Originally posted at the Public Policy Institute of California.
By Adam Soliman, Henry McCann.

How can the price of water help us manage the drought? Like everything to do with water management in California, there is no easy answer. The State Water Resources Control Board recently held a workshop to examine the current pricing climate and explore the state’s role in helping urban water utilities adopt conservation-oriented water rates.

Currently, more than half of the state’s urban water utilities use some form of tiered water rates, which increase the per-gallon charge for higher levels of water use. While tiered pricing can encourage conservation, utilities also must meet other competing objectives, covering the cost of providing services. When water sales fall, balancing the books can be a challenge, because fixed costs make up as much as 70 to 80 percent of total utility costs.

Ellen Hanak, director of PPIC’s Water Policy Center, presented findings from recent PPIC research on water system finance at the workshop. She noted that “urban water agencies have been successful so far at using revenue from water rates to remain fiscally stable.” But while utilities have generally been investing at a healthy pace, they are likely to be drawing down their financial reserves as water sales have fallen during this drought. Hanak also said that while pricing “is not an exact science,” water agencies could improve communication with customers about the major costs that must be covered even if water use declines.

One complicating factor lies with Proposition 218, a 1996 initiative that sought to ensure that the charges for many local services, including water, are closely linked to the costs of service to individual properties. Hanak and other panelists expressed concern that courts are interpreting the proposition’s cost-proportionality requirement too rigidly to allow tiered pricing to work effectively. For instance, a recent ruling in a case against San Juan Capistrano’s tiered pricing states that while this type of pricingis legal, the tiers must correspond to the actual cost of providing service at each level of usage – something easier said than done.

Ken Baerenklau, an associate professor at UC Riverside and a member of the Water Policy Center’s research network, studied a Southern California water district’s use of a specific type of tiered pricing, and found that household water demand was reduced by approximately 15% without significantly increasing the average price of water service. Baerenklau emphasized the need for better data collection on water rates and consumption in order to examine the effectiveness of various pricing mechanisms. He also noted that “there is a difference between the price and value of water,” and that we are currently not paying the true cost, especially with respect to the environment.

Lester Snow, executive director of the California Water Foundation and member of the PPIC Water Policy Center’s Advisory Council, recommended renewed investment in water infrastructure and management to adapt to our changing climate. Snow said that fundamental water policy changes should be made now while attention on water issues is high. He also advocated for reform of Proposition 218, saying that we are pushing people to conserve, but have systematically withheld some of the tools water agencies need.

Water Board members expressed interest in creating a clearinghouse of rate-setting tools for water agencies and case studies of agencies with successful conservation pricing. This will help agencies better understand what has worked and how to minimize the risk of adopting new pricing structures. Another important step mentioned by a number of panelists was the need for a statewide fee that could fund “fiscal orphans”—areas that are difficult to fund locally—such as lifeline rates for disadvantaged communities, stormwater capture, and investments to improve drought management.