Your eyes on California Government

SEPT. 13, 2011

By WAYNE LUSVARDI

State Treasurer Bill Lockyer just said that about two thirds of the bills that come out of the California Legislature are “junk” that wastes the time and resources of the legislators for symbolic purposes.

Is AB 134 a piece of junk? A market solution to the Sacramento Delta’s pollution problems? Or a water grab? Sponsored by Assemblyman Roger Dickinson, D-Sacramento, it authorizes the sale of treated wastewater.

According to the bill’s author, AB 134 authorizes the Sacramento County Regional County Sanitation District (SRCSD) to sell recycled water on the “open” market.  But there is no known “open” market for water anywhere in California.  And this piece of legislation would not by itself create an open water market. At best, the new law would allow a closed market — called a bilateral or two-party market in economics — between one seller and at least one or more buyers, upon approval of the State Water Board.

A true open market would have at least two sellers and two buyers and thus would offer choice to both buyer and seller.  Without choice there is no open market.

And there is no market value for wholesale water. If oil gets scarce, the price goes up. But if water goes up in price, the same volume typically is pumped because it doesn’t cost more.

Water is “free,” but the price we pay amounts to the cost to capture, store, pump and treat the water.  Water is a socialized public good and its “price” is set on a cost-recovery basis.

The true cost of wholesale water can vary greatly in California, depending on whether there is a wet year where only about 20 percent of cheap groundwater is mixed with imported water, or a dry year, when about 40 percent of groundwater is tapped.

What ‘s Behind AB 134: Water Cleanup Costs

What led to AB 134 was the December 2010 vote by the Central Valley Regional Water Quality Control Board to mandate an upgrade to the wastewater treatment facilities of Sacramento to remove ammonia and other elements from treated water. According to the Sacramento Press, this law will increase the sewer fees for a 1,000-square-foot fast food restaurant from $15,000 to $70,000 per year.  That would be the equivalent to imposing a $5.83 per-square-foot additional rent per year on the restaurant proprietor.

To give you an example, on April 22, 2010, the City of Sacramento leased a 763-square-foot portion of its Cesar Chavez Plaza to Café Soleil for a restaurant. The fixed market rent was $1.95 to $2.05 per square foot over a 10-year term.  The new sewer fee increase for the proprietors will raise the existing rental costs from $9,229 per year to $13,677 per year, a 48 percent increase. In 2010, the city adjusted the rent downward, as the tenants couldn’t afford the previous percentage rent structure and the cost to the city to audit the restaurant books was also too high.

Private landlords are not in a position to lower rents by $0.49 per square foot to keep a tenant by paying for their higher sewer fees.  And this is without considering the 26.1 percent forecast added cost to small business of California’s new Green Power Law — AB 32 — that kicks in by 2012, according to a study conducted by California State University Sacramento.

Hello roachcoach!  The people most adversely affected by this new fee will be Mom and Pop food service businesses, who will be forced to cut quality or go out of business.

Is Recyled Water Salable?

Assemblyman Dickinson states that AB 134 will help the Sacramento Regional County Sanitation District lower the $2.1 billion cost for additional water treatment facilities, which, in turn, can lower sewer fees to customers.  It is estimated that 180,000 acre feet of recycled wastewater could be sold per year at a target price from $200 to $400 per acre foot of water. (An acre foot of water is a football size field of water one foot high that can provide two urban households with water per year.)

At $200 per acre foot, $36 million could be generated; at $400 per acre foot, $72 million.  But is this realistic, or is it wishful thinking and political puffing?

The annual debt service on $2.1 billion for new facilities would be around $105 million per year at a prevailing 5 percent bond interest rate. That would mean that the cost to produce 180,000 acre feet of recycled water would actually be about $583 acre feet per year. ($105,000,000 / 180,000 acre feet = $58 per acre foot.)

So, if the treated water is sold for $200 to $400 per acre foot, this indicates the Sacramento Regional County Sanitation District may be willing to sell treated recycled water for less than the full recovery cost.

But the $200 to $400 per acre foot target sales unit price does not include conveyance costs to transport the water through the California Aqueduct, which would tack on another $200 to $300 per acre foot to a potential buyer.

Below is a comparison of the Sacramento Sanitation District’s target price for wastewater and the Metro Water District of Southern California’s water rates.

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Conceivably, the water conveyance cost could be lessened by doing a “water transfer.” That is, water would be delivered to the Metropolitan Water District or the State Water Project upstream, while transferring an equal amount of water from another source downstream to a buyer. But MWD or the State would likely still impose the full system cost, including delivery, anyway.

Is a Water Market Realistic?

I asked David Zetland a few questions about AB 134. He’s a senior water economist at Wageningen University in the Netherlands, has a PhD in water resource economics from the University of California, Davis, was a member of the San Francisco Public Utilties Commission and is proponent of water-market auctions.

Q: Could wastewater be sold in wet years when there would be little demand for it?

A: Yes, if it’s sold via long-term contracts. (This would benefit both sides by locking in reliable, baseline supply.) Also remember that “wet” doesn’t always translate into “supply” when infrastructure is missing or full (as is the case this winter with high flows that were too big for CVP/SWP pumps to move south).

Flexible prices in a spot market sound good, but it’s probably better to do three-to-five year contracts — especially when the cost of processing waste water is known. The selling utility would prefer stable revenues via contract. THAT contract could be auctioned to find the “right” price. 

Q: Would the sale of wastewater likely generate the projected revenues, when a similar attempt by the Chino Basin Watermaster in Southern California in 2009 failed?

A: Yes — it failed — for lack of conveyance. The Metropolitan Water District of Southern California put on the squeeze (meaning the price was too high).

Q: Would the expected price of $200 to $400 per acre-foot be too high for agriculture or water banking?

A: The price would reflect demand, but the seller SHOULD be willing to take a low (positive) price, since cleaning is already required and the alternative is to just dump it back into the Delta. 

Q: Given expected high conveyance costs for treated wastewater, would this limit the market to local users?

A: Local or export will depend on the price of “competing” water (e.g., the Metropolitian Water District of Southern California wholesale or the San Francisco Public Utilities Public Utilities Commission) — and they would be DUMB to fix a price in advance. Hopefully, that range reflects estimates of the price that would emerge in an auction. 

Or is AB 134 Simple Theft? 

As part of AB 134, the Sacramento Regional and County Sanitation District was awarded an annual water right equivalent to the 180,000 acre feet of recycled water to be treated in its expanded system.  A water right is first needed to sell the treated wastewater.

Opponents of AB 134 said the wastewater to be sold under the bill had “historically been considered Delta inflow available for use and/or export downstream” by users with prescribed water rights.  They said that “many other communities have had to do similar upgrades to their sewage treatment to meet Clean Water Act requirements without seeking to radically transform existing water rights law.”

In other words, what AB 134 in effect does is deprive downstream users of 180,000 acre feet of water rights without paying for it on the grounds the water is polluted.  This raises the question: Has a new legal precedent for inverse condemnation or a regulatory taking been established under AB 134?  If your front lawn is now considered full of nitrogenous fertilizer that is a pollutant, can they remove your lawn?  AB 134 is a legal slippery slope that should get more attention by property rights advocates.

What is AB 134? 

So what is AB 134?  A much heralded market solution to pollution of the Sacramento Delta? Junk law for mostly symbolic political purposes? Or a regulatory taking of a water right without just compensation in violation of the Fifth Amendment to the U.S. Constitution?

Doesn’t AB 134 also smack of redevelopment, where private property is taken and handed to another private party for a commercial use? Can government now take private property rights to set up revenue-generating enterprises to reduce pollution?

Given the failure of previous attempts to create a water market by the Chino Watermaster and others, whatever AB 134 is, it is not a reliable revenue stream to partly offset $2.1 billion in additional treatment plant facilities.  There is no proven market or buyer for the water.

Bottom line: What downstream buyer would buy the wastewater knowing full well that, absent an upstream buyer, the Sacramento Regional County Sanitation District would just have to dump the water back into the Delta?  And what upstream buyer could use 180,000 acre-feet of water per year — roughly the equivalent to the water in Crowley Lake in Mono County, Lake Mathews in Riverside County, or Pyramid Lake in North Los Angeles County — at a price of $583 per acre foot plus about $200 per acre foot added conveyance costs?

I posed those questions to water economist Zetland who replied that the only buyer would be:

“A downstream buyer facing a more expensive alternative. Market power matters. If there’s only ONE buyer, then the price will be $1 per acre foot. These questions would be resolved in a market.” 

Wastewater produced under AB 134 would likely only be cheaper than desalinated ocean water, but not much else.

It should be noted that Zetland’s answers to the above questions do not imply that he agrees with this author’s views about AB 134 as either “junk law” or a regulatory taking.  Nonetheless, Zetland’s apt comments about water markets pose an unanswered question about AB 134:  If there is no demonstrable market for the wastewater, would AB 134 then meet the legal “ripeness” requirements for a taking?  Or is it just “junk” law?

The only plausible answer is that we don’t know what AB 134 is. And neither does the bill’s author, who naively must believe that passing such legislation can magically create a reliable water market that can reduce ruinous new sewer fees on small businesses in Sacramento County.

Tags: AB 32, Bill Lockyer, California Delta, legislature, Sacramento County Regional County Sanitation District, water, Wayne Lusvardi