Guest commentary by Tom Kennedy, Kennedy Water Consulting
California’s statewide water system is an engineering marvel and is a key reason the Golden State prospered over the last century. Absent the sophisticated mechanisms to capture water and move it to population centers, none of our major cities would exist as they do today. The actions by visionary leaders truly delivered on the promises they made.
When these systems were built the main source of funding was from property tax assessments. The Colorado River Aqueduct, built by the Metropolitan Water District of Southern California, was financed with revenue bonds paid back by property taxes. It was not until the 70’s that over 50% of the cost of MWD’s facilities and operations were recovered through water rates levied on its member agencies.
Similarly, the State Water Project’s enabling act – the Burns Porter Act – provided for costs to be recovered through property taxation and many State Water Project Contractors continue to pay their share of ongoing costs via the property tax rolls. Numerous lawsuits have confirmed the right of these agencies to collect revenue to pay ongoing costs via property taxation.
Beginning in the 1970s and accelerating after the passage of Proposition 13 in 1978, some member agencies of the large wholesale agencies pushed for more revenue to come from rates and charges levied on retail water agencies. Big urban cities argued that they were subsidizing large water users in rural areas because of their larger assessed valuations. This process gradually increased the percentage of overall revenues based on volumetric charges.
This worked out for some time, but starting about 30 years ago the strain of increasing costs to retail agencies began to grow. Both Metropolitan, and the San Diego County Water Authority (its largest member agency by water volume) began constructing large capital projects that included necessary local storage and even a desalination plant. Without access to new property taxes under restrictions from Proposition 13, these costs were passed down to retail agencies to include in their water bills.
While water consumption was rising in Southern California this method of revenue collection seemed reasonable. Yes, they caused some rate spikes, but in the early 2000s everyone was projecting a steady increase in water sales, so the cost of these expensive projects would become a smaller and smaller cohort of wholesale water rates.
Unfortunately, the people who predicted increases in sales must have missed their Economics 101 course where freshmen in college are taught about demand elasticity: as prices go up, consumers use less. Coupled with a constant drumbeat of pleas for conservation (often funded by wholesale agencies), retail customers dutifully removed their lawns, installed low flow plumbing fixtures, and reduced their demands on the system.
Since the early 90’s, San Diego County’s population has grown significantly, but overall per capita water use is 40% lower that it was back then. With billions in debt from the capital projects of the past, retail agencies in San Diego County face the highest wholesale water costs in the nation. The San Diego County Water Authority only collects about 5% of its revenue from truly fixed charge, though they do have other “commodity based fixed charges” that are consumption-based charges disguised as “fixed” charges.
Metropolitan is in the same pickle. Though they do collect some of their SWP costs on property taxes, they are well below their statutorily authorized level. The big cities still oppose moving more revenue on the tax roll. Now Metropolitan is looking to spend billions more on delta conveyance and potable reuse projects, the costs of which will likely be passed down to retail agencies.
At the end of the day, the rubber meets the road in the board rooms retail agencies. This is where the revenue is generated to fund projects from the big wholesalers. Every year, boards face angry constituents who find that their water bill is becoming their second largest bill each month – only surpassed by their rent or mortgage. They are angry because they did what they were asked – they tore out their lawns and reduced consumption – only to be hit with higher and higher water bills.
The strain on lower income communities is at a breaking point. Water bills are a regressive form of revenue generation and hit the monthly budgets of lower income communities the hardest. While someone in Del Mar or Beverly Hills can afford $300 or $400 a month, for those in low-income situation this is untenable.
Retail water agencies are forced to delay or eliminate much needed capital projects in their own districts to keep rate increases under control. For many agencies, the wholesale charges make up 60-70% of every water bill. Local infrastructure is crumbling because retail agencies can’t just pass on 30% rate hikes all the time.
This needs to change. The visionaries who financed our large water systems on property taxes had it right – the massive systems that import water make our cities possible because water is available. Sure, those who use more water should pay a bit more for treatment costs and perhaps power, but at the end of the day the true value of our water system to our region is access to imported water. We need to structure the revenue to support these systems accordingly.
The value of land and property served by imported water would diminish rapidly in the absence of the imported water systems, so again, the logical choice is to find a way to collect the revenue based on property valuation. The Health and Safety Code allows wastewater agencies to collect fees (not taxes) through the local county assessor. Perhaps this could be modified in the legislature to allow large wholesale water agencies to do the same. This would be a more equitable, less regressive method of revenue collection as those with more would pay more. The massive increases in property valuations in California over the last few decades have greatly increased the wealth of property owners – and that wealth is directly tied to access to imported water.
In the post Proposition 13 era this will be tough to do, but retail agencies and their customers who are suffering due to this system of revenue generation cannot wait. The system we have now is regressive, inequitable, and unsustainable. It has to change.
Tom Kennedy was formerly the General Manager of Rainbow Municipal Water District and served as a board member of the San Diego County Water Authority from 2015 to 2024. He is currently a board member of Rincon Del Diablo Municipal Water District.
Related:
Water is about to get a lot more expensive for millions of San Diegans
“Millions of Californians are set to see significant water rate hikes over the next few years, with prices for essential water supplies jumping by double-digit percentage points. In one large city, cumulative increases could see prices jump about 70% just in the next five years. San Diego County, the second-largest county in California by population, will see its water rates jump 14% for 2025, according to the San Diego County Water Authority. The public water agency, responsible for providing the majority of water to nearly two dozen area municipalities, including the city of San Diego, currently imports the majority of its water from elsewhere. The utility blamed the rate hikes on increased costs to import water, among other issues. Those costs, handed from a supplier directly to a consumer, are known as “passthrough costs.” … ” Read more from SF Gate.
GUEST COMMENTARY: How customers pay for imported water needs to change
Guest commentary by Tom Kennedy, Kennedy Water Consulting
California’s statewide water system is an engineering marvel and is a key reason the Golden State prospered over the last century. Absent the sophisticated mechanisms to capture water and move it to population centers, none of our major cities would exist as they do today. The actions by visionary leaders truly delivered on the promises they made.
When these systems were built the main source of funding was from property tax assessments. The Colorado River Aqueduct, built by the Metropolitan Water District of Southern California, was financed with revenue bonds paid back by property taxes. It was not until the 70’s that over 50% of the cost of MWD’s facilities and operations were recovered through water rates levied on its member agencies.
Similarly, the State Water Project’s enabling act – the Burns Porter Act – provided for costs to be recovered through property taxation and many State Water Project Contractors continue to pay their share of ongoing costs via the property tax rolls. Numerous lawsuits have confirmed the right of these agencies to collect revenue to pay ongoing costs via property taxation.
Beginning in the 1970s and accelerating after the passage of Proposition 13 in 1978, some member agencies of the large wholesale agencies pushed for more revenue to come from rates and charges levied on retail water agencies. Big urban cities argued that they were subsidizing large water users in rural areas because of their larger assessed valuations. This process gradually increased the percentage of overall revenues based on volumetric charges.
This worked out for some time, but starting about 30 years ago the strain of increasing costs to retail agencies began to grow. Both Metropolitan, and the San Diego County Water Authority (its largest member agency by water volume) began constructing large capital projects that included necessary local storage and even a desalination plant. Without access to new property taxes under restrictions from Proposition 13, these costs were passed down to retail agencies to include in their water bills.
While water consumption was rising in Southern California this method of revenue collection seemed reasonable. Yes, they caused some rate spikes, but in the early 2000s everyone was projecting a steady increase in water sales, so the cost of these expensive projects would become a smaller and smaller cohort of wholesale water rates.
Unfortunately, the people who predicted increases in sales must have missed their Economics 101 course where freshmen in college are taught about demand elasticity: as prices go up, consumers use less. Coupled with a constant drumbeat of pleas for conservation (often funded by wholesale agencies), retail customers dutifully removed their lawns, installed low flow plumbing fixtures, and reduced their demands on the system.
Since the early 90’s, San Diego County’s population has grown significantly, but overall per capita water use is 40% lower that it was back then. With billions in debt from the capital projects of the past, retail agencies in San Diego County face the highest wholesale water costs in the nation. The San Diego County Water Authority only collects about 5% of its revenue from truly fixed charge, though they do have other “commodity based fixed charges” that are consumption-based charges disguised as “fixed” charges.
Metropolitan is in the same pickle. Though they do collect some of their SWP costs on property taxes, they are well below their statutorily authorized level. The big cities still oppose moving more revenue on the tax roll. Now Metropolitan is looking to spend billions more on delta conveyance and potable reuse projects, the costs of which will likely be passed down to retail agencies.
At the end of the day, the rubber meets the road in the board rooms retail agencies. This is where the revenue is generated to fund projects from the big wholesalers. Every year, boards face angry constituents who find that their water bill is becoming their second largest bill each month – only surpassed by their rent or mortgage. They are angry because they did what they were asked – they tore out their lawns and reduced consumption – only to be hit with higher and higher water bills.
The strain on lower income communities is at a breaking point. Water bills are a regressive form of revenue generation and hit the monthly budgets of lower income communities the hardest. While someone in Del Mar or Beverly Hills can afford $300 or $400 a month, for those in low-income situation this is untenable.
Retail water agencies are forced to delay or eliminate much needed capital projects in their own districts to keep rate increases under control. For many agencies, the wholesale charges make up 60-70% of every water bill. Local infrastructure is crumbling because retail agencies can’t just pass on 30% rate hikes all the time.
This needs to change. The visionaries who financed our large water systems on property taxes had it right – the massive systems that import water make our cities possible because water is available. Sure, those who use more water should pay a bit more for treatment costs and perhaps power, but at the end of the day the true value of our water system to our region is access to imported water. We need to structure the revenue to support these systems accordingly.
The value of land and property served by imported water would diminish rapidly in the absence of the imported water systems, so again, the logical choice is to find a way to collect the revenue based on property valuation. The Health and Safety Code allows wastewater agencies to collect fees (not taxes) through the local county assessor. Perhaps this could be modified in the legislature to allow large wholesale water agencies to do the same. This would be a more equitable, less regressive method of revenue collection as those with more would pay more. The massive increases in property valuations in California over the last few decades have greatly increased the wealth of property owners – and that wealth is directly tied to access to imported water.
In the post Proposition 13 era this will be tough to do, but retail agencies and their customers who are suffering due to this system of revenue generation cannot wait. The system we have now is regressive, inequitable, and unsustainable. It has to change.
Tom Kennedy was formerly the General Manager of Rainbow Municipal Water District and served as a board member of the San Diego County Water Authority from 2015 to 2024. He is currently a board member of Rincon Del Diablo Municipal Water District.
Related:
Water is about to get a lot more expensive for millions of San Diegans
“Millions of Californians are set to see significant water rate hikes over the next few years, with prices for essential water supplies jumping by double-digit percentage points. In one large city, cumulative increases could see prices jump about 70% just in the next five years. San Diego County, the second-largest county in California by population, will see its water rates jump 14% for 2025, according to the San Diego County Water Authority. The public water agency, responsible for providing the majority of water to nearly two dozen area municipalities, including the city of San Diego, currently imports the majority of its water from elsewhere. The utility blamed the rate hikes on increased costs to import water, among other issues. Those costs, handed from a supplier directly to a consumer, are known as “passthrough costs.” … ” Read more from SF Gate.