FEATURE: State Water Board to hold public hearing on the “Making Conservation a California Way of Life,” but does the proposed regulation make economic sense?

Independent analysis shows that implementation would drive up costs for most water suppliers which in turn will put further upward pressure on rates and charges

On Wednesday, the State Water Resources Control Board will hold a public hearing on the regulation, “Making Conservation a California Way of Life.”   The regulation is a result of AB 1668 and SB 606, passed in 2018, that directed the State Water Board to adopt long-term standards for efficient water use.

The proposed regulation will establish the standards, variances, and methodologies for calculating the urban water use objectives, along with performance measures and reporting requirements.  Variances for unique water uses that can affect the water supplier’s water use objective are included, such as livestock or fluctuations in seasonal populations.

It is important to note that the proposed regulation would not require suppliers to comply with any individual standard, but rather, suppliers would be required to meet their overall objective.

Wednesday’s public hearing will include an overview of the proposed regulation, key provisions, regulatory timeline, and process.  There will be presentations led by urban retail water suppliers and other interested parties on the proposed regulation.  That will be followed by an opportunity for the public to comment.  This is the first in a series of hearings prior to adopting the proposed regulation that will proceed as required by the Administrative Procedures Act.

Given the comments at the previous workshop in March of this year, the focus will likely be on the achievability of the outdoor standards, costs of implementation, and the reporting and data burden for water purveyors.

Does the proposed regulation make economic sense?

Per the Administrative Procedures Act, an agency must complete a Standardized Regulatory Impact Analysis (SRIA) when a proposed regulation would have a fiscal impact exceeding $50 million in any 12-month period following its adoption.  The SRIA is intended to assess adverse economic impacts and unreasonable compliance requirements and provide information for agencies and the public to determine whether the proposed regulation is efficient and effective at achieving the policy objectives.  Since the proposed regulation falls into this category, the State Water Board staff have prepared such an analysis.

Southern California water supplier Mesa Water District asked economic/policy consultants M Cubed to assess the Board’s SRIA to see if it reasonably determines the benefits of the new regulation, the costs of enforcement, and compliance and sets a reasonable baseline from which to estimate benefits and costs.

M Cubed’s analysis found that the SRIA’s estimate of benefits overstates supplier-avoided production costs, estimates avoided production costs primarily on wholesale water rates, which are comprised of sizeable fixed costs that are not avoidable, and overstates the rate at which the avoidable costs will escalate in the future.

The cost estimates in the SRIA are also similarly unreasonable as they underestimate customer costs and installation costs of installing dedicated irrigation meters for large landscapes, as well as grossly underestimate the costs of program creation, reporting, and implementation of BMPs for large landscapes.

The baseline is also problematic as it ignores the effect of future price increases on urban water use and contains contradictory assumptions.  These deficiencies result in the SRIA significantly overstating expected water savings and potential benefits of the proposed regulation.

So, bottom line:  The State Board’s SRIA estimates a net benefit of $2.2 billion and a benefit-cost ratio of 1.24; M Cubed’s analysis determined it would cost $7.4 billion and has a benefit-cost ratio of 0.53.  (Any benefit-cost ratio greater than 1 is good; less than 1 is not.)

The authors of the report note there are numerous implications of these findings, however, the ones of most concern are with respect to the affordability of water service and the impact on low-income communities.  “Although the SRIA portrays the proposed regulation as cost reducing (it estimates only 0.2% of households would face higher water bills), our analysis strongly indicates that it will drive up costs for most water suppliers which in turn will put further upward pressure on rates and charges,” the report states.

The authors also point out that there are no provisions in the proposed regulation concerning the cost-effectiveness of the mandated requirements.  “Under the proposed regulation, a supplier may receive a variance if its customers have, say, an inordinate number of horses, but not if the costs of compliance significantly outweigh its avoided costs of production. The proposed regulation should incorporate at the supplier level basic tests of economic efficiency with respect to the mandated requirements.”

They also point out that the burden would fall disproportionately on disadvantaged communities (DACs).  “We estimate that the top 25% of suppliers with the highest DAC prevalence are likely to face roughly double the compliance costs, on a per connection basis, compared to suppliers with lower DAC prevalence.  Many of these suppliers are situated in the Central Valley, where variable production costs are significantly lower than in coastal urban areas. Consequently, the likelihood of the proposed regulation increasing costs and potentially driving up rates and charges for suppliers who are already grappling with the challenge of maintaining affordable services is, in our estimation, quite high.

How might the proposed regulation affect your water utility?

There are tools available to determine the potential impact on your water utility:

• The State Water Board has a data tool for showing how different parameter values affect water use objective for any given urban retail water supplier.
• The California Association of Mutual Water Companies has a tool to see how the new water conservation targets might impact a particular water system.

Note:  A derivative of this article was first published in Maven’s Weekly Water Blast, the exclusive weekly newsletter for supporters of Maven’s Notebook.  Make a tax-deductible donation today and get more exclusive California water news in your inbox on Monday morning.