How are water rates set in California, and why is water still cheap?
July 16, 2014 7:14 PM   Subscribe

California is in a severe drought. The state just passed a law authorizing heavy fines for people who use water in visibly wasteful ways, and some municipalities are rationing households or talking about doing so. However, my impression is that actual water rates (prices for ordinary use) haven't gone up much. Is that correct? And if so, what would need to happen for rates to go up, and why isn't it happening?

Here are two reasons I've been wondering about this:

* In my household, the variable part of the water bill which reflects actual usage levels is so tiny as to be insignificant -- something like ten dollars a month. (We're EBMUD customers.) This feels insane to me.

* There seems to be pretty wide agreement that water use in the state needs to be curtailed, and that this isn't happening as of now. I would think prices are the textbook mechanism for efficiently reducing demand, so if the state is resorting to fines instead, there must be a reason, right?
posted by aws17576 to Law & Government (17 answers total) 4 users marked this as a favorite
Is there a state election coming up any time soon? It's usually bad form to raise the price of anything a year or so out from an election (provided water prices are set by the state in California, of course).
posted by turbid dahlia at 7:19 PM on July 16, 2014

This doesn't exactly answer your question, but according to this graph in yesterday's San Jose Mercury News, only a couple of (geographic) areas have not cut back on water usage. That makes me wonder if perhaps a state-wide price hike might not be effective/"fair", since it would penalize those of us who are curtailing our usage -- basically what turbid dahlia says above: increasing water rates at this point would be perceived as politically unwise.
posted by hapax_legomenon at 7:39 PM on July 16, 2014

It's true that in Southern California, residential usage makes a fairly big dent into overall water usage.

That said, statewide, here is what UCLA has to say about usage categories (see figure 1).

You, a residential user, could use less water, but that would be a pissant amount compared to how much water is used by agriculture throughout the state (especially in the Valley). A good 77% of the state's usage is agricultural. Maybe 10-12% is actually residential.

Jacking up rates would probably only serve to upset and alienate urban users/voters, while still only making a small dent in the overall problem. Jacking up agricultural rates would greatly damage an industry that is a huge part of California's economy. There's a great deal of truth in the old adage that California is now America's breadbasket. The Valley is easily the most productive agricultural region in the world. I suspect that's why you aren't seeing higher prices.

(Plus, don't forget that water prices aren't "insignificant" for everyone... not everyone is well off... there's no doubt that some of the reluctance is related to the fact that raising rates would greatly affect a lot of people living on poverty.)
posted by Old Man McKay at 7:44 PM on July 16, 2014 [4 favorites]

Santa Cruz is imposing significant cost penalties for household usage above an allocation of about 50 gallons per person per day, but that's possible because all household water is metered, which I think in many other areas is not the case.
posted by anadem at 7:46 PM on July 16, 2014 [1 favorite]

Yeah, it really depends on where in California you are. Friends in Sonora basically can't afford to keep a garden alive this year, from what I understand. Meanwhile in Fresno they just started even metering residential water at all, like, five years ago?
posted by town of cats at 8:03 PM on July 16, 2014

Echo Old Man McKay. There is another old adage regarding water in the west - water flows uphill toward money. The beneficiaries of big water projects may sign contracts to get those projects built, but they don't want to have to pay more for those massive amounts of water they use. So there is tremendous political pressure by agriculture and industry to keep water rates down. Also, of that remaining 12% residential water, there are few if any brown water systems, meaning the water most people use for gardening is the same potable water they use for drinking. Residential water users are notorious water wasters and they too complain loudly if they're told to reduce showers or point sprinklers away from trees or driveways. And within the last five years, a huge federal desalination plant was warmed in the West up with the idea of eventually trying to ease water demand. But removing a ton of salt from water is much more expensive than taking it from snowpack filled reservoirs. Bottom line, water has always been cheap and people want it when they want it w/o realizing how much it really costs to deliver. But that time is fast coming to an end.
posted by CollectiveMind at 8:31 PM on July 16, 2014 [1 favorite]

The other aspect is that the price for residential water is already absurdly high compared to ag water. California still grows 900K acres of alfalfa, which has an average retail value of $200 a ton. That alfalfa requires 1/3 of an acre-foot of water, roughly 100K gallons, also roughly what the average household uses in a year. Given that they also have to pay for land, seeds, fertilizer, and labor, some farmers are paying less way less than $2, delivered, for 1,000 gallons of water. Whereas I am paying $3 for the same amount of water, even at the "wholesale" rate, and the delivered cost is 4x that. It's really hard to justify (and also arguably bad policy) jacking up residential rates when the farmers are getting it so cheap.
posted by wnissen at 9:02 PM on July 16, 2014 [4 favorites]

Residential water is cheap because everybody needs to wash their selves and their kids and cook their food and whatnot.

And as noted, residential water is *nothing* compared to agricultural and industrial usage.

Ever watch them tear down an old freeway onramp? Millions of gallons of spray to keep the dust down as they go.

A county full of Mr & Mrs White Picket Fences with their half-acre manicured lawns won't come near that kind of usage.
posted by colin_l at 9:42 PM on July 16, 2014 [1 favorite]

And the reason the rates aren't going up for ag water is that various federal agencies compete vigorously with the state to offer the cheapest water for agriculture. And those rates tend to be fixed. That's right, the price doesn't vary with drought, though allocations can drop. For a detailed look, read Cadillac Desert. And even if you did somehow change the contracts to increase the price, farmers would go right back to the same groundwater pumping that has already caused more than half the San Joaquin Valley to sink (subside) more than a foot since the 1920s. Because while there are strict limits on surface water use, groundwater is pretty much pump, baby, pump. I don't mean in any way to diminish the severe impact that the drought is already having on agriculture in this state: $2 billion in economic losses, and 17K people have lost their jobs. A meaningful increase in the price of water would definitely cost a lot of jobs and money in California, though a lot of that would simply be shifted to other states that are currently uneconomical due to the heavy subsidy of water in California, and its superior climate. It's just that when 50-80% of the water is going to agriculture, you can't do much about a drought without causing pain in the agricultural sector.
posted by wnissen at 9:49 PM on July 16, 2014 [5 favorites]

If you think DWP in LA is cheap, you must live elsewhere.
posted by Ideefixe at 10:07 PM on July 16, 2014

Response by poster: And the reason the rates aren't going up for ag water is that various federal agencies compete vigorously with the state to offer the cheapest water for agriculture.

That's an interesting comment -- I'd love to hear more about that! I think the root of my confusion is not knowing how rates are determined, and who gets a say. Some of the answers above focus on the politics of rate hikes, but it's not clear to me which elected officials have leverage on prices to begin with.
posted by aws17576 at 11:23 PM on July 16, 2014

The reason the fixed portion of your residential bill is more expensive than the variable portion of your bill is because the utility fixed costs can be significant compared to the variable costs, i.e. the infrastructure (pipes, pump stations, treatment facilities) to provide water can be more expensive than the chemical and energy costs associated with providing you that clean water. Even if you use less water, the utility still has to pay for those fixed costs related to maintenance, conveyance, and treatment of water. Tiered (and variable) conservation pricing decreases overall utility revenue by disincentivizing water use; relying too much on variable pricing means that there is less money available to pay the fixed costs, which can lead to budget shortfall. It is a fine balancing act to get the mix of variable and fixed pricing correct.
posted by ch3ch2oh at 11:39 PM on July 16, 2014 [1 favorite]

Um, you aren't talking about the part of California in which I pay the water bill, are you? Because even the water company man told us when we moved here that water here is "liquid gold," i.e. verrrrrrrrry expensive. So much that our last bill, which covers two months of usage, was $338 and some change. Two people, no lawn and we wash 3, yes 3 loads of laundry per week.
posted by Lynsey at 12:08 AM on July 17, 2014

I would think prices are the textbook mechanism for efficiently reducing demand, so if the state is resorting to fines instead, there must be a reason, right?

Keep reading that textbook until you get to the chapter that deals with price elasticity of demand. The price elasticity of demand for water is typically low - for the US between -0.1 and -0.4, which means the demand for water would decrease by 0.1% to 0.4% for every 1% increase in price. To illustrate: If you increased the water tariffs by 20%, the demand would go down by 2% to 8%. If you increased the price by 50% it would go down by 5% to 20%. If you increased the price for water by 100% the demand would decrease by 10% to 40%.

Water is scarce during drought so your goal is to preserve water and not to make profit. Based on the numbers above you'd have to significantly increase the price to see changes. This way you get into questions of affordability and social protection measures. The threshold for affordability of household water is often defined as 2% of household income. According to a study from 2013, many households in California already spend more than that on water.

Think about the daily life and what pricing people out of water would mean for taking public buses, shopping at the grocery store, working at the office, going to the post office etc. Affordability of water is closely tied to public welfare, safety, and security. The state can not operate like a free market.

Fines also have a different psychological effect than just a price hike. A fine indicates undesirable behavior. I am not clear if it would happen in this case, but let's assume someone amasses 10 or 20 fines because they want to keep their swimming pool filled - 10 or 20 fines could potentially lead to serious legal action that could impact their life. A price hike has no such consequences, if someone wanted to fill their swimming pool and pay the increased price they would be free to do that. In a situation where water is scarce this is not a beneficial outcome.

Now this is not a new problem for California and the current water rates don't reflect the full costs of water services (think water systems infrastructure, impact by continued population growth, restoration of critical ecosystems related to extracting water and impacts of climate change - which all will continue to add further to these costs).
There are several financing options starting with increasing block pricing (progressive tariffs that charge higher rates at higher levels of water usage, and lower rates at lower usage levels) to public-private partnerships, municipal bonds, state revolving funds or public benefit funds.
posted by travelwithcats at 5:59 AM on July 17, 2014 [1 favorite]

About the federal agencies, it is a truly weird story, which I why I recommend Cadillac Desert. There's an federal agency, founded in 1902, called the Bureau of Reclamation, whose charter is basically to develop water projects (such as hydroelectric dams) that will pay for themselves. For most of the twentieth century, that meant more or less unchecked damming of any and all western rivers of any size. They were going to turn large parts of the Grand Canyon into a reservoir. It was unbelievable.

The other agency, that you've probably heard of, is the Army Corps of Engineers. They're supposed to erect dams that provide flood control, which is a serious issue in the West, especially, because of the irregular rainfall.

However, what ended up happening was that the agencies competed with each other to see who could justify putting up the most dams. And the state go into the act with the State Water Project in the 1960s. It wasn't until the environmental movement really went national in the 80s that the frenzy of dam building subsided. And while the dams were supposed to pay for themselves, either from electricity generation, water sales, or the benefits of flood control, in practice there was no enforcement. So there are all these dams, and all of them have long term contracts to sell the water to farmers at very cheap prices, often below the price of service, and none of them are set up for conservation. As far as I know, the only check is that allocations are reduced when the flow is reduced, but the price stays the same. It's a completely insane situation, when you put all the pieces together.
posted by wnissen at 7:18 AM on July 17, 2014 [1 favorite]

To add to wnissen, there is one more big federal water agency, the Tennessee Valley Authority.
posted by CollectiveMind at 6:02 PM on July 21, 2014

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