Water Rates
Considering all that is required to deliver a clean, adequate supply to the tap, water is a real bargain. For less than a penny a gallon, water providers pump local groundwater and/or secure an imported supply, maintain and improve water system infrastructure, conduct water quality tests, treat and/or filter water supplies, read meters, send bills, answer customer calls, and provide conservation information to the public.
The California Public Utilities Commission (CPUC) is responsible for setting the rates of investor-owned water utilities. In doing so, the CPUC must balance the customers' needs for a safe, reasonably priced water supply with the shareholders' right to a fair return on investment. Before the CPUC grants a water rate increase for any investor-owned water utility, it conducts a thorough audit of that utility's finances and operations to determine whether an increase is justified.
For more detailed information about the CPUC and the rate-setting process,
roll over the headings at the left.
Types of Rates
Most residential customers and all other customer classes (industrial, commercial, public authority, etc.) receive service under a metered rate schedule consisting of a service charge and a quantity rate. Service charges (also known as Readiness-to-Serve charges) are designed to recover 50% of the utility's fixed costs. Since this rate recovers fixed costs, which the utility incurs regardless of the amount of water sold, customers are billed the service charge even when no water is consumed. Often the monthly service charge is mistakenly referred to as a meter charge. Not only is this designation incorrect, but meter-related costs including meter reading and billing do not fully reflect the costs (shown above) that service charges are designed to recover.
Quantity rates, expressed in $/Ccf (100 cubic feet), recover all remaining costs (variable costs plus 50% of the fixed costs). As consumption increases, so does the customer's bill. Generally, all customers of a water utility pay the same quantity rates, which do not vary with the amount of water used. However, in areas with a severe water supply shortage, two or more quantity rate blocks may be established to encourage conservation. For these areas, the quantity rates increase with increased water consumption, such that the more the customer uses, the higher the quantity rate.
In addition to metered rate schedules, some utilities have residential flat rate schedules that do not have a quantity rate component. Flat rate customers are charged the same rate regardless of usage. However, flat rates can vary by customer based on lot size. During the last drought (early 1990s), legislation was signed to encourage conservation by requiring all new service connections to be metered rather than flat rate.
The rates for fire service lines are also a form of flat rate service, with the rate based upon the size of the fire service line. Since water consumption occurs only when there is a fire, metering this service is impractical.
Additionally, some utilities have reclaimed water metered rate schedules. Reclaimed (or recycled) water is wastewater that has been treated for reuse, but not for potable consumption. Because of its high infrastructure costs and restricted uses, reclaimed water is only available in limited areas through specially color-coded water pipes. Generally, irrigation and industrial customers use reclaimed water. Wholesale water agencies often price reclaimed water below wholesale potable water rates to encourage its use and allow customers to recover on-site infrastructure conversion costs.
Service Charge Ratios
Service charges (which recover 50% of the utility's fixed costs - see above) are determined by the Commission based on meter size. The Commission's Water Branch Memorandum dated January 18, 1991 (pursuant to D.85-06-064) contains the following meter ratios:
Meter Size |
Ratio |
| 5/8" x 3/4" | 1.0 |
| 3/4" | 1.5 |
| 1" | 2.5 |
| 1-1/2" | 5.0 |
| 2" | 8.0 |
| 3" | 15.0 |
| 4" | 25.0 |
| 6" | 50.0 |
| 8" | 80.0 |
| 10" | 115.0 |
| 12" | 165.0 |
| 14" | 225.0 |
Accordingly, if the monthly charge for a 5/8" x 3/4" meter is $5, the monthly charge for a 1" meter should be $12.50 ($5 x 2.5).
Fire Services
Fire protection service is the provision of sufficient water at minimum pressures over specific time periods for controlling and extinguishing fires. Every water utility must stand ready to meet the demands of a large fire. To make this service available, utilities construct large networks of water supply facilities, including hydrants, mains, supply sources, pumps, storage reservoirs and appurtenances.
Fire Protection Standards
The Commission has established fire flow requirements for California's investor-owned utilities. In setting the following standards, the Commission is aware of special conditions that might be faced by local fire protection agencies. Therefore, local fire flow standards preempt the following standards, whether higher or lower.
Land Use |
Minimum Flow (Gallons Per Minute) |
| Rural, residential with a lot density of two 250 or less per acre primarily for recreational and/or part-time occupancy | 250 |
| Lot density of less than one single-family residential unit per acre | 500 |
| Lot density of one or two single-family residential units per acre | 750 |
| Lot density of three or more single-family residential units per acre, including mobile home parks | 1,000 |
| Duplex residential units, neighborhood business of one story | 1,500 |
| Multiple residential, one and two stories, light commercial or light industrial | 2,00 |
| Multiple residential, three stories or higher,heavy commercial or heavy industrial | 2,5000 |
Costs Considered in Setting Rates
Rate Design (Including Reclaimed Water)
After the just and reasonable revenue requirement (cost of service) has been determined, rates are designed to collect the authorized revenues. In Decision (D.) 86-05-064 the Commission set forth its water rate design policy by segregating a utility's revenue requirement into fixed and variable components.
Fixed Costs
Fixed costs do not vary with the level of sales, while variable costs change proportionately with sales. As determined by the Commission, fixed costs are as follows:
Maintenance expense
Transmission and distribution expense
Customer account expense, excluding uncollectibles
Administrative and general expense
Rent expense
Depreciation expense
Property tax expense
Gross return on investment (rate base)
Variable Costs
All remaining costs, such as purchased water, pump taxes, electric power, and uncollectibles, are variable costs. The most significant variable costs are those associated with water supply.
Retail water purveyors generally obtain their water supply from two sources: groundwater, pumped from local underground aquifers, and purchased water, delivered by wholesale water agencies. Wholesale water agencies, usually referred to as water districts, transport water long distances to the State's metropolitan areas. While most purveyors in California obtain water from one or both of these sources, a small percentage take water from local surface sources such as lakes and rivers.
In addition to the capital and operation and maintenance costs associated with constructing and maintaining wells, pumps, and connections with wholesale water agencies, there are water-related costs that are not within the control of the local water purveyor. These costs include:
Power Costs
Electricity and/or natural gas used to pump groundwater from wells and boost water to higher pressure zones are obtained from local energy provider.
Replenishment Fees
In most areas of California, water is pumped from local groundwater basins at a greater rate than replenished by nature. Many areas have formed water replenishment districts to manage the groundwater basins. Groundwater assessment fees, also referred to as pump taxes, are levied by these agencies to cover the costs of purchasing water for recharging the basins and developing and maintaining projects that ensure the long-term viability of the basins. In some areas, the courts have established a safe yield for the basins and assigned groundwater rights based on historical usage by the pumpers.
Purchased Water
In areas where the local water supply is insufficient, wholesale water districts, quasi-governmental agencies, have been formed to import water, typically from remote sources, rivers and manmade reservoirs. Importing water from these remote locations requires extensive water conveyance systems, which may include canals, aqueducts, and large transmission pipelines. Additionally, storage reservoirs and treatment plants are used to ensure a reliable and safe water supply is available for local water purveyors. Each wholesale water agency sets the rates for purchased water to recover operational and maintenance expenses and infrastructure costs.
Not only are power costs, replenishment fees, and purchased water costs beyond the control of local water purveyors, but they can be subject to unexpected and significant variations over short time periods. Price changes in fuel oil, which is used in generating electricity, can drastically impact electric rates, as was evidenced in the 1970s. Variations in rainfall and other weather conditions impact the annual groundwater replenishment costs. Additionally, fluctuations in demand, source availability, and water treatment requirements impact purchased water costs.
For these reasons, when the Commission sets water rates, it does not estimate future changes in water production costs.
To avoid inherent forecasting inaccuracies, the Commission allows water companies to file offset rate increases or decreases, between general rate filings, after the actual changes in costs are known. Frequently, offset increases occur mid-year, since many wholesale and replenishment districts operate on a non-calendar fiscal year. Furthermore, the Commission requires water production cost changes and revenues to be tracked in balancing accounts with interest to ensure that ratepayers and shareholders are treated fairly. Overcollections are refunded to customers through billing surcredits and undercollections.
Partial Listing Wholesalers
Santa Clara Valley Water District
Central Basin Metropolitan Water District
West Basin Metropolitan Water District
Calleguas Municipal Water District
Castaic Lake Water Agency
Las Virgenes Municipal Water District
Upper San Gabriel Valley District Water District
Stockton East Water District
San Francisco Water Department
Kern County Water Agency
Alameda County Flood Control & Water Conservation District
Partial Listing Replenishment Districts
Water Replenishment District of Southern California
Mojave Water Agency
How Water Rates are Set
Cost of Service/Rate of Return
Pricing for Commission-regulated water utilities is cost-based. Accordingly, consumers are charged the cost of acquiring and delivering water. Most goods and services in the United States are priced according to value (in other words, the price is established by what the consumer is willing and able to pay) as determined by the forces of supply and demand. Since water utilities are monopolies with exclusive service areas (no direct competition), the Commission regulates their activities to ensure adequate levels of service are provided at the lowest reasonable costs.
Water utilities incur expenses and capital costs in providing water service. Expenses are costs that have short-term benefits. In general rate cases, these costs are estimated on an annual basis. Capital expenditures provide long-term value. Therefore, cost recovery is spread over the years the benefits will occur. For example, the cost of a reservoir is recovered in rates over its expected useful life. Capital expenditures are financed by stockholder equity and long-term debt. Stockholders are provided a return on the funds they invest. Returns are forecasted in general rate cases based on market conditions (inflation and interest rates) and returns in comparable risk investments.
General Rate Increase - Large Water
Rates are primarily determined in general rate cases, which are formal applications filed with the Commission in three or more year intervals. Included in the utility's application are detailed cost estimates, expenses, capital expenditures, and water sales on a forward-looking basis. The Commission staff (accountants, economists, engineers, and lawyers) reviews this information over a period of several months and issues a report with recommendations.
In a general rate case, the Commission takes a broad, in-depth look at a utility's revenues, expenses, and financial outlook and considers quality of service and other factors to arrive at just and reasonable rates. Additionally, the Commission conducts public participation hearings, at which customers are encouraged to express their views concerning the utility's service and rate request, and evidentiary hearings, during which expert witnesses testify and are cross-examined. An Administrative Law Judge (ALJ) presides over all Commission hearings. After the hearings, the ALJ prepares a proposed decision for comment. Finally, the Commission weighs all the evidence and issues a decision. To the extent that the Commission finds expenses, capital expenditures, and other rate items are necessary and reasonable, a rate increase is authorized. The entire process takes approximately 10 months.
General Rate Increase - Small Water
General rate cases are time-consuming and expensive. To lighten the burden for small water companies and minimize rate case expenses recovered in rates, the Commission allows rates for small water companies to increase periodically using an inflation factor (Consumer Price Index or CPI) in lieu of a general rate case. Informal general rate cases by advice letter are also available for small water companies. While this process does not involve hearings or a formal Commission decision, the Commission staff does perform a through investigation and presents its recommendations to the Commission. Rates are approved by a Commission resolution. Typically, advice letter general rate increases take six to nine months.
Advice Letters, Including Offset Increases
Advice letters are sequentially numbered formal letters required by the Commission to change a utility's tariffs, including rates, rules, and conditions of service. They can also be used for notification, such as triggering a catastrophic event memorandum account (discussed below). Typical advice letters include changes in service area maps, rate changes adopted in Commission decisions, rule changes, and implementation of new services not previously offered.
Offset rate increases are for changes in costs not established during a general rate proceeding. Advice letter offsets may be requested for costs that are beyond the utility's control (purchased water, pump taxes, electric power, and water quality related items) and for specific items, such as capital improvements, where the timing and/or cost can not be determined with sufficient certainty during a general rate case. An advice letter offset can be filed after the timing and costs are known with certainty, and for capital improvements after the project has been placed in service. No hearings are held, but the Commission staff examines the utility's request and supporting workpapers, and, if appropriate, recommends that the Commission authorize the rate change.
The filing requirements for advice letters are contained in the Commission's General Order No. 96-A.
Balancing/Memorandum Accounts
The Commission's ratemaking procedures do not allow a utility to charge retroactively (after the fact) for expenses previously incurred. While over- and under-recovery of costs occur for a variety of reasons, such as unexpected changes in expense or sales levels, these are considered a normal business risk. However, for items that are outside the utility's control, the Commission in limited circumstances permits a tracking mechanism. These tracking mechanisms are called balancing and memorandum accounts (there is a technical accounting difference between the two, but they operate essentially the same). Once a balancing/memorandum account has been authorized, unexpected cost changes that are not reflected in rates may be recorded for future recovery.
Commonly used balancing accounts include water supply related costs (purchased water, pump taxes, and electric power). In the water supply balancing accounts, utilities may record any differences from the expense levels reflected in rates. If an offset increase has been granted since the general rate case for a specific balancing account, both the revenue and expense changes are recorded in the account.
Another example is costs related to catastrophic events, such as earthquakes and major storms. Obviously, estimating costs related to catastrophic events in general rate cases is not practicable. Therefore, the Commission allows water utilities to open Catastrophic Event Memorandum Accounts by filing an advice letter after a catastrophic event occurs. By timely filing this advice letter, utilities are permitted to track all catastrophic event costs for subsequent recovery, after a review of their reasonableness.
In sum, balancing accounts and memorandum accounts allow water rates to more accurately reflect costs.