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Flawed Cost of Service Study

FLAWED REPRESENTATION:
EID’s Board appointed to the FIVE-member Cost of Services Study (COSS) Citizen’s panel the following:

SECRET MEETINGS:
The COSS meetings were NOT open to the Public.  Substantial policy discussions and analytical debates were held “outside the eyes and ears of the public”.  If “walls could talk”, the Public would learn that the COSS Panel’s considerations were disproportionately directed toward special rules and cost exclusions for just 1,700 Irrigation customers of EID.

PROPOSITION 218 LARGELY IGNORED:
At the first meeting with the Cost of Services Consultant (go to Consultant site), when queried about how he would resolve discrepancies between Proposition 218 prohibitions against subsidization and EID Principles to be used in the COSS process, the Consultant responded that he knew of no successful legal challenges to Proposition 218 because of the practical improbability of achieving the “50% +1” ratepayer protest requirement.  Emboldened by the Consultant’s lack of concern regarding Proposition 218, the Cost of Services Study was  effectively acquitted of the requirement to adhere to Proposition 218 non-subsidization prohibitions.

COST ALLOCATIONS VS. DETAILED STUDY OF COSTS:
Just $19 million (32%) of EID’s costs were directly assigned between Water and Sewer customers.  Instead of conducting a detailed Cost of Services Study for the majority $40 million of costs, over two-thirds (68%) of EID’s $59 million of operating costs were generally allocated 60% to Water and 40% to Sewer (based on parameters conceived of and proposed by EID’s General Manager).

But, allocating more than two-thirds of costs by “broad-brush” 60%/40% allocation parameters certainly constitutes neither a “bona fide” Cost Study, nor a Proposition 218-compliant Cost Study.  In turn, absurd anomalies resulted whereby Sewer customers pay MORE THAN DOUBLE (what a Water-only customer pays) for billing expenses, press releases, consultants, legal expenses, and a plethora of other items amongst EID’s $18 million of Overhead expense items.   Additionally, although less than 15% of EID’s Capital Projects are for Sewer, 40% of Engineering expenses are charged to Sewer customers, and 40% of Debt-related expenses are charged to Sewer customers. These non-cost consistent allocations, in turn, violate

DIFFERENT DEBT COVERAGE RATIOS:
The Draft Rate Models presented to EID’s Board on January 24, 2011 included materially different Debt coverage ratios for Water and Sewer.  The net impact of these differences on rates is that 2011 Sewer customer rates are $ 2.0 million higher than cost or legally justified and are subsidizing a shortfall in Water Debt coverage ratios… contrary to Proposition 218 (Sec. 6.(b)) proportionality requirements.  Combined with the 2011 Sewer Operations budget’s 3.6% DECREASE while the 2011 Water Operations budget SURGED 36%, this is further evidence that there should NOT have been a 15% 2011 Sewer rate increase. Instead, Water rates should have increased $2 million more so both Water and Sewer provided the same 1.25 standard debt coverage ratios.

SOPHISTICATED RATE MODELS:
The good news from EID’s COSS/Rate Model development is that EID now has highly sophisticated rate apportionment models. The bad news is that EID skipped over the “Cost of Services” portion of the project and, as the COSS Consultant himself acknowledges, “Garbage-in, Garbage-out”. It further is instructive that, despite the Panel supposedly “voting” on COSS matters, the COSS Consultant repeatedly stated “I do what Jim tells me (to do).” 
(go to Consultant site)

COSS REWORK NEEDED… TO COMPLY WITH PROPOSITION 218:
To provide a fair, legal, and Proposition 218-compliant Cost of Services Study (see HJTA v Roseville), EID must: