Marin Municipal Water District details drought surcharge proposal

Marin Municipal Water District officials are proposing rate increases during drought periods to prevent financial shortfalls, but say ratepayers shouldn’t expect their bills to spike if they meet their conservation targets.

“Almost 95% of our costs are fixed and that is just inescapable,” Monty Schmitt, president of the district board, said during a meeting this week. “The only way to address this is to recover our revenue in some way. There is no cutting back when our revenue goes down because then we’re no longer providing water for people or taking care of our system.”

In a presentation, Bret Uppendahl, the district finance director, said adding drought surcharges to water rates is a common practice by water agencies throughout the country, including the North Marin Water District. The surcharges are used to make up for revenue losses during droughts resulting from reduced water sales from conservation and mandatory water use restrictions. The district does not use these surcharges and instead sets aside its regular water sales revenue into a reserve fund that it taps when droughts occur.

After the recent two-year drought, the district’s reserve fund balance dropped from $63.1 million in 2021 to about $28.1 million. Additionally, the staff said the agency faces an annual $31 million budget shortfall that would increase to $42 million in the next few years as a result of water revenue losses, inflation and projected costs or investments in adding new water supplies.

To address these issues, the district is proposing to raise base water rates and also add the ability to institute drought surcharges when reservoir levels dip below about 82% of capacity or 65,000 acre-feet.

“By establishing drought rates, the district will not need to hold the same level of reserve balances for future droughts, which partially reduces the overall rate increase,” Uppendahl wrote in an email on Thursday. “The drought rates would not be used to refill reserves, but rather, they would be enacted during a future drought to offset the revenue losses associated with reduced consumption.”

Uppendahl said the drought surcharge would work by temporarily increasing the base water rate for a set period. Residents who conserve, he said, should not notice a difference in the total charges on their bimonthly bills when drought rates are implemented compared to when they are not.

“Obviously, you’re using less water so you’re paying a higher unit price, but the idea is to have customers not pay more during a drought,” Uppendahl told the district board on Tuesday. “It’s just basically to keep everything flat so that the district can continue running.”

While the agency has yet to release its proposed rate increases, Uppendahl said the drought surcharge would increase as reservoir storage depletes and as conservation targets increase. Additionally, how much rates would increase would not correlate with the amount of water the district is asking residents to conserve.

For example, the district’s newly updated water shortage plan states that the board can add drought surcharges to rates when reservoir storage reaches 65,000 acre-feet or less. At that stage, residents will be asked to cut back water use by 20%, but the district could add a 25% drought surcharge to rates. In order for the district to maintain its normal water rate revenue as demand decreases, the drought surcharge must be higher than the amount of conservation, Uppendahl said. A 20% increase in rates would not recover the total lost revenue from a 20% reduction in water sales, he said.

As reservoir supplies deplete, the drought surcharge would increase rates by 43% as ratepayers are asked to cut back by 30%.

Board member Jed Smith said the rate would encourage conservation among ratepayers.

“If you conserve water, if you save, if we keep water in our reservoirs, the rates won’t go up as much,” Smith said during the meeting Tuesday. “This is a strong incentive to reduce demand, reuse your water and not waste it. I think that that is the key message for this pretty significant change.”

Uppendahl said the drought rates will not cover all costs associated with drought, including importing more water from the Russian River, community outreach campaigns and drought planning. Additionally, if residents conserve more water than is asked, it will result in some financial losses for the district.

“They’re not a silver bullet, but they’re a very important factor to have in our toolbox,” he told the board.

The drought rates do not affect fixed fees that the district charges to customers based on their water meter size, including the controversial capital maintenance fee adopted in 2019 meant to fund repairs and replacement of aging water tanks, pipes and pumps as well as fire prevention projects.

The capital maintenance fee and the district’s watershed maintenance fee have been challenged in the Marin County Superior Court by the Coalition of Sensible Taxpayers, known as COST. The nonprofit organization alleges the fees violate state Proposition 218, which prohibits government agencies from charging more for a service than it costs to provide it. COST alleges the fees violate the proposition by charging customers based on the size of their water meter rather than how much water they actually use.

COST’s attorney, Walt McNeill, said the drought rate proposal does not appear to affect fixed fees at this time.

“What’s very obvious is the district has some real work on its hands and I have to say they seem to have a very attentive and pretty intelligent group of board members,” McNeill said. “I’m hopeful they’ll do a pretty good job with this. But obviously, they’re in a difficult situation to deal with the problems they have with not only revenues and planning for the drought contingencies and taking care of all these issues.”