27 May 2009

Metropolitan Water Pricing FAIL

There have been many stories in the press about the 40-50 percent price increases that the Metropolitan Water District of Southern California (Met) is imposing on its wholesale customers (e.g., LADWP, SDCWA, West Basin Water District, Long Beach and 22 other agencies). These price increases are coming with (related) decreases in delivery quantities.

Here's why Met is making these announcements:
  1. Most of its costs are fixed, e.g., Met must pay DWR for 100% of its contracted water rights in the SWP -- even when DWR is only delivering 40% of its "obligations."
  2. Met is buying more supply from other areas (e.g., the PVID deal @ $340/af), which raises its average cost of water.
  3. With less quantity at higher costs, Met is forced to raise prices on the reduced amount of water it is selling (rather, rationing among its member agencies).
Does Met have any alternative to this "system"? Yes. First, let me point out two things that I learned while I was writing my dissertation on Met:
  1. Met's rationing relies on formulas, and these formulas are subjective and flawed.
  2. Even worse, Met's use of average cost pricing does NOTHING to ensure that supply and demand is equal. Instead, Met threatens member agencies with massive (100% surcharge) price penalties if they exceed their quota.
These facts, taken together, lead me to conclude that Met's price increase/water rationing "solution" is neither equitable nor efficient. Of course, there is another way (as outlined in Section 7.2 of my dissertation):
  1. Met can set aside a "human right" allocation for each member agency (say, 75 gallons/cap/day) based on its population. Met can sell this water at cost.
  2. Remaining water can then be sold -- in an auction -- to member agencies. Agencies that "need" the water more can bid more for it. Since auctions prices are likely to exceed the cost of provision, auction revenue will also cover costs.
  3. The results is that Met will allocate all of its water with equity AND efficiency, cover its costs, and avoid all of the wangling, complaining and lawsuits that it now faces.
Why doesn't Met use this method (very similar to my all-in-auctions idea)? Because the "old way" is the way it has done things since the 1977 drought -- when Travolta was but a young dancing fool... Bottom Line: When times change and/or tools break, it's time to try something different. The citizens of Southern California deserve better than this.


Anonymous said...


There are about 18 million people in Met's service area. At 75 gpcd, that's about 1.5 MAF/year. Local supplies are about 2 MAF/year. So, would Met not sell any water other than through the auction?

Kevin Wattier
Long Beach

David Zetland said...

@Kevin -- good question.

The key (to me) is to allocate about half of MET's water via rights and the rest via auction. The 75gcd could be adjusted up or down.

Some districts have zero local water, some have a lot. Since local water is ex-auction, some districts may get ALL of their water under in the "base allocation" and buy nothing at auction. (They may even sell their unused rights in a side deal.) Other districts (e.g., SDCWA) would get all their basic allocation and then go to the auction for more.

Steve Bloom said...

Hmm, all else equal, it appears that small wealthy districts would get all the water they want and others wouldn't.

Re the local supply issue, it seems to me that failing to take that into account (e.g. by subtracting it from the base allocation) would result in similar inequities, recalling that this is a public resource. An allocation system that appears to have an overly unequal outcome simply will never get adopted.

Granting that the quota formulas MWD is actually using are imperfect, it's not clear to me from what you write why the quota approach is in principle inequitable and inefficient.

David Zetland said...

@Steve: Small wealthy districts (e.g., Beverly Hills) WOULD get all the water they want. Poorer districts (e.g., Compton) would get their base allocation. They would NOT go dry.

I will NOT subtract local supply, since that's often something that the district has spent time and $ to develop (e.g., Long beach on conservation, LA aqueduct or Carlsbad desal). It makes no sense to "take away" rights because of that.

Further, Met has an obligation to treat members equally, and the best way to do it is based on population, not water supply, prior payments (preferential rights), etc. [btw, I address how to retire PR in my diss...]

Met's quotas are inequitable and inefficient b/c they are NOT based on per capita allocations, but conservation programs (toilets ok, turf not). Further, they are based on PAST USE, which -- as you know -- rewards water wasting ("high demand") districts.

So, yes, there are BIG differences :)

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