Item-16

ITEM:		ACTION ITEM

16.	CONSIDER ADOPTION OF A FINANCE PLAN FOR UTILIZATION OF USER FEE AND WATER SUPPLY CHARGE FUNDS

Meeting Date:			April 18, 2016	Budgeted:	N/A

From:			David J. Stoldt	Program/
			General Manager	Line Item No.:	N/A

Prepared By:			David J. Stoldt	Cost Estimate:	N/A

General Counsel Approval: N/A
Committee Recommendation: The Water Supply Planning Committee reviewed this item on April 8, 2016 and recommended approval on a vote of 3 – 0. The Administrative Committee reviewed this item on April 11, 2016 and recommended approval.
CEQA Compliance: N/A

SUMMARY: On January 25, 2016 the California Supreme Court filed its opinion in the suit the District brought against the California Public Utilities Commission (CPUC or PUC), determining “PUC Decision No. 11-03-035 (rejecting Cal-Am’s application for authorization to collect the District’s user fee, and also rejecting the settlement agreement entered into by Cal-Am, the District, and the Division of Ratepayer Advocates) and PUC Decision No. 13-01-040 (denying the District’s application for rehearing) are set aside. The matter is remanded to the PUC for further proceedings consistent with the views expressed herein.” A new Commissioner, Liane Randolph was assigned to the case on March 24, 2016. The Administrative Law Judge (ALJ) assigned by the CPUC remains Mary Beth Bushey. On March 30, 2016 the Commissioner and ALJ issued a ruling stating that the District’s Water Supply Charge provides the relief sought by the 2010 application, hence rather than reinstating the User Fee we must now have to comment and demonstrate how that is not the case. The process could become protracted and last beyond the July 1 start of the fiscal year.

As discussed under “LEGAL AUTHORITY” below, On March 16, 2016 the law firm of Colantuono, Highsmith, Whatley PC issued the legal opinion (Exhibit 16-A, attached) answering four of the District’s questions in the District’s favor. Hence, the District will have great flexibility in assessing and using the User Fee going forward.

However, District Ordinance No. 152 which established the Water Supply Charge states in its Section 10.C(b) that the District shall not collect a Water Supply Charge “to the extent alternative funds are available via a charge collected on the California American Water Company bill.” Therefore, it is incumbent upon the board to examine its needs and availability of its two primary funding sources and develop a plan for their use, including reductions or possible sunsets of either or both.

The General Manager and Chief Financial Officer have thoroughly examined the issue and makes the following recommended strategy:

· Collect both charges for at least 3 years. This would be done for 4 key reasons: (i) the User Fee would primarily fund programs already in Cal-Am surcharges (District conservation and river mitigation), so there is little “new” revenue; (ii) the Monterey Peninsula Taxpayers Association lawsuit over the Water Supply Charge remains unresolved, hence that revenue remains at risk; (iii) there are still large near-term expenditures required on water supply projects; and (iv) Cal-Am has a recent history of significant revenue undercollection, so the viability of the User Fee is at risk until the CPUC rules on a more stable rate design, and the predictability of the User Fee revenue is better known. After that time, begin to sunset or reduce collections of either or both, if possible.

Have only a single MPWMD User Fee Surcharge on Cal-Am bill, instead of a mitigation surcharge, a conservation surcharge, and the User Fee.

Remove the existing Conservation Surcharge and Mitigation Program expenses from the Cal-Am rates beginning July 1, 2016. Capture in MPWMD User Fee budget. Cal-Am to remain responsible for its rebate budget until the User Fee has capacity.

Remove the same programs from the next GRC period (2018-2020).

Calculate solely on “Total Water Service Related Charges” line on bill, ensuring that there is no “surcharge on a surcharge”, rather the User Fee is based solely on Cal-Am water and meter revenues.

Amount to be set after additional consultation with Cal-Am and at least 30 days prior to July 1, 2016, or as soon after as allowed by the CPUC;

Cal-Am shall remit with regularity (monthly) and automatically.

There should be a reporting requirement by Cal-Am in order for the District to audit its receipts.

Undercollections should get added to the WRAM and remitted to the District when collected.

RECOMMENDATION: The Water Supply Planning Committee and the Administrative Committee recommend approval of the financial plan outlined in the nine bullet-points immediately above in the “SUMMARY” section.

BACKGROUND: The District is authorized, by law, to impose rates and charges for services, facilities, or water that it may furnish, as well costs of operations and activities related to the provision of water delivered by others. The District first implemented a User Fee in 1983 as a percentage of the California American Water (Cal-Am) bill to fund District activities and collected it continuously until temporarily suspended by the CPUC on May 24, 2011.

The District modified its User Fee by Ordinance sixteen times from 1983 through 2008. The proceeds of the User Fee have been used to support the District’s environmental mitigation, conservation and rationing, water supply, and any other purposes throughout the history of its collection;

District Ordinance 61 adopted July 20, 1992 established a User Fee at 7.125 percent of the Cal-Am bill, an amount that was reinforced by Ordinance 67 in1992, Ordinance 78 in 1995, and Ordinance 82 in 1996 and all four ordinances preceded Proposition 218, the self-titled “Right to Vote on Taxes Act” approved by voters November 5, 1996 and which added Articles XIIIC and XIIID to the California Constitution, and made numerous changes to local government finance law, a defines a fee or charge subject to Proposition 218. District Ordinance 138 adopted December 8, 2008 reaffirmed the addition of a 1.20 percent to the User Fee after a Proposition 218 protest hearing, said amount to support the funding of the District’s Aquifer Storage and Recovery (ASR) program, bringing the total amount of the User Fee to 8.325 percent of the Cal-Am bill.

The CPUC in Decision D.09-07-021 in July 2009 prohibited further regular collection and disbursement by Cal-Am to the District of its User Fee and directed such amounts to be recorded in a memorandum account until Cal-Am reapplies to the CPUC proposing a program to reinstate the User Fee. Such application was made January 5, 2010. A motion to approve an all-party settlement was made to the CPUC in May 2010 which would have allowed continued past practice of collection of the District User Fee on Cal-Am bills. CPUC decision D.11-03-035, issued March 24, 2011 rejected the joint settlement agreement. The CPUC halted collection of the User Fee and ordered the memorandum account closed May 24, 2011. On January 24, 2013 the CPUC issued decision D.13-01-040 modifying D.11-03-035 and denying any further rehearing of the matter.

The District on February 22, 2013 filed a Petition for Review of CPUC Decisions D.11-03-035 and D.13-01-040 with the California Supreme Court.

On January 25, 2016 the California Supreme Court filed its opinion in the matter, as described under “SUMMARY” above.

LEGAL AUTHORITY: On February 18, 2016 the general manager asked for outside counsel legal opinions on four matters:

1) The User Fee at an amount of 7.125% was in place prior to Proposition 218. Can we reinstate it on the Cal-Am bill without a Prop 218 protest hearing process? The theory being that the District never terminated the fee, rather was inappropriately barred from collecting it. Further, 7.125% was continuously collected from the Seaside municipal water distribution system and the Pebble Beach Reclamation project even during the time the CPUC barred its collection on the Cal-Am bills.

2) The 1.2% component was designated for Aquifer Storage and Recovery (ASR) by District Ordinances 123 and 138 and was established pursuant to Prop 218 with a protest hearing. Can we reinstate it without a Prop 218 protest hearing process for use on ASR?

3) The establishment of the District’s User Fee dates back to 1983, but it has been changed by ordinance several times. The Ordinances have tended to describe the uses of the money, sometimes generally such as Section 5 of Ordinance 78, or sometimes more specifically, such as Section 6 of Ordinance 61. Then Section 3 of Ordinance 67 appears to give the Board broad authority to use the User Fee proceeds in any manner and was the last active ordinance which established the 7.125% level. Hence, if Question 1 is answered in the affirmative, does the District have the authority to allocate the revenues to any purpose of the District?

4) Can the District “establish” the User Fee at the total of 8.325% of the water bill, but then waive collection of all or a portion of it if not all the money is needed at that time? (e.g. use the grandfathered 7.125% amount but collect, for example, only 4.0% worth of it one year, 6.5% the next, and so on)

On March 16, 2016 the law firm of Colantuono, Highsmith, Whatley PC issued the legal opinion (Exhibit 16-A, attached) answering all four of the questions in the District’s favor. Hence, the District will have great flexibility going forward.

AVAILABILITY AND USE: Potential collection from a User Fee on the Cal-Am bill will be dependent on the level of Cal-Am revenues. Using amounts approved for the current General Rate Case period, we estimate approximately $57 million in total Cal-Am revenue, as shown below:

2015 Revenue Requirement per

CPUC General Rate Case A.13-07-002 $53,205,444

2016 allowed increase of 3.90% $55,280,456

2017 allowed increase of 3.02% $56,949,926

However, Cal-Am has experienced collection problems in its Monterey District, as shown here:

CALIFORNIA AMERICAN WATER COMPANY
MONTEREY RATE DESIGN AND RATIONING APPLICATION
FIVE YEAR COMPARISON OF AUTHORIZED/ACTUAL CONSUMPTION AND REVENUE

		Residential Consumption (AF)			Residential Quantity Revenue
		Authorized	Actual	Percent Dif.	Authorized	Actual	Percent Dif.
	2010⁽¹⁾	7,755	7,140	-7.9%	$ 22,564,085	$ 14,764,965	-34.6%
	2011	8,216	7,202	-12.3%	$ 24,165,312	$ 15,071,310	-37.6%
	2012	7,315	7,392	1.0%	$ 27,672,417	$ 20,926,190	-24.4%
	2013	8,433	6,865	-18.6%	$ 28,136,600	$ 18,954,319	-32.6%
	2014	7,278	6,951	-4.5%	$ 28,846,295	$ 22,178,830	-23.1%
			Average	-8.5%		Average	-30.5%

Residential volumetric revenue is approximately 37% of the whole revenue requirement.

30.5% x 37% = 11.3% average undercollection of total revenues

Thus, 2017 assumed revenues of $56,949,926 minus 11.3% equals $50,523,127 of Cal-Am revenue. Assuming the approved levels of User Fee, this would result in the following amounts annually to the District.

1.2% ASR User Fee = $606,280 per year (2017 revenues)

7.125% User Fee = $3,599,770 per year (2017 revenues)

The 1.2% ASR amount would be assigned to ASR as shown in Exhibit 16-B and the 7.125% would be applied first to the District’s mitigation and conservation programs. Doing so, leaves the District less than $700,000 dollars a year in revenues available for any other purpose as shown below:

Available from 7.125% User Fee	$3,599,770
Conservation Surcharge costs	-330,000
Mitigation Program Costs	-2,580,130
“Excess” Available for other uses	689,640

This assumes the undercollection rate calculated above. As demonstrated in Exhibit 4-B there are sufficient uses of the two fees for the near term without expanding the District’s mission. The “excess” computed above would go towards water supply related activities.

EXHIBIT

16-A Colantuono, Highsmith, Whatley PC Legal Opinion

16-B Sources and Uses of User Fee and Water Supply Charge Revenue

U:\staff\Boardpacket\2016\20160418\PublicHrng\16\Item-16.docx

April 18, 2016

Budgeted:

N/A

General Counsel Approval: N/A

Committee Recommendation: The Water Supply Planning Committee reviewed this item on April 8, 2016 and recommended approval on a vote of 3 – 0. The Administrative Committee reviewed this item on April 11, 2016 and recommended approval.