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Drought Watch: Roadblocks to Efficient Funding

This is part of a continuing series on the impact of the drought.

The drought has prompted California to redirect hundreds of millions of dollars of remaining state bond funds and other revenues to make the state more resilient in the future. These funds are certainly welcome, but it’s important to see this spending in perspective. As we show in a new PPIC report—written with a team of co-authors from other institutions—the contributions of state money are small change when it comes to spending on water. Most of the $30 billion spent annually to support California’s water system is raised by local and regional water agencies.

The good news is that California’s urban water and wastewater utilities are in relatively good fiscal health. Thanks to their significant investments to improve water supply reliability in the two decades since the last major drought, California’s major urban areas—and the state’s economy—will largely be able to weather this one. Crucially, these utilities have been able to make the needed investments by raising local water rates.

However, looming legal challenges may limit the ability of local agencies to make continued investments in modern, integrated water management—investments that would better prepare us for population growth, climate change, and future droughts. Proposition 218, a constitutional amendment adopted by the state’s voters in 1996, requires water bills to reflect the costs of service to each individual parcel. As some recent court cases have shown, a narrow interpretation of this requirement can present roadblocks to several important management tools:

  • Conservation pricing. Tiered pricing—which charges higher per gallon prices for larger amounts of water use—can promote conservation. And, because new water sources often cost more than existing supplies, higher-priced tiers are justified. But it is difficult to establish a precise link between the price paid and the amount of water saved at each property. As a result, these rate structures may be legally vulnerable even though they improve utilities’ ability to maintain reliable water service.
  • Use of new water sources. Non-traditional sources of water, such as recycled wastewater and stormwater, improve overall system reliability for existing customers, even if not all customers use those specific sources. But a recent trial court interpreted Proposition 218 to mean agencies could not charge customers for any part of water service (in this case, recycled water) that was not physically available to them.
  • Sustainable groundwater management. One promising way to stabilize California’s overtaxed groundwater basins is by charging a per gallon fee to limit pumping and to cover the costs of recharging basins with other supplies. But because groundwater overdraft doesn’t affect each parcel in exactly the same way, groundwater agencies have also faced court challenges regarding the legality of these fees.

To enable our water system to respond effectively to future droughts, the courts need to keep the entire water system in mind when responding to rate challenges. And over the longer term, California needs to better align its funding laws to the goals of modern water management. In a state where drought is a fact of life, this alignment will allow us to manage this crucial resource far into the future. Asking our water managers to account for the cost and location of each drop of water when developing their water rate structures will undermine recent momentum toward a more sophisticated and interconnected water system.

News and analysis of California policy issues from PPIC

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