A Public Monopoly Considers Private Alliances To Meet Regional Water Needs

A major element of Metropolitan's efforts over the last two years has been the reform of its rate structure. Can you share with our readers the major objectives of this reform effort?

As Metropolitan looks ahead over the next 10 to 20 years, there are several objectives we want to accomplish in revising our rate structure.

One is to make sure that we are financially stable and can make the necessary investments for overall reliability and water quality in our region.

Second, we want to have a transparent rate structure where the various components are evident and price signals incentivize responsible behavior. For example, we're proposing a water stewardship charge in which everyone that uses the system contributes towards conservation programs and investments in local resource projects, including recycling. We're also looking at a growth charge-should growth pay some portion of the infrastructure costs required to meet the demands of that growth? The entire system of Southern California's water infrastructure requires constant maintenance. In our current rate structure, it's difficult to tell precisely what the costs are. Our intent with the new structure is to identify costs and charge a ‘system access charge' to everyone that uses the system, according to cost of service. This uniform charge allows us to facilitate wheeling through our available system capacity for water transfers.

The MWD Board conceptually approved the new rate structure, and over the next year there will be many discussions-both in the public arena and at the member agency-level-about how to implement it. The electrical deregulation issue has heightened awareness among policy makers about the potential for unintended consequences when making major changes in an essential public service, so that process will be very interesting.

Your response prompts a request for a reaction to a statement made by former MWD Board member and DWP General Manager David Freeman in last month's MIR. He first made a point of distinguishing water from electricity regulation, and then went on to criticize current water reform efforts as placing too much focus on water pricing rather than securing a reliable future water supply for semiarid Southern California.

I agree with David that the resource question has to be addressed as a part of this rate structure. But the focus is not misplaced.

In the first six months of 2001-before we do anything to finalize our rate structure-we'll review our integrated resources plan. We've told our member agencies we have 2.1 million acre-feet of reliable supply even in a dry year or series of years. That being the case, we're offering contracts to our member agencies of much higher-level reliability than they've had in the past-up to 110% of their highest peak use over the last 10 years.

To make that promise good, we're going to have to illustrate to our member agencies that the resource is there. So over the next six months, we're going to identify exactly where we plan to get those 2.1 million acre-feet. And if there is any question about the reliability of those sources-i.e. the Colorado River or the State Water Project-we will provide added insurance with dry-year options or other projects to back it up.

November's MIR ran an excerpt of a recent utility deregulation panel hosted by MWD and VICA. In it, you are quoted as saying: "Deregulation in the water industry would be a disaster. But I think most would agree that at least some form of water transfers and marketing would be necessary in California's future." What do you say to the critics who claim that MWD-by maintaining control of conveyance, storage and treatment-will never be amenable to water marketing, and that the agency does not want to give up being the monopoly buyer of all water available for transfer in Southern California?

Metropolitan built the system, and Metropolitan operates and controls the system. What those critics forget is that our region has phenomenal reliability relative to most parts of the State because of those investments.

Nonetheless, we recognize that water transfers are going to be a valuable addition to our future resource mix, and we've built them into our rate structure accordingly. We will institute a uniform ‘system access charge' so that whether you're Metropolitan or a member agency or a third party, whether in Ventura or San Diego, you can access the system for the same price. We believe that's entirely consistent with the way that systems are accessed and paid for in other major utilities, such as California's electrical utility system.

The difficulty as time goes on is that we will eventually use up all of our existing capacity and will need to build new infrastructure.

What percentage of system capacity is MWD at now?

On some days during the summer, we're full. But on average, we have quite a bit of open capacity. It all depends on the time of year and the usage in the system.

We're also building more-and as we move forward, we want to make sure that everyone using the system is contributing to the costs of building that additional capacity. So we'll rely on this uniform access charge to meet that test of fairness.

In the long run, it is absolutely in the interests of Southern California residents that there be a highly competitive market, of which water transfers are a part, so that we're not trapped into one or two sources. And by opening our system and making it available to everyone at an equal rate, we're facilitating that kind of competition.

State Senator Costa and Governor Davis have proposed new legislation aimed at opening the water market to competition. Can you tell our readers how Metropolitan has responded and what that legislation might look like when adopted?

Both have stated their intent to sponsor legislation and Senator Costa has been working diligently over the last six months. Metropolitan-along with many others-has been engaged in the discussions over what that legislation might look like, and we are very optimistic about the outcome.

It really depends on how broadly Senator Costa and the Governor define the ‘wheeling' issue. For example, we've seen a number of situations where controversies arising in the areas of origin have stopped transfers from going through. Whether perceived or real, localities often see these proposed transfers as having adverse impacts on other water users in the source area and the local economy/community. So any new legislation should address those third-party impacts.

In terms of procedure, wheelers will have to obtain a variety of clearances-from the State Water Resources Control Board, the State Department of Water Resources (because the State Water Project will wheel the water), the Bureau of Reclamation, and other local water conveyance operators like MWD. So the process side will have to be addressed as well.

And the third component will be: How much should it cost to use these conveyance systems?

As a means of addressing these very issues and facilitating the development of a competitive transfer market on an immediate basis, Metropolitan has issued a Request-for-Proposals (RFP) to secure water transfers that can be accessed to meet demands within our service area during droughts. Both private and public entities were invited to submit proposals. We received and evaluated several, and competitive negotiations are currently underway to develop cost-effective water transfers with three public agencies and one private entity. And we're hopeful these negotiations will conclude in successful transfers.

Your answer doesn't sound like that of an end-user in Southern California desperate to move more water from Northern and Central to parched and developing Southern California. A critic of MWD might assert that you sound more like a protectionist entity attempting to control access to the market by limiting access to the water transfer system. As you suggest, many on MWD's Board want more water in the South to support coming growth-which is projected to be equal to the size of Florida over the next several years. But how does MWD effectively encourage-instead of throwing up roadblocks-the transfer of more water to MWD's member water districts?

We are not throwing up roadblocks. What we are saying is that if any of our member agencies want to transfer water and we have the capacity, they can do that. They just have to pay the uniform charge.

MWD obviously needs to focus on the problems of supply-where it comes from and its unintended impacts on the environment. But again, in this interview, you don't sound like an advocate for a greater supply of water for Southern California. Northern and Central California interests are not without their protectors. The question is: who is advocating Southern California's position and what is that position?

Our advocacy position is that while we'd like to facilitate water transfers, we have to be realistic. We can't expect to get water transfers from Northern or Central California without dealing with third-party impacts. The local areas involved have to be comfortable and the issues have to be addressed before we can expect those transfers to occur.

We're constantly reminded of the specter of Owens Valley. It's just too easy for people in Northern California to say, "Oh, here comes Southern California with another Owens Valley."

Do you think Senator Jim Costa is insensitive to that concern?

No. I think the Senator is absolutely sensitive. And that's why he's taking the time to put together a comprehensive bill.

In another recent MIR interview, Tom Graff of Environmental Defense noted the California Court of Appeals' recent rejection of the 1994 Monterey Amendments. That opinion states that the State Water Project does not have the capability to meet its entitlements and shouldn't be claiming it does. He said, "If the California Supreme Court decides not to review this lawsuit, then we're going to see a lot more attention on water markets for suburban growth needs." What is your response to his assessment and to that decision?

First of all, I don't think the Department of Water Resources is claiming to be able to meet all the entitlements. In the early 1990s, MWD began an integrated resources program to create a diverse portfolio of supplies and programs to compensate for the fact that the State will most likely not meet all of our entitlement requests in the near future. To the extent that the Court is characterizing anyone as relying on paper water, they certainly couldn't have been thinking about Metropolitan.

Having said that, the decision has tremendous implications for the State of California. One of the underpinnings of the CalFed approach is that the Monterey Agreement would remain in place. Now, we need to focus on how to deal with that uncertainty.

For years, Metropolitan has publicized its joint project with Cadiz, Inc. for storage and new facilities from the Mojave Desert. It seems, however, that the project faces uncertainty. Bring our readers up to date on the status of that joint venture.

The public comment period for the EIR/EIS supplement (which ended January 8) has been very valuable in raising issues about groundwater management plans and water quality issues. And we will address those issues when we take this project to our Board of Directors. Early in the New Year, we will start with a recommendation on the economic terms of a long-term agreement with Cadiz. If fair terms can be negotiated and are agreed to by the MWD Board, we will follow with a recommendation on a final contract and certification of the EIR documents.

I personally remain very supportive of doing major storage projects adjacent to the Colorado River Aqueduct; it will be very valuable in dealing with the 4.4 reduction in Colorado River supplies that California faces.

Let's end by again asking what measuring stick our readers should use to judge the success of your efforts a year from now?

Number one, have we completed a credible and open evaluation of the reliability of our supplies here in Southern California? Two, have we adopted a rate structure that sends new price signals that support conservation, water transfers and investments in recycling and possibly desalination or other things? And three, have we gotten our message across? Our fundamental message to State policy-makers is that it's not just reliability that Southern California needs, it's quality too.