New Battle Fronts in the L.A. vs. San Diego Water War

Starting next month, the Metropolitan Water District, the region’s main water wholesaler, will be making critical policy choices--a new strategic plan and rate restructuring encouraging greater choice and market competition--affecting 17 million customers in nearly 300 Southern California communities. State legislators also are at work crafting proposals for MWD governance and fiscal reform. More market-oriented policies will soon transform the agency, with winners and losers in terms of who pays and who benefits. At risk is the huge, historical and little-appreciated equity investment in the MWD made by Los Angeles and 12 neighboring communities, such as Pasadena, who founded the MWD in 1928.

Critics charge that the MWD is a dysfunctional organization, in part because of its seeming inability, in part, to facilitate the growing demand for agricultural-to-urban water transfers as Southern California’s population adds the equivalent of nearly two new Los Angeleses by 2020. They cite the agency’s apparent foot dragging on, if not outright opposition to, the landmark transfer of up to 200,000 acre-feet of water a year between the San Diego County Water Authority, MWD’s largest customer with a 25% share of its deliveries, and the Imperial Irrigation District, which has priority claims to nearly 75% of California’s Colorado River rights.

In response, MWD’s new leadership has embraced water markets and transfers and has reshuffled staff. Despite these efforts, dissident member agencies and water marketers have formed state-level alliances with sympathetic legislators to alter permanently how the water wholesaler does business. Among their proposals are the direct election of MWD board members and a mandate that member agencies sign take-or-pay contracts for MWD services.

Critics claim that a restructured agency exposed to market forces would prevent needless and expensive storage investments and cost overruns, such as those reputedly associated with the $2-billion Eastside Reservoir in Riverside County. In their view, a large supply of low-cost public water sends the wrong market signals. Influenced by energy deregulation, they believe that market-based reforms could turn MWD into a set of pipes serving the water market.

To date, MWD has resisted radical restructuring calls. Last month, its board unanimously reaffirmed the agency’s strong regional mission. MWD would remain the major voice of the region’s water interests statewide and nationally; provide imported water to meet baseline needs; manage the region’s importation, distribution, treatment and storage systems; serve as drought allocator during times of shortage; and encourage local recycling, reclamation and conservation programs. As MWD implements these principles, it will face hard decisions involving service choice, market competition and financial commitments. For example, to encourage competition from alternative water suppliers above the region’s baseline needs, can fair “wheeling” (or conveyance) charges through MWD’s system be devised to avoid shifting costs to member agencies not benefiting from water transfers?

If MWD’s new policies are to be fair, they need to be Janus-faced: not only looking forward to more choice and competition but also respecting the past financial contributions of members. Especially at risk are the substantial early infrastructure investments and water subsidies made by the taxpayers and ratepayers of the city of Los Angeles and other founding members.

MWD originally was devised as a supplemental system for cities like L.A. with independent supplies such as the Owens River. L.A. and its suburbs have taken relatively little MWD water. Yet, agency founders paid dearly for such early investments as the Colorado River Aqueduct. Their shares of water deliveries have been well below their real (inflation-adjusted) financial payments. By contrast, agencies that joined later, like San Diego, have used MWD as a primary water source, paid low annexation charges and have received large supplies of lower-cost agricultural water.

The greatest delivery-payment disparity, and resulting policy conflicts, has been between the city of Los Angeles and San Diego County. From 1929-1996, the unit cost (in 1996 dollars) per acre-foot of MWD water delivered was $794 for Los Angeles, compared with $251 for San Diego. While L.A. drew only 8% of total MWD water deliveries, it generated 17% of total real revenue. In contrast, San Diego received 26% of MWD water deliveries and contributed only 18% of overall revenue. Most of this disparity occurred before 1970, when three-quarters of MWD financing was generated by property taxes and Los Angeles and its suburbs comprised most of the district’s tax base.

Before 1970, Los Angeles paid $1,670 per acre-foot of MWD water, compared with only $211 for San Diego. While L.A. appears a fiscal profligate, it heavily relied upon its Owens River supplies, taking few MWD deliveries. Hence, the retail cost of water to L.A. customers remained relatively low. Other founding members also paid dearly for early MWD water provision: Glendale, $1,645 per acre-foot; Beverly Hills, $950; Compton, $889; and Burbank, $878. Since 1970, as three-quarters of MWD financing shifted to water charges featuring a “postage stamp” or uniform rate, cost disparities have been reduced but not eliminated. The post-1970 cost of MWD water for Angelenos has been $473 per acre-foot, compared with $262 for San Diegans.

Overall, Los Angeles’ total real payments to MWD, 1929-1996, were $1.9 billion more than its water deliveries. The rest of L.A. County contributed $300 million more than its deliveries. In contrast, San Diego’s water deliveries exceeded its real payments by $1.3 billion, while Orange County’s deliveries have been nearly $700 million more than its financing share.

Los Angeles has benefited from financing most of the Colorado River Aqueduct and bestowing its substantial Colorado River water entitlement upon MWD. The 1928 Metropolitan Act creating MWD confers preferential rights to water, such as during droughts, on the basis of property taxes and other financial contributions exclusive of water sales. L.A. has a preferential claim to one-quarter of MWD water, compared to San Diego’s 13% claim. In effect, Los Angeles bought an expensive drought-insurance policy (now generally considered unenforceable under the State Water Code) should its Owens River supplies prove insufficient. L.A. also was assured a major role in MWD policymaking when assessed valuation became the basis for board representation and voting.

As MWD’s board considers the agency’s market-oriented future, these equitable interests and past investments need to be considered. Certainly, MWD’s vision and rate structure should provide mechanisms for developing water markets in partnership with the private sector. Markets, in conjunction with conservation, recycling and new technologies, will assist MWD in meeting the long-term water needs of Southern California. With forecasts of a prolonged dry cycle ahead, those needs could grow.

Yet, profit-based water markets should not be allowed to displace sales of less-costly supplies developed using public funds. Nor should private parties profit from subsidies based upon past public-infrastructure investments. Marketers also need to compete with new cost-effective technologies such as desalination. They should receive a fair return based upon the added value they bring to the region through developing new supplies of high-quality water in a cost-effective manner. However, overall reliability and consumer savings can be compromised if an artificial market is allowed to develop that depends upon public-agency subsidies and cost shifting to state and local governments for conveyance and distribution systems and water-treatment plants.

Notwithstanding its current troubles, the Metropolitan Water District, has provided Southern California with a reliable water supply for over 70 years, satisfying more than one-half of the region’s needs. The agency has contributed to the development of a $600- billion economy, the world’s 11th-largest. As it ponders market-oriented service, competition and financing policies, the MWD board needs to balance efficiency and equity, the future and the past. Based upon their substantial past MWD investments, Los Angeles and its suburbs have a large equity stake in such an outcome. *