Financial effects of potential Stage 2 water restrictions.

The following report was published in the June 28th edition of the Vernon Morning Star:

The above proposal was neither cleared by GVAC nor the RDNO Board so I rely on the report for the accuracy of the proposed water conservation move. However, the financial consequences of this proposal should be investigated before it is implemented.

For my own information I attempted to analyze the effects of a 10% consumption decrease. I am sharing the results with you.

Assuming that all rate classes (Tiers A, B, C, D and E as well as ICI) will comply with the 10% consumption cutbacks there will be a 10% reduction in revenue as well. It is also assumed that agricultural customers are not subjected to the general water restrictions and only the fiscal consequences on domestic customers are treated here. 

GVWU has a revenue expectation from their domestic customers of $17,845,332 for 2015.The base fee component of this sum is $9,905,140 and will not be affected by the reduction in consumption. Only the consumption revenue of $8,161,328 will be reduced. Reducing consumption by 10% will reduce the revenue by 10% as well creating a budget shortfall of $816,133 (see Table 1). There are 24,325 water accounts in Greater Vernon, thus, the budget shortfall will be $33.55 per account. 

Table 1.    Revenue losses by rate classes with 10% water consumption reduction.

This shortfall should be recovered in 2016 by increasing either all components of the rate structure used by GVWU by about 4-5% or simply add the $33.55 to the annual base fees. The latter is more reliable for recovering the needed revenues so it is likely that staff would recommend this method for recovery. The new base fees, then, would have to be increased to $445.75 ($110.19 per quarter, an 8.24% increase) just to cover the shortfall of 2015. It is quite likely that other increases in expenditure will be required resulting in further rate increases.

The big question is: how would these changes affect customers of the various Tiers financially? I made some calculations and the results are demonstrated in Table 2 . As the table demonstrates, low water consumers would be bearing the brunt of the costs created by loss of revenue due to the water saving measure.

Table 2: Effect on the various rate classes created by 10% water consumption cut.

 A customer using 10 cubic meters of water a quarter would reduce consumption by 1 cu. m. per quarter (4 cu. m. per year) and would save $2.04 a year. At the same time the $33.55 additional base fee would increase his/her bill by $31.51 (33.55-2.04). A customer using 80 cu. m. per quarter would save $15.41 while a customer using a 1000 cu. m. per quarter could save a hefty $843.65 per year.

There might be other measures staff will recommend to GVAC but the unavoidable fact is: water conservation measures will create a deficit for 2015 and the deficit would have to be recovered in the next budget year. This point is missing from the news article.

The real user pay rate system I proposed would resolve this reduction of water usage by simply multiplying the volume of water originally estimated to be sold by 0.9. The new base fee and water rate would be revealed instantly. Every customer would be bearing the cost of the water saving initiative equally.

I would be happy to answer any questions regarding to this analysis.

Gyula Kiss