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In the last four years, the price of water for almost every customer in San Diego has exploded. Scarcity and new construction projects have fueled constant rate increases and higher bills.

But one class of customers has escaped the rate hikes unscathed: The 475 businesses, homeowners associations, golf courses and public agencies that buy reclaimed water from the city.

Reclaimed water, often called “recycled water” or “purple pipe” for the color of pipe used to distribute it, is highly treated sewage deemed safe for irrigation but not human consumption. The city has invested more than $330 million in two plants to produce the water.

The city’s reclaimed water is the cheapest supply you can buy in San Diego. It’s so cheap, in fact, that it costs more to make than it sells for. The city loses $10.6 million annually producing the water, according to a confidential city analysis obtained by voiceofsandiego.org.

Everyone else in San Diego who pays a water bill is filling the gap.

That means San Diego’s more than 200,000 water customers are subsidizing the water bills of 475 golf courses, biotech companies and homeowners associations. The Santaluz Golf Course, a major customer, saves more than $500,000 annually buying reclaimed water. The Black Mountain Ranch homeowners’ association saves nearly $300,000. Qualcomm saves $70,000.

The subsidy also benefits people in other water districts buying reclaimed supplies from the city. The Olivenhain Municipal Water District in Encinitas buys reclaimed water from San Diego and sells it for almost three times more. It invests the profit in expanding its own purple pipe system.

The city’s subsidy has some purpose. It offsets users’ costs to connect to San Diego’s purple pipe system, which can require expensive retrofits. And it helps reduce demand for imported water. Every gallon of reclaimed water used reduces demand on strained sources hundreds of miles away.

But San Diego’s price stands out as being exceptionally low. Other local water districts have closely tied their reclaimed rates to the price of tap water. Users get only small discount as an incentive. It often amounts to 10 percent off.

By contrast, San Diego’s customers get a 78 percent discount.

That’s despite the fact that some customers expect to pay more. Olivenhain and the Otay Water District, the city’s largest reclaimed water customer, say they’ve expected San Diego to increase rates for years. They’ve even budgeted for hikes.

But an increase has never come.

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While drinking water rates jumped 60 percent in the last four years, reclaimed rates didn’t budge. They’ve stayed flat since 2001. The city flirted with raising rates last year, but shelved the proposal. The current status is unclear. Three years have passed since Mayor Jerry Sanders said reclaimed water rates needed to be increased. It’s not clear whether he still thinks that, though he’s frequently endorsed the program as an alternative to the City Council plan to purify sewage as a drinking water source.

After a city water spokesman promised prompt answers to VOSD questions, Alex Roth, a Sanders spokesman, intervened and refused an interview request with water officials. Roth wouldn’t provide some information that’s readily available despite having two weeks to do so. Roth declined comment Friday.

Watchdogs and other city officials weren’t aware of the effects of the subsidy until contacted by VOSD. City Councilwoman Donna Frye called it “out-of-whack” and promised to hold a public hearing on it. Michael Shames, a utility watchdog, questioned whether it violated laws forbidding one group from subsidizing the water use of another.

Don Billings, chairman of San Diego’s independent water and sewer rates oversight committee, said tap water customers shouldn’t pay higher rates to subsidize reclaimed water users.

“I don’t know on what legal basis they can continue to do this,” he said. “If I could do a moratorium on purple pipe, I’d declare it yesterday.”

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It was 2001 when San Diego’s City Council voted to cut the price of reclaimed water. The city had invested more than $330 million to build two reclaimed water plants — one near University Towne Center, the other near the U.S.-Mexico border.

But the city didn’t have many customers, and it needed them. San Diego was under a court order to produce reclaimed water because of a settlement with the U.S. Environmental Protection Agency over the sewage dumped in the ocean off Point Loma that doesn’t meet federal standards.

Until the rate cut, the city charged reclaimed customers 90 percent of what tap water cost. Small discounts like that are common across the county and even the nation, because reclaimed water has extra costs for users, who must meet health department regulations and put new pipes in the ground.

“Businesses were saying: ‘Please help us, we’re going to incur costs,’” said Frye, who voted for the rate cut. “We as a city did not want to just continue dumping it (in the ocean).”

So the price of reclaimed water was cut almost in half. The decision worked. Lower rates attracted some customers, but even today, the plants produce less than a third of their capacity. Not because the price is too high. Because the city hasn’t spent enough on purple pipes to get the water to everyone who wants it. Qualcomm, for example, has additional buildings plumbed to use the water, but the city’s pipes don’t reach them.

The city was under a legal order to construct the plants and use a small fraction of their water. But it wasn’t required to build all the new pipes needed to fully utilize the plants. City spending on purple pipes dwindled to nearly nothing a few years ago. The city had spent tens of millions on pipes in the last decade.

Shames, executive director of the Utility Consumers’ Action Network, questioned whether the city could charge so little for reclaimed water, because it can be illegal for one type of customer to subsidize another. Shames said he would investigate further and present a legal opinion to the city.

“It does appear as though the rates the city is charging its recycled water customers may fall afoul of the current law,” Shames said.

Michael Cowett, a Best Best & Krieger attorney who represents several local water districts, said the city could face legal trouble if its rate subsidy lacks any economic justification.

“They’ve done a lot of studies on recycled water,” Cowett said. “But whether they’ve done the math right, I have no confidence.”

San Diego could also face legal trouble if it increases its rates.

The Otay Water District protested a rate hike evaluated last year. The city proposed charging Otay the same rate as retail customers, like golf courses.

Otay makes more than $2 million annually from reselling the city’s reclaimed water to users across its service area, which stretches from eastern Chula Vista to Jamul. But that revenue is paying down debt on a $42 million investment Otay made to connect to the city’s system in 2007.

Mark Watton, Otay’s general manager, said he doesn’t oppose a rate increase, as long as it’s gradual, reasonable and treats the district like a wholesale customer. Otay sells the water to 700 customers San Diego couldn’t otherwise reach.

“The city hasn’t raised recycled rates in 10 years,” Watton said. “It’s probably not real smart.”

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Raising reclaimed water rates has another risk: Make it too expensive, and customers may stop buying. The city acknowledged that challenge in the confidential analysis, a January 2009 draft rate increase study that VOSD obtained. But as long as reclaimed water costs slightly less than tap water, the analysis said, users have an incentive to buy it.

Unlike in 2001, when the City Council cut rates, reclaimed water is a more marketable commodity today. As this arid region faces supply restrictions, water districts across the county have built their own reclamation plants or begun evaluating them.

But business leaders, environmental groups and ratepayer advocates question whether reclaimed water has any long-term future in San Diego. They say it makes little economic sense to build a second set of purple pipes throughout the city.

Instead, they say, the city should use its sewage to boost drinking water supplies.

San Diego’s City Council is currently evaluating a strategy that would purify its sewage to be clean enough for human consumption — not just irrigation — and use it to augment the San Vicente Reservoir, a drinking water source.

An $11.8 million city study of that plan is ongoing.

Please contact Rob Davis directly at rob.davis@voiceofsandiego.org and follow him on Twitter: twitter.com/robwdavis.

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