WATER SUPPLY PLANNING COMMITTEE
ITEM:		DISCUSSION ITEM
2.	WATER SUPPLY CHARGE AND USER FEE – CITIZEN OVERSIGHT PANEL DISCUSSION
Meeting Date:			August 21, 2018	Budgeted:	N/A
From:			David J. Stoldt	Program/
			General Manager	Line Item No.:	N/A
Prepared By:			David J. Stoldt	Cost Estimate:
General Counsel Approval: N/A
Committee Recommendation: N/A
CEQA Compliance: This action does not constitute a project as defined by the California Environmental Quality Act Guidelines Section 15378.

DISCUSSION: At its July 23, 2018 meeting the Ordinance 152 Citizens’ Oversight Panel renewed discussion of the potential sunset of all or a portion of the District’s Water Supply Charge now that the User Fee is back on the Cal-Am water bill.

As background, 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 remained 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. The District challenged the CPUC that it reached an improper conclusion and was not following the Court’s direction. After protracted discussions, the Use Fee was finally reinstated in July 2017.

As discussed under “LEGAL AUTHORITY” below, On March 16, 2016 the law firm of Colantuono, Highsmith, Whatley PC issued the legal opinion (Exhibit 2-C, attached) answering four of the District’s questions in the District’s favor. Hence, the District will have 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.

At its April 2016 meeting, the District Board approved a plan that encompassed the following:

• 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 or unknown “surplus” revenue; (ii) the Monterey Peninsula Taxpayers Association lawsuit over the Water Supply Charge remained unresolved at that time, hence that revenue remained at risk; (iii) there were still large near-term expenditures required on water supply projects; and (iv) Cal-Am had 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, the Board would begin to sunset or reduce collections of either or both, if possible. Collection of the User Fee began in July 2017, hence full collection of both is slated to continue through June 2020.

• 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 when User Fee collections begin. 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.

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

There are challenges to a full and immediate sunset of the Water Supply Charge after the 3-year period as follows:

Covenants and Pledges: The Water Supply Charge has been pledged to the repayment of the Rabobank loan which will have a balance of $3.1 million due June 30, 2023. A sinking fund of approximately $596,000 per year could meet this future obligation (assumes 2.0% interest over 5 years.) Regular annual payments until that time are $219,136 (see Exhibit 2-A attached.) The District also adopted Resolution 2015-14 which obligates the District to utilize the Water Supply Charge to repay the State Revolving Fund loan for the Pure Water Monterey project in the event the wholesale water sale revenues are interrupted or insufficient (see Exhibit 2-B.) This is a contingent liability and there is not presently any payment obligation.

Sufficiency: As noted in the first and third bullet points above, two District programs that were contractually funded by Cal-Am and shown as surcharges on the bill – Conservation and Carmel River Mitigation – but are rightfully activities of the District that should be funded through District revenue, were subsumed by the User Fee once reinstated. For FY 2017-18, Conservation expenses that were previously funded contractually were approximately $370,000 and Mitigation expenses were $2,700,000 or a total of $3.07 million. The FY 2018-19 adopted budget assumes $4.25 million in User Fee Revenue. Hence, there is a budgeted “surplus” of $1.18 million annually, which is approximately one-third of annual Water Supply Charge revenue.

Other Water Supply Needs: The District continues to build-out its Aquifer Storage and Recovery project, certain mitigation projects related to the pumping by Cal-Am, public financing a portion of the desalination debt, the new water allocation process, and Pure Water Monterey establishment of reserve water. Each of these has a related cost:

Aquifer Storage and Recovery build-out $1.2 million

Mitigation Projects $1.3 million

Desalination financing $0.9 million

Water Allocation $1.3 million

Pure Water Monterey reserve water $3.1 million

Such expenditures are expected to be incurred within the next 4 to 5 years.

Future District Liabilities: Competing for the use of the User Fee are other unfunded liabilities of the District. Any Board action that would direct User Fee revenue to be reserved for such liabilities reduces the availability to sunset the Water Supply Charge. Presently, the District’s unfunded CalPERS pension obligation is $4.9 million and its unfunded Other Post-Employment Benefits (OPEB) is $3.2 million.

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 its history.

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 “DISCUSSION” 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 2-C, attached) answering all four of the questions in the District’s favor.

EXHIBITS

2-A Selected pages of Rabobank Loan Installment Purchase Agreement

2-B MPWMD Resolution 2015-14

2-C Opinion of law firm of Colantuono, Highsmith, Whatley PC

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