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A proposed new rate structure would increase the water bill for the average homeowner in the unincorporated areas of Pima County by $5 to $7 a month starting in July, according to an analysis prepared by Tucson Water. At the same time, the average homeowner living in Tucson, Marana and other incorporated cities who are Tucson Water customers would see their bills drop an average of about $2 a month starting in July compared to what they would be paying under the current rate structure.

Depending on which of three possible differential rate structures the City Council approves, an unincorporated area household would pay on average from $6.41 to $8.88 per month more than a typical household living in an incorporated area, Tucson Water told the Star.

On Tuesday, the City Council will consider approving a notice of intent to create these differential rates for Tucson Water customers living in unincorporated areas compared to those charged to utility customers living in incorporated areas, which also include parts of Oro Valley and all of South Tucson. Thomure is asking the council to hold a public hearing on the proposal on June 17 before approving a differential rate plan.

The proposal also calls for much smaller increases in city water rates to support existing water conservation programs and creation of “green stormwater infrastructure.” Such projects encourage rainwater harvesting and other methods of making use of storm runoff to enhance residential neighborhood landscaping. These increases would be charged to all customers, inside and outside of incorporated cities.

The impact of a differential water rate structure would be broad and sweeping. Many other Arizona cities, including Phoenix, charge their suburban customers more than they charge their city customers. But in most of those cities, the utilities’ unincorporated customer base represents a small fraction of their total customer base.

For Tucson Water, unincorporated area customers represent about one-third of its customers. That is one reason the idea of differential rates has proven controversial in the past, having been approved in a different version in 2021 only to be tossed out in court in 2023.

And controversy is already dogging this proposal, with the chairman of the Pima County Board of Supervisors opposing it and calling it “highly aggravating.”

But there’s a big difference between the 2021 plan and the one going before the council on Tuesday. The earlier plan boosted water rates to unincorporated customers by 10%. The new plan would charge unincorporated customers 16%, 19% or 23% higher than what incorporated area residents are paying.

Rex Scott, chair of the Board of Supervisors, says the new city proposal still fails to meet the prime objection handed down in 2021 by a Maricopa County Superior Court judge when he halted the city’s differential rates in response to a Pima County lawsuit.

Another part of the new city proposal that’s drawing opposition is its plan to have the extra money raised by the differential rates to be returned to customers living in incorporated areas, including Tucson.

Councilman Kevin Dahl wants to see some of that money spent on climate resiliency efforts, including the city’s Storm to Shade program that uses stormwater captured through natural means to nourish trees, shrubs and cacti in residential neighborhoods. He would also like to use some of the revenue to give financial help to low-income customers.

A lingering issue from the last differential rate fight was finally settled for good on Wednesday. The Arizona Supreme Court issued an order denying Pima County’s request that the city of Tucson be required to return to its unincorporated customers the $10 million it collected when the differential rates were in place from 2021 to 2023. The new ruling upholds the positions previously taken in the case by the Superior Court and the Arizona Court of Appeals.

It costs more to serve outlying areas

The city lost the lawsuit back in September 2023 when Judge Randall Warner ruled the city’s differential rate structure wasn’t properly justified by an analysis of the costs of serving water to both incorporated and unincorporated areas. The City Council had approved it in June 2021, over the outspoken opposition of Pima County officials and some suburban residents.

This time, however, Tucson Water is basing its higher proposed rates on costs — but not just the raw costs of serving its customers living in cities versus the costs of serving customers outside cities, the utility said.

Instead, it’s basing its proposed charges on what Assistant City Attorney Chris Avery calls “the cost of capital assets” owned by city residents, compared to comparable asset costs for unincorporated area customers. The assets are Tucson Water’s infrastructure, including wells, pipelines, booster stations, and other equipment needed to deliver water to customers, he said.

“It’s not based on the cost of expenses or programs — such as a conservation program or a pipeline maintenance program. Instead, it is just based on the cost of assets owned by the city,” Avery said in an email to Councilman Dahl.

“Since the 2023 ruling, this office has consistently advised the city that any new rate study should be simple. It is my opinion that using the cost of capital, as recommended by the experts here, is that approach, and it also has the benefits of using a methodology that is consistently used to set rates in the private sector, under Arizona Corporation Commission jurisdiction, which also requires rates to be reasonable, and allows the city to use settled case law to defend this approach,” Avery wrote to Dahl.

The city hired four outside experts to help with this proposal, he said. Three worked directly on using the cost of capital assets to determine the cost of service, while a fourth produced a method to determine the rate of return the city should get in the process from its capital investments. The experts recommended what’s known as a “utility basis” approach, the city said.

Scott, however, said, “What (the city) is doing here is no cost of service study of their entire system. They’re only looking at unincorporated ratepayers. And they’re only looking at the debt service ratio for people who live in the unincorporated county. If you are gong to do a real cost of service analysis, you need to look at all your ratepayers.

“I believe they began with an end in mind — they came up with a methodology that justifies raising unincorporated county rates. That’s what they wanted all along and they want to lower rates for people who can vote for them,” Scott said.

Overall, Scott said he found Tucson Water’s proposal “highly discouraging and extremely aggravating.”

“I read the Mayor and Council memo” from City Manager Thomure, “and they may be covering all their basis legally this time, with an accent on legally,” Scott said. “But they’re still treating one set of their ratepayers unfairly. They’re doing this purely to generate revenue for Tucson Water’s capital costs.”

Tucson Water declined to respond to Scott’s comments. But Assistant City Attorney Avery said the city also looked at the direct cost of serving customers in the city and unincorporated areas. The conclusion was that if Tucson Water gets the same return on investment on its rate base from all customers living in both incorporated and unincorporated areas, it costs 5.9% less to serve incorporated areas than it does to serve unincorporated areas, Thomure’s memo said.

It costs more to serve unincorporated areas because they need more pipes and other infrastructure per unit of water sold, Tucson Water told the Star. That’s partly because the unincorporated areas have lower population densities and partly because they use more water per person than incorporated areas, the utility said.

Might give money back to city residents

In 2021, the City Council voted to use the extra revenue from its earlier differential rate plan to pay for infrastructure upgrades, climate resilience and expansion of the utility’s low-income program that helps defray some of their water costs.

Now, the utility seeks to have the increased revenue returned to incorporated area customers, as a way of making the new rate structure “revenue neutral.”

The judge's 2023 ruling didn't require that a differential rate structure be "revenue neutral."

But in his email to Dahl, Avery wrote, “It is my opinion that the most straightforward way to develop a cost of service study based on ownership of the capital is to return the cost savings to the owners of that capital — namely City of Tucson customers. Strictly speaking, I suppose, a cost-of-service study could be developed that would build in other pathways for the revenue arising from the cost-of-service study, but such an approach could leave the City open to more legal issues than the current approach.

“In the 2021-23 litigation, for example, Pima County provided expert opinion on all sorts of issues, ranging from conservation, soil moisture, annexation, etc. Basically, any reason for developing the rate or use of the revenue was attacked by Pima County’s lawyers, who hired experts on any issue, and took endless depositions and made countless discovery requests of all parties,” he wrote.

He added to the Star, “We were attacked on every front in the last rate case, including disagreements in ways the money would be spent. The utility basis approach recommended to us avoids all those issues. There’s no increased revenue to the city... .”

Dahl, however, told the Star he supports having some of the new revenue going to the Storm to Shade program because the unincorporated residents, besides using more infrastructure and water, “also (in general) have much cooler temperatures than their urban counterparts in large part due to more tree canopy and vegetation.

“I also support a portion of the revenues going to expand our low income program and that goes for BOTH City and County residents,” Dahl said in an email.

Councilman Paul Cunningham, however, told the Star he’s inclined to support the city proposal because it returns value to city residents who own the Tucson Water system.

Because the proposal also includes small rate increases to improve existing city water conservation programs, it will also provide sustainable, long-term funding for water conservation and “green infrastructure” projects along with better water use monitoring and better programs for low-income residents and homeowners’ associations, he said.

“The proposal will allow us to avoid some regular rate increases for city residents while providing sustainable, long-term funding” for the other projects, he said.

‘Don’t hit people all at once’

Val Little, a longtime water activist and member of the Tucson Citizens Water Advisory Committee, opposed the 2021 proposed differential rates because she didn’t agree with the process the city used to institute them.

Now, she’s supporting the proposal, although she and other advisory committee members are asking the City Council to delay the time the new rates take effect from a now-scheduled July 1 until Aug. 1. The latter day is when the city’s separately scheduled 5.5% annual water rate increase will take effect and it would be good to have both new rates kick in at the same time to avoid customer confusion, Little said.

“I’ll admit a lot of it is pretty fuzzy,” Little said of the economic reasoning the city used to support its proposals, “but I feel they have covered their bases with the use of subject matter experts and consultants.

“They have come up with a way to calculate cost of service inside and outside the city that will satisfy any court, any judge,” Little said. “It may not make everybody happy or satisfy everyone, but there is a case to be made.”

On the other side, County Supervisor Matt Heinz said that if the city does adopt a differential rate program, it should phase it in up to 18 months or two years from the time of adoption so it won’t “hit people all at once.”

“I know when they planned this discussion (the city) had no knowledge of the president going crazy on this global trade war crap,” said Heinz, a Democrat, referring to Republican President Donald Trump’s new, sweeping tariff plan. “That’s going to cost anywhere from $2,000 to $4,000 per family per year for the average family, probably forever until Trump is out of office.

“Maybe that’s not the best time to be contemplating raising any (water) rates,” Heinz told the Star.