Concern should be deepening over the city’s capability of managing its municipal utilities and that the jacked-up process it just went through for setting new water rates isn’t a prelude to the electric rate increases it moves on to later this year.
Part of the city’s FY2023 budget that was approved Monday night are double-digit increases to the city’s municipal water rates that take effect Oct. 1. What started this spring as a simple process to add additional rate revenue to shore up the water utility’s finances degenerated into a case study of just how dysfunctional and ineffective the Columbia city council can be.
What first needs to be acknowledged is the power struggle ongoing between Water and Light’s management unit and the city’s growing finance department. Traditionally, Water and Light existed in its own silo, making its own decisions, keeping its own books, and reporting its numbers over to city finance. New Finance Director Matthew Lue, with the encouragement and support of City Manager De’Carlon Seewood, is imposing his department upon Water and Light’s operations, resulting in what would be expected friction and frustration.
Very much worth noting is that the original new water rates proposed by “city staff” this spring did not come from the Water & Light professionals, but from Lue and his staff economist Deepayan Debnath. They sought to raise an additional $2.5 million in rate revenue that would reverse the utility’s declining financial performance and also service the sale of about $20 million in bonds authorized by voters in 2018 for financing improvements to the water treatment plant at McBaine and the water distribution system.
“Deep” and Lue’s plan was to simply apply percentage increases to the various rate tiers, services and groups that make up the utility’s water customers. These rates were tweaked and evaluated for equity and fairness during the summer in reviews with the city’s citizen Finance and Audit Committee and Water and Light Advisory Board. A $1 increase to the $10 base rate paid by all customers was acknowledged to result in a higher percentage of increase to the lowest paying customers – but acceptable. Higher increases were placed on the largest residential consumers – typically referred to as those who regularly irrigate their lawns – to continue encouraging conservation. Commercial customers were to get a flat 15% increase. Both citizen committees wrote memos to council endorsing the new rates.
But early in the process, John Conway, a fifth-ward resident, semi-retired civil engineer, experienced public policy expert and former chairperson of the Water and Light Advisory Board expressed concern that the percentage increases deviated from a “cost-of-services” method of raising utility rates. A “cost-of-services” study is an analysis of historical costs that allocates those costs to customer classes as fairly as possible based on their consumption patterns. In short, a “cost-of-services” study takes all of the utility expenses and shows how those costs are attributed to the various customer rate classes.
In Conway’s world, raising rates any way other than tied to a cost-of-services study leaves the utility unable to justify the increases to citizens, much less defend itself from legal challenges. Each year that another percentage increase is simply slapped on, the further the rates get from justifiable, Conway believes. Unfortunately, the city hasn’t updated a cost of services for water since a flawed study was delivered in 2018. So Conway recommended instead a simple formula that would generate the $2.5 million by adding a flat dollar cost increase to all the current tiers of the rate system, effectively spreading the entire increase by customers’ historical water usage.
Lue considered Conway’s concerns and plan, but ultimately sent his original plan to city manager Seewood, who concurred and included it in his 2023 budget. But in the meantime, Conway continued to gain the ear of city council members who were becoming increasingly uncomfortable with Lue’s plan and warming up to Conway’s approach they regarded as closer to a cost-of-services method.
During the second of three public hearings on the budget earlier this month, two weeks before the date of final approval, Ward 5 Councilman Matt Pitzer introduced a substitute resolution on water rates he had worked out with Lue that would generate the needed $2.5 million and utilize the addition of a flat dollar cost increase to all the current tiers of the rate system. In the midst of a grueling session evaluating multiple budget amendments, council members unanimously approved Pitzer’s resolution with few questions or further financial analysis.
It was a big mistake because, unfortunately, the plan turned out to be flawed on many accounts.
First of all, the new Pitzer rate plan also included a $2 increase to the base fee (20%), which has no basis or justification related to any cost-of-service and further exacerbates the cost burden - by percentage - on the lowest ratepayers. The timing and amount of the base rate increase is also tied to the sale and amount of the bonds, now lumping for the first time debt service into the base rate, ignoring the typical components of fixed monthly charges in cost-of-service methodology. Also, by the way, in 2018 voters authorized percent rate increases to pay for the debt service, not changes to the base fee.
The new plan also calls for a 2% increase in each of the following four years, also not justifiable by any cost-of-service methodology.
And the worst part: compared to the city staff’s original rate plan, Pitzer’s new plan reduced the amount of rate increase on commercial customers and moved it to an increased amount on residential customers. It also reduced the conservation-driven rate increase on high consumption “irrigation” users from 30% in the original staff proposal to just an additional 4%.
As a result, a couple or small family that pays about $30 per month for water will see an increase of about $4, hit the hardest at around 14%. A midsized business that pays about $1,500 for water will jump about $180 or 11%, instead of the original plan’s 15%. And nobody will be needing to adjust their irrigation systems.
Ratepayers are unlikely to care that their new rates fail any concern for equity or semblance to cost-of-service methodology and are instead morphing into a hodgepodge of political expedience, professional neglect, amateur meddling and social engineering. Apparently, city council members don’t either. They voted 5-1 to adopt the new rates, with only first ward councilperson Pat Fowler more willing to change her earlier vote than sell out her struggling constituents for green lawns in the fifth ward.
City manager Seewood, who has staff to ensure equity and inclusion in city policy making, didn’t weigh in – at least publicly - because he wasn’t at the meeting to see his first Columbia budget approved. He chose instead to be at an International City/County Management Association conference in Columbus, OH.
Finance Director Lue is surely relieved that about $2.5 million per year in new rate revenue will be coming in, with projected rate increases for four more years – as he prepares for the bond market. But because the water and electric utilities are considered as one entity in the bond market, financial performance will also need to be similarly improved on the electric side – which will include proposals for rate increases expected later this year.
The electric utility paid consultant Horizons Energy $68,000 for an electric cost-of-service study earlier this year and another $16,000 recently for an update, recommended rate options and review of a “fuel adjustment ordinance” that would allow the utility to implement a surcharge on ratepayers based on electric power costs. Utility staff has said they hope to deliver their recommendations for new rates to city council by December. What happens after that is anyone’s guess.