The Foolproof Economics Behind Measure W

I am writing in response to the article by Elliott Hamilton
entitled “Risky Business: Why
Measure W is Inefficient,” which appeared in the Oct. 17 issue of TSL. Mr. Hamilton describes himself as an economics major. As a professor of economics, I
find the many errors in his piece, both analytic and factual, to be rather
disappointing. To begin with, he totally ignores the hard fact that under
the Golden State Water Company (GSW), we as Claremont residents are paying
an average of 45 percent more for our water than residents from La Verne, Pomona,
Ontario and Upland—all of which have publicly controlled water utilities.

If he was truly concerned with efficiency, he might have acknowledged that fact and asked why that is the case. As a private company operating under the rules
set by the California Public Utilities Commission (PUC), the current rate
structure allows GSW to: (1) earn an average profit rate of 8.8 percent; (2) base its rates to Claremont on a broad service district including very high-cost
areas that result in us being charged about 10 percent more than would be the case for
Claremont alone; (3) pay million-dollar-plus salaries to their executives
(which Claremont would never pay); (4) respond to residents reducing their
water usage by increasing water rates to sustain the flow of
revenue to GSW, thus punishing us for conserving water; and (5) allow for a margin
to pay its corporate taxes, to which Claremont, as a public entity, would not be
subject.

In total, if Claremont operated its water service it could do so
at a savings of about $8.4 million per year. That is, Claremont could keep
the water rates exactly at their current levels 
and have an extra $8.4 million
with which to service about $80 million in revenue bonds, another key fact Mr.
Hamilton ignores. Since an objective, independent market evaluation of GSW’s
assets is only $55 million, the City could afford that much and up to $25
million more and not have to raise rates at all.

However, to be very conservative, the City set Measure W at $135
million to give it a high credit limit to allow for the unlikely case that a court (which will have to determine the official fair market value for the
sale) set a value up to that amount. So what if Measure W passes and the
City were forced to pay that full amount? In that highly unlikely eventuality,
the average resident would pay about $27 per month more than now—not the false and unfounded $101.42 figure
that Mr. Hamilton cites. This $27 would hardly be a major burden to
Claremont residents. Moreover, the temporary surcharge (which is not a tax) would be on a
cubic-foot-of-water-used basis. So residents who use less than the average amount
of water would pay even less, while those who use more would pay more.

What would Claremont and the 5Cs get for their money? Most importantly, they would
gain full control of their water system and the future rate structures because
the City Council, after open, public hearings, would be the one setting the
rates—not GSW and the PUC. And while water from the Colorado River and
Northern California will surely become more expensive in the future, that would
be far less true of the water from the many wells under our city. 

GSW has every
incentive to use the most expensive water in order to increase their costs. This increases the rates the PUC allows the corporation to charge and the profits it makes. 
The City would have exactly the opposite incentives—that is, to keep the cost
of water as low as possible and to use as little as possible, to keep our rates
low. The City would have the incentive to encourage conservation and the
use of ‘gray’ and even ‘black’ recycled water, initiatives GSW has strongly
resisted. This would align well with the sustainability goals of the Claremont
Colleges.

Finally Mr. Hamilton makes a classic mistake when he talks about
the opportunity costs to the City and the alternative uses to which it could
use the money to purchase GSW. There are no
such costs 
because the City
cannot, under the laws governing public utilities, use the funds raised to
purchase or operate the water system for any other purpose.
They can choose not to purchase the system from GSW, but that would not release
any funds for other purposes, except to the extent to which it would save the City
Council members and the City Manager a bit of time and effort.

In short, Measure W and the City’s purchase of GSW would be
highly efficient. It would lead to lower water rates in the long-term (than those
that would be charged by GSW) and would support conservation efforts.

Andy Winnick is a professor of economics and statistics at California State University, Los Angeles. A Claremont resident since 1996, he is a former member of the Claremont
Human Services Commission and a current member of Claremont Friends of Locally Owned Water
(FLOW). 

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