Author Archives: Richard McCann

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About Richard McCann

Partner in M.Cubed, an economics and policy consulting firm.

The Elusive Potential of California’s Water Supply

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NRDC and the Pacific Institute just released a report purporting to show the potential for large water savings in California in the face of our severe drought. While laying out the technical potential in a static setting is a useful exercise, this report can be misleading about the true potential for water savings without significant institutional and political change. The report doesn’t account for how farmers actually respond to improved irrigation efficiencies, and how residential customers resist changing their landscapes and using recycled water.

Starting with farmers, we found in a study on the benefits of aggregating PG&E’s agricultural accounts that growers were using subsurface drip systems increase tomato yields by as much as 50%. In Fresno County, processed tomato yields have risen 26% in 5 years as flood irrigation has been replaced by drip. In addition, the amount of runoff has been reduced, so on net the new efficient irrigation technologies have lead to increased productivity with no reduction in water use.

Residential customers are resistant to the idea that they should give up their lush landscaping. As I posted previously, even in environmentally-friendly Davis, voters rejected a new rate structure that would have encouraged summer water conservation. And they are just as thrilled with using recycled water. A 2004 SDCWA survey found that 63% of residents didn’t want recycled water introduced into their drinking water. All of this adds up to political resistance to change that water professionals see as a “no-brainer.”

Another question is what happens to the downstream and groundwater basin users who now depend on runoff for their water supplies? Particularly in agriculture, water is often reused several times as it drains or percolates to the next user. Calculating the true potential savings requires a full water-budget analysis of a basin, not just adding up all of the individual savings without considering the synergism among them.

And finally, what happens to the ability to respond to variations in water conditions? Urban water agencies are already concerned about “demand hardening.” Farmers have moved to higher yield, more profitable orchard crops, but as a result they can’t easily accommodate large swings in water availability. Managing our water supply isn’t just about reducing the average consumption–it’s about creating a less vulnerable system.

Setting Davis water rates in the most fair manner

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The City of Davis adopted an innovative rate structure in 2012 to fund a new surface water supply project. The new framework, called “consumption-based fixed rate” or CBFR, originally was structured to provide a stable revenue source for recovering debt costs while allowing customers to reduce their bills when conserving. Instead of having a fixed, constant readiness to serve or demand charge, the summer demand charge would be recomputed each year by dividing the fixed debt service (about $10M per year) by the total summer usage of all customers. When a customer reduced their share of overall summer usage, their bill would go down. However, the total revenue would remain stable year to year because the summer demand charge would be recomputed to ensure meeting the overall revenue target. The CBFR mutated to a more standard fixed demand charge for various political and legal reasons and it lost some of its revenue stability features.

The City has faced several challenges to the water project and the rates. All had lost up until June 3 when Measure P passed by a small margin and rolled rates back to 2011. The Utility Rates Advisory Committee (URAC), of which I am a member, is redesigning rates on an accelerated schedule to ensure viability of the water project. The Measure P proponents missed several key facts in their arguments, so the URAC will need to ignore some of those errors. However, the most important factor in the defeat of the proposed water rates was in the lack of simple communication and understanding by the public. “CBFR” just doesn’t cut it as a simple saleable concept.

I believe that Davis needs to move toward a more efficient water pricing scheme that signals consumers when they should be using water given costs and environmental impacts. The first fairness criterion is that people should pay prices that best reflect the cost to serve them so there are no unjustified subsidies flowing among customers.  The second fairness criterion is that those with less means can receive a subsidy from those with more if the subsidy can be structured to minimize misallocations of resources.

What doesn’t meet a fairness criterion is having everyone pay a single average annual price that doesn’t reflect how the cost of water varies over the year.  Someone who uses the same amount of water year round should not pay the same average annual rate as someone who uses much more water during the summer, even if they use the same total amount for the year. There are several reasons for this.

The most important centerpiece of the Woodland-Davis water project is the 10,000 acre-foot a year (or 3.25 billion gallons) water right acquired from Conaway Ranch. Based on terms of that agreement and depending on the period used to recover the investment, this water supply costs at least $0.50 per CCF.  But the most important fact is that this cost is only for water delivered in the summer. The purchased water right only runs from April 1 to October 31. Water used in the winter is free. That means that customers using water in the summer should pay at least $0.50 per CCF more just to cover the ongoing costs of the water supply.

Further we need to consider how to allocate the costs of delivering that water to Davis. The reason why Sacramento River water is expensive in the summer and free in the winter is that water is scare and in high demand during the summer. How best to allocate costs when most of the demand happens over a short period can be best illustrated by looking at parking in downtown San Francisco. Parking structures are built with capacity to meet demand during work hours on weekdays. Work hour parking can cost upwards of $30 per day, but on a weekend night when the area is empty, parking typically costs $5. These rates are set by private operators who are recovering their investments as efficiently as they can.

For the same reason, Davis must recover most of its investment in the water conveyance facilities from summer users—the plant capacity was built to meet their demand.  A plant built to an annual average capacity won’t be sufficient in August. The current rate structure properly recovers those costs from those individuals who create the need for such a large investment.

Fortunately, the second fairness criterion of reducing costs for those of lesser means can be met through higher summer pricing because they tend to live in multi-family dwellings or have lower irrigation needs.

Summer water bills could increase dramatically, but a solution is to create an Easy Pay plan where a large portion of the summer water bills are spread over a 12-month period. PG&E offers its Balanced Pay Plan to achieve the same ends. Customers should be placed in this bill payment plan on an opt-out basis, as that opt-in options are usually undersubscribed even when the opt-in benefits are large.