MWD Adjusts Water Supply Allocation Plan

At its December meeting, the Board of Directors of the Metropolitan Water District of Southern California approved adjustments to its Water Supply Allocation Plan (“WSAP”) for allocating water supplies to its member agencies in times of declared water shortages.  The original WSAP was adopted in February 2008 and implemented from July 1, 2009 through June 30, 2011 when Metropolitan’s storage levels had fallen to low levels during drought conditions.

The staff notes that Metropolitan managed to avoid declaring a water shortage in 2014 by drawing down its water storage.  But circumstances may be changing:  “prudent management of remaining storage if severe drought conditions continue into 2015 will likely result in Metropolitan imposing mandatory supply allocations.”

The WSAP is a “needs-based” method that uses financial incentives for water conservation.  A baseline is established by the difference between retail water demands in a member agency’s service area and local supplies.  Under the original WSAP, a Penalty Rate was charged at two times the “fully encumbered” Tier 2 untreated water rate for water use between 100 percent and 115 percent of supply allocations and four times the Tier 2 untreated water rate for water use in excess of 115% of supply allocations (see table).

Incentives under Original and Revised WRAP

Water Use Above Supply Allocation	Penalty Rate	Allocation Surcharge	Increase
100% to 115%	$1,428	$1,480	$52
Greater than 115%	$2,856	$2,960	$104

Tier 2 Untreated water rate in 2015: $714/AF

The adjusted WSAP now involves an Allocation Surcharge based on the marginal cost of water conservation (Metropolitan pays homeowners $2 per square foot for turf removal).  With annual water savings of 44 gallons per square foot, this program yields water conservation at $14,811 per acre foot.  Amortizing the cost over 10 years (without interest), the annual cost of water conservation is $1,480/AF.  The Allocation Surcharge is, therefore, $1,480/AF for water use above 100% to 115% of supply allocation.  The Allocation Surcharge for water use greater than 115% of supply allocation is doubled to $2,960 per acre foot.  The Allocation Surcharge exceeds the Penalty rate by $52/AF for water use above 100% to 115% above supply allocation and by $104/AF for water use greater than 115% of supply allocation.

A key point of the adjustment is that the Allocation Surcharge is based on a cost-of-service charge.  The Penalty Rate was not based on cost-of-service.  The revenues generated by the Allocation Surcharge will go to increased funding of water conservation.

The interest-free amortization, of course, understates the actual economic cost of turf removal.  Using a 5% interest rate (that reflects long-term yield on 10-Year Treasury notes and a 50 basis point risk premium), the annual cost of turf removal for a 10 year amortization period is $1,918/AF, or $438/AF higher than the interest-free amortization (see figure).  Therefore, basing the Allocation Surcharge on the cost-of-service of additional water conservation would support even greater financial incentives in the WSAP.  If turf removal programs prove water savings last longer than 10 years, then the annual cost of water conservation from the one-time payment to homeowners would fall considerably.

The WSAP Allocation for consumptive uses (water use other than for groundwater replenishment and seawater barriers, which receive separate allocations) reflects retail water demands less local supplies for 2015 (see table for 2015 allocations).  For comparison, the Pro Rata Baseline allocates 1,764,551 AF among member agencies by average annual purchases of Metropolitan water for consumptive uses in FY 2012-13 and FY 2013-14.  All but seven member agencies (Anaheim, Central Basin, Compton, Fullerton, San Diego County Water Authority, Santa Monica and Upper San Gabriel) receive a larger allocation under WSAP than they would under the Pro Rata Baseline.  The 1,764,551 AF WSAP Baseline is 11,719 AF below member agency purchases of Metropolitan water in FY 2012-13 and 182,264 AF below member agency purchases of Metropolitan water in FY 2013-14.

Member Agency WASP Baseline for 2015

Member Agency	WASP Baseline	Pro Rata Baseline	Percentage Difference
Anaheim	14,604	16,465	-11.3%
Beverly Hills	11,402	10,780	5.8%
Burbank	8,908	7,794	14.3%
Calleguas	111,460	107,405	3.8%
Central Basin	32,390	33,865	-4.4%
Compton	154	819	-81.2%
Eastern	106,905	95,520	11.9%
Foothill	9,459	8,593	10.1%
Fullerton	8,288	8,522	-2.7%
Glendale	21,011	18,534	13.4%
Inland Empire	68,461	59,760	14.6%
Las Virgenes	22,807	21,376	6.7%
Long Beach	30,975	27,449	12.8%
Los Angeles	480,536	396,231	21.3%
MWD Orange County	182,582	181,200	0.8%
Pasadena	22,695	19,598	15.8%
San Diego County Water Authority	334,254	473,741	-29.4%
San Fernando	101	85	19.1%
San Marino	1,277	1,136	12.4%
Santa Ana	11,143	10,805	3.1%
Santa Monica	5,454	5,797	-5.9%
Three Valleys	65,044	59,929	8.5%
Torrance	16,655	16,145	3.2%
Upper San Gabriel	2,657	3,327	-20.1%
West Basin	117,395	111,256	5.5%
Western	77,934	68,423	13.9%
Total	1,764,551	1,764,551

Source:  Attachment 2 to Metropolitan Board Letter 8-2 dated December 9, 2014
Pro Rata Baseline: Allocating 1,764,551 AF among member agencies by average annual purchases of Metropolitan water for consumptive uses in FY 2012-2013 and FY 2013-14.

The WSAP also provides allocations for groundwater replenishment (150,000 AF) and seawater barrier (15,200 AF).  These maximum allocations are separate from the above municipal and industrial allocations and are based on a 10-year historical average of groundwater replenishment.  Groundwater replenishment must go to groundwater replenishment connections (no in-lieu deliveries).  Any groundwater replenishment allocation taken by a member agency will reduce the adjustments in the above WSAP allocation for reduced groundwater production.

WSAP Member Agency Maximum Potential Groundwater Replenishment and Seawater Barrier Allocations

Member Agency	Groundwater Replenishment	Seawater Barrier	Total
Anaheim	3,000		3,000
Beverly Hills
Burbank	2,800		2,800
Calleguas
Central Basin	23,100		23,100
Compton
Eastern	7,000		7,000
Foothill
Fullerton	2,700		2,700
Glendale
Inland Empire	17,100		17,100
Las Virgenes
Long Beach	5,100	4,000	9,100
Los Angeles
MWD Orange County	51,100		51,100
Pasadena
San Diego County Water Authority
San Fernando
San Marino
Santa Ana	3,500		3,500
Santa Monica
Three Valleys	5,100		5,100
Torrance
Upper San Gabriel	29,500		29,500
West Basin		11,200	11,200
Western
Total	150,000	15,200	165,200

The allocations adopted by the Board are starting points for member agencies.  Using FY 2012-13 and FY 2013-14 as the base period will require Metropolitan staff to make adjustments for mandatory use restrictions or rationing during these years.  Staff will also update the method for calculating the “demand hardening” from conservation efforts.  There will also be consultations with member agencies regarding groundwater replenishment for meeting groundwater management objectives and consideration of severe and/or inequitable financial impacts.

Written by Rodney T. Smith, Ph. D.