My dinner with Basco - a parable

My friend, Basco, and I were really hungry, so we went to eat chicken nuggets (tasty and cheap!). We decided to buy them together to keep the wait time low - after all, a nugget is a nugget. I offered to put $3 into the nugget fund; Basco countered that he would pay $0.12 for each nugget he wanted. I noted that nuggets usually cost more than $0.12 a pop, but Basco assured me that he paid $0.12 per nugget the last time he bought some - 2006 - and that the price of nuggets was uncertain because of an ongoing price war.* I was really hungry and didn’t want to wait (or, frankly, to think too hard about it), so I agreed.

When we got to the fast food place, it turned out that nuggets cost $0.20 apiece. Basco said he wanted 12 nuggets, so I totaled up our nugget fund: my $3 plus Basco’s $1.44 (=$0.12*12) would allow us to buy 22 nuggets ($4.44/$0.20 per). After I put in our order, it dawned on me what a poor deal I had made: Basco got 12 nuggets at $0.12 each; I got 10 nuggets at $0.30 each; Basco paid for less than a third of the tab and got more than half of the nuggets; Basco bought nuggets at 60% of their actual cost, while I paid 150% of the actual cost.**

The moral of the story: don’t split the bill while you are distracted by hunger.

(I will return to the usual wonkery soon ....)

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* http://www.businessweek.com/articles/2015-01-15/burger-wars-the-cheap-chicken-nuggets-phase

** Suppose nuggets would have been $0.15 per. The nugget fund would still have been $4.44, but that would have gotten us 29 nuggets. Basco would get his 12 nuggets at $0.12 apiece; I would get 17 nuggets at $0.18 apiece. 17 nuggets is probably more than I should eat at a sitting.

Vote NO on Tuesday!

I am going to vote NO in the Jan. 13 water rate election. I hope this blog persuades at least some of you to do the same.

The proposed water rates are part of a ongoing subsidy deal for new development. The City says it will cost $12 million to get 2 million gallons per day (GpD) in new water capacity - $6/GpD. The water rates proposed include $9 million for up to 1.5 million GpD for current ratepayers, which works out to be at least $6/GpD for new capacity. The price for new development, on the other hand, was set by ordinance at $3.14/GpD in 2015 and $3.92/GpD in 2016 (and potentially beyond) without any quantity limits. If new development buys $3 million worth of new water capacity at these prices, they will end up with 835,655 GpD capacity.* $3 million from new development and $9 million from customers still only buys 2 million GpD, however, so current customers only get 1,164,345 GpD, for an effective price of $7.73/GpD. Higher or lower actual well costs don't help current customers - at best, we get 1.5 million GpD a for $9 million. New development pays less than full cost for new water capacity; current water customers make up the difference.

This water-capacity subsidy is a problem, not only as a matter of principle, but also as a matter of practice and precedent. Norman has very limited access to new potable water. Subsidizing new development leads to overuse by the most resource-intensive users - at least until the water is gone. New development needs to pay its own way, both as a matter of fairness and as a matter of providing appropriate incentives for conservation. The water rate election is a crucial test of this principle. Norman is at a point where new development is increasingly costly. According to the 2060 Strategic Water Supply Plan, new well water capacity will be $13/GpD if the EPA adopts proposed Chromium 6 regulations. Further, it calculates that new development will be responsible for well over half of the $415 million cost of supplying water in the future. Drinking water isn't the only issue either - wastewater and stormwater issues are on the horizon. If we can't hold new development accountable for its costs with the power of an election behind us, we will be unlikely to do better without any direct influence on the outcome.

Rejecting this water rate proposal is not to reject any rate increase. Water rates will need to go up in order to pay for legally mandated improvements for current users. The Jan. 13 election is, however, a crucial opportunity for citizens to negotiate a better deal for both this set of water system improvements and future cases where developers try to leverage a subsidy. The City Council can end the water-capacity subsidy at any time by raising water connection fees for new development, so there is no reason why we can't get a better deal quickly.** Or we could adopt a real 'trigger mechanism' that raises the connection fee as soon as costs are known. Or we could vote on the mandated water treatment issues as soon as possible and leave the contentious capacity issues for a later vote. The smart vote on Tuesday is NO until the water capacity subsidy ends. If we can't get new development to pay its own way in this case, we will have little chance to influence the inevitable subsidy fights of the future.

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* Assumes no acceleration in new connections to take advantage of 2015 prices.

** The City has already certified that $3 million is a legally appropriate cost for 500,000 GpD capacity in Section 10 of Resolution R-1415-60 adopted on Nov. 25, 2014 (https://norman.legistar.com/View.ashx?M=F&ID=3383535&GUID=4F934AAC-E43B-4242-9383-215FBCEB4C4A).

More magical thinking from the City

Here's the latest (mis)information about the water rate election. The City's position is that (1) it can't close the distance between what it charges new development for water capacity and what it charges rate-payers for water capacity because state law won't allow it; (2) it did the next best thing by adopting a 'trigger' that will set the water connection fee at a level sufficient to cover capital costs once those costs are known. Unfortunately, both (1) and (2) are false.

With respect to issue (1), the state law at issue is Title 62, Section 895 - you can see it in full at http://www.oscn.net/applications/oscn/DeliverDocument.asp?CiteID=463751. It reads, in relevant part:

B. New development and expanded or modified existing development may only be charged the development fee for capital improvement costs for increases or expansion to the capacity of public infrastructure systems attributable to that development.

1. Development fees shall not exceed a clear, ascertainable, and reasonably determined proportionate share of the cost of capital improvement to the public infrastructure system attributable to the expansion or increase in functional service capacity generated, or to be generated by, the development being charged the fee. There shall be a clearly established functional nexus between the purpose and amount of the development fee being charged and the development against which the fee is charged. In determining the development fee, the municipality shall make a documented effort to quantify the projected impact from development and determine that the proposed development fee is reasonably and roughly proportional to the nature and extent of the impact of development.
...

3. The development fees shall be based on actual system improvement costs or reliable, ascertainable and reasonable projected estimates of the costs. Any estimates of costs shall be based upon factual and historically realized costs for similar system capital improvements.

This clearly does not forbid fees based on future cost estimates; it only requires the City to do its due diligence in making those cost estimates. Given that the City plans to actually charge rate payers for the same wells based on cost estimates, I would certainly hope that those estimates are "reasonable" and "based on ... costs" from comparable projects. I'll give the staff the benefit of the doubt that they didn't pull the $12 million for 2 MGD a capacity out of thin air.

It is also worth noting that the law in question provides a lot of protection for a city that adopts a development fee:

K. Any ordinance, resolution, or regulation adopted in compliance with this section which is thereafter challenged in any future court action shall be reviewed through rational-basis scrutiny, such that it shall be upheld if it substantially complies with this section and if the municipality documented reasonably conceivable facts that provided a rational basis for the adoption.

Norman can already document "reasonably conceivable facts that provide[...] a rational basis for the adoption" of a connection fee up to $1530.* If well costs come in higher or lower, the fee can be adjusted then. To avoid charging what we think it will cost for fear of lawsuit guarantees that new development will never pay its own way.

Even if rate-increase advocates were correct in their interpretation of this statute, the correct response would not be to just abandon the idea that development should pay it's own way. Rather, the City could still fully recoup its costs if it had a moritorium on new development until it is satisfied that its cost estimates pass legal muster. The state law being cited does not undermine the #nountil strategy.

With respect to issue (2), the 'trigger' adopted by the City does not do what is claimed for it. The fee ordinance requires that "City Council shall review the connection fees relative to their sufficiency to fund new capacity no later than November 1, 2016 ...."** This is a long way from a commitment to actually set the connection fee so that it covers capital costs. Is considering "review" and "relative to" to be 'weasel words' unfair? No - just immediately prior to adopting the foregoing language the City Council adopted a Resolution guiding its thinking about connection fees. That resolution - R-1415-60 - explicitly says that "to determine the appropriate charge" it will take into account non-cost information - "total development fees charged by surrounding and comparable cities" (section 18, https://norman.legistar.com/View.ashx?M=F&ID=3383535&GUID=4F934AAC-E43B-4242-9383-215FBCEB4C4A).

The 'trigger' is not a commitment to make new development pay its own way. If anything, its adoption was a repudiation of that principle. A real trigger mechanism might be a way to go forward after we defeat this rate increase, but the adopted policy won't do.

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* The City concluded as much itself in section 10 of Resolution R-1415-60 that passed on Nov. 25, 2014 (https://norman.legistar.com/View.ashx?M=F&ID=3383535&GUID=4F934AAC-E43B-4242-9383-215FBCEB4C4A).

** Ordinance O-1415-18, adopted on Nov. 25, 2014 (https://norman.legistar.com/View.ashx?M=F&ID=3383005&GUID=0038CA6F-9FB7-4AA9-869F-65EA2A4908A0).