City of Modesto Grand Jury Case # 06-26

Notification of Water Rates and Justification for Rates Del Rio alleged that the notice did not contain proper notification of the time for a public hearing and a justification for the new rates. The CGJ found that the notice contained the following information: • The District mailed the notice, “Proposed Water Rate Increase and of Public Hearing” to all property owners in the District. • A public hearing was scheduled for November 23, 2004, for “hearing” public testimony and receiving written protests on the proposed “Water Rate Increase.” • The rate schedule for 2005 and ensuing years was included for both flat rate (by lot size) and metered rates (by size of pipe and usage.) • The notification stated that the proposed rates would take effect January 1, 2005. • The notice stated that the increase was needed to fund operation, maintenance, and replacement costs. The improvements were necessary to rehabilitate, upgrade, and replace the existing water distribution system. • A protest form was included with the notice which gave instructions on where and when to return it.

Proportional Costs Del Rio alleged that the water rate policy violated the Proposition’s provision requiring that a parcel be charged only its proportional costs. Fees collected under the proportional cost provision of Proposition 218, fall into four areas. They include: (cid:121) Revenues derived from fees shall not exceed the funds required to provide the property-related service. (Article XIII D, §6 (b)(1).) (cid:121) Revenues shall not be used for any purpose other than that for which the fee was imposed. (Article XIII D §6 (b)(2).) (b)(3).) (cid:121) The amount of a fee imposed may not exceed the proportional cost of the service attributed to the service. (Article XIII D §6 (b)(4).) (cid:121) The fee imposed must be for a service used by, or immediately available to the owner in question and not based upon potential or future use of a service. (Article XIII D §6 (b)(4).) Under sworn testimony, the CGJ determined that it would be impossible to develop any rate schedule if each parcel were charged just what it costs for individual water delivery. As one of Modesto’s legal experts testified: “If you had fifty-thousand customers, you’d have fifty-thousand rates, and we don’t think the law meant that. It would be impractical and impossible to calculate rates that way.” (cid:121) The Modesto legal counsel stated the issue of proportionality in the following way: “It’s just like getting car insurance or life insurance. It is cheaper for everybody if we are all in a pool. You can spread out the cost. I do not think when they drafted (Proposition) 218 that they thought about that. If you take the argument that Del Rio is entitled to a different rate than Modesto or Grayson, it’s the same thing. Then it is a slippery slope and you are going to slide all the way to the bottom where water rates are calculated house by house, street by street.” (cid:121) The CGJ determined through extensive investigation that there was considerable disagreement between Del Rio’s legal council and the City of Modesto’s legal counsel as to how each of these sections of the law is to be interpreted and applied. The CGJ did not take a position on these opinions of law. It is up to the courts to make these determinations.

Use of Water Funds As a result of the 1999/2000 Civil Grand Jury Report, water and other funds are no longer being transferred into the general fund. As of September 1999 funds are kept within the Modesto City Water District in separate accounts known as Enterprise Funds. (Enterprise Funds are funds designed for specific uses and are established for accounting purposes. Defined in section 1.08, b. (1) of the State of California “Accounting Standards and Procedures for Counties,” May 2003.) According to sworn testimony, these funds are used to provide service to the entire system and designated for the projects as they occur. There is an accumulation of reserve funds within the 6 Enterprise Fund to pay for capital projects. According to the Foresight Report, the rates should “generate revenue adequate to meet the utility’s operating costs as well as projecting new capital and sources of supply costs.” (cid:121) The CGJ determined that the District is accounting for water costs and revenues separately from other non-water related accounts.

Access to Information (cid:121) The CGJ found that obtaining specific information concerning actual costs of water delivery and cost of usage to specific geographic areas is extremely difficult to obtain from the City. The Del Rio community tried repeatedly to get such information so they could analyze what it cost Modesto to provide water to its area and the rest of the District. (cid:121) The CGJ attended one public forum and a City Council meeting and found that, in both instances, specific water delivery cost information justifying the rates is non-existent or vague. Decisions on how to “fix” the schedule or even to determine if there is or is not enough money to run the system cannot be done with any validity when it is so difficult to get detailed financial information. Under sworn testimony, the Chief Financial Officer stated that the city’s financial computer system is not readily able to produce reports that provide detailed financial information on specific costs. (cid:121) The City Public Works Department did supply the CGJ with the information requested regarding a list of metered and flat rate properties and a comparison sample of metered customers in Del Rio and the City. The information arrived almost two months after the request was made (one month after due). This delay could be the result of a lack of ease within the system to retrieve such data. An upgraded system would serve the city and the public well, so that essential data from which to determine water rates and other utilities can be readily available.

Flat and Metered Rate schedules The former rate schedule was a three zone system in which residential customers differed in the amount paid, dependent upon which geographical area the customer resided. Zone 3 had the lowest rate, followed by the other two zones. Under the new water rate system, the former three zone system with different rates was replaced by three different rate classifications: (cid:121) Residential (cid:121) Industrial (cid:121) Commercial 7 All residential areas are billed under one of two rates, depending if their area is metered or on a flat rate. The “blending” of rates, from the previous three zones, equalizes the burden of any one area having to pay more than another area. (cid:121) Flat rate schedules are based upon lot size, regardless where the property lies within the District (Appendix 1 for details.) (cid:121) A metered rate schedule is based upon the amount of water consumed and is the same for all residential areas within the District (Appendix 1 for details.) (cid:121) In December 2005 there were 55,185 customers within the Modesto jurisdiction (City limits) that were either on a flat rate schedule or were metered but billed at a flat rate. In the Modesto jurisdiction 9998 were metered and billed as such. (cid:121) Within the areas of the following cities that are served by the Modesto Water District including Ceres, Turlock, and Waterford, as well as the unincorporated areas of Salida, Del Rio, Grayson and Empire, 8103 customers were on flat rate schedule or were metered but billed at a flat rate. Except for Del Rio and Grayson (the only two areas fully metered and billed as such) 2009 customers were metered and billed as such. (cid:121) The total number of customers within and outside Modesto which have meters but not currently being read is 17,117. (Appendix 3 for detailed table)

A Comparison Of Similar-Sized Lots Between Del Rio and Modesto City Customers (Appendix 4, for details.) The CGJ obtained from the City of Modesto a comparison of ten similar sized lots (greater than 17, 000 square feet) within the City limits and ten within Del Rio. This City report compared the charges of both areas as to the actual metered costs in 2004 and 2005 as well as what the costs would have been if billed at a flat rate. (cid:121) In 2005, for the sampled lots, the yearly range of charges for Del Rio over a flat rate charge was between $47.88 and $633.12 with an average difference of $287.90. (cid:121) In 2005, for the sampled lots within the City, the difference compared with flat rates ranged between negative $248.36 and $556.17 with an average difference of $8.12. This was due to six of the ten customers using less water than the average flat rate charge. In viewing the lots, it was noticed that seven lots were not extensively landscaped or watered. 8 (cid:121) The one lot comparable to the landscaping of Del Rio was in the Fleur de Ville subdivision and had an increase of $499.65 more than a flat rate charge in 2005. The consumption of water for the ten Del Rio properties dropped in seven out of ten cases from 2004 to 2005. This drop is consistent with an expert’s testimony that overall, when parcels are switched from flat rates to metered rates consumption also drops. (cid:121) The average consumption for the ten Del Rio properties in 2005 was 5880 ccf (consumption cubic feet) which translates into 43,392.4 gallons per month or 1466 gallons per day (one cubic foot of water equal 7.48 gallons.) (cid:121) The average consumption for the ten Modesto properties in 2005 was 3396.7 ccf which translates into 25,407.4 gallons per month or 846.9 gallons per day. (cid:121) In order for the cost of metered water and flat rate to be equivalent, a customer with a lot size greater than 17,000 square feet would consume just over 25,000 gallons per month or an average of 840 gallons per day (2005.) (cid:121) Costs were compared for 2005 as the rates were converted in June 2004 from flat rate to metered in the Del Rio area. This resulted in part of the year being on different rate schedules.

Fairness of Rates to Del Rio Del Rio is the only discrete area besides Grayson that is billed as all metered rates. Since Grayson generally has a much smaller lot size resulting in less water usage, the impact for Del Rio being metered is greater than any other single area. As the change from flat rate to metered rate in Del Rio occurred about the same time as an increase in rates it is difficult to separate the effect that each change had upon the charges for water. (cid:121) Another issue that impacted Del Rio more than other areas is that Del Rio was in the previous Zone 3 which historically paid less than Zones 1 or 2. The increased costs for Del Rio was exacerbated by being one of the few areas changed to meters, which has a greater impact on larger landscaped lot sizes as more water is consumed. (cid:121) The CGJ found no evidence to show that Del Rio was singled out to pay a different rate than any other area with the same parameters (metered large lots.) The claim by Del Rio that they pay up to ten times the cost of someone living in the City does not hold up with the evidence presented by the City. Without a comparison of all properties, both metered and flat rate, this assertion cannot be verified. It is possible that a person could pay ten times more than another if one compared the smallest lot size or least amount of water used with a metered rate on a large lot with an excessive amount of water use. This would appear to be an exception, not the rule. Del Rio does, in general, pay more than most customers due to large lot sizes, 9 usage and being exclusively metered. (cid:121) With the small sample reviewed, it is not possible to accurately predict which system costs the consumers more overall. After looking at most of the properties listed in the sample, the CGJ predicts that a parcel with a well landscaped yard, with normal grass and plants, would cost more under a metered plan. The public has been given no data from the City as to the comparability of the two rates when translated into actual monthly charges. (cid:121) In the sample of similar-sized lots, four were in the Modesto High or Mark Twain area, two in the Airport district, one in South Modesto, one in a middle class property, and one in Fleur de Ville. This sample can hardly be representative for all of Modesto. It may well reflect what areas within the City are on metered water with lot sizes of approximately one half acre in size. (cid:121) The conversion to metered water as quickly as possible for all areas that have meters but not read would be more equitable for all customers. The conversion would probably be more expensive for most customers, but more reflective of their water usage. There are now over 17,000 customers with unread meters. The City’s plan to convert to meters (outside in) (outlying areas first and gradually include inside the city limits) can be seen as unfair to the outlying areas already converted (Del Rio and Grayson.) The evidence comparing the number of meters read between 2004 and 2005 showed very little effort to convert flat rate users to metered users either within the city or in the outlying areas. In Salida, for instance, 59 parcels are on a flat rate, 819 on a metered rate, and 3516 are metered but billed at a flat rate. (cid:121) At the March 7, 2006, City Council meeting the Board passed a resolution authorizing $5,000,000 per year for the installation of water meters. This resolution was passed, without a plan stating which area would have meters installed and when such areas would be read as metered. (cid:121) While impractical, considering that all properties within a water district must be eventually metered under state law, the fairest solution is that all residential areas remain on a flat rate until all are converted to a metered rate. (cid:121) There is no way to make water rates and charges totally fair. Under a flat rate plan, there is no way to control the amount of usage nor is there an incentive to conserve. Those customers paying under a metered rate appear to be paying more than flat rate customers with similar, well landscaped properties. Those properties with very little landscape or outside watering generally pay less under a metered rate. Paying for usage seems to be the most equitable solution. Ultimately, as previously stated, all properties in California within a water district must be metered. 10

Ownership of Water System Del Rio and Waterford were offered the opportunity to obtain part of the Del Estes water system from Modesto that previously serviced their area. Waterford, thus far, has been satisfied with Modesto handling the system, but a new subdivision in Waterford has set up its own district which is not associated with Modesto. Del Rio elected not to obtain its own water district from the City. The complainant stated that Del Rio probably could not get the votes from its own residents necessary to obtain the district from Modesto. This was primarily due to the fear of potential costs for future repairs. The former attorney for the City of Modesto testified that the City would have been willing to “give it to them.”