. The reductions are least for multi family residential customers because they have the least amount of seasonal water demand in proportion to their total demand. Figure IV-4. Shortage Reductions By Class The revenue stabilization factors are derived so that they only recover fixed costs that are part of the quantity charges. Variable costs, such as the cost of MWD water, that decrease during rationing are netted out. The adjustments can go in either direction depending on whether the level of staged reduction is increasing or decreasing during the shortage. At least 30 days prior to making the adjustment, notice must be provided to rate payers, which can be included in the customer s bills. No protest process is required. Figure IV-5 shows the adjustment factors that would be applied to the rates that would normally be in effect absent shortage conditions. 5 Figure IV-5. Water Shortage Revenue Stabilization Factors By Class 5 In Stage E, there is not adjustment factor in Figure IV-5 for irrigation because irrigation is 100% curtailed.

22 Page 22 of 29 The recommended Water Shortage Revenue Stabilization Adjustments are implemented only during periods of declared shortages. They act similarly to the Pass-Through Adjustment for the cost of MWD purchased water, which was incorporated into the Proposition 218 notice in last year s rate increase. The Pass-Through Adjustment allows Beverly Hills to adjust quantity charges to track any difference between the MWD rates that were included in the model and the actual rates adopted each year by MWD. The Pass-Through Adjustment can be made by providing 30-day notice in the customer bills without triggering the need for a Proposition 218 protest process. The same notification process would apply to the Water Shortage Revenue Stabilization Adjustments. Expected Outcome. The use of revenue stabilization adjustments streamlines the implementation of revenue-neutral rate adjustments during water shortages that are unpredictable as to their occurrence, severity, and duration. The use of revenue stabilization adjustments also provides revenue stability at no increased cost to customers who conserve and is a growing practice throughout California. IVC. Outside City Rates Issue. The City currently charges Outside City water customers service and quantity charge rates that are 25% higher than Inside City rates. The purpose of the 1.25 multiplier is to recover the additional costs of serving customers located outside Beverly Hills. Recommendation. The following is recommended: Replace the 1.25 multiplier, which was an approximation of the additional cost to serve Outside City customers, with rates that are based on more exacting cost analysis. Apply the costs to the quantity charges only. Charge equal service charges to both Inside City and Outside City customers. Rationale. Since the acquisition of the Sherman Water Company in the 1920s, the City of Beverly Hills has supplied water to a portion of West Hollywood. The rate structure varied over time until the current structure was implemented in Since then, Outside City customers have paid 1.25 times the rates paid by Inside City customers. Serving outside a service area can be more expensive for various reasons such as:

23 Page 23 of 29 The outside customers are farther away, requiring additional transmission and distribution facilities such as pipelines, pump stations, and reservoirs and additional operations and maintenance expenses for personnel, pumping power, etc.. The outside customers may be located at a higher elevation, again, requiring additional infrastructure capital and operating costs. (A portion of West Hollywood that is served by LADWP is at a higher elevation.) Supplying outside customers may require enlarging the infrastructure located inside the service area so that there is sufficient capacity to serve outside. Funding provided from property taxes and other non-rate revenue sources would come only from customers inside the service area. Funding provided by the general fund would come only from customers inside the service area. Calculating each of the foregoing costs can be problematic. For example, calculating the incremental capital and operating costs of serving outside a service area is very complicated. Determining the historical sources of revenue from property taxes and the general fund may be impossible for lack of complete records. As a result, the use of a multiplier was a common industry practice to recover these increased costs. The multipliers are applied to customers outside the service area to recover the additional costs. Throughout the State, we have seen multipliers that ranged considerably from over 2.00 to 1.10 or less. The use of multipliers has gradually been replaced with cost-based rates to comply with Proposition 218, which requires that rates be proportionate to the cost of providing service. Rather than using a multiplier to approximate proportionality, costbased analysis is now a favored industry practice. A cost-based analysis 6 was prepared and indicated that the City of Beverly Hills currently incurs $425,000 per year in additional costs to serve Outside City customers for public safety services ($129,000), governmental facilities ($63,000), and right-of-way maintenance ($233,000). These costs are covered by the City of Beverly Hills general fund from property taxes paid for within Beverly Hills. 7 The analysis allocated a portion of these costs to Outside City customers, which does not contribute property 6 Cost Allocation Study. Prepared for the City of Beverly Hills by HF&H Consultants, LLC. November 6, The City plans to continue to cover Beverly Hills share of these three enterprise reimbursements with property tax revenue and not to include them in the Internal Service Fund cost allocation, which is outside the purview of the current water rate study.

24 Page 24 of 29 taxes to Beverly Hills. The cost analysis focused only on these three enterprise reimbursements and did not include the incremental capital and operating costs incurred by Beverly Hills to serve Outside City customers. Recovering the $425,000 from Outside City customers increases the differential between Inside City and Outside City rates. The entire $425,000 cost can be recovered by adding $0.823 per HCF to the Outside City quantity charges for its single family, multi family, and commercial customers. The Outside City service charges will be equal to the Inside City service charges. The differential increases further when the City of Beverly Hills general fund reimburses Inside City rate payers $3,109,000 for the lease of two properties. These properties were formerly used by the Water Enterprise to provide water service but are now being used by the City for other purposes. The City has entered into leases of these properties and will reimburse the Water Department at market rates. The revenue from these leases will be credited to the quantity charges paid by Inside City customers at $0.818 per HCF. Outside City customers do not receive a share of the lease revenue because the property is Water Department property and is available for the City to use for other purposes. The lease revenue is comparable to other sources of nonrate revenue such as property taxes paid only by Beverly Hills rate payers. It would not be appropriate to credit such sources of non-rate revenue to Outside City customers. Figures IV-6 through IV-11 comprise the graphs and tables for Outside City Customers. Expected Outcome. Converting the 1.25 multiplier to a more exacting cost-based differential is consistent with current legislation and rate-making practices in California. It provides a clear basis for the cost differential between Inside City and Outside City customers. The differential can be implemented through a credit and debit to Inside City s and Outside City s quantity charges, respectively, which is simple to administer. The additional capital and operating costs of infrastructure required to serve Outside City customers could be included in the future, which would further increase the differential in rates between Inside City and Outside City customers. The reimbursement by Outside City customers for Beverly Hills public safety services, governmental facilities, and right-of-way maintenance is required to maintain parity with Beverly Hills, which has previously been paying the entire cost with Beverly Hills property tax revenue. Paying for these reimbursements with either property taxes or rate revenue is permissible as long as the payments are based on costs. No adjustment

25 Page 25 of 29 to the Beverly Hills ISF is required to include these reimbursements because they are already covered by Beverly Hills property taxes. Figure IV-6. Preliminary Outside City Single Family Quantity Charges Single Family Figure IV-7. Preliminary Outside City Single Family Bills Meter Water Service Charge Quantity Charge Size Use (HCF) $/Bill % of total $/Bill % of total Total Low Water Use 1" 24 Current $ % $ % $ Proposed $ % $ % $ $ Difference -$6.86 -$ $32.66 Average Water Use 1" 48 Current $ % $ % $ Proposed $ % $ % $ $ Difference -$6.86 $1.94 -$4.92 High Water Use 1.5" 200 Current $ % $2, % $2, Proposed $ % $2, % $2, $ Difference -$ $ $199.35

26 Page 26 of 29 Figure IV-8. Preliminary Outside City Multi Family Quantity Charges Mutli-Family Figure IV-9. Preliminary Outside City Multi Family Bills 10 Dwelling Units (DU) Meter Water Use Service Charge Quantity Charge Size (HCF/DU) $/Bill % of total $/Bill % of total Total Low Water Use 1" 5 Current $ % $ % $ Proposed $ % $ % $ $ Difference (total bill) -$6.86 $23.30 $16.44 $ Difference per DU $/DU $1.64 Average Water Use 1" 10 Current $ % $ % $ Proposed $ % $ % $ $ Difference (total bill) -$6.86 $43.40 $36.54 $ Difference per DU $/DU $3.65 High Water Use 1.5" 24 Current $ % $2, % $2, Proposed $ % $2, % $2, $ Difference (total bill) -$10.89 $11.20 $0.31 $ Difference per DU $/DU $0.03

27 Page 27 of 29 Figure IV-10. Preliminary Outside City Commercial Quantity Charges Commercial Figure IV-11. Preliminary Outside City Commercial Bills Meter Water Service Charge Quantity Charge Size Use (HCF) $/Bill % of total $/Bill % of total Total Low Water Use 1" 20 Current $ % $ % $ Proposed $ % $ % $ $ Difference -$6.86 -$8.20 -$15.06 Average Water Use 1.5" 126 Current $ % $1, % $1, Proposed $ % $1, % $1, $ Difference -$ $ $62.55 High Water Use 2" 300 Current $ % $2, % $2, Proposed $ % $2, % $2, $ Difference -$ $ $ Very High Water Use 4" 5014 Current $ % $43, % $43, Proposed $ % $40, % $41, $ Difference -$ $2, $2,098.88

28 Page 28 of 29 V. SUMMARY OF RECOMMENDED RATES The following tables summarize the recommended rates. These rates are based on the current cost-of-service model, which reflects the recommended policy issues in this Technical Memorandum with the exception of the Water Reliability Charge because the City Council is still reviewing funding the WEP. Figure V-1. Current and Recommended Service Charge Rates Current Recommended $/bi-month $/bi-month Inside City Meter Size 1" $44.66 $ " $77.41 $ " $ $ " $ $ " $ $ " $ $ " $1, $1, Outside City Meter Size 1" $55.83 $ " $96.77 $ " $ $ " $ $ " $ $ " $ $ " $1, $1,193.15

29 Page 29 of 29 Figure V-2. Current and Recommended Quantity Charge Rates Current Recommended Tier Size $/HCF Tier Size $/HCF Inside City Single Family Tier HCF $ HCF $3.24 Tier HCF $ HCF $6.41 Tier HCF $ HCF $9.48 Tier HCF $ HCF $13.51 Multi Family Tier HCF $ HCF $4.16 Tier HCF $ HCF $14.14 Tier HCF $8.36 Tier HCF $16.15 Commercial ALL $6.86 ALL $6.53 Outside City Single Family Tier HCF $ HCF $4.88 Tier HCF $ HCF $8.05 Tier HCF $ HCF $11.12 Tier HCF $ HCF $15.15 Multi Family Tier HCF $ HCF $5.80 Tier HCF $ HCF $15.78 Tier HCF $10.45 Tier HCF $20.18 Commercial ALL $8.58 ALL $8.17