Title: Wheeling Provisions of the Model Water Transfer Act
CITATION THUMBNAILS PAGE IMAGE ZOOMABLE
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/WL00002777/00001
 Material Information
Title: Wheeling Provisions of the Model Water Transfer Act
Physical Description: Book
Language: English
 Subjects
Spatial Coverage: North America -- United States of America -- Florida
 Notes
Abstract: Wheeling Provisions of the Model Water Transfer Act, Fall 1996, by Timothy H Quinn
General Note: Box 11, Folder 2 ( 17th Annual Water Management Seminar - 1998 ), Item 14
Funding: Digitized by the Legal Technology Institute in the Levin College of Law at the University of Florida.
 Record Information
Bibliographic ID: WL00002777
Volume ID: VID00001
Source Institution: Levin College of Law, University of Florida
Holding Location: Levin College of Law, University of Florida
Rights Management: All rights reserved by the source institution and holding location.

Full Text



















Wheeling Provisions
of the
Model Water Transfer Act


by Timothy H. Quinn


Introduction

The 1990's have been a period of great promise for end-
ing decades of policy gridlock in California's storied water
wars. After years of conflict. the main stakeholder groups. rep-
resenting urban, agricultural, and environmental interests. as
well as key state and federal governmental agencies, have
entered a new era of cooperation. In December 1994. the his-
toric Bay-Delta Accord forged consensus regarding environ-
mental protections for the San Francisco Bay/Sacramento-
San loaquin River Delta (Bay-Delta). That same month, the
"Monterey Agreement" ended years of disputes regarding the
finances and water allocations of the State Water Project.
During 1996. an unprecedented stakeholder coalition worked
cooperatively to secure state and federal funding for environ-
mental restoration in the Bay-Delta watershed totaling more
than S1.4 billion.' Building upon this foundation of consen-
sus and cooperation. California has a remarkable opportunity
to resolve major environmental and economic problems that
have long plagued its water policies.
Developing effective and fair approaches to the voluntary
transfer of water among willing buyers and willing sellers
remains one of the central challenges to achieving the full
policy potential of the 1990's. From the earliest days of coop-
erative negotiations in the so-called Three-Way Process." it
has been clear that environmental interest groups and others
concerned about the implications of improving the state's
water transportation infrastructure, particularly in the Bay-
Delta. could support such improvements only if strong assur-
ances were provided that improved water management prac-
tices would be implemented statewide. Among these assur-
ances is the implementation of effective water markets so
that future growth in the State's water demands can be met in
part by voluntary transfers of existing supplies, rather than
solely through the construction of costly and environmental-
ly damaging new capital projects to increase supplies.
Timothy H. Quinn is one of three Deputy General Managers respon-
stble for overseeing the activities of the Metropolitan Water District of
Southern California (Metropolitan) which delivers supplemental water to
more than 16 million Southern Californians. His primary responsibilities
involve the development and implementation of external policies' and
strategies to assure that Metropolitan receives reliable imported supplies in
an economically and environmentally sound manner. He holds a Ph.D. in
economics from the University of California. Los Angeles. The views
expressed in this article are those of the author and do not necessarily
reflect the views of Metropolitan or its member agencies.
I. The passage of California's Proposition 204 in November 1996
authorized almost St billion for environmental restoration in the Bay Delta.
St CAL. WATa Coo e 78684 (West 1996). Contingent on the passage of
Proposition 204. Congress allocated another S430 million for the same pur-
pose. See Omnibus Parks and Public Lands Management Act of 1996. Pub. L
No. 104-333. 110 Stat. 4093 (1996).
2. The "rhree-Way Process refers to a coalition of environmental. urban
and agricultural groups created in the late 19Ws to work toward mutually ben-
eficial solutions to water resource allocation problems in California. The coali-
tion. with its Principles for the Three-Way Water Agreement Process, laid a
* major part of the groundwork for Governor Pete Wilson's water policy statement
in 1992. Letter from California Governor Pete Wilson to Metropolitan Water
District. Endi i Cadinui Water War (Apr. 6.1992) (on file with West-Norhwest).


-m *.' .
1iE=-;


I


I i


5.3.1
"
i
i


I









omk ". Wim


1

(ml


Long regarded as theoretically attractive by aca-
demics. environmentalists, business interests, and
some urban water suppliers, water marketing has
evolved from theory to practical reality during the
past decade. The recent state-run drought water
banks. while significantly constraining market forces
in favor of governmental decisions regarding the allo-
cation of water, nonetheless provided ample evidence
of the power of private market forces to help allocate
scarce water resources.3 Increasingly. in places such
as the west side of the San loaquin Valley. where
more and more stringent environmental regulations
have eroded traditional sources of supply, water users
are relying on the market as a long-term source of
replacement supplies. In Southern California. an
extensive integrated resources planning process has
identified water transfers as a key to the region's long-
term water supply reliability from both the Colorado
River and State Water Projects systems.'
While a vital element of long-term water policy.
water marketing has nonetheless been one of the
most contentious issues in the California water
policy debate. Water marketing is the subject of
fierce differences regarding the proper role of state
and federal governments and of water agencies.
The issue also raises concerns about impacts to the
economy, to groundwater resources of selling
areas. and to the adverse financial impacts in both
the selling and buying regions. Against this back-
drop of potential and pitfalls. the Model Water
Transfer Act (Model Act) emerges as one of the
more important issues that may confront the state
legislature in its 1997 session. The Model Act pro-
poses wide-ranging statutory changes designed to
consolidate and simplify California's existing
labyrinth of law affecting water transfers.
This article provides a critical review of this
ambitious and complex legislative proposal, with a
particular emphasis on the wheeling provisions of
the Model Act. Section II offers general observa-
tions on what will be required for sustainable policy
change to assure the.continued evolution of water
markets. Section III defines some common sense
principles for wheeling policies based on the need
for sustainable marketing policies. Section IV sum-
marizes the wheeling provisions of the Model Act.
while Section V provides an assessment of these
provisions along with recommendations for some
key changes. Section VI offers concluding remarks
and recommendations for changes in the wheeling
provisions of the Model Act.
3. For a review of Californa's 1991 Orought Water Bank. see
CAL. D'T or WATE RESOUKCES. THE 1991 DOOUcMT WAT/I BANK.
(lanuary 19921.
4. For a review of integrated resources planning in
Metropolitan's service area. see MaoourAN WAnrt Oismcr o S.

84


Voltm* 4, bs0

Wheeling is one of the most important policy
areas affecting the overall success of efforts to pro-
mote effective voluntary marketing. In its current
form. the wheeling provisions of the Model Act fall
considerably short of achieving sound policy that will
promote sustainable water markets in California.
These provisions could result in substantial negative
water supply and financial impacts on other water
users who are not parties to a transaction.
Accordingly. the Model Act's provisions would likely
add to the controversies plaguing California water
policy rather than resolve conflict. However, with
appropriate changes, the Model Act provides a frame-
work through which the stakeholders, legislators, and
others can create a viable market as part of a success-
ful comprehensive water policy for California's future.

II. Creating a Sustainable Water Market

To be sustainable and to create lasting benefits
for the State's environment and economy, any major
policy change related to the establishment of a vol-
untary water market must strive to generate a broad
distribution of gains and to avoid unnecessary nega-
tive impacts on stakeholders not directly involved in
market transactions. This common-sense principle
certainly applies to wheeling policies, which have
the potential of greatly facilitating market transac-
tions, but could also result in enormous negative
impacts on others if implemented imprudently.
As defined by the proponents of the Model Act.
wheeling involves the act of "using the water supply
facilities by someone other than the owner or opera-
tor to transport water" for a fee.' While perhaps an
unglamorous topic, wheeling in fact can play a critical
role in facilitating more competitive behavior on both
the supply and demand side of the water market. On
the supply side, a wheeling policy can assure physical
access to supplies made available by willing sellers.
On the demand side of the market, wheeling can cre-
ate competition among buyers by allowing existing
customers of water supply agencies to acquire water
supplies in a commodity market on their own.
However, if wheeling plays an important role in pro-
moting competition. it also poses enormously compli-
cated challenges to assure that positive market incen-
tives do not result in negative impacts on those who
choose not to participate in a particular market transac-
tion. To understand potential impacts on nonpartid-
pants. it is useful to distinguish between the physical
and financial aspects of a wheeling transaction.
CAL.. SOUTnUNa CAU MS NA's InTCur IA w RSOUKC PLAW.
RcPOrT No. 1107 (March 1996) Ihereinafter SouT1mrt CAufrOIA
PLAN.
5. Brian E Cray. The S aop f Tmra S t CMo A Mdd Watr
Trnmsftr Ac for CaON 4 Wusr-Nowmwr 23 (1996).

5.3. .
'. -. .*'...-


I


"-










Fd 1996 Wha. f"Midof do. MAll Y1Wmiv n Ad


Physically. wheeling is often essential to assure
access to the existing storage and transportation
infrastructure for the delivery of market supplies to
purchasers. The voluntary market transaction itself
creates a raw water supply Like any other supply
source in the arid West. wheeling is required as a
separate service to transport the available com-
modity supply across both time and space.
However, the owners and other customers of the
existing storage and transportation system have
typically invested vast amounts of financial
resources in these systems. These stakeholder inter-
ests will reasonably demand that a wheeling policy
fully preect the benefits they anticipated when
investing in the infrastructure. including access to
low-cost supplies, reliability, and flexibility.
Financially, the establishment of wheeling
charges requires the owners of the existing infra-
structure system to determine how much of the sys-
tem's fixed and variable costs should be recovered
by those wheeling their own water, and how much
should be recovered by those receiving normal
agency supplies. Since the vast majority of costs for
public agencies which operate water storage and
distribution systems are fixed and unavoidable, dis-
putes among current owners and would-be wheel-
ers are likely. If wheeling charges do not recover an
S appropriate amount for unavoidable costs, then
these costs will have to be shifted to the public
agency's other members or customers who are not
parties to the transaction. These other members or
customers will experience rising water rates as a
result cf market transactions over which they have
no control. By the same token, if wheeling charges
are unnecessarily high, desirable transactions could
be discouraged which would otherwise increase
supplies available for use within the service area of
the public agency that adopts such charges.
During the past five years, the Metropolitan Water
District of Southern California (Metropolitan) has con-
fronted the challenges of developing a sound wheel-
ing policy as it has received a variety of wheeling pro-
posals ranging from short-term transfers to replenish
groundwater basins to a well-publicized long-term
6. For a review of Metropolitan's wheeling policies. including
Metropolitan's wheeling principles. Letter from Metropolitan
General Manager to Metropolitan Board of Directors. tur -10.
Rate RAineret PMras Ptia 2 Wk in PriarcM s. ItRjsuena ud Wia1
Raes E.at leaury s1. 1997. Jn Raehdt OiGiia Natiue f lara rd to
Adpt Wslon Rats (Nov. 1996) Ihereinafter Mrepalsn Ltarl (on
file with West-Northwest).
7. Metropolitan's Administrative Code 4 4202 ('Laguna
Declaration') states that. lwlhen and as additional water
q resources are required to meet increasing needs for domestic.
industrial and municipal water, the District will be prepared to
deliver such supplies.,' and that. establishmentt of overlapping
and paralleling governmental authorities and water distribution


transfer from Imperial Irrigation District to the San
Diego County Water Authority. To deal with the chal-
lenges of an increasingly competitive environment,
Metropolitan and its member agencies created a
mediated negotiating process to make recommenda-
tions to Metropolitan's Board of Directors regarding
changes in Metropolitan's rate structure. including the
establishment of wheeling services and charges. At its
November 1996 meeting, Metropolitan's Board adopt-
ed a wheeling policy based on the report of the medi-
ated process. The overall goal of the policy is to pro-
vide access to Metropolitan's system. thereby promot-
ing competition in the water market. while fully pro-
tecting the financial and water supply of all of its
member agencies.6
The decision to establish such a policy is historic
Dating back to the 1952 Laguna Declaration, the pol-
icy of Metropolitan has been that the District shall be
the sole provider of supplemental water to its mem-
ber agencies in Southern California.' The recently
adopted wheeling policy reverses that trend, recog-
nizing the potential value of member agency market
purchases as a source of supply for the regions.

Ill. Some Common Sense Wheeling Principles

To assure that market transactions do not have
unnecessary negative financial or water supply
impacts on nonparticipants. wheeling policies should
embrace some common sense principles. To illustrate.
this section describes wheeling principles recently
adopted by Metropolitan. While developed by
Metropolitan in cooperation with its member agen-
cies. similar principles are necessary in other parts of
California to implement a balanced wheeling policy.
Equal Treatment. Perhaps the most fundamental
wheeling principle is that all water moving through
the storage and transportation system, whether
normal supply deliveries or water being delivered
-under a wheeling agreement, should be treated the
same. This concept assures market participants that
they will enjoy a "level playing field" in the use of
the storage and transportation services being
sought under a wheeling arrangement. Similarly.
facilities to service Southern California areas would place a
wasteful and unnecessary financial burden upon all of the people
of California. and particularly the residents of Southern
California.' Mmoractouor WArmt Dnstcr Ac M AHo onwanvTm
Coo 4 202 (on file with West-Northwestn.
8. The development of water transfer programs at the mem-
ber agency level is consistent with the core straty of
Metropolitan's integrated Water Resources Plan which encourages
development of water resources for the region at the member
agency level. Programs developed at the local level, including
water conservation, water reclamation and groundwater recovery
programs are expected to develop approximately 800.000 ace
feet of water for the region by the year 2000. S ray. save note 5.


as 5.3.3


FM 1996


'61091199 Rauirmnr of lie Medd'l#w riwlbr id









Vonm 4. Nmtbr


I

rj


the equal treatment principle assures existing cus-
tomers that those seeking wheeling services will
share equally in the responsibility to pay for the
storage and transportation system.
No Financial Harm. A fundamental tenet of fair-
ness is that non-participants in a market transac-
tion should not experience an increase in their
costs or water rates as a result of the implementa-
tion of a market transaction. If this principle is vio-
lated, nonparticipants will have incentives to
oppose market transfers. As a practical matter, this
principle requires that wheeling charges must fully
recover a fair share of all unavoidable costs associ-
ated with the system through which wheeling is
desired. 3y definition, if a reasonable portion of
such unavoidable costs are not recovered in the
wheeling charge, these costs must be shifted to oth-
ers, thereby increasing the water rates of third par-
ties not involved in the market transaction.'
Riabilty. Wheeling terms and conditions must be
structured to deliver water to the market participants in
a manner that does not interfere with supply deliveries
that would otherwise be available to others as a result
of their investment in the existing system. This princi-
ple requires that the owner and the existing customers
be given the flexibility to operate the storage and trans-
portation system to accommodate future conditions.
Virtually all water supply systems vary greatly and
unpredictably in their utilization, depending upon
hydrologic and other variable conditions, such as the
demands of other contractors entitled to water from a
joint project. During wet conditions the system may be
fully utilized, for example, by carrying water for local
groundwater or surface reservoir storage. At other
times. excess capacity may be present. Requiring rigid
rules guaranteeing deliver/ of transferred water, regard-
less of future circumstances. could negatively impact
the owners and the other users of the system by deny-
ing them necessary discretion in the operation of the
system under changing circumstances.
Water Quality. The Metropolitan wheeling policy.
in effect, requires a nondegradation standard for mar-
ket transactions. Adverse impacts on water quality
can affect drinking water quality as well as impair
water reclamation and conjunctive use efforts.
Because of the unanimous concerns of Metropolitan's
member agencies, wheeling transactions will not be
allowed to degrade water quality. Wheeling propo-
9. Metropolitan's wheeling rate is based on the premise that
a member agency purchasing water from Metropolitan at the
"bundled full service rate includes payment for the fixed and
unavoidable costs of the system, induding transmission and stor-
age. plus appropriate variable costs. These costs represent
approximately 85% of Metropolitan's costs. To develop wheeling
rates. Metropolitan in cooperation with its member agencies.
unbundledd" its costs to determine which costs should appropri-
ately be recovered and which costs should not be recovered. To


53.4


nents would have the option to proceed with a trans-
fer if any adverse water quality impacts were mitigat-
ed to the satisfaction of the party potentially harmed.
Water Managment Programs. Finally. wheeling
transactions should not interfere with the financing or
implementation of other water management programs
that are critical to the stare or region. To accomplish
this. and to be consistent with the principle of equal
treatment, the wheeling charge should recover a pro-
portionate share of the region's financial assistance to
such programs as wastewater reclamation and reuse.
conservation, and groundwater recovery. When
Metropolitan's customers utilize the storage and dis-
tribution system, the water rate they pay recovers a
portion of the costs of such programs. Such programs
are beneficial to Metropolitan's customers because
they are designed to stretch the available capacity in
the existing system and to help reduce demands for
imported water which promotes consensus on vital
statewide water issues. Because wheelers also enjoy
the benefits of these programs, they should pay a pro-
portionate share of costs. Failure to do so would either
undermine the financial integrity of programs vital to
regional and statewide interests or unfairly shift' the
costs to other customers utilizing the system.

IV. Wheeling Provisions of the Model Act

In an effort to promote more competition on
the buyers' side of the emerging water market.
Section 804 of the Model Act expressly allows the
members or customers of a water supply agency to
acquire transfer water from sources other than the
water supply agency. if such a transfer would require
the use of the water supply agency's storage and
transportation facilities to deliver the purchased
water, the water supply agency must comply with
the wheeling provisions of the Model Act.
In brief, the key wheeling provisions of the
Model Act include the following:
Aces. Section 901(a) of the Model Act requires
a public water agency to allow any legal users of
water to use up to 70 percent of the unused capaci-
ty in the water supply system of the agency to wheel
transferred water. The Model Act further provides
that the entity seeking such wheeling shall be
assured the right to such capacity "throughout the
term of the water transfer agreement."'0
avoid iniury to other member agencies, wheeling rates should
recover that portion allocated to unavoidable costs on the same
basis as member agencies purchasing Metropolitan supplies. This
approach to establishing wheeling rates is similar to that being
implemented by the California electric utility industry as par of
AB 1890. signed by Governor Pete Wilson in September. 1996.
which allows for the recovery of unavoidable and stranded costs.
10. A Moos WXar Tamsuu Acr ms CAupoumA Ihereinafter
Moot ACTrI 901(a). r rintd in 4 WEsr-Nomnwcs 3.


Tanlhv N Oai._


rvmdw H Otim-.- ---









Fd 199A W-drA ?W= of f"t W1Ad


Prompt Action. Section 902(b) requires prompt
determination by the public agency, within 30 days
of receipt of a written request for wheeling, regard-
ing the availability of unused capacity and the terms
and conditions for wheeling water."I
Wa'er Quality. Section 903(a) would permit the
introduction of transfer water to the system of a pub-
lic agency that could significantly degrade the quali-
ty of water delivered to the customers of the agency.
The public agency could prohibit or impose restric-
tions on the transaction only "if ... the transferred
water would diminish the quality of the water in the
system to an extent that the blended water could not
be t.'eated for distribution to the public agenc/s
other .-embers or customers.' or if reasonable terms
and conditions were required to assure that the
water supply system could comply with all applicable
water quality and environmental standards."2
Fair Reimburment. Section 903(b) allows the
public owner to impose wheeling charges for the use
of its system. These charges may recover capital.
operations and maintenance, and replacement costs
only for the "portion of the unused capacity made
available by the agency for the transfer of water." In
addition. the agency may recover power, treatment
and reasonable administrative costs.'3
Administrative Discretion. The Model Act affords
C1 little discretion to the public agency in making deci-
sions regarding whether and under what terms and
conditions to offer wheeling services. Section 904(a)
requires that all disputes regarding the agency's
decisions be subject to binding arbitration. If the
parties :o the dispute cannot agree on an arbitrator.
Section; 904(c requires that a single, neutral arbi-
:ratcr ze selected by the State Water Resources
Control Board. In all related proceedings. the public
agency would bear the burden of proof based on a
preponderance of the evidence, and the decision of
the arbitrator would be final and beyond challenge
by the public agency. 4

V. An Assessment of the Model Act Wheeling
Provisions

Essentially. the common sense wheeling princi-
ples discussed in Section III require that:

Transferred water and normal deliveries
using the same storage and transportation
system be treated equally:


S1. Id. 902(b).
12. Id. 903(a).
1 3 4903(b).
14 Id. 904.


Market transactions be structured to avoid
adverse financial, water supply, or water
quality impacts on others: and
Wheeling policy protect the financial
integrity of water management programs.
such as reclamation and reuse and
implementation of urban water conserva-
tion Best Management Practices
(BMPs)."

Consistent with these principles, current law
regarding wheeling contains an explicit provision
that the "use of a water conveyance facility is to
be made without injuring any legal user of water
...."': Similarly. the precedent-setting water mar-
keting provisions of the Central Valley Project
Improvement Act protect nonparticipants in the
market by requiring that voluntary transfers result
in "no unreasonable impact on the water supply.
operations, or financial conditions of the trans-
feror's contracting district or agency or its water
users."" in contrast, the proposed wheeling pro-
visions of the Model Act include no comparable
provision. Indeed. an analysis of the possible
impacts of the Model Act's wheeling provisions
indicates that. as currently proposed, they could
result in substantial negative impacts on others.
The Model Act requires that determinations
of available unused capacity be made on a sys-
tem-wide basis, but that wheeling charges be
assessed only with respect to the portion of the
system used to transport the water. This
approach is the reverse of the standard practices
of water management agencies and will result in
unequal treatment of transferred water and nor-
mal deliveries.
The determination of unused capacity should
be made on the basis of the portion of the system
physically required for wheeling. For example.
consider an agency with two distinguishable sup-
ply sources of equal capacity. one operating at
full capacity and the other operating at 50 percent
capacity. It makes little sense to require the
owner of the overall system to wheel water
through the fully utilized portion of its system
because, on average, the system has 25 percent
unused capacity. Such a policy would interfere
with the operations of the agency to the detri-
ment of its other customers either through
reduced availability of water or increased costs.


15. Se CAL OtPT or WATEU RiSOURCS. supra note 3.
16. CAL. WArts Coot 4 1810t(d IWest 1996).
I7. Central Valley Project Improvement Act. Pub. L No. 102-
S75. 3405(a)(1)(K). 106 Sta. 4600(1992).


87 5.3.5


MaAn hairiaa d Ibr Ikbl Warr bnfrkr


6991l laF










Tmryr lH.Quin


rno*N Qdm m a tlmi'. A


SI


The requirement in the Model Act that wheel-
ing charges recover costs only for the portion of the
system used in the transaction will often require
that the public agency establish different pricing
structures for the use of its storage and transporta-
tion system depending on whether the water mov-
ing through the system is a normal water delivery
or transferred water. Such differences in pricing are
inconsistent with the "equal treatment" principle
and may result in significant financial inequities
and in market signals that distort decisions to pur-
chase water in the emerging water market.
L:ke many other water agencies. Metropolitan
recovers the fixed costs of its storage and trans-
portation system on a uniform basis regardless of
where water is actually delivered in the system.
Such a "postage stamp" rate reflects the fact that
the entire system is operated in an integrated man-
ner to provide blended water and reliability for all
water users relying on the system. Because it is vir-
tually impossible to determine which specific costs
are associated with particular deliveries, the system
is priced on a postage stamp basis for all of
Metropolitan's normal deliveries.!' Under the
"equal treatment" principle. Metropolitan has pro-
posed to treat wheeled water the same. charging a
uniform rate for wheeling on a postage stamp
basis.1"
The Model Act would apparently prohibit
such an approach and require a fundamentally
different pricing structure for the use of the sys-
tem for transferred water as compared to normal
deliveries Depending upon the costs allocated
to different portions of the system and the
specifics of a transfer proposal, the approach of
the Model Act could result in different costs
(both higher or lower) to use the system for
transferred water than for normal deliveries. As a
matter of fairness, this approach may result in
significant cost-shifting among water users and
will likely undermine the long-term sustainabili-
ty of a marketing approach.20


18. An appropriate pricing structure for recovering fixed.
unavoidable costs may vary depending upon the physical charac-
teistics of the storage and transportation system. For example.
the State Water Project (SWP) is a highly linear system where
contractors further downstream pay different fixed charges
because it is relatively easy to identify an acceptable basis for dif-
ferential charges. Similarly, wheeling charges for noncontactors
using the SWP system have varied based on how much of the sys-
tem was utilized to wheel water. In contrast. a system like
Metropolitan's is highly nonlinear with customers dispersed over
5.200 square miles of service area and a uniform or -postage
stamp" approach has been historically viewed as more equitable.
19. Under Metropolitan's recently adopted wheeling princi-
ples. the estimated price for wheeling service for the 1996&97 fis-
cal year will be S262 per ace-foot. This charge will allow recovery
for all transmission costs and unavoidable storage and supply


costs associated with utilizing Metropolitan's facilities. The
charge will be applied on a uniform basis and is identical to the
implicit charge for use of the system for Metropolitan's normal
deliveries. Inthe future, working in cooperation with its member
agencies. Metropolitan will investigate alternative means of
recovering fixed costs in order to reduce the incremental costs of
wheeled water. See Metrwta Letter suwra note 6.
20. An analysis of the impact of cost-shifting if unavoidable
costs are not included in the wheeling rate shows that a 100,000
acre-feet transfer would result in a cost shifting of approximately
S14.6 million and a water rate increase of approximately S9 per
acre-foot to nonparticipating member agencies of Metropolitan.
See Met piun Lttr. suwm note 6. at Exhibit 8. Attachment I. p. 16.
21. Moot Act 9031b. ).




*5 3.


No less importantly, by artificially shifting how
the costs of the storage and transportation system
are recovered, the Model Act encourages price sig-
nals that will distort market activities. Because the
capital costs of the storage and transportation sys-
tem are fixed and unavoidable, pricing signals for
their use should not be allowed to distort activity in
the commodity market for water. Yet the Model Act
would lead to different wheeling charges for differ-
ent types of water marketing transactions. Such dif-
ferential wheeling charges have little benefit since
wheeling can occur only in unused (or excess)
capacity. the costs of which are unavoidable.
However, differential wheeling charges can inappro-
priately influence market decisions by encouraging
transfers to occur where wheeling charges are artifi-
cially lower, even if the economic and social costs of
the water transfer may be higher in this geographic
region than in others. All of the above concerns can
be remedied by simply allowing the public agency
to use the same pricing structure for use of the sys-
tem to wheel water and for normal water deliveries.
The water quality provisions in Section 903(b)
of the Model Act allow for substantial degradation
of the quality of water delivered to other customers
as the direct result of wheeling transferred water.21
This could substantially increase the costs of non-
market participants in treating water to meet drink-
ing water standards and may impair the effective-
ness of programs to reclaim and reuse water and to
promote conjunctive water management. Water
quality impacts are generally of equal or greater
concern than reliability issues to local water man-
agers and the possibility of water marketing trans-
actions degrading water quality will be the source of
substantial opposition to the evolving market.
The Model Act wheeling provisions could also
undermine the financial viability of water manage-
ment programs that are of regional or statewide
importance. To promote reclamation and reuse of
water, implementation of urban BMPs. and other
desirable programs, some agencies, including


;1 -


Vdmu4 I ml,,rn










Fd 1996 Wimba P~u~aI5 d ~w Ma~ Wow 1~~wMt


( Metropolitan. include an assessment in their water
charges to subsidize these activities. Absent such
financial assistance. many of these programs would
not be economically viable. Apparently, the intent
of the Model Act is to exclude such costs from
recovery as a part of a wheeling charge. Such an
approach would either undermine the financial via-
bility of desirable water management programs or
require that the costs of such programs be dispro-
portionately shifted to other members or customers
as others continue to develop alternative supplies
free of these charges. As a result. the Model Act. in
attempting to promote water markets, could harm
other equally important water management pro-
grams. Once again, allowing for equal treatment so
that all parties using the system pay a proportion-
ate share of the costs of these subsidies would
eliminate this potential problem.
Finally. the Model Act wheeling provisions sub-
stantially and unnecessarily eliminate the discretion
of existing public agency owners to operate their sys-
tems for the benefit of their customers as a whole. In
the past. water marketing legislation has generated
bitter disputes regarding the ability of individual
water users to sell water with minimal or no oversight
exercised by the local public agencies that developed
the supply. Legislation introduced by Assemblyman
Richard Katz in 1992 (AB 2090) and subsequent
efforts by Assemblyman Dom Cortese in 1993 (AB 97)
floundered amidst considerable acrimony over the
issue of user-initiated transfers, as market propo-
nents sought to eliminate the discretion of public
agencies on the supply side of the market. The Model
Act prudently puts aside this contentious issue.
Unfortunately, the Model Act invites the same
controversy on the demand side of the market
because the wheeling provisions attempt to elimi-
nate the discretion of agencies operating storage
and transportation systems required to deliver
transferred water to buyers. In most cases, the exist-
ing customers of these systems have invested enor-
mous amounts, acting in good faith because they
believed that they would receive the benefits of
such investments through the flexible operations of
the system to deliver affordable. high quality water.
It is appropriate for public policy to establish rules
that require reasonable actions to promote volun-
tary market activity on both the seller and buyer
side of the market. However, attempts to eliminate
the discretion of public agencies regarding how this
mandate is to be fulfilled will not likely be any more
successful on the buyer sides through wheeling pro-
Svisions than it was on the seller side through efforts
to force user initiated transfers.


VI. Coacluslo and Recommeadatlown

The Model Act offers considerable promise for
promoting an effective water market as a key com-
ponent in California's long-term water policy.
Indeed. it is difficult to imagine resolving the major
questions in the Bay-Delta watershed as part of the
CALFED process without addressing this fundamen-
tally important issue. However, the wheeling provi-
sions of the Model Act in their current form would
likely raise more problems than they would resolve.
Accordingly. if the Model Act or other legislation
progresses through the California legislature, its
sponsors and others involved in the debate should
consider substantive changes to the wheeling provi-
sions. To assure the development of water marketing
policy and legislation in an effective manner with
maximum consensus support, the wheeling provi-
sions should be amended consistent with the fol-
lowing general recommendations. The Act should:

Include assurances that public agencies
have the option to adopt "equal treatment"
policies under which water moving through
the storage and transportation, system is
treated on an equal basis, whether normal
water deliveries or transferred water;
Maintain the "no harm" provision of exist-
ing law to assure that wheeling does not
adversely affect the finances, reliability, or
water quality of other members or cus-
tomers of the system;
Expressly allow determinations of
unused capacity on the basis of the por-
tion of the system required to deliver the
transferred water:
Eliminate the existing provisions requiring
binding arbitration and imposing the bur-
den of proof on the public agency based on
the preponderance of the evidence: and
Allow public agencies reasonable discre-
tion in the operation of their systems so
long as they implement policies consistent
with the principles identified above to
wheel transferred water to those members
or customers who wish to purchase water
from other sources.


__


Whhea Proisms od Mo l Wa W ~im hrAt


Fdl1996




University of Florida Home Page
© 2004 - 2010 University of Florida George A. Smathers Libraries.
All rights reserved.

Acceptable Use, Copyright, and Disclaimer Statement
Last updated October 10, 2010 - - mvs