(5 - 8 min read)
Water is essential to every home and community in Los Angeles. Every two months, many Los Angeles Department of Water and Power (LADWP) customers receive a water bill that reflects the cost of their water service, including the shared costs of maintaining one of the nation’s largest, most complex water systems – a system that delivers hundreds of millions of gallons of clean, reliable drinking water to homes and businesses every day.
At the Los Angeles Office of Public Accountability (OPA), we work to keep LADWP’s water and power systems performing fairly and with transparency and accountability to the people they serve. This guide is intended to help residents understand what they pay for through their water bills, how LADWP sets water rates, and how OPA provides independent analysis to support and protect ratepayers as LADWP invests in water reliability, safety, and sustainability.
What LADWP Customers are Getting: Clean & Safe Water Today and in the Future
LADWP is a publicly owned utility, so it has no shareholders and makes no profit. As a result, money collected through water bills goes directly back into operating and improving our water system that benefits everyone in Los Angeles. At a high level, LADWP rates support investments in essential investments in Clean and Safe Drinking Water (meeting standards and upgrading facilities), Reliable Service (operating and maintaining infrastructure like aqueducts and pipelines), Customer Affordability and Resilience Programs (funding rebates and conservation efforts), a Sustainable and Secure Water Future (investing in recycled water and stormwater capture), and managing Owens Valley Programs (covering dust mitigation, restoration, and water conservation).
How LADWP Sets Water Rates: Revenue Requirement, Cost of Service, Rate Design and Impact Analysis, and Stakeholder Engagement
Water rates at LADWP are developed in accordance with leading industry practices and California law. The structured process involves several steps:
LADWP starts by figuring out the total amount of money (the Revenue Requirement) it needs to run the water system, pay for repairs, and keep it safe. Then, they use a Cost of Service study to fairly divide that total cost among different groups (homes, businesses, factories) based on how much water each group uses. Finally, they use those shares, plus analysis on potential bill impacts resulting from water rate changes to decide the exact price per gallon customers see on their bills. Along the way, LADWP holds public meetings to get feedback on the proposed rate before finalizing the proposal. Once adopted by the LADWP Board, the Los Angeles City Council votes to make it official.
Tiered Rate Structure: Reflecting Costs while Supporting Conservation
Like many utilities, the result of LADWP’s past rate design processes has resulted in the creation of a tiered rate structure for residential customers. This means the price per unit of water increases by tier blocks as usage rises:
- Tier 1: Covers essential indoor needs and is priced in accordance with less expensive water supplies, helping to keep basic water service affordable.
- Tiers 2 through 4: Higher usage is charged at progressively higher rates to reflect the greater costs of serving higher usage customers, including securing more costly water supplies and maintaining additional pumping and storage, while supporting conservation.
Adjustment Factors: Adapting to Changing Costs
After rates are established, costs on the LADWP system will fluctuate due to a range of factors, some of which are outside LADWP’s direct control, such as imported water prices. To address this, in addition to tiered base rates, LADWP also includes pass-through adjustment factors (sometimes called escalators) in its approved rate structure. These allow the utility to recover actual costs without requiring the full rate process outlined above every time conditions change. The size of these adjustment factors is presented to the LADWP Board, subject to City Council review, and is calculated by updating the formula approved in the rate ordinance with estimates and expenditures provided by the utility’s financial experts.
Key adjustment mechanisms for LADWP water rates include:
- Water Supply Cost Adjustment (WSCA): This adjustment covers the cost of buying imported water, paying for water transported through the Los Angeles Aqueduct, groundwater production, recycled water, water conservation, and any additional water supply source expenses. Many of these costs vary based on supply conditions, drought, and regional investments.
- Water Quality Improvement Adjustment (WQIA): This adjustment funds expenses that ensure the water delivered throughout the City is high quality clean drinking water that meets State and Federal water quality standards, and to provide critical security for water supply, storage, and conveyance infrastructure and related facilities.
- Water Infrastructure Adjustment (WIA) – This adjustment allows LADWP to recover costs of infrastructure investments that are needed to maintain and improve the reliability of the water distribution system.
- Owens Valley Regulatory Adjustment (OVRA): This adjustment recovers expenses related to protecting air quality and the environment in the Owens Lake and Lower Owens River area.
- Base Rate Revenue Target Adjustment (BRRTA) and Water Expense Stabilization Adjustment (WESA) – These adjustments allow LADWP to provide for its long-term financial stability by recovering shortage in revenue as compared to costs due to things like variation in water sales from projections, unforeseen events impacting water service delivery, and legal costs.
These mechanisms are designed to allow LADWP to respond to real-world changes while maintaining financial stability and transparency.
A Few Checks on Water Rates
Under California law, the revenues derived from water rates of publicly owned utilities like LADWP can’t exceed the funds required to provide the service, and can’t be used for any purpose other than that for which the rates were imposed. Also, the amount of the rates imposed upon any parcel or person receiving water service can’t exceed the proportional cost of the service attributable to the parcel. LADWP works to comply with these requirements and make sure it recovers the amount of funds necessary to operate, maintain, and invest in the water system by building water rates based on accurate and transparent revenue requirement calculations and cost of service studies.
In addition to a check on the amount of rates that are allowed, there are also checks embedded in the process of setting rates. Before a new rate can become final the City Council must adopt a rate ordinance (City law setting the rates). For new or increased water rates, owners of the affected parcels will receive notice of a City Council public hearing and may submit written protests. If a majority of identified parcel owners file written protests, the proposal is not adopted. If there is not a majority protest, the City Council may either approve the rate ordinance or reject it and send the proposal back to the LADWP Board for reconsideration.
OPA plays an essential role in these processes. Through independent analysis and public reporting, OPA helps confirm that LADWP’s assumptions and calculations that go into rate design and adjustment factors are appropriate and transparent, serving as an independent voice for the LADWP board and City Council to consider.
Looking Ahead: Building a Reliable and Resilient Water Future
Los Angeles faces growing challenges to water reliability — including climate change, aging infrastructure, and potentially reduced / increased cost of imported supplies. The way LADWP invests over the next decade will have long-lasting impacts on reliability, resiliency, affordability, and sustainability. To ensure that Angelenos have reliable and affordable access to clean and safe water now and in the future, LADWP plans to make key investments, including:
- Infrastructure renewal: Projects like replacing old pipes, upgrading reservoirs, and maintaining the Los Angeles Aqueduct and filtration system to reduce leaks and service interruptions.
- Local water supply projects: Projects like Pure Water Los Angeles, expanding stormwater capture, restoring groundwater basins, and reducing dependence on imported water.
- Water efficiency programs: Helping residents and businesses use water wisely and more efficiently through rebates, technology, and education.
- Operational effectiveness: Initiatives to modernize the utility so that ongoing operations are efficient and effective, including technology modernization, process improvements, and workforce improvements.
- Federally mandated quality standards: For example, the EPA has new regulations on the amount of certain contaminants in drinking water. Water providers must comply with these regulations by 2027.
As LADWP advances these investments, OPA will continue to uphold its commitment to:
- Transparency: Making rate decisions and financial information open and understandable.
- Accountability: Evaluating whether LADWP’s rate proposals, plans, and assumptions are data-driven and appropriate.
- Affordability: Protecting ratepayers from unnecessary or excessive costs while supporting investments that secure long-term water reliability.
Through these processes, Los Angeles can continue building a water system that will reliably deliver safe, affordable water for every Angeleno.