Big Year of Rain Means Big Budget Hole at Metropolitan

California’s biggest water supplier is hurting for cash this year as the recent record-breaking rainy winter means its customers need to buy less water. 

The Metropolitan Water District of Southern California is facing a more than $300 million budget shortfall – about a quarter of its normal revenue from selling water. The agency, which provides drinking water for 19 million people including San Diego, is drawing money out of its cash reserves and taking out a $100 million loan to make up the shortfall.  

But long term, its leaders are talking about changing the way they charge for water, realizing that decades of conservation policies in California and diversification of water supplies with desalination and wastewater recycling means water sales will continue to drop. Except, selling water is the main way Met, and other water agencies like the San Diego County Water Authority, make money.  

“Water goes up, revenues are down. It’s critical to remind ourselves that this is the relationship and how we manage our funds,” said Katano Kasaine, assistant general manager at Metropolitan.  

Met sold about 1.66 million acre-feet of water in 2022 when water demands were high and the drought worsening. (An acre foot of water serves about two California households for indoor and outdoor water use in one year.) Metropolitan sold about 1.42 million acre-feet in 2023, and projects it will sell about 1.19 million acre-feet in 2024.  

On the positive side, because of all the rain and snow over the wintertime, Met stored a ton of water in its various reservoirs for drier times. It’ll have 3.4 million acre-feet of water in storage in 2023 compared to 2.2 million acre-feet in 2022. But so much water stored also means so much unsold.  
 
“Despite the fact that we have record low sales is not ideal. But we have an all-time high storage projection for the district by the end of 2023,” said Adam Benson, manager of finance for Metropolitan. 

Water Authority’s representatives that attend Metropolitan board meetings presented the dire projections during Thursday’s San Diego board meeting.  

“That drop in demand is enormous. I think we should be very concerned,” said Jim Madaffer, a Water Authority board member.  

San Diego bought about 13 percent of its water from Metropolitan last year. It’s one of San Diego’s cheapest water sources and the Water Authority recently agreed to buy 50,000 acre feet off Metropolitan’s hands in a new three-way deal to keep more water in the Colorado River. So, San Diego has major stake in how Metropolitan decides to charge its water customers into the future.  

That’s precisely what Metropolitan is pondering to do. It created a new task force to look at the business model and rate structure for its 26 customer water agencies. What that might look like remains to be seen.  

“The power industry is 10 years ahead of us and learned that you can’t just base your investments based on your demand,” said Adel Hagekhalil, general manager of Metropolitan, during the meeting.  

Like the Water Authority, the bulk of the cost of the water is not for the element itself but transporting it through aqueducts, pipes and pumps that need constant maintenance. Its water rates are 80 percent based on how much water a member agency buys with the remaining 20 percent a fixed charge to pay for things like maintenance or constructing new pipes or reservoirs. But the inverse is true for Metropolitan’s expenses – about 80 percent of what it needs to spend money on is construction and maintenance versus 20 percent for the actual cost of water.  

Metropolitan is planning a few expensive construction projects like Pure Water of Southern California – a wastewater to drinking water project in Los Angeles and a potential pipeline to transport water from East to West across its landscape. That would help get water to an area of western Los Angeles which experienced unprecedented drought restrictions last year because there was so little northern California water to go around.  

Hagekhalil said Metropolitan may entertain selling off some of its water supplies to create revenue or putting renewable energy installations on Met property as a revenue builder.  

Some of the Water Authority’s water districts have been calling for restructuring how water is charged as well. The cost of water in San Diego has two components: About 72 percent of the Water Authority’s revenue is tied to how much they sell, called the volumetric rate. The remaining 28 percent is a fixed cost everyone pays to transport the water here via Metropolitan.  

But fixed costs make up about 85 percent of the Water Authority’s expenses, according to a report from Berkeley economist Michael Hanemann. That’s “a serious financial problem” for the Water Authority, Hanemann wrote.   

The Water Authority is selling about 40 percent less water than it did in 2010 as Californians learned to conserve. And the Water Authority will sell even less once water districts start recycling and drinking their own wastewater. The city of San Diego expects to generate half of its water demand this way by 2035. And Oceanside and a bloc of eastern San Diego County water agencies began building their own, too.