Why Inefficient Markets, Perverse Incentives and Regulatory Hurdles are Causing Deeper Strains on California’s Water System

In the midst of California’s fourth year of drought, cities and water districts are starting to get tougher on both individual water wasters and cities that are not reaching state-mandated water reduction targets. In late October, the East Bay Municipal Utilities District outside of San Francisco released the names and data of the top-100 water wasters in the District. The list includes venture capitalists, business executives and even former and current baseball and basketball stars. The top water waster identified was Chevron executive George Kirkland, who used an average of 12,579 gallons per day. Extrapolating that water usage to a monthly basis (assuming 30 days in a month), Kirkland was on pace to use more than one acre-foot per month, more than an average California household uses in an entire year!

Across Southern California, the State Water Resources Control Board fined four Southern California cities $61,000 each for not meeting the state-mandated usage reduction goals. Beverly Hills, Indio, Redlands and the Coachella Valley Water District received these fines for missing the state mandated targets. But despite the front page headlines, the cities and individuals facing fines are not significantly worse off financially after the fines. The penalties for cities missing the state-mandated targets is $500 per day. In the East Bay Municipal Utilities District, water users are penalized $2 for every unit of water consumed over 80 units (each unit is 100 cubic feet, or 748 gallons) in a 60-day billing cycle, likely a pittance for well-to-do business executives that top the water wasters list.

On November 2, Marta L. Weismann wrote a post about how water conservation can cause unintended negative consequences including potential revenue shortfalls for water districts. The drought conditions have exacerbated these issues and have shown that water supplies don’t always go to the places with highest demand, especially during times of drought. But are there ways that California can streamline getting water to places and end users that need it most? In this post, I will discuss the challenges that water agencies face in financial planning for current and future water needs and why these challenges occur. In my next piece, I will discuss the potential solutions that California could implement to alleviate these challenges.

Perverse Incentives for Conserving Water

When Governor Jerry Brown issued an Executive Order in April mandating statewide water use restrictions, California immediately created challenges for water districts to create enough revenue to cover costs. A water system by its nature is a capital-intensive investment. Significant infrastructure such as pipelines, storage tanks, wells and pumps must be constructed and maintained over the life of the system. To pay for this infrastructure, water districts make a series of long-term assumptions about how much water customers will use, and if the district is in a growth area, how much new development will occur (and therefore new customers will contribute to the district’s revenues). An unplanned cutback in water usage or a slowdown in new construction has negative consequences on cash flows of a water district, and may put financial strains on the utility.

A water district’s primary source of revenue comes from its users, but districts’ revenue streams are currently under pressure for a variety of reasons. First as I mentioned, mandatory water conservation means less than projected water sales for a district, and therefore less revenue. Rob McDonald at The Nature Conservancy estimates that California municipal water districts’ revenue will drop by as much as $600 million this year due to the mandatory water restrictions. Second, and rather ironically, some water districts will be forced to raise water rates to make up for revenue shortfalls because we have conserved water too well. The Los Angeles Times reported in late October that the LA Department of Water and Power plans to add a “pass-through charge” that will require customers to pay about $1.80 a month more than they currently pay for water service. The reason? LA DWP fell approximately $111 million short of revenue projections because its customers conserved more water than the Department planned. It has no other way of recouping this money to pay for necessary repairs and infrastructure without raising rates. It is a vicious cycle, and does not promote further water conservation.

Some areas have water, but it doesn’t always go to the places that need it most

There is no doubt that California is in the midst of a severe drought, and that the negative effects of the drought are far-reaching. But it is not accurate to say that all areas of the state are suffering equally. The state’s cities and irrigation districts receive water from a variety of sources, and the drought has not affected each one of these sources equally. Further, the priority system of California’s water rights have highlighted the “haves” and the “have nots” in terms of water supplies. For example, farmers with rights to Central Valley Project water have not received supplies from the system for the last two years. Some farmers that rely on water from the Friant-Kern Canal worry that even with significant rains this winter, the Bureau of Reclamation will be conservative in the supplies they grant to farmers.

Other areas of the state have experienced no cutbacks in water supplies.  Bloomberg reports that farmers in the Imperial Irrigation District (IID) in Southeastern California have not experienced cutbacks in water supplies despite the drought. IID has court-affirmed water rights from the Colorado River, and these rights have not been curtailed. Further, because of California’s seniority in rights along the Lower Colorado River Basin, neighboring Arizona would be the first to experience cutbacks. (For more information on why Arizona’s Colorado River rights are junior to California’s, please see the post I wrote about this topic earlier this year.)

The fact that water is relatively abundant in some places and non-existent in others highlights a major challenge that California faces – that water does not always go to the places and uses that need it the most, especially in times of drought.

The hold-ups to transfer water efficiently in California

There are a few reasons why California does not currently have an efficient way to transfer water to the places and uses that need it the most. First, California’s water rights system is exceedingly complex and does not currently lend itself to efficient transfers. Water could come from surface water rights, (which both the State Department of Water Resources and the US Bureau of Reclamation have jurisdiction over, depending on which system the water rights originate from) groundwater rights, reclaimed water or even from desalination plants that are coming online. There is no one central clearinghouse to match willing sellers who have excess water and willing buyers who need excess water.

Second, the regulatory environment in the state causes slowdowns in delivering much needed water projects. A myriad of environmental hurdles including the California Environmental Quality Act (CEQA), Federal Clean Water Act and takings permits as well as the lawsuits that generally accompany large water projects all contribute to major slowdowns in project approval. For example, the Carlsbad Desalination Plant took 17 years after the developers initiated feasibility studies to receive final permits and court decisions to proceed on construction.  Last month, The Journal of Water  wrote an interesting piece on the myriad of legal challenges to the Cadiz project, a water storage and transfer project in San Bernardino County that has been winding its way through regulatory approvals and lawsuits since the 1980s. Recently, a group of Southern California water districts including the Metropolitan Water District of Southern California has entered into negotiations to purchase the Delta Wetlands properties, a water storage project in the Delta that has been winding through the approval process for approximately 25 years. Neither the Cadiz Project nor the Delta Wetlands Project currently has all of the necessary permits to move forward on construction.

Regardless of your opinion of the water projects mentioned (and opinions vary wildly on the validity of these projects), one thing is clear – each of these projects have taken decades to process through the environmental and legal reviews that California’s laws necessitate. And while the projects slog through regulatory approvals, Californians still must make due with the limited water supplies we have stored in our current water system.  In my next post, I will look at some solutions California could implement to help transfer water more efficiently and bring viable projects to the construction phase more efficiently.


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About Jeff Simonetti

Jeff Simonetti is the Vice President of Public Affairs at the Capitol Core Group and provides project management, business development, and policy/lobbying expertise to a variety of federal, state and local clients. During his tenure at Capitol Core, Jeff has among other projects helped a renewable energy company to secure authorizing resolutions in cities across Southern California. Prior to joining Capitol Core Group, Jeff was a Vice President at the Kosmont Companies, a real estate and economic development consulting firm. At Kosmont, Jeff was the project lead for cities looking to implement financing strategies such as Enhanced Infrastructure Financing Districts (EIFDs) and other post-redevelopment funding mechanisms. He also was the project manager for the Economic Development element of the Fontana General Plan Update. Jeff gained significant state and local government affairs experience as the Government Affairs Director at the Building Industry Association (BIA) of Southern California’s Baldy View Chapter. During his tenure at the BIA, he helped to found the annual San Bernardino County Water Conference, an event that gathers over 400 elected officials and business leaders in the region to discuss the pressing water policy issues that affect the community.

5 thoughts on “Why Inefficient Markets, Perverse Incentives and Regulatory Hurdles are Causing Deeper Strains on California’s Water System

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  3. Greg Gartrell

    “It is a vicious cycle, and does not promote further water conservation.” Wow. That is the first time I have heard someone claim raising rates does not promote conservation!! Don’t tell that to Marin MWD, who raised rates, and drove so many out of the top tier they had a financial crisis as they did not collect the rate increase revenues they planned on.
    Of course, you and many others confuse rates with revenues. While agencies need to increase rates as demand drops, revenues generally stay the same or go down (as expenses go down, since about 20% of expenses are tied to demand, while about 80% are fixed costs–furthermore public agencies cannot make a profit, they can only charge what it costs to deliver water). Customers still pay less with conservation, just not as much less as without the rate increase that keeps the revenue level.

    Correct that the regulatory system is a mess and takes time (Delta Wetlands started before I started my career at Contra Costa Water District, and it still is trying to get the final permits, and I have retired). But during my tenure, we permitted and built Los Vaqueros Reservoir, and two new intakes in the Delta, put screens on all our intakes (yes, even that took time, permits and required mitigation) and permitted and built the expansion of Los Vaqueros Reservoir, among many other projects. If you do it right, you get it done. But you haven’t got enough room to list all the things done wrong, and you only list two projects that are still around; how about South Delta Permanent Barriers, Franks Tract (Threemile Slough) Project, Dutch Slough Habitat Project, the BDCP, the North Delta Project (go back to the late 1980’s for that one if you don’t remember or never heard of it), Los Banos Grandes….I could go on….

    1. Jeff Simonetti Post author

      Hi Greg,
      Thanks for your comment. When I said that “it is a vicious cycle and does not promote further water conservation,” I was referring to the need for LA DWP to raise rates after their customers had conserved to make up for a revenue shortfall. I agree with you that higher prices drives consumption lower. My point is that it is frustrating for customers to conserve – only for their water provider to increase rates next year because of a revenue shortfall due to water conservation! The act of raising rates after water conservation occurs is the “vicious cycle” I was referring to, and it will be interesting to see how water conservation in LA DWP fares next year. I would be discouraged to conserve if my provider increased my rates after I met their conservation goals.

      As for the regulatory environment – for sure there have been some projects that have navigated the regulatory scrutiny – but overall it just takes too long for helpful projects to get approved. Thanks for reading the blog and for your comment.

      – Jeff

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