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Sustainability in the water delivery industry by Tony Shiao

Posted by: | March 18, 2011 Comments Off on Sustainability in the water delivery industry by Tony Shiao |

For the arid communities of Southern California, the importance of water conservation measures cannot be overstated. In fact, higher water efficiency through conservation measures might be the only way the water-stripped cities can exist sustainably.[i] Water is also a natural commodity; it has to be systematically developed and transported to the municipalities before it can be used. In greater Los Angeles-San Diego area, the Metropolitan Water District (MWD) has the responsibility of performing the two tasks. MWD was created by the California Legislature in 1969 for the purpose of obtaining potable freshwater from any available source and transporting the water to the cities of Southern California. [ii] MWD sells its water to the various municipal water agencies via a vast network of pipes, pumps, and reservoirs, and these municipal agencies then in turn sell the water to its residents and businesses for everyday usage.

                MWD is the only entity that can physically deliver significant amount of water to the urban water users around Los Angeles and San Diego.[iii] Furthermore, it is one of the few as well as the largest entity that is actively developing potable water for Southern California urban communities.[iv] This dual role renders potential conservation measures inherently problematic. If we want to eat healthily and sustainably, we have the liberty to pick and choose between various retail services, be it grocery stores, farmers’ markets, or reputable restaurants. But imagine a grocery store that is locked in a 50 years contract with food producers that create food products in a relatively unsustainable fashion, and store is also the only retailer in town where people can buy their food. This single grocery store will most likely have relatively little incentive to buy sustainable food products. But since that store is also the only retail establishment for food, the people of this imaginary town will have no choice but to continue consuming unsustainable food products.

                Lastly, imagine that this particular retail store does not contract with an independent unsustainable food producer, but instead is itself that unsustainable food producer. We now have a situation similar to that of Southern California water industry. While any diversion of natural bodies of water is inherently damaging to our environment, MWD’s operation places a particularly substantial strain on our ecosystems due to the nature of its responsibility.[v] To physically transport water from the Colorado River and Northern California to the arid Southern California requires a vast amount of energy.[vi] However, like the food retailer we used in our example, MWD is also the only commodity transporter. MWD controls the only pipes that connect the Southern California cities to the regional water grid, and thus it is in the perfect position to hamper water sales to any of the cities from other water developers, including developers that are selling water produced through conservation efforts. The case of Metropolitan Water District of Southern California v. Imperial Irrigation District (MWD v. IID) involves exactly such a scenario.[vii]

                In MWD v. IID, a California state appellate court upheld MWD’s right to charge an independent water seller for not only the direct cost of conveying water to one of MWD’s customer agency, but also the indirect cost due to lost revenue.[viii] The case involved a water sale between the San Diego County Water Authority (SDCWA) as the buyer and the Imperial Irrigation District (IID) as the third-party supplier. Through a series of conservation effort, IID managed to conserve a substantial amount of water. It then tried to sell that extra water to the County of San Diego.[ix] Since MWD controls the only pipes leading into San Diego, the physical transfer could not take place without MWD’s approval. While MWD did not outright reject the proposed transfer, it did require SDCWA and IID to pay a premium for the cost of transferring the water. In computing the cost of the conveyance service, MWD included the maintenance costs of its entire conveyance system.[x] Thus even though SDCWA and IID were using only a small fraction of the entire MWD network, they were being asked to pay for part of the cost of maintaining the entire MWD infrastructure, including the maintenance cost of the Colorado River Aqueduct and the California Aqueduct, which play no physical parts in that particular transaction. MWD’s explanation, which the court ultimately adopted, was that by displacing part of its revenue which MWD was depending on to pay for the operational cost of its vast conveyance network, MWD cannot avoid placing extra financial burdens on non-participating member agencies without charging those cost to SDCWA and IID.[xi]

                To be fair, MWD is a non-profit government agency staffed by well-qualified public servants and administrators who want to deliver the best results to the people of Southern California. However, as an organization, it has an arguably reasonable tendency for self-preservation. As both a water developer and a water conveyor, MWD inherently cannot separate the cost of development from the cost of conveyance. The MWD v. IID opinion explicitly points to the problem of how MWD may have trouble recovering the revenue loss caused by the IID transfer.[xii] Many of the MWD’s fixed costs, such as cost for infrastructure maintenance, cannot be avoided even if less water is conveyed. In order to make up for the lost sale and to keep its infrastructure in god condition, MWD would have had to raise the price of the water it sells to the rest of its customers. The MWD v. IID court essentially held that such costs, even those that are more closely related to water development, such as the cost of maintaining the All-American Aqueduct, can be considered as part of its conveyance cost. MWD is allowed to, in turn, place such cost onto any third-parties wishing to use the MWD system for water conveyance.

                The ramification of MWD v. IID is clear. As long as MWD continues to exist as both a water developer and a water conveyor, the MWD v. IID scenario will continue to occur. While modification to MWD’s statutory mandates is a plausible solution, it is not the only one. California can conceivably unbundle the industry into suppliers and conveyors, with only the conveyors remaining as natural monopolies. If MWD is only responsible for the conveyance of water, it will be less inclined to favor water from a particular source over water from other sources. In other words, MWD will be more inclined to charge its customers based on prices that are reflective of the cost of developing individual water sources. Water from distant sources that result in severe environmental damages and require substantial energy for transportation may be more expensive than water developed at lower cost, and MWD will not be tempted to cover the cost of one by artificially inflating the price of another.

[i] http://www.saveourh2o.org/index.cfm/why-conserve/

[ii] Cal. Water Code §109 et seq. (2011), http://www.mwdh2o.com/rsap/Act.pdf

[iii] The Design of “Smart” Water Market Institutions Using Laboratory Experiment, Environmental and Resource Economics 17: 375-394, 384 (2000)

[iv] Metropolitan Water District of Southern California v. Imperial Irrigation District, 80 Cal.App.4th 1403, pdf p.10-11 (2000)

[v] http://www.pacinst.org/topics/water_and_sustainability/colorado_river/

[vi] http://www.nrdc.org/water/conservation/edrain/execsum.asp

[vii] Metropolitan Water District of Southern California v. Imperial Irrigation District, 80 Cal.App.4th 1403 (2000)

[viii] Id

[ix] Id

[x] Id at pdf p.12-14

[xi] Slater, Scott S., A Prescription for Fulfilling the Promise of a Robust Water Market, 36 MCGLR 253 (2005)

[xii] Metropolitan Water District of Southern California v. Imperial Irrigation District, 80 Cal.App.4th 1403, pdf p.20 (2000)

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