The moderator’s Monday question was this:

Are we dealing with an ever-more scarce resource that we’ll have to conserve to ensure there is enough for vital business and health needs? Or are we dealing with an ever more valuable resource that we’ll simply have to pay more to import or create?

The amount of water available from the current system is going to drop. Nearly every projection about the Colorado River system forecasts that there will be significantly less water available. There is significant uncertainty about the ability of the State Water Project to deliver present volumes. At least for now, there is going to be a significant amount of fresh water delivered to the Delta for environmental reasons.

Meanwhile demand is likely to increase. Demographers still project that the state will grow by 10 million between 2010 and 2030. Much of this increase will occur in hotter, drier interior regions. Climate change is likely to put upward pressure on the demand for water from the state’s agricultural industry and will require a massive reworking of the “plumbing” of the state’s water conveyance system. The “low hanging” fruit in water conservation, especially in respect to interior uses, has been plucked.

There are only a few reasonably settled issues in the social sciences. One of them is that a shrinking supply of a good plus increased demand leads to upward pressure on prices along with efforts to decrease consumption and develop new supplies. With hiccups along the way, we are seeing all of those responses to the new water reality in region’s like San Diego where, at least on the wholesale level, water is more “market-priced.” Prices are rising, conservation efforts are redoubling, and higher prices are encouraging entrepreneurs to deploy technologies like desalination to increase supply.

The biggest challenge, however, is that so much of the water in the state is NOT currently allocated by using price. Water “rights” conferred in the last century were conferred not on the basis of any bidding system but as a way of opening up land for “productive” agricultural uses.

State law prohibits approving transfers if it will lead to significant fallowing of agricultural land. While some urban areas (San Diego, Orange County, the Inland Empire) depend upon the state and federal water systems, the cities where the majority of urban Californians live (San Francisco, Los Angeles, and the East Bay have access, won by questionable means, to water outside of the state and federal systems.

The Metropolitan Water District of Southern California and its near-monopoly power over the conveyance system that serve Southern California, creates serious barriers for negotiating large-scale water transfers between the Central Valley and Southern California.

Moreover, the wide economic disparities between the affluent urban coast and the relatively impoverished agricultural interior increase the political difficulties of implementing a statewide water market. If you ever want to see people actually tar-and-feather an economist, I suggest sending one to the Central Valley and have them argue that it is more “rational” to allow water prices to float so that coastal water users can buy expensive water to irrigate ornamental landscapes while agricultural lands sit fallow and large agro-businesses with historic water rights collect a check.

While economics offers some pathways out of the sticky wicket of third party effects, transaction costs and rent-seeking, it doesn’t offer any magic bullets to get our hypothetical economist out of town unscathed.

In sum, what I see as the biggest challenge for water in California is managing through a fractured system. Most, if not all, of the 80 percent of the state’s water that has traditionally been used for agricultural uses is unlikely to be priced freely. San Francisco, Los Angeles, and the cities served by the East Bay Municipal Utility District are NOT going to give up their monopoly rights to the cheap water from the Owens and Hetch Hetchy valleys and allow this water to flow to the highest bidder.

The rest of urban California, including San Diego, which didn’t get in on damming up irreplaceable scenic landscapes in the central Sierra or laying waste to bucolic farmland, are going to see water prices “float” to achieve a more efficient use of the resource. That arrangement is not going to please San Diegans but it is the probable outcome of the policy dispute.

The bottom line? Get ready for significantly higher water prices and disparities between what we pay and the water rates enjoyed by certain other parts of the state. As Bette Davis, fasten your seatbelts, it promises to be a bumpy ride.


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