Creating a Free-Flowing Market to Buy, Sell Water

It became clearer than ever last week that if a community or a business is going to expand and use more water in Southern California from now on, it is going to have to pay more.

A new rate structure approved by the Metropolitan Water District and Gov. Gray Davis’ signature on a new law laid out the terms for water and growth.

The MWD, a consortium of 27 cities and water districts serving six Southern California counties, set up a new two-tier system of water prices that almost certainly will mean more expensive water for growing communities.

And a new law, signed by Davis on Oct. 9, states flatly that if a city or county wants a new large housing development, it must produce a guaranteed supply of water to serve that development before construction begins. The same qualification, based on proposals first put forward by Sen. Sheila Kuehl (D-Santa Monica), will hold for new industrial developments too.

Both moves are a realistic response to California’s water prospects. They recognize the certainty of a growing population in Southern California, which is expected to add 6 million people in the next dozen years--a 35% increase.

And they recognize that such growth will mean demands for more water, even though the region’s allotment from the Colorado River is to be cut back by 5% over the next 15 years.

Yet neither the MWD’s new rate structure nor the law on development is in response to threats of water shortages. “There is no necessary shortage of water to the extent it would retard California’s economic growth,” says Ronald R. Gastelum, MWD general manager.

But there is an unbalanced use of water that MWD and other agencies are moving to correct by creating a market for water transfers from agriculture to the cities and by investments in regional water storage, conservation and recycling facilities.

Here’s how the MWD’s new rate structure, approved by its board of directors Oct. 17, will work. Agencies that buy water from MWD, such as the Los Angeles Department of Water & Power and the San Diego County Water Authority, will have to guarantee to purchase over the next decade 60% of the water they used in their highest year of consumption.

The guarantee is to give MWD a better sense of revenue--enabling it to finance purchases of new sources of water as well as conservation and recycling projects to generate more water for a growing future.

In return for the purchase orders, MWD will guarantee cities the right to buy 90% of the water they used in their highest year over the last decade at a base rate, to be called the Tier 1 price. MWD calculates that price at about $80 an acre-foot at present. (An acre-foot is 360,000 gallons of water, or enough to supply eight people for one year.)

Any water the cities need above 90% of their previous usage levels, they will have to purchase on the open market or from MWD at a Tier 2 price--which MWD officials estimate would be $150 to $175 per acre-foot, roughly double the Tier 1 price.

New water at double the price of the old looks at first glance like a measure to discourage growth.

But it isn’t. It’s a major step toward creating a market for farmers, cities and private businesses to buy and sell water.

Under the current system, it’s too difficult for those with surplus water to sell it on an open market, and it’s too difficult for buyers to find surplus water at a competitive rate.

To help provide that flow of information--which should help ease the flow of water--the MWD board unbundled the agency’s pricing for services last week.

When the new rate structure starts in January 2003, MWD will bill cities separately for transporting, storing and treating water--which will make it easier for buyers to compare what they are paying for MWD water with what they might pay an agricultural district or others trying to sell surplus water.

And there is an abundance of water in agriculture, which uses about 80% of California’s supply. State and federal subsidies keep agricultural water prices low, about $14 an acre-foot.

In contrast, a city such as Los Angeles pays $431 per acre-foot from the MWD--a figure that, unlike the rate quoted above, includes the cost of treating and delivering the water. And farmers, who have been managing through innovations such as drip irrigation to produce larger crops with less water, are eager to sell their surpluses. MWD bought some water rights from farmers in the Palo Verde Valley on Oct. 17. But transferring water is not yet a simple business; public interests must be taken into account. For example, when it purchased water rights from Palo Verde farmers who will cut back their planted acreage, MWD compensated feed and farm implement dealers and other merchants for a potential loss of business. “The selling community pays a price as well as the buying community,” says Gastelum.

So a free-wheeling market in water will take time to develop. But steps toward creating a market are necessary because growing needs for water in the next decade will come not only to new communities in Riverside and San Diego counties but to Los Angeles as well, experts say.

Also, population growth is only one of the challenges facing this region, says Adan Ortega, vice president of external affairs at MWD. There is climate change--scientists warned California last year that changing Pacific Ocean temperatures could be bringing a long drought.

There are issues of water quality, on which cities now have to spend millions of dollars. And there are long-term questions of Colorado River allotments as other areas with rights to its water--Arizona, Nevada, northern Mexico--are growing.

Ultimately, desalination of ocean water will provide a solution. At present, desalination pilot projects could produce usable water at $700 to $1,000 an acre-foot, MWD officials say.

The long-term outlook? Kuehl, whose new legislation asks developers to “show me the water,” put it in perspective in a recent interview with the Metro Investment Report newsletter. “In terms of population growth and the way we use our resources, it could easily be argued that we have a time bomb on our hands,” Kuehl said. “However, they argued that way in 1850 and again in 1901--and the answer then was: How do we use what we have better, and move it around more efficiently?” New century, same questions.

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James Flanigan can be reached at jim.flanigan@latimes.com.