Visitors to Rough & Tumble, the insider-beloved news aggregator devoted to California politics and government, generally see two or three flashing ads under its masthead. This month, two are always on view. One touts the Cabinet Report education website. The other asks, “Is the Metropolitan Water District of Southern California Over-Charging You?” Those who click on the latter ad are taken to a website run by the San Diego water agency, mwdfacts.com, packed with unflattering reports about MWD, its leaders and its history.

You could call it a 21st-century version of “Chinatown” — hardball water politics going places no one has gone before.

MWD targeted San Diego officials at least twice

The MWD-San Diego feud began in the early 1990s when San Diego officials responded to being squeezed on supplies during a severe drought by seeking to hugely diversify where they got water, starting with obtaining some of the massive allotment going to agriculture in Imperial County. MWD took this decision from its largest client as an outrageous affront and launched what the Los Angeles Times later called a “clandestine effort to discredit San Diego County water leaders,” a well-funded campaign in which communications firms were paid hundreds of thousands of dollars to push stories that the county agency was betraying its residents by forcing them to pay more for water than necessary.

San Diego County Water Authority leaders also alleged that MWD had launched another conspiratorial campaign against the agency more recently. In 2014, documents obtained by the authority showed MWD had orchestrated one of its member agencies’ public-relations campaign against the San Diego agency while denying involvement.

The San Diego County Water Authority was 95 percent reliant on MWD supplies in 1991. This year, it says 49 percent of the water it delivers to 3.2 million people comes from MWD, and that figure will drop even more in coming months when the Carlsbad desalination plant, the largest in the Western Hemisphere, goes online. MWD has never wavered from its primary criticism of the San Diego approach: that it forces customers to use much more expensive supplies without solid reasons.

Filling reservoirs during a drought

But the San Diego agency’s record in dealing with the state’s lengthy drought has made charges of incompetence tough to stick. The only reason the San Diego region is making big cuts in water usage is because Gov. Jerry Brown issued a statewide decree. The San Diego County agency announced this spring that it believed it had supplies to cover 99 percent of normal demand in fiscal 2016, which started July 1. This fact, combined with the state-mandated reduction in water use, has led to an unusual phenomenon: One of California’s largest water agencies is steadily filling its reservoirs in the middle of a historic and destructive drought.

The San Diego agency has also enjoyed legal success against MWD after years of claims of systematic overcharging. In a preliminary judgment issued in July and ratified in August, a San Francisco Superior Court judge awarded the the county water authority $188.3 million plus interest for MWD overcharges from 2011-2014. An MWD appeal is considered a certainty.

The Palm Springs region and its 400,000 residents and 124 golf courses aren’t gobbling up an extreme chunk of Colorado River supplies, as many assume. It’s blessed with huge underground aquifers that are tapped with an efficient water infrastructure that has drawn admiring looks for decades. Its residents, tourism industry and business community have deeply benefited from state laws that require water rates to be linked to the actual cost of providing water.

This is from a 1991 Los Angeles Times story during the last major California drought:

PALM SPRINGS — Like a mirage lurking in a dip in the highway, Palm Springs shimmers enticingly atop the Sonoran Desert, an impossibly green splotch on a canvas of tawny brown.

 

Outside the city, the flat, sandy landscape is broken only rarely by scraggly tamarisk trees, yucca plants and pathetic shrubs twisted by relentless desert winds.

 

But in town it’s another world, with lush grass and petunias lining the boulevards, fountains gurgling outside local landmarks and shaggy palms swaying soothingly in the breeze. There are even misters on several restaurant patios, which shower diners with a fine, tropical spray.

 

For visitors from drought-stressed corners of California, the dramatic contrast provokes instant suspicion: Is this artificial oasis hogging water while folks in other regions are skipping showers?

 

It does look suspicious, but appearances can be deceiving. The truth is, Palm Springs — which gets just 5 inches of rain annually and sweats out 120-degree temperatures most summers — sits atop a vast sea of ground water, which has been carefully managed and now insulates the city from the effects of drought.

Water rates a fraction of coastal cities

During the current drought, Palm Springs water officials are keeping a lower profile — and for good reason. The state government’s announcement Friday that it will put on hold some of the old rules that governed water apportionment in the Central Valley could foreshadow a full-on attack on labyrinth rules that assign water rights in thousands of communities.

But one still sees stories in the local press that underscore how much different — and better — things are in Palm Springs. Some articles in the Desert Sun talk about city officials stepping up water conservation efforts, but they seem to be more about creating a sympathetic appearance than in response to an actual need for conservation.

Articles such as this 2013 piece raise long-term concerns about overpumping, but they aren’t remotely as daunting as analyses looking at the state’s long-term water-supply picture. That’s because they include facts such as these:

The state Department of Water Resources in 1964 estimated that the aquifer, in the first 1,000 feet below ground, had a total capacity of at least 39.2 million acre-feet. Based on that estimate, the aquifer has lost about 13.5 percent of the total since the 1970s.

That’s not good news. But it’s nothing like the problems facing coastal water agencies and those in the Central Valley.

This hugely favorable status quo is why rates at the Desert Water Agency have barely budged in recent years. With a base rate of from $1.16 to $1.83 per 100 cubic feet of drinking water, depending on the community, Coachella Valley water bills are far less than those in San Diego County, which are based on a rate of over $4 per 100 cubic feet, or San Francisco (over $5).

Will we see water power plays?

Water politics in California have been fraught and ugly for decades. The movie “Chinatown” reflects the cutthroat atmosphere of 80 years ago, but the tactics of the Metropolitan Water District of Southern California in the 1990s are also jaw-dropping. When its largest client — the San Diego County Water Authority — began looking for new supplies, the MWD undertook what the Los Angeles Times called a “clandestine effort to discredit San Diego County water leaders.”

So it wouldn’t be surprising to see wealthy communities in Silicon Valley and the MWD agitate for a statewide market in water, disguising a grab for cheaper water supplies as a “for the greater good” policy change. The economic argument for such markets is clean and lean. But the history of California was shaped by the complex water rights system left over from a century ago. There would be no Palm Springs as we now know it if water rates in the region were affected by outside factors.

A change in basic water rights isn’t just an existential threat to the economy of the Coachella Valley. It would imperil Imperial Country, the mini-agricultural juggernaut in the state’s southeastern corner that thrives because of cheap, grandfathered water rights.

Brutal battles loom in coming years. But in the short term, what we’re likely to see is more bureaucratic maneuvers. This is from the L.A. Daily News via the San Jose Mercury-News:

“… as the long hot summer drags on, more curtailments are likely to affect those who hold even older rights,” said Caren Trgovcich, the board’s deputy director.

“We are continuing to evaluate the hydrology in watersheds. There could be additional action” as early as next Friday, she said.

The mayors, city managers and city council members in the Coachella Valley and Imperial County are likely to be paying close attention.

… mid- and late-1990s fight between the San Diego County Water Authority and MWD over the authority’s interest in securing new water supplies from Imperial County. MWD secretively paid hundreds of thousands of dollars to a public relations firm for what the Los Angeles Times called a “clandestine effort to discredit San Diego County water leaders.”

That’s from what I wrote a few years ago in chronicling all MWD’s machinations. We could soon see more. San Diego city leaders have joined with environmentalists in embracing a plan that would allow for thoroughly retreated wastewater to be used in city water supplies. In 20 years, officials say, this could supply 83 million gallons of water a day — one-third of the city’s needs.

This could set a precedent for not just other California cities but the world. It’s a far bigger threat to MWD’s hegemony over its 19 million customers from San Diego to Riverside to Santa Barbara than the San Diego County Water Authority’s deal in the 1990s to secure water from the Imperial Irrigation District.

So don’t be surprised if we soon see ad campaigns sponsored by previously unheard of groups popping up around Southern California warning of the perils of “toilet to tap.”

I’m not kidding. Self-serving arrogance is in the MWD’s DNA.

Remember Proposition 26, the Stop Hidden Taxes Initiative, passed by 52.5 percent of California’s voters in 2010?  Probably no one who voted at that time had any idea Prop. 26 would help resolve — at least for now — the 68-year water rate battle between the San Diego County Water Authority and the Metropolitan Water District of Southern California.

SDCWA and MWD have been fighting a water war since 1946 over who has paramount water rights during droughts and how much SDCWA should pay for the transport of water through MWD’s aqueduct and pipeline system.

After 68 years of nearly perpetual water war, on April 24 San Francisco County Superior Court Judge Curtis E. Karnow issued a decision in the water rate battle of the war in favor of SDCWA.  The judge ruled that MWD had overcharged SDCWA in violation of the California Constitution, state water wheeling (transportation) laws and Prop. 26.

MWD is the wholesale water supplier to the Southern-most six urban counties in the state.  MWD built and operates the Colorado River Aqueduct and pays for most of the costs to operate the California Aqueduct that delivers water from Northern California.

(MWD is not identical to the Los Angeles Department of Water and Power that built the Los Angeles Aqueduct from Owens Valley.  MWD is so big that LADWP is just one of its member water agencies.)

If California’s water system were to be characterized as one big pipeline from Northern to Southern California, SDCWA would be at the very end of the line.  And since SDCWA had few groundwater basins due to its geology, it was also the largest urban county most dependent on imported water.

SDCWA lost water war before it started up

Historically, SDCWA was a latecomer to MWD’s current confederation of 26 cities and water district; it joined MWD in 1946. Two years earlier, in 1944, President Franklin D. Roosevelt had forced SDCWA to abandon its plans to use the gravity-fed All American Canal in favor of MWD’s costly Colorado River Aqueduct that had to pump water over Mojave Desert mountain chains.  Roosevelt’s main interest was to supply water to Navy bases in SDCWA during World War II.

SDCWA has always agonized over whether the original 13 cities that formed MWD could exert preferential rights to water over SDCWA, leaving it dry in a drought.  MWD’s Laguna Declaration of 1952 stated it would supply all the water all member agencies needed at any one time, either in wet or dry years.  Nevertheless, in 1991 SDCWA’s share of MWD water was reduced by 31 percent in a drought.

Even though SDCWA is MWD’s biggest water customer, it has never had enough political clout on MWD’s Board of Directors to undo what it has long considered an unfair arrangement. According to an email from spokesman Mike Lee, SDCWA buys on average about 25 percent of MWD’s water, but has only four votes on its 37-member board — or 11 percent of the votes.  The voting formula on MWD’s board is weighted based on assessed property values, not on what pays most of the bills.

From 1947 to the 1990’s, six pipelines were built branching off from MWD’s Colorado River Aqueduct, then stretching some 70 miles to San Diego.  The U.S. Navy built most of the lines, but MWD operated them.  The only user of these pipelines was SDCWA.  Yet, SDCWA was charged a “water wheeling” (transportation) fee over MWD’s entire grid of 800 miles of pipelines across nearly all of Southern California.

Back in 2000, MWD prevailed in court in a water-wheeling rate case against SDCWA. SDCWA argued that wheeling fees should be charged on a point-to-point basis. But the Appeals court ruled that MWD was entitled to recover its full system costs.

MWD ended up counter-suing SDCWA, Imperial County, private water developer Cadiz Inc., and some Indian tribes to validate the Appeals court’s decision.

Along came Proposition 26

Then in 2010, along came Prop. 26, which only applied to fees imposed after Nov. 3, 2010, the date of the election. The provisions of Prop. 26 required that fees must be based on the actual costs of a particular government service, not full system costs. Prop. 26 reclassified regulatory fees as a taxes requiring a two-thirds vote of local voters consistent with prior Props. 13 and 218.

Prop. 26 re-opened the spillway to the longstanding water rate dispute between SDCWA and MWD.  MWD insisted that its water-rate structure is legal and is reportedly in the process of appealing Judge Karnow’s decision to a higher court.  However, unlike MWD and SDCWA’s 2000 water-rate court case, for the current case an appeals court would have to overcome the “will of the electorate” expressed in Prop. 26.

This is a good example of how water cases commonly last decades in the courts, and in some cases never really end.

But so far, at least, Prop. 26 is a taxpayer-built dam to hold back a flood of taxes.

                                     Contributions for and Against Prop. 26 in 2010 

Commentary

May 7, 2012

By Wayne Lusvardi

San Diego’s recent transfer of excess agricultural water from Imperial County has been the only major addition to urban water sources for Southern California for decades. The transfer is the largest agriculture-to-urban water transfer in U.S. history. And it originated in the lining of irrigation canals by the San Diego County Water Authority. This resulted in bringing enough previously wasted farm water to serve 1.2 million people in the San Diego area.

But a partially market-driven water system, as recently proposed by economist Art Laffer, might offer a better solution to California’s dysfunctional water system.

Under- or Over-Charging?

Is the rate charged for San Diego County to convey excess agricultural water through the Colorado River Aqueduct to San Diego a fair deal?  Sociologist Steven Erie of the University of San Diego thinks so.  He even goes further and says the Metropolitan Water District of Southern California has been subsidizing San Diego water rates for decades.

As evidence for his claim that MWD is not overcharging, but subsidizing, water rates for San Diego, professor Erie cites a recent study he co-authored with Greg Freeman for the Los Angeles Economic Development Corporation. The study is titled, “The Cost of Water in San Diego: The Imperial Irrigation District Water Transfer and San Diego County Water Authority Water Rates.” The study was commissioned by MWD.

San Diego Waterboards Prof. Erie

But first: What do water purchase rates have to do with “water wheeling” rates?

Water wheeling is a utility industry term. Wheeling is the conveying of water through the unused capacity in a pipeline or aqueduct by another water provider.  Water wheeling is provided for under Section 1810 of the California Water Code.

It isn’t the price of water that is at issue, but the cost to transport it in unused space or excess capacity called “freeboard” in a pipeline or aqueduct. Freeboard is defined as the distance between the normal water level and the top of a pipe or the top of the canal bank of an aqueduct.

As the San Diego County Water Authority states on its website “MWD Facts”:

“1. The price San Diego pays the Imperial Irrigation District for its transfer supplies has nothing to do with whether or not MWD’s transportation rates are legal.
“2.  San Diego’s court challenge is over the price that the Metropolitan Water District of Southern California charges San Diego to transport water purchased from Imperial County. San Diego is not suing Imperial County over the price it pays for water supplies.
“3. All of Southern California has benefitted from this additional supply of water, not just San Diego.” 

So Erie’s argument that San Diego’s water rates have been subsidized for decades is irrelevant to the issue of the proper water transport rate in the ongoing legal dispute between San Diego County and MWD.  Any attempt to introduce such data would likely be ruled as irrelevant in the San Diego versus MWD water rate overcharging court case.

San Diego paid $491 per acre-foot for excess farm water from Imperial County. If this was a bad bargain, why does the city of San Francisco consider $700 per acre-foot for its purchase of water from the Modesto Irrigation District a bargain price? According to San Francisco officials, the answer is: because a $700 per acre-foot water transfer beats the cost of alternatives such as recycling, conservation, groundwater and desalinization.

And if California water law forbids charging more than the recovery of a proportionate share of “full system costs,” how is it that the Modesto Irrigation District brags that it upgraded its facilities and will only use “some” of the income to catch water before it flows into nearby rivers for diversion to San Francisco?

San Diego’s View of Water Dispute

What is at really in dispute is the water rate that MWD can lawfully charge San Diego to wheel water through the Colorado River and San Diego Pipeline systems.  MWD is required by law to charge rates that reflect only the actual, reasonable and proportionate costs of serving each class of its customers (urban or agricultural).

Erie claims, however, that San Diego paid too much for agricultural water and is now trying to fend off a water ratepayer revolt.  The initial water price for San Diego’s acquisition of surplus farm water is $491 per acre-foot of water.  An acre-foot of water is an acre of land flooded with one foot high of water.  An acre-foot is enough water to supply two urban families for one year or irrigate about one-third of an acre of cropland for a year.

San Diego County’s lawsuit claims MWD is overcharging in the three water sub-rates that make up its water transportation charge. According to MWD’s Water Rates posted online, the three rates that make up the transportation charge are as follows:

MWD Water Transport Rate

.

Once again, the above total transport rate of $396 per acre-foot of water for 2012 cannot be compared with San Diego’s excess farm water rate of $491 per acre-foot.  That would be like comparing the wholesale price of an un-harvested apple on a tree with the retail price of an apple for sale in a store.  That is not an “apples to apples” price comparison.

Is MWD Double Dipping? 

San Diego claims that MWD is overcharging for its water transport rate. This is because the sub-rates that comprise the transport rate allegedly overlap, leading to possible double charging. See the graph below.

San Diego is geographically “at the end of the pipeline” of MWD’s system.  It would thus pay the greatest transport costs compared to other water agencies that are members of MWD.  If San Diego’s contention were proven in a court of law, MWD’s water transport rate would be a subsidy to water ratepayers in Los Angeles and an overcharge on San Diego ratepayers. This is the opposite of professor Erie’s unsupported contention that MWD is subsidizing San Diego’s water rates.

Water Wheeling Reduces Water System Fixed Costs

Arguably, San Diego’s conveyance of an additional 200,000 acre feet of water acquired from farmers through the Colorado River Aqueduct would hypothetically lower the aqueduct’s fixed operational costs by 5 percent of the 4.4 million acre-feet of water it conveys annually.  Power costs would have to be deducted for pumping the water;  200,000 acre-feet is enough water to serve 1.2 million people.

The transfer of water from Imperial County farmers to urban San Diego County also frees up an equal 200,000 acre-feet of water in MWD’s system for use by its other member agencies in Los Angeles, Orange, Riverside, San Bernardino and Ventura counties.

MWD Prevailed In Prior Lawsuit

San Diego County initially prevailed in court in prior water wheeling rate disputes with MWD. However, the Second District Court of Appeal overturned that decision holding MWD: (1) was entitled to recover its system-wide costs not just the incremental cost caused by the wheeling transaction; (2) may base its charges on a one price “postage stamp” basis instead of charging only for the part of MWD’s system; and (3) is not prohibited from setting a fixed wheeling rate for all wheeling transactions.

In a socialized water system, a regional water wholesaler such as MWD is apparently entitled to charge for wheeling another water agency’s water based on a pro rata share of total system costs.  San Diego’s contention that it should only be charged for the additional cost to the affected part of MWD’s system was denied.  San Diego’s wheeling of 200,000 acre feet of water per year through MWD’s total system would reflect about 3.1 percent of MWD’s average annual 6.4 million acre-feet of imported water.

In a market system, both costs and benefits could be considered, rather than only costs.  San Diego’s 200,000 acre-feet of wheeled water per year would reflect $79.2 million of additional annual revenue to offset fixed costs of operating the Colorado River Aqueduct (200,000 x $396/Acre-Foot). This is perhaps another fatal flaw in a socialized water system.

However, that MWD can charge full system costs for water wheeling is apparent not the issue in the current court case.  San Diego asserts that the formula MWD uses for its water transportation rate overcharges by doubling up components of the fee.

The Appeals Court ratified MWD’s policy of charging full system cost over its six county service area rather than only the costs for the Colorado River-San Diego Pipeline system.  This appears to run against past recommendations of the Committee on Water Rates of the American Water Works Association.

In the past, the American Water Works Association has recommended that the appropriate rate set between two pure government entities for allocating “joint capacity costs” should not exceed the demonstrable additional costs involved in providing such a service.  An example would be the rate set for a fire protection service to wheel water through a municipal water line.  According to the AWWA, “[T]he costs allocated to fire protection should not exceed the demonstrable additional costs involved in rendering such service” (cited in Paul J. Garfield and Wallace F. Lovejoy, Public Utility Economics, 1964: p. 233).

By setting a standard of having to pay “full system costs,” the courts have not only deterred a water market, but water transfers between pure government entities that could alleviate California’s water crisis.  Again, this reflects more dysfunction in California’s water system.

Are There Alternatives to Paying Wheeling Fees?

Neither the local nor the appeals court indicated, however, if San Diego was prohibited from using eminent domain to acquire a specific co-location wheeling easement or leasehold in the freeboard excess capacity within specified aqueducts and pipelines of MWD.  If so, San Diego might be able to pay “Fair Market Value” for wheeling water through the unused portion of a pipeline instead of a monopoly unit price of the total MWD system cost.

In 1999 to 2001, a market price for co-location easements supplanted eminent domain just compensation for telecom communications corridors for regulated public utilities. San Diego is exploring building its own pipeline to Imperial County.  Perhaps San Diego could co-locate its own pipe in the rights of way for the Colorado River Aqueduct.

Various aquifers around the Salton Sea may flow into each other.  But suppose water was put in upstream in exchange for withdrawal rights at the other end of the slope closer to San Diego to cut pipeline and right of way acquisition costs?

Socialized Water System Has No Incentive for Conservation

Economist Art Laffer points out that California could solve nearly all of its many raging water wars if it shifted to a modified market water system, albeit with some set asides for environmental water.  Laffer cites a study by Dorothy Robyn of California’s water pricing system.  Robyn’s study indicates that a reduction in private water rights “removed the incentive for conservation” because in a socialized system “there is little reason to avoid waste.”

Thus, a socialized water system ends up with water agencies like San Diego’s having to get a court order to compel farmers to conserve water. San Diego County filed a lawsuit against Imperial County and Coachella Valley to allow San Diego to line irrigation canals with concrete to avoid leakage. The canal lining was at San Diego’s expense.

In a market system, farmers would have an incentive to conserve their excess water and re-sell it for a profit.  And according to Lawrence Livermore Labs, the Salton Sea might have enough water in rechargeable groundwater basins to supplant a large share of the Colorado River water now shipped to San Diego.

Water Runs Downhill Toward Politics

It once was probably true that in California that “water ran uphill toward money.”  But the system California now has allows water to go to the most politically connected.  Perhaps farmers need a separate water system such as the Federal Central Valley Project.  But environmentalists oppose farmers reselling water for a profit, even though such a system would result in more water conservation.

This is why San Diego alleges that a cabal of water agencies in the Metropolitan Water District is overcharging for excess water wheeled through its regional plumbing system.  In a socialized system, there is an incentive to game the system for gain.

San Diego doesn’t want to pay for all the contrived jobs programs of MWD.  MWD’s origins were as a 1930’s Works Progress Administration style “stimulus” jobs program.  MWD’s policy has been to launch large public works projects during economic recessions to stimulate the regional economy.

Below is a chart of what San Diego County contends is the amount of subsidy it pays to MWD’s other water agencies and the amount of overcharge in the water wheeling rate it must pay.

Why California Water System Is Dysfunctional

California is dysfunctional not because of too few taxes, or lack of supermajority rule of the Legislature or the courts. Its water system is not dysfunctional because of lack of voter approval of yet another water bond.

It is dysfunctional partly because it has replaced private property rights and markets with a socialized water system.  This is partly why California only has about a half-year of water storage in both the State and federal water systems, while the Colorado River system has four to 10 years of water storage. And it is why California has squandered five “waterless” water bonds totaling $18.7 billion on mostly open space land acquisitions with no storage reservoirs to show for it.

And what California has done to water rights has also flooded the entire governmental regulation of the economy. Such a system encourages the formation of political coalitions of academics, technical consultants, and activists who all become parasites off the dysfunctional water system.  The more such special interests advocate, the less functional the system becomes.

The number of people now dependent for their livelihood on such a parasitic system is so large that is nearly impossible to reverse it.  And it is sinking the economy and with it government budgets at every level.