Introduction

It’s no secret that providing water in a state with the size and climate of California costs money. The gamut of water-related infrastructure – from reservoirs like Lake Oroville to the pumps and pipes that deliver water to homes, businesses and farms – incurs initial and ongoing expenses. Throw in a new spate of possible mega-projects, such as those designed to rescue the ailing Sacramento-San Joaquin Delta, and the dollar amount grows exponen­tially to billion-dollar amounts that rival the entire gross national product of a small country.

Who pays for this? Everyone does, individually and collectively. From the urban centers to the most remote farmlands, water comes at a cost, and as long as people have needed access to a clean, reliable source of water, there has been virtually no hurdle too large to ensure the viability of cities and farms, no matter how dry the climate. The reliability of water causes people to think it will always be there, like the air we breathe.

“We are spoiled,” said Univer­sity of Arizona law Professor Robert Glennon, author of the book, Un­quenchable: America’s Water Crisis and What to Do About It, in an interview with Arizona radio station KJZZ July 15. “We get up in the morning and turn on the tap and there is a limit­less supply of fresh water for less than we pay for cell phone service or cable television.”

Today, the question of who pays for water is much more complex than years past. Several factors affect the price, starting with the basics of what it takes to bring water from its source to the tap. In some areas the distance is minimal; in others water travels hundreds of miles through a vast net­work. Many people receive their water at a metered rate, with some paying significantly more if their water use goes beyond designated levels. Others pay a flat fee no matter how much they use. Ultimately, Glennon said, water itself is as free as the air we breathe.

“The reality now is we pay zero for water,” he said. “What we pay for is the delivery and treatment. There is no cost for the commodity itself.”

The relative indifference to water indicates the success by which de­velopment projects large and small have enabled communities to thrive in areas bereft of sufficient rainfall or natural sources of water. The generally uninterrupted nature of water service underlies its genuine but some would say underappreciated value.

“Water is still the best deal in California,” said Randy Kanouse, special assistant to the general manager at the East Bay Municipal Utility District (EBMUD). “You get safe, reliable, high quality water [and] if you pay more than $30 a month for it, I’d be very surprised.”
While Californians for years en­joyed water service at a price that few people would quibble over, the passage of time has brought home the real­ity that increased revenue is needed to maintain and improve upon that service. In several parts of the state, residents have been advised to expect rate increases at regular intervals for the near future.

“Water rates are going up for several reasons,” said Jonas Minton, water policy advisor to the Planning and Conservation League. “Agencies throughout the state have to raise their rates because of aging infrastructure. The pipes and pumps that deliver water in many places have been in the ground 50 to 100 years and now the repair and replacement bills are com­ing due.”

Beyond economics lies the reality that water is a finite resource that is becoming scarcer for several reasons, including drought, climate change and regulatory cutbacks in deliveries. A glance around California reveals an unsettled situation – communities grappling with water restrictions and farmers left with dry fields in small towns with staggering unemployment rates. In such a climate, officials be­lieve it is important to understand the changing paradigm that exists with the state and its water.

“The fact is we are moving from policies of extraction toward policies of sustainability,” said Tim Quinn, executive director of the Association of California Water Agencies (ACWA). “That is a good thing, but sustainabil­ity costs more than a policy designed to extract resources from Mother Nature at the lowest possible cost. Water rates will trend upward, period. But your water will still cost less than your cable bill chances are.”

Discussion of water pricing inevi­tably raises the question of equity and the impact of higher rates on water use. David Zetland, an economist who writes the water blog, Aguanom­ics, said “the elephant in the room is demand,” which he believes can be dealt with through higher water rates. “Water at urban levels is too cheap and at the ag level is too cheap or not traded,” he said. “We know that higher prices would promote efficiency but we can also protect equity by ensuring that everyone gets access to an initial block of cheap water. My bumper sticker policy for urban water pricing is ‘some for free, pay for more.’”

The connection between money and water is fairly direct at the local level, yet the situation changes in the larger context of publicly-financed water projects. While there is a legacy of voter-supported bond projects directed toward a water supply, water quality and the environment, there is the ever-present discussion of how such proposals should be paid for.

“The more interesting question is who pays vs. who benefits,” said Kathy Jacobs, a professor in the Department of Soil, Water and Environmental Science at the University of Arizona. “There is a long history in the West of asking the federal government to subsidize our water and our energy, but it is not that clear that the benefits are shared across the country. This is not to say that there aren’t a multitude of subsidies elsewhere, but there is a need to compare the two populations.”

Creating an acceptable means of financing water system improve­ments was part of an ambitious slate of bills California state lawmakers failed to reach agreement on as the clock wound down on the 2009 legislative year, although as this magazine went to press, there remained the possibility of a special session being convened to deal especially with water issues. Faced with an unprecedented water crisis, the Legislature attempted to send to the governor a set of bills that included a proposed annual fee on those that hold the right, permit or license to divert water from the system.

Disputes over financing and other provisions of the legislation kept the package from being sent to the governor. Senate President Pro Tem Darrell Steinberg, D-Sacramento, said lawmakers were “close” to forging a compromise and had “made a decade’s worth of progress in just a few weeks.”

“I remain confident that the Legis­lature can pass a comprehensive water package that will restore the Delta’s fragile ecosystem and ensure a reliable water supply for California’s economic growth,” Steinberg said in a Sept. 11 statement.

Sen. Dave Cogdill, R-Modesto, author of a $12.3 billion water bond, acknowledged there are “hurdles to be overcome – but they are not insur­mountable.”

“Republicans agree our fragile Delta needs to be fixed, but we have been clear that environmental protec­tion should not come at the price of economic destruction,” Cogdill said in a Sept. 11 statement. “Despite [the] setback, we are making progress and I will continue to work until we achieve a complete solution that meets California’s water needs now and into the future.”

Affordability is especially apt in light of projections made by Steven Kasower, an economist whose preliminary estimates indicated a bill as high as $54 billion for all the water system improvements, including Delta mitiga­tion and restoration, new convey­ance and the construction of storage reservoirs. Debt service for such an undertaking could reach as much as $3.4 billion annually.

“The magnitude of the numbers suggests there are alternatives that may be feasible,” Kasower told lawmakers Aug. 27. “With costs so high, it behooves us to ask ourselves, are there not more local, sustainable opportuni­ties for regional [water] recycling?”

In an August report, Fixing the Delta: How Will We Pay for It? Dean Misczynski, adjunct fellow with the Public Policy Institute of California, writes that while there is “broad agree­ment about the virtues of beneficiary financing, there is great disagreement about the extent of benefits entering into the equation.

“Water providers tend toward the view that they should pay for the water they receive, period,” the report says. “Environmentalists prefer the view that water providers should also pay to restore fish populations harmed by water deliveries. This difference of opinion has largely stalemated discussions about benefit financing for at least a decade.”

At an Aug. 19 briefing on the report, Misczynski said a new user fee to fund projects such as alternative conveyance could be paid directly to the Department of Water Resources or through the proposed Delta Steward­ship Council, “which may … put more thought in to the amount of environ­mental mitigation required.”

Then there is the question of whether voters will be in the mood next year to approve a state water bond, given the travails of the economy and the state budget. Kanouse asked rhetorically, “How can we justify asking voters to tax themselves for a $10-15 billion water bond? With California’s huge debt burden, there’s a very high bar to ensure that the public is getting its money’s worth, rather than funding the needs of a limited group of interests.” Kanouse said lawmakers should also be considering carefully crafted water user fees to finance Delta programs that provide broad benefits. “Any notion of a statewide water fee must include strong protections to ensure that it cannot be channeled into the general fund for other, non-water uses,” he said. “There must be a fair and equitable formula for assessing payments, and all water users must contribute.”

In PPIC’s July 2009 report, Cali­fornia Water, Research Director Ellen Hanak wrote that “California needs to decide how to pay for water invest­ments,” whether it be private sources, taxpayers or a combination. “When in­vestments lead to true public benefits, such as ecosystem restoration, relying on tax dollars makes sense,” the report says. “But this takes general revenue funds away from education and other state budget categories. One alterna­tive is the ‘user pays’ principle, which guided investments in the State Water Project (SWP). Also, higher water rates create incentives to use water more efficiently.”

Incentive-laden or not, rising water rates are evident in virtually every corner of the state, the result of squeezed supplies as well as the need to pay for projects, some quite large, that will solidify existing sources while tapping into new supplies such as re­cycled water. More recently, water rates have begun to reflect the difficulties in moving water through the Delta.

“One of the reasons water costs are going up is because we are just now beginning to pay out of our wallets the environmental costs associated with supplies of water,” Minton said. “In the past, there was no cost for restoring fisheries heavily impacted by water projects. Now that mitigation is recognized by the public and the courts as a necessity, those external costs are getting wrapped into what we as consumers pay.”

In Oregon, recently signed legisla­tion sets forth a process by which utility ratepayers will help pay the costs to re­move dams in the Klamath River Basin that have hindered salmon migration. Under the plan, average homeowner bills will go up by 1 percent for a 10-year period. Costs are capped at a total of $200 million, and if the dams are not removed the funds must be returned to customers or used for their benefit.

In one of the largest such projects ever, the San Francisco Public Utilities Commission (SFPUC) has commit­ted $4.6 billion to repair and upgrade its Hetch Hetchy System, the water supply infrastructure that brings water 167 miles from Hetch Hetchy Reser­voir in Yosemite National Park to the Bay Area. Built in the aftermath of the 1906 earthquake, parts of the convey­ance system have succumbed to age and are now threatened by the next large earthquake, which scientists pre­dict has better than two-thirds chance of occurring in the next 25 years.

One of the more ambitious aspects of the project involves boring a 5-mile tunnel beneath San Francisco Bay to install new, earthquake-resistant pipelines. To finance the water system improvements, the SFPUC has embarked on a series of rate increases that means the typical San Francisco single-family household’s bill for water and sewer service will increase by an average of 9.9 percent for each of the next five years.

“Increasing rates is never easy, especially in these tough economic times, but the cost of not making these urgently-needed improvements to our water and sewer systems would be far greater for our economy, our public health and our environment,” said Ed Harrington, general manager for the SFPUC, after commissioners adopted the rate increase May 5.

Elsewhere, utilities public and private are raising rates to keep up with retrofitting efforts and the need to boost water conservation programs. In Stockton, the California Water Service Co. is seeking a rate increase to pay for new and existing infrastructure projects and to help defray the costs of rebates for low-flush toilets. Up the road in Lodi, city officials approved a 73 percent wastewater rate increase in July that will push the average bill to nearly $50 per month by 2012. The increase was due in part to the city’s need to comply with discharge require­ments overseen by state regulators.

This issue of Western Water exam­ines the financing of water infrastruc­ture, both at the local level and from the statewide perspective, and some of the factors that influence how people receive their water, the price they pay for it and how much they might have to pay in the future.

Click here to purchase a copy of the entire article.

Editor’s Desk

I recently was quoted in a Sacramento maga­zine as saying that water stakeholders continue digging in their heels causing stalemate on this key statewide issue. As a veteran observer of the water wars, I also said that unless there’s a crisis, nobody pays attention. “Everyone panics in a flood but when the rain stops and the sun comes out, it is amazing how quickly people forget.”

The current drought and other statewide water crises California is experiencing led to a flurry of legislative bills that were left un­resolved as the state Legislature adjourned in mid-September. The usual lack of trust among negotiators led to stalemate at the last moment. As another water war veteran Phil Isenberg, who led the Delta Vision Task Force, commented on the legislative failure, “People tend to dislike the status quo, but prefer to live with it rather than taking a risk.”

Democrats and Republicans are still saying they will not budge on certain points. The major sticking point is surface storage – dams. Observers of this legisla­tive game know that Gov. Schwarzenegger will not sign a bill without the proposed storage he and the Republicans want. And the majority party Democrats will not agree to that request. Instead, they support more conservation, reform of groundwater regulations and other “soft” path options.

I am reminded of stories I heard as a young reporter from earlier water war veterans about the negotiations that went on during the fight to create the State Water Project in the late 1950s. One story concerned state Sen. Pauline Davis, one of the few women legislators at that time. A northern California legislator, it was said she demanded that her area in the northern part of the state receive some small reservoirs for her support of the State Water Project legislation. Called a “hardnosed politician” by Gov. Pat Brown, she wanted some recreation dollars to flow to her district. And that’s why the three small lakes above Oroville Dam in her district – Lake Davis, Antelope Lake and Frenchman’s Lake – are today part of the State Water Project. The funding for these lakes came from another deal to use state tidelands oil funds to finance the lakes. This story of negotiating on water legislation, which I was able to verify by reading Gov. Brown’s fascinating 1979 interview with the University of California’s Bancroft Library, is not often quoted in the official histories of California water.

The point of this story is that we all know these kinds of deals are made in the legislative process. Both sides agree to some points they don’t want in order to get what they believe is still a package that delivers the goods for them. I still hope the next legislative session yields results in which both sides give and take and come up with something that will have some benefit for us, the water users, and for our environment.

One thing is certain. As our state and the West continues to grow in popula­tion and faces an uncertain future in terms of climate change, we are learning that we will all have to get along with less – but more costly – water.

-  Rita Schmidt Sudman

In the News

Water Shortage Sparks Surge in Market Activity

A robust demand for water has prompted a round of buying and selling as agri­cultural water districts in the Central Valley struggle to cope with three years of drought.

One of the more notable transactions recently occurred with the permanent transfer of a State Water Project (SWP) water right entitlement of 14,000 acre-feet of water from the Dudley Ridge Water District in the west side of the San Joaquin Valley to the Mojave Water Agency (MWA) in San Bernardino County – a rapidly urbanizing service area with boundaries that are expected to see 133,000 more people by 2020. An acre-foot of water, about 326,000 gallons, is enough to cover an acre of land one foot deep and can meet the annual needs of one to two households.

Because of limited groundwater supplies, a 2004 MWA regional water manage­ment plan identified water from the SWP as “a potential means of increasing water supplies to meet future demand.”

MWA will pay a lump sum of $73 million for the permanent water right to the 14,000 acre-feet, according to news reports, more than $5,000 per acre-foot.

The transfer of water from Dudley Ridge – a wholly agricultural area owned by a handful of farming interests – “is a benefit to MWA, which has overdrafted groundwater since the 1950s, and can use the water to balance water demand and supply, eliminate groundwater overdraft, and store water within MWA groundwater basins to use as a reliable supply during periods of drought,” according to an environmental document prepared for the transfer.

The document notes the transfer will remove 2,500 acres of almond trees during a 10-year period, to be replaced by grazing, dry farming and/or open space.

Elsewhere, the South San Joaquin Irrigation District in Manteca has trans­ferred about 30,000 acre-feet of water to support municipal and agricultural purposes. The Manteca Bulletin Aug. 27 reported the district has sold water to the city of Stockton, Stockton East Water District and San Luis-Delta Mendota Water Agency (SLDMWA) for a grand total of $6.8 million. Shortly thereafter, the U.S. Fish and Wildlife Service announced its approval of a request that could make an additional 30,000 acre-feet of water available to SLDMWA through the 2009 Drought Water Bank. Under the plan, the Tehama-Colusa Canal Authority would be able to sell the water that recently became available because of increased alloca­tions, shifting to crops that use less water and increased use of groundwater.

Ellen Hanak, director of research at the Public Policy Institute of California and author of the 2003 report Who Should Be Allowed to Sell Water in California?, said “it makes a lot of sense to have some long-term shifts of water rights from agri­cultural to urban users, given the fact that most water rights were established some time ago, and that the California economy is changing over time with population growth and a relative decline in the share of agriculture in the overall economy.

“Water markets are a way to facilitate this transition through voluntary means, with compensation for the rights holders, and in this sense preferable to forcing reallocation without compensation,” Hanak said.

– Gary Pitzer