Category Archives: Water resources management

How to allocate our scarce most precious resource

How to choose a water system model

The California Water & Environmental Modeling Forum (CWEMF) has proposed to update its water modeling protocol guidance, last issued in 2000. This modeling protocol applies to many other settings, including electricity production and planning (which I am familiar with). I led the review of electricity system simulation models for the California Energy Commission, and asked many of these questions then.

Questions that should be addressed in water system modeling include:

  • Models can be used for either short-term operational or long term planning purposes—models rarely can serve both masters. The model should be chosen for its analytic focus is on predicting with accuracy and/or precision a particular outcome (usually for short term operations) or identifying resilience and sustainability.
  • There can be a trade off between accuracy and precision. And focusing overly so on precision in one aspect of a model is unlikely to improve the overall accuracy of the model due to the lack of precision elsewhere. In addition, increased precision also increases processing time, thus slowing output and flexibility.
  • A model should be able to produce multiple outcomes quickly as a “scenario generator” for analyzing uncertainty, risk and vulnerability. The model should be tested for accuracy when relaxing key constraints that increase processing time. For example, in an electricity production model, relaxing the unit commitment algorithm increased processing speed twelve fold while losing only 7 percent in accuracy, mostly in the extreme tail cases.
  • Water models should be able to use different water condition sequences rather than relying on historic traces. In the latter case, models may operate as though the future is known with certainty.
  • Water management models should include the full set of opportunity costs for water supply, power generation, flood protection and groundwater pumping. This implies that some type of linkage should exist between these types of models.

Davis Should Set Its Utility Reserve Targets with a Transparent and Rigorous Method

The City of Davis Utilities Commission is considering on February 19 whether to disregard the preliminary recommendations of the Commission’s Enterprise Fund Reserve Policies subcommittee to establish a transparent, relatively rigorous and consistent method for setting City reserves. The Staff Report, written by the now-departed finance director, ignored the stated objectives of both the Utilities and Finance and Budget Commissions to develop a consistent set of policies that did not rely on the undocumented and opaque practices of other communities. Those practices had no linkage whatsoever to risk assessment, and the American Water Works Association’s report that the Staff relied on again to reject the Commission’s recommendation again fails to provide any documentation on how the proposed targets reflect risk mitigation—they are simply drawn from past practices.[1]

The City’s Finance & Budget Committee raised the question of whether the City held too much in reserves over five years ago, and the Utilities Commission agreed in 2017 to evaluate the status of the reserves for the four City enterprise funds—water, sanitation/waste disposal, sewer/wastewater, and stormwater. A Utilities Commission subcommittee reviewed the current reserve policies and what is being done by other cities. (I was on that subcommittee.) First, the subcommittee found that the City was using different methods for each fund, and that other cities had not conducted risk analyses to set their targets either. The subcommittee conducted a statistical analysis that allows the City to adjust its reserve targets for changing conditions rather than just relying on the heuristic values provided by consultants.

The subcommittee’s proposal adopted initially by the Utilities Commission achieved three objectives that had been missing from the previous informal reserves policy. Two of these would still be missing under the Staff’s proposal:

  1. Clearly defining and documenting the reserves held for debt coverage. While these amounts were shown in previous rate studies, the documented source of those amounts generally not included and the subcommittee’s requests brought those to the fore. The Staff method appears to accept continuance of that practice. The Staff proposes to keep those separate, which differs from past practice which rolled all reserves together.
  2. Reserve targets are first set based on the historic volatility of enterprise net income. In other words, the reserves would be determined transparently with a rigorous method on the basis of the need for those reserves. The method uses a target that is statistically beyond the 99th percentile in the probability distribution. And this target can be readily updated for new information each year. The Staff report rejects this method to adopt a target that refers to the practice of other communities, and none of those practices appear to be based on analytic methods from research done by the subcommittee.
  3. Reserve targets are then adjusted to cover the largest single year capital improvement/replacement investment made historically to ensure enough cash for non-debt expenditures. Because the net income volatility is a joint function of revenues, operating expenditures and non-debt capital expenditures, the latter category is not separated out of the analysis. However, an added margin can be incorporated. That said, the data set for the fiscal years of 2008/2009 to 2016/2017 used by the subcommittee found that setting the target based on the volatility has been sufficient to date. The Staff report appears to call for a separate, unnecessary reserve fund for this purpose based on annual depreciation that has no relationship to risk exposure, and implicitly duplicates the debt payments already being made on these utility systems. This would be a wasteful duplication that sets the reserves too high.

The Finance and Budget raised at least two important issues in its review:

  1. Water and sewer usage and revenues may be correlated so that the reserves may be shared between the two funds. However, further review shows that the funds have a slight negative correlation, indicating that the reserves should be held separately.
  2. The water fund already has an implicit reserve source when a drought emergency is declared because a surcharge of 25% is added to water utility charges. I agree that this should be accounted for in the historic volatility analysis. This reduces the volatility in fiscal years 2014/2015 and 2015/2016, and reduces the water fund volatility reserve from 26% to 21%.
  3. Working cash reserves are unnecessary because the utility funds are already well established (not needing a start up reserve), and that the volatility reserves already cover any significant lags in the revenues that may occur. This observation is valid, and I agree that the working cash reserves are duplicative of the other reserve requirements. The working cash reserves should be eliminated from the reserve targets for this reason.

Finally, the Staff proposal raises an issue about the appropriate basis for determining the sanitation/waste removal reserve target. The Staff proposes to base it solely on direct City expenses. However, the enterprise fund balance shows a deficit that includes the revenues and expenses incurred by the contractor, first Davis Waste Removal and then Recology. We need more specificity on which party is bearing the risk of these shortfalls before determining the appropriate reserve target. Given the current City accounting stance that incorporates those shortfalls, I propose using the Utility Commission’s proposed method for now.

Based the analysis done by Utilities Commission subcommittee and the recommendations of the Finance & Budget Committee, the chart above shows the target % reserves for each fund without the debt coverage target. It also shows the % reserve targets implied by the Staff’s proposed method.[2] The chart also shows corresponding dollar amount for the proposed total target reserves, including the debt reserves, and the cash assets held for those funds in fiscal year 2016/2017. Importantly, this new reserve target shows that the City held about $30 million of excess reserves in 2016/2017.

[1] It appears the Staff may have misread the Utilities Commission’s recommendation memorandum and confused the proposed targets policies with the inferred existing policies. This makes it uncertain as to whether the Staff fully considered what had been proposed by the Utilities Commission.

[2] The amounts shown in the October 16, 2019 Staff Report on Item 6B do not appear to be consistent with the methodology shown in Table 1 of that report.

Moving forward on Flood-MAR with pilots

The progress on implementing floodwater managed aquifer recharge programs (Flood-MAR) reminds me of the economist’s joke, “sure it works in practice, but does it work in theory?” A lot of focus seems to be on trying to refine the technical understanding of recharge, without going with what we already know about aquifer replenishment from decades of applications.

The Department of Water Resources Flood-MAR program recently held a public forum to discuss its research program. I presented a poster (shown above) on the findings of a series of studies we conducted for Sustainable Conservation on the economic and financial considerations for establishing these programs. (I posted about this last February.)

My conclusion from the presentations and the other publications we’ve followed is that the next step is to set up pilots using different institutional set ups and economic incentives. The scientists and engineers can further refine their findings, but we generally know where the soils are better for percolation versus others, and we know that crop productivity won’t fall too much where fields are flooded. The real issues fall into five categories, of which we’ve delved into four in our Floodwater Recharge Memos.

Benefits Diagrams_Page_5

The first is identifying the beneficiaries and the potential magnitude of those benefits. As can be seen in the flow chart above, there many more potential beneficiaries than just the local groundwater users. Some of these benefits require forecast informed reservoir operations (FIRO) to realize those gains through reduced flood control space, increased water supply storage and greater summertime hydropower output. Flood-MAR programs can provide the needed margin of error to lower the risk from FIRO.

FloodMAR Poster - Financing

The second is finding the funding mechanisms to compensate growers or to build dedicated recharge basins. We prepared a list of potential financing mechanisms linked to the potential beneficiaries. (This list grew out of another study that we prepared for the Delta Protection Commission on feasible options for beneficiary-pays financing.)

FloodMAR Poster Incentives

The third is determining what type of market incentive transactions mechanisms would work best at attracting the most preferred operations and acreage. I have explored the issues of establishing unusual new markets for a couple of decades, including for water rights transfer and air quality permit trading. It is not a simple case of “declaring markets exist” and then walking away. Managing institutions have important roles in setting up, running and funding any market, and most particularly for those that manage what were “public goods” that individuals and firms were able to use for free. The table above lists the most important considerations in establishing those markets.

The fourth assessing what type of infrastructure investment will produce the most cost-effective recharge. Construction costs (which we evaluated) is one aspect, and impacts on agricultural operations and financial feasibility are other considerations. The chart at the top summarizes the results from comparing several case studies. These will vary by situation, but remarkably, these options appear to cost substantially less than any surface storage projects currently being proposed.

The final institutional issue to be addressed, but not the least important, is determining the extent of rights over floodwaters and aquifers. California state law and regulations are just beginning to grapple with these issues. Certain areas are beginning to assert protection of their existing rights. This issue probably represents the single biggest impediment to these programs before attracting growers to participate.

All of these issues can be addressed in a range of pilot programs which use different variables to test which are likely to be more successful. Scientists and engineers can use these pilots to test for the impacts of different types of water diversion and application. Statistical regression analysis can provide us much of what we know without having to understand the hydrological dynamics. Legal rights can be assessed by providing temporary permits that might be modified as we learn more from the pilots.

Is it time to move forward with local pilot programs? Do we know enough that we can demonstrate the likely benefits? What other aspects should we explore before moving to widespread adoption and implementation?

A transparent municipal utility’s reserve target

Reserves chart

As one of my civic activities, I sat on the City of Davis Utility Rates Advisory Commission. In my final action with that commission, along with Elaine Roberts-Musser and Lorenzo Kristov, we prepared what might be a first-of-its kind enterprise fund reserve policy for the four utilities managed by the city. Up to this point, the URAC had been presented with rates development reports that appeared to use somewhat arbitrary, and inconsistent, methods of setting reserve targets. The city also appeared to be holding tens of millions of dollars in those funds that might be unneeded to meet expected reserve requirements.

With the City Council’s approval and support from the staff and the Finance and Budget Commission, we identified the elements that needed to be covered by reserves, including working capital, debt covenants, unanticipated capital replacements, and revenue-expense volatility. The first two elements were fairly straightforward to calculate, and unanticipated replacements didn’t appear to be significant. It was the analysis of the relationship of revenue and expense volatility where the report innovates. Previous studies had used some variation of a percentage of capital assets with no underlying explanation. Our solution was to derive an estimate of the outerbound of an annual revenue shortfall for a utility as buffer to allow rate or management adjustments.

In the end, the target reserves generally didn’t change much, but the City now has a transparent target that it can use to determine when it has excess funds that might be used in different fashions instead.

Using floods to replenish groundwater

ALMOND  ORCHARD FLOODING

M.Cubed produced four reports for Sustainable Conservation on using floodwaters to recharge aquifers in California’s Central Valley. The first is on expected costs. The next three are a set on the benefits, participation incentives and financing options for using floodwaters in wetter years to replenish groundwater aquifers. We found that costs would range around $100 per acre-foot, and beneficiaries include not only local farmers, but also downstream communities with lower flood control costs, upstream water users with more space for storage instead of flood control, increased hydropower generation, and more streamside habitat. We discussed several different approaches to incentives based on our experience in a range of market-based regulatory settings and the water transfer market.

With the PPIC’s release of Water and the Future of the San Joaquin Valley, which forecasts a loss of 500,000 acres of agricultural production due to reduced groundwater pumping under the State Groundwater Management Act (SGMA), local solutions that mitigate groundwater restrictions should be moving to the fore.

Don Cameron at Terranova Ranch started doing this deliberately earlier this decade, and working with Phil Bachand and UC Davis, more study has shown the effectiveness, and the lack of risk to crops, from this strategy. The Department of Water Resources has implemented the Flood-MAR program to explore this alternative further. The Flood-MAR whitepaper explores many of these issues, but its list of beneficiaries is incomplete, and the program appears to not yet moved on to how to effectively implement these programs integrated with the local SGMA plans. Our white papers could be useful starting points for that discussion.

(Image Source: Chico Enterprise-Record)

 

 

 

Another finding of the obvious from academics…

361063-crop-field

This study published in the American Journal of Agricultural Economics seems to have a surprising finding, at least to academic economists, that farmers with riskier water supplies rely less on irrigation! What? If you’re uncertain about whether you will get water every year, you are less likely to count on that water to irrigate your crops? Who possibly would think that way?

Not so bad in our estimate…

fort-lauderdale-sprinklers-960x500_c

The University of California ARE Update published a short study that found that the drought emergency regulations adopted by the State Water Resources Control Board were only 18% more costly than the most “efficient” standards. In May 2015, the State Water Resources Control Board adopted Resolution No. 2015-0032 which imposed restrictions to reduce water use by local agencies by 4 to 36 percent depending on their circumstances. Northern California agencies were to reduce usage by 16.2 percent on average, while Southern California utilities were to reduce by 22.5 percent. In the end, Northern California utilities far exceeded their target with a 23.3 percent reduction, and Southern California’s just missed theirs with an average of 21.4 percent. M.Cubed conducted the economic study of the regulations, and found that the insurance benefits were likely substantial enough to justify the costs.

The real headline of the study should be “Drought regulations remarkably efficient!” Given that the regulations were developed in just a few months and that they were done on a prospective basis with uncertainties and unknowns (e.g., the price elasticities referenced in the study), missing the mark by only 18% is truly remarkable. In comparison, the California Air Resources Board may have missed the mark by more than 100% in setting out its AB 32 Greenhouse Gas Reduction Scoping Plan in 2008 by relying too heavily on mandated measures such as renewables generation and certain types of energy efficiencies instead of more effective market based measures.

Nevertheless, the study appears to the make mistake of making the classic economist’s joke “sure it works in practice, but does it work in theory?” Consumers are chastised for behavior that doesn’t fit the fitted values for price elasticities. The study compares the mandated and achieved reductions and notes that achieved reductions were more even across agencies than the mandates. Agencies with lower mandates achieved higher reductions, and those with higher mandates fell short on achievements. Instead of questioning the original price elasticity estimates–and such estimates commonly have a wide range and are often situation specific–the report just plows ahead as though these theoretical results should have driven human behavior.

The more interesting question the researchers should have asked given the consistent patterns in achieved versus mandated reductions is what factors caused these agencies to diverge from the mandates. Geography is clearly only part of the reason. It also appears that there is not as much “demand hardening” at the low end of use, and a higher premium put on water uses at the upper end. These factors have implications for how we should modify our price elasticity estimates.