January 18, 2006 - From the January, 2006 issue

‘Arcane' Political Structure Poses Significant Threat to State's Water Supply & Distribution

As a veteran of California water sale and distribution, Michael George understands the business and politics of California water policy as well as anyone, and he does not like much of what he sees. The CEO of Western Water Co., a wholesale water supplier to cities and water districts, Mr. George explains that layers of regulations and governing bodies have combined with decades of entrenched bureaucratic thinking to produce a policy challenge that almost no one but insiders can understand, much less solve. But a solution is critical, and the stakes are tremendous. The sale and distribution of water is essential for the state's economy, and even though the state has enough supply to meet current demand, old policies hinder its distribution. Moreover, the state faces potential environmental crises in the Bay-Delta, which, if not solved, could create massive disruptions in supply to Southern California.

Michael George

A recent Southern California water policy conference asked, "Can we provide an affordable, clean, reliable, ecologically sustainable water supply for all of California's competing needs?" You've been the CEO of Western Water Company and in the thick of water distribution issues for nearly a decade. How do you respond to the above question?

I believe Cali-fornians can have affordable, clean, sustainable water supplies. We don't really face a shortage of water, but we do face a serious misallocation between the state's limited water resources and its current needs. We also face localized supply/demand imbalances from time to time, and that, in turn, means that we lack reliability. We need to focus on both macro (statewide) and micro (localized) misallocations and to understand why the misallocations developed in the first place and what equities are involved in the current allocation system. Then we can look at reallocation of resources in a variety of settings so that we can make marginal adjustments that won't disrupt the economy, politics, or social fabric of California but will move us towards better management of water resources and sustainable reliability.

In my view, the best mechanism for making marginal re-allocations is a properly regulated market. However, if we fail to address the current misallocations on a rational, equitable and timely basis, it is predictable that a series of crises will arise in the future, and, like all crises, they are likely to come at inopportune moments.

If meeting all of the state's long-term water demands requires tough policy choices, as you suggest, how can readers be assured we are making these policy choices as appropriately as possible?

That's a great question, because water policy is, frankly, too important to be left to the so-called "water buffaloes." In fact, if you take a look at water as a social, economic, and political issue, it's probably as critical to California's future as any issue, right along with education, housing, jobs, and transportation. As critical as water policy is, it is also arcane and complex. It is made more so by the current balkanized arrangements under which water management and allocation decisions are made by disjointed local agencies under state policies that are neither consistent nor current with California's needs.

One problem with bringing water policy out of the back rooms of "Inside Baseball" water development is that there just isn't an apparently available forum for enlightened discussion. It's hard to think of the current California Legislature as a meaningful forum for policy development because the Legislature is so hampered by term limits, by the terrible and growing political partisanship, and by the gerrymandering of districts, which disenfranchises most of California's voters. Also, the Legislature's attention is diffused across so many social, financial, political and policy issues that it's hard to get the Legislature to comprehend the issues, let alone provide leadership and policy development concerning water. The departments with water expertise (like the Department of Water Resources and the State Water Resources Control Board) are deeply conflicted as both regulators and interested participants in water issues. So, I think that the likelihood of intelligent policy discussion migrates, almost by default, to some of the NGOs and think tanks and maybe to some of the regional governmental institutions and a few private entities, where you could have an environment with the hope objective, coherent policy development.

Elaborate on some of California's priorities related to water, such as the Colorado River and Bay-Delta. Give us a sense of how these challenges are likely to evolve and be solved.

You put your finger on probably the two hottest hot spots in California water politics: the Colorado River allocation issues and Bay-Delta management issues. I'd throw in the growing conflict over environmental restoration in the face of increasing population and increasing water needs, as well as the whole set of issues around conservation, recycling and potential desalination of brackish or ocean water.

The Colorado River faces structural challenges to the so-called "law of the river," which goes back almost a century when the Colorado River Compact was negotiated in a way that essentially allocates more water than the average annual flow in that river. With growth in the West, we face the structural challenges to that early allocation system because now everyone with a legal allocation wants to actually use the water and the total draw is more than the River can routinely provide, notwithstanding the huge federal storage projects.

In that sense, the Colorado presents a preview of what's happening in lots of the western United States. Historic water allocations, which were primarily driven by the agricultural demands of the rural West, are being overtaken by population growth and the growing demands for environmental restoration.

Those stresses forced California to substantially reduce reliance on the river. Now, the stresses threaten the sustainability of Nevada's recent and planned growth and threaten enforcement of water releases by Colorado that could seriously disrupt that state's economy. Some members of the compact are seeking cooperation but implicitly threatening legal action. These issues wind up on the desk of the Secretary of the Interior, because the secretary is essentially the watermaster of the Colorado River. That means the secretary has the unenviable task of trying to make peace among competing states, regions, and users.

So, notwithstanding the wrenching compromises reached within California in the Quantification Settlement Agreement and the continued attempts by the secretary to promote cooperation rather than conflict, the stage is set for further confrontation among the various users of the Colorado River. California, which contributes little to the Colorado River in terms of watershed but takes 4.4 million acre-feet per year under the compact, faces serious equity and reliability issues with no handy solution in sight.

And what public policy challenges does the Bay-Delta pose?

In the Bay-Delta, I think we're seeing the dismantling of the CalFed process, which was launched through the Bay Delta Accords more than a decade ago. The ecology of the Delta continues to deteriorate as evidenced by crashing populations of indicator and endangered species. We're also seeing huge physical and financial challenges to the old, outdated, and poorly maintained system of levees. The failure of the Delta levee system (for instance, as the result of a flood or earthquake) would be catastrophic in terms of water deliveries to Southern California not to mention the devastation to complex enterprises and ecosystems in the Delta itself. The accords and CalFed are in extremis politically, financially, and ecologically. There's not sufficient funding, vision, or energy to offer much hope for a resolution of the Delta's crises, either as the "transfer station" for water supplies in the state or as an ecologically significant estuary.

Obviously, the Delta's environmental deterioration raises another hot issue: how to allocate water, money, and political will to environmental restoration. Building and maintaining the extensive plumbing system in California and throughout the West has radically challenged the natural environment, and there are understandable calls for significant restoration efforts. In fact, demands for restoration are a significant factor in the disruption in the historic supply and demand balances throughout the West. We simply have to do a better job than CalFed was able to do in identifying what restoration is possible, appropriate, and affordable.

Then we have to apply the scientific, human and financial resources to pursue achievable goals, and we've got to be rigorous in measuring our success against those objectives. I think one of the problems that has become more and more apparent over the last decade is that simply throwing money at environmental restoration has not succeeded. That doesn't meant that restoration should or can be starved for either financial or water resources. It just means that we have to be much more rigorous in how we apply our scarce financial and water resources to meet our environmental restoration goals.

That leads to the other hot topics that I mentioned: the array of issues around conservation of scarce water. To put it bluntly, opportunities for and obstacles to conservation, recycling and desalination, for instance, are hostage to financial and political interests in the back rooms of the water districts from which it's hard to generate public support, much less understanding of the true cost/benefit of available options.

What key principles should be the touchstones for California water policy reform?


First, we need to acknowledge that water is the scarce and precious resource for the entire western United States. It's an old adage in the business world that you value what you measure.

Second, therefore, we need to create a consistent system of water accounting. We need to rigorously account for the quality of the water that we use, the quantity that is available for use consistent with a good environmental stewardship, and the reliability of water supplies, so that we can maintain our lifestyle and grow our economy. Currently, we tolerate sloppy accounting and we thereby encourage waste and misallocation.

Third, we need to be rigorous about accounting for water expenditures. We need to ask, for instance, what we have to show from billions of dollars in bonds, user fees, and taxes that have been approved by California water consumers and tax-payers. We need to look at our restoration programs. We need to look at the environmental water account, and we need to look at our investments, for instance, in shallow desert reservoirs.

We also need to look at the hidden cross-subsidies and incentives for the waste of precious water resources. Water managers like to point out that the delivered cost of water to the average California home is less than that home's expenditures for phone, cable or internet services. Looking ahead, however, the cost of water will go up, and consumers have a right to accountability for their water dollars.

Fourth, we must establish strict accountability for critical water policy decisions. The decision-making processes are currently too diffused and inherently conflicted. As a result, we lose reliability in our water supplies because regulatory decisions cannot be predicted based on clear legal and regulatory standards. For example, the Water Code requires access to public water conveyance facilities, but the agencies that control the public's facilities thwart the code to protect their power bases.

One of the reasons is that we have structural conflicts of interest in many of our regulatory agencies. For instance, it's a travesty that the Department of Water Resources is charged with managing the development and regulation of the water transfer system while, wearing another hat, it is also the biggest exporter of water from north to south. There is an inherent conflict of interest that makes the DWR, as it is currently constituted, fundamentally incapable of regulating the water transfer market and at the same time being the most significant participant in that market.

Fifth, we have to support regional, interest-based negations among water users as an alternative to current political systems for water allocation. As I've said, the current allocation system is an outmoded remnant of our history as an agricultural society.

Nonetheless, we have to respect the legal rights of historic water users. Instead of simply taking farmers' water for growing cities, we need to support a market to induce farmers to conserve and sell surplus water. By the way, in these interest-based negotiations environment must have equal footing with urban and agricultural users so that tradeoffs can be worked out efficiently.

Sixth, California must promote conjunctive use, the consistent and interrelated use of surface water and groundwater, along with storage, conveyance and distribution and treatment systems. Conjunctive use implies improved watershed management to preserve quality of the water and of the environment through which the water passes. Currently, it is impossible to use our water resources intelligently because of institutional barriers, perverse regulatory processes, and confused and sometimes contradictory legal precepts.

Seventh, California should adopt an explicit policy favoring appropriately regulated water markets to promote efficiency and reduce regulatory friction in water transfers. The state needs an efficient way to move water regularly between areas of temporary surplus to areas of shortage.

The alternative to an efficient and carefully regulated water market is the current ossified misallocation system in which farmers, in order to protect their water rights, are incentivized to use all they can, while metropolitan water districts are incentivized to steal all the water they can through arcane regulatory processes. Markets work because it's cheaper, more efficient and more reliable to buy water than to try to expropriate it.

Finally, California needs a water court with strong subject matter background and jurisdiction so that water rights can be economically and fairly vindicated. A fair, well-grounded water court would separate the adjudicators from the competitors thus ending the current rigged system in which the regulator of water rights is also a competitor for water rights.

Who do you hope reads this MIR interview and reacts, "Aha, that's just what California should do to fix its water policy!"?

I would hope that the readership will be business, social, and political leaders with a broad interest in a sustainable future for California's economy, not just the narrow group of people who tend to think of water as their exclusive and protected province.

Infrastructure is shaping up to be California's number-one issue. The governor's "State of the State" address emphasized need for and dependence on adequate infrastructure. What ought to be in his bond funding package to best address the water issues that you have raised in this interview?

I would emphasize infrastructure that supports conjunctive use through inter-regional and intra-regional cooperation. And, I would reduce physical barriers to flexible use of water. That means improving connections between an already robust plumbing system in the state. It means adding flexibility through additional storage-both in storage reservoirs and aquifer storage. And, it means reducing the stranglehold on the state's water infrastructure by water agencies with historic control over the system.

Unfortunately, I fear that too much of our bonding capacity will be frittered away on levee maintenance without any of the institutional and accountability reforms that must go along with the level of infrastructure investments Californians will be asked to approve. Without credible water policy reforms to support the infrastructure improvements, I fear we will forfeit the opportunity to make intelligent investments that will pay dividends for our children and their children.


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