Tag Archives: drought

Not so bad in our estimate…


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.


Building Drought Resilience in California’s Cities and Suburbs from PPIC

Then And Now: California's Drought Officially Declared To Be Over

M.Cubed partner David Mitchell is the lead author on this PPIC report that reviews the responses by urban agencies to the California’s recent drought and looks at the lessons learned. He’s speaking during a webinar on June 16 at noon. In addition, he co-authored an opinion article for the Sacramento Bee.

Looking to the Aussies to solve California’s water problems

The San Francisco Chronicle ran an article how Australia changed its water infrastructure and usage in the face of the 12-year “Big Dry.” Earlier the Chronicle ran “5 fixes for California’s age-old water rights system” that drew on Australia’s experience. M.Cubed’s analysis of the state’s urban drought regulations included a synopsis of Australia’s experience. An interesting question is whether anyone has assessed the political-economic process that facilitated Australia’s transformation. What were the trade-offs made? How were key interest groups satisfied?

MWDSC looking to add recycled water to their portfolio

Metropolitan Water District is looking at spending up to $1 billion on recycled water supplies. MWD is considering a $15 million pilot in Carson to start. When I talked to the California Association of Sanitation Districts last month on the impacts of the drought, I highlighted that recycled water now may be a cost-effective supply source as the water market changes. In 2008, M.Cubed prepared with AECOM/EDAW and RMC East Bay Municipal Utility District’s Water Supply Management Program 2040. At that time, other resources such as water transfers were more attractive, but the economics are changing for a variety of reasons.  I’ll blog in the near future about how agriculture may no longer be an attractive source for urban supplies.

Far Reaching Impacts of the California Drought

I talked to the California Association of  Sanitation Agencies in San Diego on the drought situation, its economic impacts and available resources including recycled or “recovered” water. My presentation is here.

Assessing the economic impacts of drought regulations

M.Cubed was asked by the State Water Resources Control Board to prepare an economic assessment of the emergency regulations ordered by the Governor to reduce municipal water use by 25%. We gathered a team that included Roger Mann of RMann Economics, Tom Wegge of TCW Economics, Richard Howitt and Duncan MacEwan of ERA Economics, and prepared the report in about two weeks. The SWRCB included a summary of those findings in its regulatory digest.

The innovative aspect of our study is to steer away from a single point probabilistic estimate of the benefits of the regulations and instead to focus on the potential vulnerability and consequences of the risk of continued drought in the future.

The EO is intended to address potentially significant economic vulnerabilities – risks – rather than statistical or probabilistic expectations. If the drought and high temperatures continue in California, water saved as a result of the order will become increasingly valuable. Under these circumstances, costs estimated to be associated with the EO this year could be more than exceeded by greater adverse impacts next year if the EO had not been issued.

Australia had an extended drought that lasted 10 years before ending in 2012 that cut 1.6% off its GDP. For California that would be $35 billion in a single year which is multiples of the range of costs we estimated for the regulations. In other words, the probability of continued drought would have to be less than 4% to make this option uneconomic.

We also pointed out that while the water utilities will lose revenues this year, as mostly public agencies, they will have to make up those losses in the future. For this reason, those revenue losses should be treated as eventual economic costs.

Paying for Water in California

My partner David Mitchell has coauthored an article in the Hastings Law Review:

Paying for Water in California: The Legal Framework

Brian Gray, Dean Misczynski, Ellen Hanak, Andrew Fahlund, Jay Lund, David Mitchell, and James Nachbaur
Over the past four decades, California voters passed a series of initiatives that
amended the California Constitution to limit the power of the state legislature and
local governments to enact taxes and restrict their authority to adopt fees and other
charges to fund government programs. Three of these initiatives—Proposition 13
(enacted in 1978), Proposition 218 (passed in 1996), and Proposition 26 (approved in
2010)—have placed significant constraints on the funding of water resources projects.
Although each of these laws has enhanced the transparency and accountability of the
decision-making process, the funding constraints now jeopardize an array of vital
water supply, management, and regulatory functions. These include funding for the
development of new water supplies, integrated water management, protection of
groundwater resources, development of alternative water sources (including recycled
and conserved water programs), control of stormwater discharges, and regulation of
water extraction and water use to protect water rights, water quality, aquatic species,
and other beneficial uses of the state’s water systems.
This Article is a companion to the report Paying for Water in California and focuses
on the legal aspects of water financing. The Paying for Water study demonstrated the critical importance of local funding to support California’s water system: local
utilities and governments raise eighty-five percent of the more than thirty billion
dollars spent annually on water supply, quality, flood, and ecosystem management
through local fees and taxes. The study identified a two to three billion dollar annual
funding gap, with critical gaps already evident for provision of safe drinking water in
small, rural communities, prevention of stormwater pollution, protection of people,
property, and infrastructure from flooding, recovery efforts for aquatic ecosystems,
and integrated water management. In most cases, these gaps reflect legal obstacles to
raising more funds locally. In addition, urban water and wastewater systems—now in
relatively good fiscal health—face looming challenges related to rising costs and legal
constraints on the ability to raise fees to support modern, integrated water
This Article begins with an overview of the traditional sources of funding for water
development, management, and regulation, and proceeds to a detailed analysis of the
effects of the constitutional constraints (especially of Propositions 218 and 26) on
these essential governmental programs. Topics include: (i) analysis of the effects of
Proposition 218 on water rates and fees charged by public retail water agencies for
water service and integrated, portfolio-based water management; (ii) consideration of
the special problems of Proposition 218 for groundwater regulation and stormwater
discharge programs; (iii) predictions about the effects of Proposition 26 on wholesale
water rates, water stewardship charges, and regulatory fees; and (iv) suggestions for
harmonizing the fiscal strictures of Propositions 218 and 26 with the reasonable use
mandates of Article X, Section 2, of the California Constitution, which form the
foundation of the state’s water law and policy.
Our key conclusions are that: (1) Propositions 218 and 26 have created significant
impediments to economically rational and sustainable funding of California’s most
important water service, management, and regulatory programs; (2) judicial
interpretations of the constitutional restrictions generally have compounded these
impediments; and (3) reform of the law is needed. The Article concludes with
recommendations that water agencies, the legislature, the courts, and the voters
should consider as a means of correcting (or at least ameliorating) those aspects of
the law that are inconsistent with sound and creative water resources administration