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Seattle City Councilmember Bruce Harrell

Feb 04 2009

Water Rate Surcharge?

History: Until January 1, 2005, the City funded fire hydrant services through water rates. On March 1, 2005 the Lane v. City of Seattle case was filed. The suit claims the City’s method of charging Seattle Public Utilities (SPU) customers for fire hydrants through water bills was an improper means to an end. The practice of funding fire hydrant services has since been corrected. SPU now charges the General Subfund (GF) and other governmental customers, which include King County and the City of Shoreline for hydrant services.

Late in 2008, the Washington State Supreme Court ruled that the City was not justified in charging the fire hydrant costs to the ratepayers during March 2002 to December 2004. SPU was required to refund to water ratepayers a total amount of $20,346,660, plus interest at 12% until paid, less any amounts paid for attorneys’ fees and expenses. A court order also required the City’s GF to pay SPU $13,553,286 plus interest at the rate of 3.18% by April 30, 2009.

The Mayor has proposed legislation that imposes a temporary “surcharge” on all customers to pay the Water Fund costs (over two months) to comply with the judgment and to increase the B&O tax rate on water rate revenue from May through December 2009. The temporary tax rate would increase from 15.54% to 24.75% which would generate the $14.4 million needed to repay the SPU Water Fund. The Mayor’s proposed surcharge will impose a 143% surcharge on water rates from March through July 2009 (if done in two months) in order to fund the increased utility taxes and other costs associated with the court ruling. The rate surcharge revenue would total $22.7 million ($14.4 million in B&O tax increase and $8.3 million in additional SPU cost).

The impact on an average ratepayer with a $51.90 bill would be 27.9% or $14.47. On a commercial ratepayer with a bill of $12,541.31, the increase would be 126.9% or $15,914.89. The Finance and Budge Committee is currently reviewing the legislation to determine whether it can improve the impact of the surcharge on ratepayers by lengthening the time period of the surcharge to perhaps two years or perhaps requesting SPU examine its budget to determine whether any savings can be made, perhaps in the range of $500,000 – $1m. By lengthening the duration of the surcharge, the effect is to allow the ratepayer to finance the impact over a longer period.

My Position and Concern: While it is clear the City is creatively addressing a legal liability that is not the fault of its ratepayers, SPU, the council or the mayor, the proposed legislation in effect pushes the full brunt of the liability to the ratepayers. For individuals, retirees, homeowners, renters, small businesses, large businesses, non-profits, etc…this raises the issue as to when we recognize that taxing these captive “customers” is the least desirable option. In 2008, the council passed legislation that would in effect raise water rates approximately 40% for most residential customers for the rate period 2009-2011. A review of its past water rate increases would suggest that these increases have consistently and significantly exceeded the rate of inflation.

Fully recognizing that SPU has great employees and leadership, significant infrastructure needs, service demands and a reputation for providing high quality service, I am proposing the Council and Finance and Budget Committee take a different approach. Rather than pass 100% of the liability to the ratepayer, I would like to create an “impact neutral” approach to the ratepayer by matching the amount refunded to water customers to the revenue collected from a temporary water increase.

In short, I am asking that SPU impose a temporary surcharge that collects $15.2 million in response to the court-ordered refund. I am agreeing that the surcharge be used to pay for a temporary utility tax increase in response to the court-ordered refunds. The General Subfund could use the added utility tax revenue to comply with the court-ordered $14.4 million payment to the Water Fund and the surcharge and tax increase should expire at the end of 2010. However, in order to neutralize the impact to the ratepayer, the difference, which is approximately about $7.5 million, be shared between the General Fund and the Water Fund, 60%-40% respectively. These reductions could be determined after the Executive presents information to the Finance and Budget Committee about how spending cuts could be achieved and how service levels would be impacted.

My approach neutralizes the financial impact imposed upon the ratepayers and simultaneously corrects the debt owed by the city.

The fact remains, our citizens and businesses are being asked to do more with less. They do not have a captive customer in which they can unilaterally shift the costs. Most consumers have a choice in the products. These ratepayers do not. Because of this, we must be particularly sensitive to our exercise of rate setting authority. When you are the sole provider of service, you must, at every opportunity, consistently demonstrate a higher standard of financial discipline and a clear commitment to your citizens. If not now, when.

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