Fact vs. Fiction: Is Lower Water Sales or Capital Spending Driving Your Water Rate Increases?

MWD Fiction: Recent increases in MWD water rates and charges are driven primarily by increasing costs of its capital improvement program.

FACT: Declining water sales, not spending on capital facilities are driving MWD’s increasing water rates. While capital projects and corresponding debt service payments have contributed to MWD’s water rate increases, they are not the primary driver of the big water rate increases in recent years.  This is an especially big problem for MWD because its rate structure features very high fixed costs and very low fixed revenues. 

There are a couple ways to look at MWD’s capital expenditures. One is MWD’s annual Capital Investment Plan (CIP) budget, which is funded by a combination of revenues raised through revenue bond sales and water rates. The following graph shows that MWD’s proposed CIP budget in 2013 and 2014 is $552 million – 48 percent lower than MWD budgeted in 2006 and 2007 ($1.07 billion).


 

 

 

 

 

 

 

 

Because a significant portion of MWD’s CIP budget is funded by bond sales — which does not impact water rates immediately, another way to look at MWD’s investment in capital projects is through how water rates are actually paying for MWD’s annual costs related to capital projects. The total amount of money MWD invests each year in its capital projects is a combination of two expenditures: 1) MWD annual debt service payment (its “mortgage payment”); and 2) cash (in the water industry, we call this “pay-as-you-go” or “PAYGo”).  Both of these components are directly funded through annual water rates.

When viewed this way, annual revenues from water rates by MWD for investments in its capital projects have grown since 2006, rising from $317 million in 2006 to $378 million in the current fiscal year 2011-2012, an increase of 19.3 percent over that period[1].  But annual revenues from water rates on MWD capital projects represent less than a quarter of MWD’s operations budget. So, while increasing debt service payments have contributed to MWD’s water rate increases, they are not the primary driver of the big water rate increases in recent years.

If spending on MWD’s capital facilities is not the primary driver of MWD’s water rate increases, what is?  Declining water sales are driving water rate increases.  This is an especially big problem for MWD because its rate structure features very high fixed costs and very low fixed revenues.  We’ll focus on that in the next edition of Fact vs. Fiction.

Stubborn things, facts are.
Check back for the next installment of MWD Fiction vs. Fact.


[1] MWD’s 2013 and 2014 budget proposes to increase PAYGo funding of its Capital Investment Program budget to $55 million in 2013 and $125 million in 2014.  If MWD follows through on this plan, then its annual investment through water rates on capital projects (a combination of annual debt service payments and PAYGo) will have increased 48 percent from 2006.