Title: Urban Water Costs
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 Material Information
Title: Urban Water Costs
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Language: English
 Subjects
Spatial Coverage: North America -- United States of America -- Florida
 Notes
Abstract: Urban Water Costs Future water reliability and quality requirements are expected to raise resident's rates by Sue McClurg
General Note: Box 8, Folder 7 ( Vail Conference, 1997 - 1997 ), Item 25
Funding: Digitized by the Legal Technology Institute in the Levin College of Law at the University of Florida.
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Bibliographic ID: WL00001547
Volume ID: VID00001
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Urban Water Costs


Future water reliability and quality requirements are

expected to raise residents' rates

by Sue McClurg


Until the fifth year of
the drought, most Califor-
nians gave little thought to
urban water supply and use,
and its effect on monthly
water bills. But in 1991,
residents in metropolitan
areas throughout the state
encountered the "conserva-
tion contradiction" they
were using less water, but
(S were facing higher rates.
The situation isn't likely
to change in the future.
Drought-related rate
increases aside, officials
predict monthly water bills
will continue to rise in the coming
decades as facilities are constructed to
boost water supply reliability, and
water treatment plants are built or
modified to meet stricter federal water
quality standards. At the same time,
state and local officials will continue to
make urban water conservation -
through ultra-low-flow toilets, low-flow
shower heads and drought-tolerant
landscaping a high priority to help
stretch available supply to meet
projected demand.
"In general, we see retail water
rates probably doubling over the next
10 to 20 years. The cost of treating
water and the cost of new sources,
including water transfers and improve-
ments in the State Water Project
(SWP), will all be factors," said Lester
N Snow. general manager of the San
Diego County Water Authority
(SDCWA). "It's doable, and even with
doubling the rates, it's not overpricing
4


the resource."
On average, urban residents of
California now pay about the same for
their water as do residents of other
cities throughout the United States. In
its "1992 National Water and Wastewa-
ter Rate Survey" of utilities in 121
metropolitan areas, Ernst & Young's
National Environmental Consulting
Group found that the average monthly
charge for 1,000 cubic feet (7,480
gallons) of water was $12.35. The
average for 13 suppliers serving 11
California metropolitan areas included
in the study was $12.80.
Despite the similarity in average
charges, water rates in California are
often said to be "too cheap," especially
considering the semi-arid climate found
in much of the state and the reliance of
many metropolitan areas on imported
water. But whatever rate is charged,
under state law the water is free;
customers are billed for the capital and


operating costs to trans-
port water from a well,
river or reservoir to a
treatment plant and from
the plant to the faucet.
Water storage,
diversion, conveyance,
treatment, distribution,
construction repayment
and drought-related costs
are all included in a
customer's monthly water
bill. Rates also cover
operating and mainte-
nance expenses and, in the
case of a private utility,
taxes and any profit.
Along with the prolonged drought
has come an increased interest in more
reliable water supplies. In a 1990 Field
Institute Poll, 81 percent of the 1,100
adults surveyed said it was necessary to
build new water supply facilities. But
most urban water consumers do not
realize what effect capital costs of new
facilities to improve water quantity and
quality could have on their bills.
"The public doesn't understand
water costs and people have never had
to think about it; it's always been so
inexpensive. People now feel they have
the right to inexpensive water," said
Jerry Gewe, senior engineer for water
resources planning for the Los Angeles
Department of Water and Power
(LADWP). "But we've been living on
the vision of those people who built
visionary projects at the turn of the
century and the capacity of those
projects has been reached. The public
is going to have to make a decision


__












f about their water: price, quality or
reliability."
The capital costs of future waste-
water reclamation projects, sea water
desalination plants and new reservoirs
to boost water quantity, and new plants
to meet new water quality rules may,
and probably will, play the largest role
in higher rates. But even water market-
ing the voluntary transfer, trade or
sale of water or water rights could
increase water rates.
"Rates are going to go up dramati-
cally," said Tim Quinn, director of the
SWP and Conservation Division for
the Metropolitan Water District of
Southern California (MWD). "Water
is the cheapest utility people have. I
suspect that will continue to be the
case but not as much as in the past."
According to Snow, even with a
proposed rate increase to finance
capital projects, the average SDCWA
customer's water bill would be about
one-third of the average monthly gas
and electric bill, while made compa-
rable to the lowest monthly cable bill.
While urban water officials weigh
rate increases to cover capital costs for
projects to improve water quantity and
quality, proposals by state lawmakers
could also push local water rates
upward. Among several bills pending
in the state Legislature is one by Sen.
Robert Presley, D-Riverside, that
would create an urban water tax. The
tax would raise money to subsidize
small water districts' compliance with
new federal treatment standards, clean
up contaminated ground water basins
and restore and create wildlife habitats.
As this issue of Western Water went to
press, Presley's bill had been approved
by the Senate and was under review in
the Assembly.
Local water districts could also
lose some tax revenue under a plan
included in Gov. Pete Wilson's pro-
posed 1992-93 state budget. Wilson's
plan would shift $347 million in
property tax revenue from 1,500 special
"enterprise districts" to California's
public schools. These enterprise
districts local government entities


that deliver water, maintain street
lights and treat wastewater would be
given authority to raise fees on their
local customers in order to make up
the difference. Officials at the Associa-
tion of California Water Agencies say
water rates in some districts could rise
by as much as 75 percent to offset the
loss of property tax revenue.
At the East Bay Municipal Utility
District (EBMUD), officials say the
water system would lose $10.6 million
in revenue under Wilson's proposal.
Water rates could rise by 10.6 percent
alone under the governor's proposal
while Presley's bill and other potential
drinking water fees could push them
upwards another 15 percent, said
Randy Kanouse, manager of legislative
affairs. "There's this whole shift away
from general income tax revenue to
this 'fee for service' revenue," Kanouse
said of these state legislative proposals.
This issue of Western Water
provides a historical look at urban
water development and rates, an
overview of the drought and its costs to
water suppliers and consumers, and a
look at future issues and how those
supply and treatment requirements
could ultimately affect urban consum-
ers' water bills.


W& at o r F' ales 'in e via

WATER IS FREE under California
law; customers are billed for the cost
to transport the water from a well,
river or reservoir to a treatment plant
and from the plant to the faucet.

DURING THE DROUGHT, utilities
sold less water, but were faced with
the same ifnot higher- expenses to
meet fixed deliver) system costs and
finance special conservation programs,
and many suppliers raised rates to
maintain their budgets.

IN A 1990 Field Institute Poll, 81
percent of the people surveyed said it
was necessary to build new water fa-


History
As pioneers moved west to Califor-
nia, many in search of gold, settlers first
tapped nearby rivers to use for hydrau-
lic mining and underground aquifers to
irrigate fields and supply the urban
population boom. Growth was the road
to prosperity and was encouraged by
local, state and federal governments.
The young state's two major metropoli-
tan areas, Los Angeles and San Fran-
cisco, recognized early on that they
were outgrowing their local water
supplies. Both cities turned to sources
far afield Los Angeles to the Owens
Valley in the Eastern Sierra Nevada
and San Francisco to the Hetch Hetchy
Valley in Yosemite National Park -
and constructed elaborate reservoirs
and aqueduct systems to store and
transport water. These two projects,
which made their first deliveries in
1913 and 1928, respectively, were
capable of transporting many times the
amount of water initially needed, and
only in recent years have their full
capacities been reached.
"Water rates in most urban areas


cilities to ensure an adequate supply
of water and improve water quality.

STATE LAW PROHIBITS utilities
managedbyacityoraseparatelyelected
board of directorsfrom earning a profit
on water sales; rates are set to meet
delivery costs. However, the Public Utili-
ties Commission (PUC) grants utili-
ties owned by investors rates projected
to include a return on their invest-
ment.


3.2.(o












S (PUC) that are projected to include a
"reasonable" return on their invest-
ment.
Traditionally, urban water works
based monthly rates on the costs to
provide service and the fixed costs of
the water delivery system; customers
typically were billed a monthly service
fee and then charged for each unit of
water used. Managers soon discovered
that the cost of producing each unit of
water dropped as the system grew and
many utilities established declining or
decreasing block rates, which often
encouraged industrial growth. Under
such a system, the per unit rate for
water drops as usage increases. A
decade ago, about 90 percent of the
nation's water utilities had declining
block rates, compared to about 50
percent today. In California, just 2
percent of 218 retail water purveyors
providing service to 335 cities have
declining block rates, according to a
1991 survey conducted by consulting
,N engineers Black & Veatch.
The 1976-77 drought and the need
for customer conservation prompted
many California urban utilities to
switch from a declining block rate
system to uniform or inclining block
rate systems. Under a uniform block
rate system, consumers pay the same
amount for each unit of water used.
Under an inclining or increasing block
rate system, the price rises for each
unit. According to the 1991 Black &
Veatch study, 58 percent of the Califor-
nia suppliers surveyed have uniform
block rates while 29 percent have
inclining block rates. (Two percent
have-declining block rates and 13
percent use other rate structures.)



Average Monthly Water
Charges by Region

Northern $19.22
Coastal $28.17
San Joaquin Valley $11.50
S Southern $17.89
Source: Black & Veatch


The drought has
prompted suppliers in
some areas to adopt
steeply inclining block
rates to encourage
customer conserva-
tion. Even when the
drought ends, more
suppliers are expected
to switch to inclining
block rate systems
because of an overall
"conservation ethic."
This ethic includes a The Santa Clar
Memorandum of tal water to off
Understanding Guadalupe Res
(MOU) regarding
water conservation in California signed
in December 1991 by 130 urban
agencies, environmentalists and public
interest groups. The MOU, primarily
developed by the State Water Conser-
vation Coalition, sets forth a series of
Best Management Practices for water
conservation, and encourages suppliers
to adopt either a uniform or an inclin-
ing block rate structure.
Although the cost of providing
water service was once the primary
basis for setting water rates, urban
utilities are now considering such
philosophical issues as whether growth
should pay for itself through new
connection fees, whether low- and
fixed-income consumers should be
subsidized by other users and whether
water supplier policies should influence
urban growth.
"Most traditional water supply
people don't like socially based rates
because they are not cost-related and
there are no standards, but we are
shifting away from the 'cost of service'
approach," said Gilbert, who now
serves as a private engineering consult-
ant.
While future capital projects to
improve water supply reliability and
pending federal water treatment
standards are the most important long-
term issues facing the state's urban
water suppliers, these matters have
been overshadowed in recent years by
the prolonged drought.


a Valley Water District bought supplemen-
set drastic losses in local supplies, like
ervoir, above, shown in 1989.


Drought Costs

The state's drought has forced
some urban utilities to buy supplemen-
tal and more expensive water
supplies while others resorted to
drilling additional wells and installing
more pipeline to augment usual
sources. The need for customer
conservation has prompted many
suppliers to police water-wasting rules,
provide ultra-low-flow toilet rebates
and launch extensive public relations
campaigns. These increased capital,
supply and administrative costs have
been passed onto consumers through
their monthly or bimonthly water bills.
Drought conditions, the cost of
purchased water and conservation-
designed water rates can be seen in the
1991 survey of 335 California cities and
water purveyors conducted by consult-
ing engineers Black & Veatch. Al-
though rate structures and the average
amount of water consumed differ from
city to city, Black & Veatch compared
water charges in the communities
based on a uniform monthly usage of
1,500 cubic feet or 11,000 gallons.
According to the survey, the average
single-family residence pays $18.31 a
month for water. The highest monthly
water charge, $60.20, was found in
drought-stricken Santa Barbara while
the lowest, $5.80, was found in Los
Banos, a Central Valley farming town

7


3.2.7













that uses ground water. (Through
water conservation efforts of as much
as 45 percent, encouraged by steeply
inclining block rates, Santa Barbara
city officials said their customers'
median monthly water use in 1990 was
500 cubic feet at a charge of $9.10.) Joy
Parsons, the senior financial analyst for
Black & Veatch who compiled the
survey, said she found some suppliers
adjusting water rates upward as often
as every three months as they struggled
to stay even with drought conditions
and the cost of purchased water.


"The public is incensed

because they will have to

pay more when they are

using less, but the cost to

produce each unit increases

(r when less water is used."

-Jerry Gewe, LADWP


As the call to conserve went out in
1990 and 1991, urban residents cut
their consumption, reducing utilities'
revenues. Confronted with fixed
service costs on water supply systems,
declining revenues from reduced water
sales and the cost of new programs to
encourage conservation, many utilities
either raised water rates or proposed
rate increases, causing some customers
to cry foul.
"We have to pay for that capital
whether we bring an acre-foot of water
through the projects or not," said Bob
Smith, assistant general manager of the
Santa Clara Valley Water District
(SCVWD). "Our operation and
maintenance costs on the plant and
debt service on the CVP and SWP
don't go away when we only get 50
percent or 25 percent of our normal
S water supply."
In 1991, urban suppliers in many
water-short areas not only faced paying


Santa Barbara County

Residents of the coastal communities
of Santa Barbara County Goleta,
Montecito and the city of Santa Barbara -
have been hit hard by the drought, water
use restrictions and, for some, high water
bills. Higher water rates will continue as
the areas pay capital costs on a new desali-
nation plant and their share of the Coastal
Aqueduct to tap the SWP. (Each supplier
also is facing system improvement costs
not related to the drought.)
Unlike other parts of Santa Barbara
County, these three communities do not
have large ground water basins and each
relies heavily on surface water supplied by
federal and local reservoirs. Those reser-
voirs have been drawn down to record lows
during the prolonged drought and the
three water districts that serve the com-
munities each imposed mandatory con-
servation and implemented rate structures
designed to encourage lower water use.
The higher rates also helped the three
districts pay for expensive sources of emer-
gency water imported in 1990 and 1991,
said Rob Almy, manager of the Santa Bar-
bara County Water Agency. According to
Almy, it cost $865,000 to install and oper-


ate a floating pipeline on the
Lake Cachuma that allowed the
to be drawn down below the
existing intake structure. An
additional $2.4 million was
spent to construct an emer-
gency pipeline and create a
complex trading and wheel-
ing agreement to bring SWP
water to the south coast.
(The water cost another $1.8
million.) "All of those costs
have been paid or will need
to be paid off within the next
few years," Almy said, "and
they're also facing capital
costs on the desalination
plant and the permanent
connection to the SWP."
Steve Mack, water sup-
ply development manager
for the city of Santa Bar-


Bureau's
reservoir


bara, said those emergency supplies
of water cost about $1,800 an acre-
foot compared to the $150 to $300
acre-foot cost for water from Lake
Cachuma reservoir and the city's
reservoir, Lake Gibraltar. A new
desalination plant to serve the city
and Goleta and Montecito will soon
be on line with emergency supplies
expected to cost from $1,200 to
$1,900 an acre-foot Mack said the
city expects to pay about $1,100 an
acre-foot for SWP water, the same
amount for desalinated water once
the project's capital costs are re-
paid by 1997. The city's use of re-
claimed wastewater to irrigate parks
and other landscaped areas, a
project accelerated because of the
drought, also proved costly $1,300
an acre-foot.
"The cost of water from these
projects is something people well
understood and they were willing
to pay the price in order to have the
dependability," Mack said of the
city's voters, who approved the de-
salination plant and the SWP
Coastal Aqueduct projects in June
1991. "People appear to be resigned
to the higher price of water and
want certainty in their supplies."


Average Monthly Water Charges

Top Five Counties

Marin $40.86
SantaBarbara $30.51
Monterey $29.49
Nevada $27.68
Amador $27.30


Bottom Five Counties
Shasta $ 9.70
Sacramento $ 9.85
Stanislaus $10.04
Madera $10.25
Tulare $10.35

Source: Black & Veatch











' fixed water system costs in spite of
declining revenues through customer
conservation, but the additional cost of
importing other sources of water. For
example, the SCVWD, which supplies
water from local wells and reservoirs,
the SWP and the CVP to 12 major
retailers, bought water from the
Emergency Drought Water Bank and
Placer and Yuba counties to offset
reductions in its usual supplies. At the
same time it was paying for this water,
the district was making "mortgage
payments" on the state and federal
projects. Since the drought began in
Santa Clara County, officials have had
to raise wholesale untreated water
rates by over 260 percent, from $100 an
acre-foot in fiscal year 1987-88 to $262
an acre-foot in fiscal year 1991-92.
Those costs were passed onto retail
agencies like the San Jose Water Co.
which has, in turn, raised customers'
water rates more than 75 percent since
1988.
In southern California, LADWP
( saw its revenues drop 25 to 30 percent
as consumers cut their water use by 30
percent. The loss of income coupled
with increased expenditures for
conservation programs LADWP
spent more than $26 million on its
ultra-low-flow toilet rebate program -
prompted officials to propose an 11


percent rate increase. Some
members of the Los Angeles City
Council feared the public would
perceive the increase as punish-
ment for having saved water and
the council rejected rate increase
proposals of 11 percent and 6.85
percent before recently approving
a 3.6 percent increase by a one-
vote margin.
"It's an emotional issue,"
Gewe said. "The public is incensed
because they will have to pay more
when they are using less, but the cost to
produce each unit of water increases
when less water is used. And we have
the need for $500 million over the next
10 years in Los Angeles alone for
capital costs of water filtration and
other treatment systems."
Giant wholesaler MWD, which
sells water from the Colorado River
and SWP to 27 member agencies
throughout southern California,
developed a special $120 million rate
stabilization fund in the early 1980s
when water supplies were plentiful and
water sales were at a record level. This
fund allowed the wholesale agency to
avoid raising its rates despite drought
conditions and costs until July 1991,
when untreated MWD water climbed
from $193 per acre-foot to $222 per
acre-foot, an increased cost of about 50


Drought-stricken Lake Oroville, before the
rains of the "Miracle March" of 1991.

cents to the average homeowner. The
MWD Board of Directors soon will
consider an additional $47 per acre-
foot increase (with an additional $16
per acre-foot surcharge for treated
water) to go into effect this July, which
will help finance the cost of new
facilities designed to improve water
supply reliability.
Although the state's urban resi-
dents have discovered that conserva-
tion may not save them money in
reduced water bills during times of
drought, water officials believe a
reduction in consumption will produce
long-term financial savings.
"If our customers use less water, it
will reduce the potential cost of water
because we will be able to avoid
desalination water that costs about
$1,500 to $2,000 an acre-foot compared
to $222 an acre-foot for MWD sup-
plies," said LADWP engineer Gewe.


The Cost of Industrial Shortages

Future capital costs to increase the reliability and
quality of water supplies are not the only issues confronting
urban utilities. Officials must-also contend with the needs
of industry. Although California manufacturing uses just 2
percent of the state's water, an adequate supply is a critical
factor in the production process of many industries. Busi-
nesses have taken extensive steps to conserve water and use
their share more efficiently but a study released in Novem-
ber 1991 by the California Urban Water Agencies found
that "California's economy and business climate are being
eroded as a result of unreliable water supplies."
The report, prepared by Spectrum Economics Inc. of
San Francisco, outlined the steps many manufacturers have
taken to conserve water, the economic interest in more


reliable supplies and the potential loss in production and jobs
- if these plants do not have an adequate supply of water. The
study found that the largest production losses because of a hypo-
thetical water supply shortage would hit the refining, computer
and electronics, beverages and food industry groups. The study
also found that "plants are spending many times more than the unit
cost of purchased water to protect themselves from drought
rationing and uncertain utility water supplies by installing water
conservation projects."
"Water supply, along with air quality and transportation,
is becoming a critical issue in the business community, as it
should," said Smith, who has seen first-hand the vulnerability
of Santa Clara Valley's water supply and its potential effect on
the area's $40 billion annual gross regional product, including
the Silicon Valley computer industry.


3.2.q






























Future Water

Reliability and

Quality


While California's prolonged
drought has caused many urban
suppliers to implement drought-related
rate increases, officials predict water
Costs will continue to climb as they
work to increase supplies and improve
reliability. Although capital costs to
build new off-stream reservoirs,
wastewater reclamation systems and
desalination plants will play the largest
factor in increasing the price of water,
even water marketing the new supply
source favored by environmentalists
and some urban water officials may
increase rates.
"In the short-term, rates will drop
once the drought is over if water sales
go up," said LADWP's Gewe. "But we
still have growth, we still have the need
for reliable supplies and new facilities,
which will cause rates to go up. Water
marketing is an important portion of
future supply, but that will not keep
prices from going up."
Still, Gewe and other proponents
of water marketing say such a system
would provide the least expensive
source of new supplies for the state's
growing metropolitan areas. Fred
Cannon, vice president and senior
economist for Bank of America,
believes a regulated market also would
create a fairer system of urban water


rates. "The present urban pricing
system, like the agricultural pricing, is
troubling to an economist," Cannon
said. "We don't price according to
market, we price according to historical
basis, and supply and demand don't
drive rates. Over time, we believe if we
develop a water market, water will be
cheaper in urban areas than through
other sources."
Portner, of MWD, agreed water
marketing could offer the southern
California wholesaler the most eco-
nomical way to increase or maintain its
water supply, but said future electricity
costs to transport the water must be
considered. "If we purchase water from
agriculture we're not only looking at
the cost of water, but the cost to get it
to southern California," he said. "For
example, MWD purchased water from
the state's Emergency Drought Water
Bank for $175 an acre-foot, but then
had to spend another $140 an acre-foot
to pump it up and over the Tehachapi
Mountains."
And capital costs cannot be ruled
out even if water marketing provides
urban areas with the bulk of new
supplies, said George Baumli, general
manager of the State Water Contrac-
tors. "One factor frequently over-
looked in assessing the cost of water
marketing is the cost of transferring the
water from the seller to the buyer,"
Baumli said. "In most cases, it has to be
transferred across the Delta and
additional and improved facilities are
needed there before significant trans-


fers are possible."
Water officials statewide believe
water marketing, like urban conserva-
tion, will provide just a portion of the
needed supply to meet future demand
and accommodate expected growth.
While the state Department of Water
Resources (DWR) continues work on
the proposed off-stream Los Banos
Grandes Reservoir and other projects
to increase the SWP's firm supply,
officials at MWD, SDCWA and
SCVWD are pursuing their own off-
stream reservoirs, wastewater reclama-
tion programs and/or sea water desali-
nation plants. "The big factor that has
driven up rates in recent years is the
drought," said Smith, of the SCVWD.
"But it's just the tip of the iceberg
when you look at the other things that
are coming up."
The suggested $47 per-acre-foot
rate increase to go before MWD
directors this year would help fund the
wholesale agency's proposed 800,000
acre-foot off-stream reservoir in
Riverside County, which would double
the agency's storage capacity. The
reservoir is just one part of a planned
$6 billion in capital projects that
Portner said is expected to raise
MWD's rate for untreated municipal
and industrial water to $490 an acre-
foot by 2000. "It's not going to be
unmanageable, but it's not going to be
business as usual anymore," he said.
Like MWD, the SDCWA, which
sells water to 23 agencies serving 2.5
million people in San Diego County, is
weighing a general rate increase to
finance a major capital improvement
program of $660 million. The program
is projected to include one or more
new reservoirs and an improved and
expanded pipeline system. Reclama-
tion, desalination, conservation and
water treatment also will require
revenue. Officials say these capital
projects and MWD's pending projects
could cause San Diego-area customers'
monthly bills to rise $10 by 2000. This
would be in addition to capital, treat-
ment or other costs at the retail utility
level.


Wastewater reclamation will provide much-needed suppliesfor urban irrigation,
but the need to install additional distribution systems leads to high capital costs.


3.2.10




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