California’s Drought: A Metered Solution

Background

On January 17, 2014, California Governor Edmund G. Brown Jr. declared a state of emergency addressing the severe drought conditions in the state. The past year was the driest in recorded state history, and as of February 27, 2014, surveys estimated only 24% of average snowpack. The Governor’s state of emergency declaration calls on Californians to reduce their water usage by 20% and directs state agencies to impose various efforts aimed at conserving water. In addition, the Governor stated, “I’ve declared this emergency and I’m calling all Californians to conserve water in every way possible.” Yet, despite this declaration and the severity of the situation, most major water providers and the Governor opted for voluntary cuts, choosing not to impose mandatory water restrictions with fines for excessive use.

Current Conservation Options

No Californian Governor has ever ordered mandatory statewide water restrictions, and while that option is within the Governor’s power, major uncertainty exists over how enforcement of that rationing would work. While the state holds the power to allocate water within it, the responsibility of managing and distributing that water lies at the local level, spread out amongst over 3,000 water providers, ranging from cities to municipal water districts, to private farm districts operating wells. The bottom line is these entities rely on selling water, not conserving it. A 20% percent reduction in water consumption and the subsequent loss of revenue would undoubtedly result in future rate increases. As a result, reducing water consumption through mandatory conservation measures are unpopular for cities and utilities.

Prior to the current drought, many water providers elected to implement tiered water rates to encourage conservation. Tiered water rates set a lower price for the initial basic use allocation. After that base, each additional water-use block or tier increases in price, causing a user of more water to pay at a higher rate than a user who stays within the basic use allotment. Tiered water rates stay within the voluntary classification of rationing that California has opted to use, while also using a market-based approach to achieve water conservation results.

Proposition 218

Passed in 1996, Proposition 218 limits the ability of local governments in California to raise taxes or fees without the approval of property owners while also including a proportionality condition by requiring that those taxes and fees cannot exceed the cost of providing the public service. In 2006, the California Supreme Court clarified that Proposition 218 applied to local water, refuse, and sewer charges. The result of this ruling meant that water providers could not charge one group of water users more in order to subsidize the fees of another group of water users. For instance, agricultural water users like farms and ranches who traditionally use much larger water volumes for their crops and livestock could not be charged at a higher rate than urban water users who use smaller volumes for domestic purposes.

In the 2011 case City of Palmdale v. Palmdale Water Dist., the California Court of Appeals held that an existing tiered pricing structure had instilled a “dramatically higher and disproportionate” pricing structure on irrigation users and violated the proportionality requirement in Proposition 218. While it remains unclear if the application of Proposition 218 will dissuade the use of tiered pricing systems in California, prior cases have shown that water providers must prove that they satisfy the proportional cost of service associated with a tiered pricing structure. Water providers must prove proportionality of the costs increases they pass on to consumers in relation to the increased service cost to provide that water.

Smart Metering

The creation of the proportionality requirement potentially created a unique opportunity for water providers to refine their conservation pricing policies through the use of smart metering. Smart metering has two main components: meters that measure chronological intervals, and a communication channel that allows the water provider to obtain readings on demand. Many Western states already use real time or near real time data collection software to monitor their distribution and collection systems. Detailed accounting is essential in order to ensure that both temporal and quantitative requirements are met. Smart metering offers essentially the same information, breaking down individual customer usage by time intervals and quantity. In the case of complying with Proposition 218’s proportionality requirement, a water provider could establish peak use hours where the energy costs associated with providing that water are higher. Then by using smart metering to compare usage to those peak times, water providers could provide the necessary proof to overcome the proportionality requirements.

The benefits of smart metering could also enable individual customers to monitor their own usage habitats by reading their own meters from inside their home. This technology would provide consumers current usage-data to evaluate and base water use decisions on.

Potential Issues

While smart metering does offer a potential solution to the use of tiered pricing systems under Proposition 218, it is important to acknowledge how difficult it would be for some water providers to comply with the proportionality requirement. While comparing energy costs to demand may be relatively simply, the calculation becomes far more complicated when integrating multiple supply sources into the cost of service equation. Cost of service must consider where a municipality received its raw water supply: whether supply comes from a gravity fed ditch, groundwater pumping, or, as here in Denver, pumped under the continental divide. These different sources would have a dramatic effect on how to equate the cost of service. Water providers may have to untangle the costs of each of their water sources, in combination with the costs of storage, treatment, and distribution, in order to be ready to comply with the scenario posed by Proposition 218.

Conclusion

As California continues to struggle with drought, water conservation policies will come under further scrutiny. If the courts decide that tiered pricing in combination with smart metering passes Proposition 218’s proportionality requirement, the result may be a valuable water conservation tool for California.

 

The title picture is of the San Gabriel Dam and Reservoir, located in Los Angeles County, California, in December 2013. The picture is attributed to Shannon1 and licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license. The use of this picture does not in any way suggest that Shannon1 endorses this blog.


Sources:

Bryan Barnhart, Rebecca Anderson Smith, Upgrading Conservation Pricing Proposition 218, Smart Meters, And The Step Beyond Tiered Rates, California Water Law Journal (Jan. 3, 2014), http://blogs.mcgeorge.edu/waterlawjournal/upgrading-conservation-pricing-proposition-218-smart-meters-and-the-step-beyond-tiered-rates/.

Governor Brown Declares Drought State of Emergency, Office of Governor Edmund G. Brown Jr. (Jan. 17, 2014), http://www.gov.ca.gov/news.php?id=18368.

Paul Rodgers, California drought: Why is there no mandatory water rationing?, San Jose Mercury News (Feb. 15, 2014), http://www.mercurynews.com/science/ci_25153774/california-drought-why-is-there-no-mandatory-water.

Driest Year on Record?, California Dept. of Water Resource (Feb. 28, 2014), http://www.water.ca.gov/waterconditions/.

San Juan Capistrano- Prop 218, Water in the West (Oct, 10, 2013), http://waterinthewest.stanford.edu/resources/forum/san-juan-capistrano-prop-218.

Smart Metering for Water Utilities, Oracle (Sept. 2009), available at www.oracle.com/us/industries/utilities/046596.pdf.