Wednesday, March 13, 2019

Guest Article: Revisiting Water Rates in Ann Arbor

Ed: form time to time, we publish Guest Articles. This piece is by Erich Z., who has been diligently following the debate in Ann Arbor about the changes in the structure of water rates.

A sink in Ann Arbor, Michigan.

Last week, the city received a second consultant’s opinion on Ann Arbor’s water rates. Arcadis Consulting’s report’s findings are largely consistent with conclusions reached by Stantec Consulting Services in 2017. This report suggested Ann Arbor introduce a tiered rate system where residential customers who use large amounts of water would pay a higher rate per 100 cubic foot (CCF) of water. The city adopted its current rate and tier structure in 2018. The new rates have been a hot topic, with resident confusion and anger helping to fuel a new balance of power in the wake of city elections late last year. The new council majority has contracted with both Stantec and Arcadis for a reappraisal of the water datagathered by Stantec.

A Gallon is a Gallon, right?

Reviewing the 2018 report by Stantec Consulting, the justification for a tiered rate system is that water rates should be tied to the actual cost of service. In 1998, the Michigan Supreme Court ruled that fees must be proportionate to the costs of providing a service, otherwise they are considered taxes, and can violate the Headlee Amendment. The cost of a water system is mostly determined by its peak usage, so users whose needs do not fluctuate throughout the year do not cost nearly as much to serve as those those usage spikes. Peak use occurs in July for Ann Arbor, mostly due to a relatively small number of residential customers watering lawns and irrigating gardens. The presentation showed residential meters paid 12% less than the cost of service, while multi-family meters were paying about 30% more than their cost of service. In a move to make rates more fair and equitable, the council voted to change the water rates, most controversially to a four-tier system for single-family residential customers.

The bars on left are pre-2018, rates on the right are our current tiers. 

Water rates are calculated in units of CCF, each unit representing 748 gallons of water, with the average residence using about 18 CCF in a quarter. Above is a breakdown from the Stantec presentation on the rates and tiers prior to, and after the residential pricing restructuring last year. With the new rates, residential prices for the first 18 CCF of water stayed about the same before and after the 2018 rate restructuring. The rate on the next 19-36 units of water went up, and the rate each unit over 36 went dramatically higher, more than double the previous rate.

The reasoning given behind this change was that the heaviest 5% of users create an inordinate peak strain on the system, causing much higher cost of service. Tier 4 users in off-peak months account for almost none of the water demand, but in July account for about half of all residential demand, as seen on this Stantec slide:

Note how in July Tier 4 makes up half of all residential demand, yet represents only 5% of customers

Multifamily and non-residential water meters are billed on a flat rate. Multifamily users do not show peak usage in the summer the way residential customers do, and so it is not any more expensive to supply them for peak demand. Non-residential meters often do peak during peak months, as some larger business and nonprofits do water lawns, however Stantec’s presentation indicated that tiered non-residential rates are something our billing infrastructure does not currently allow.

Alternatives presented

The second opinion from Arcadis concurs with our city’s user class structure and division of rates across classes, but presents a few interesting, if not particularly palatable, options for the residential 4th tier. Our current rates for the bottom 93% of users (those who use 30 CCF or less per quarter) are about even with the national average. The top 1% of users in Ann Arbor, those who use more than 90 units per quarter, are more than double the national average. Options to alleviate the burden of paying more for those heaviest of users will inevitably raise rates on those using less water. Consolidating the four tiers into two or three would lower the bill for the top 1% of users by about 25%, but increase the rates paid by many, perhaps most, other families. There is also a suggestion of resetting the tiers into a 3-tier system with similar results.

One option some council members have championed is eliminating tiers altogether, charging a flat rate per gallon for all customers. This would cause billing to be equal, but not equitable. According to the Arcadis report, changing to a flat per-gallon fee structure would cut the top 1% of user bills by more than half, but would nearly double the rates of many users, including those who fall in the average range in Ann Arbor. The summary table for all residential options is in this graph provided by Arcadis:

summary table of all options provided by Arcadis
All the options presented by Arcadis with percent of residents for each usage

For non-residential customers, one possibly attractive option presented is billing all non-residential customers at a higher flat rate during the peak use months, and less during the winter. This would cause most non-residential rates to drop on average, but some to increase by up to 24%. A “peaking” alternative is also presented but not feasible with our current billing structure, and would present challenges in administration.

Next Steps

Arcadis presented these results to the city council at a work session on March 11. It is now up to council members to decide whether to keep the rates as currently set, or consider an alternative rate structure, including one of the many presented by Arcadis. The council will also consider implementation of a consumer portal through Aquahawk where customers can monitor their usage of water, at a cost to the city of $260,000 over 5 years.

On a related note, earlier this year City Administrator Howard Lazurus wrote regarding the need for an additional across-the-board increase in water rates of 6%. The letter explains that failure to increase rates in line with spending will cause later more significant rate increases, infrastructure spending delays, or both. That increase was subsequently defeated in a 4-7 vote at City Council, with CMs Nelson, Taylor, Ackerman, Smith voting in the minority (CM Grand voted against to be able to reintroduce the measure in the future).

A final word on leaky toilets

One final criticism of the new rate structure that I’ve seen frequently is what I would call the leaky toilet fallacy. In this scenario, an unsuspecting resident is shocked by their quarterly water bill for many thousands of dollars, because a toilet developed a leak and they were unaware. Obviously a scary proposition, and one I myself have been a victim of. At the Arcadis presentation, City Administrator Craig Hupy said with confidence that the water department will work with residents in cases like this, forgiving the amount owed so long as the leak is fixed and does not recur. Also, as noted above, the city may soon implement leak notification system for residents in the near future.


  1. A comment by Diane Giannola who was unable to post:

    "This is well written. I would like to add one point though. The reason why Multi-family does not have peak seasonal differences in their water rate is because most large apartment and condo complexes have a "water only" meter that they use for irrigation(watering their lawns). This "water only" meter is charged at a much higher rate. The flat water rate is only for their indoor water usage.

    Residential customers have their regular indoor water and their outdoor water used for irrigation on the SAME meter which is why there is tiering to adjust for peak seasonal usage."

    1. I was thinking today, I wonder whether residential customers who water their lawn could get a water only meter?

    2. Yes, people who use water for outside use can get a separate meter where they are not charged sewer fees.

  2. I am in favor of water conservation and thus in favor of tiered rates. But I see a couple of significant problems with the way Ann Arbor does tiered rates.
    Firstly, only individual homeowners pay tiered rates. Apartment renters and Condo owners mostly pay a flat rate. These two groups must also be on tiered rates. This is a matter of water conservation and of fairness. All residents should be rewarded for conserving and all residents should pay a higher tier if not being conservative with water use.
    Most other municipalities in Michigan do NOT treat apartment/condo dwellers differently from homeowners.
    All Ann Arbor residences must have individual water meters. The same way they mostly all have separate electric meters. Separate water meters are as simple to install as electric meters. Yes, there will be a moderate initial expense to install water meters where builders cut corners and initially saved the expense, but individual meters help tremendously with conservation when dwellers can see directly how much their individual water bills are. Individual water meters for all will help out our city is a major way. It's the fairest and most effective way to proceed.

  3. Ann Arbor Needs to get out of the water business. They are now pumping Dioxane through our tap water pipes. There is one solution Beg the City of Detroit to extend their water supply to Ann Arbor at whatever cost. As things are the city will be liable for contaminated pipes to every home and business in the city. The alternative is a Ghost Town

    1. They have studied this, and the quote was $250-300M to connect to Detroit's system.