by Lynn Lipinski

Despite the onslaught of news coverage and political rhetoric, many of us may still be in the dark when it comes to understanding California's power crisis. It is a story with more sides than a Thanksgiving dinner; its heroes and villains are often indistinguishable; and, of course, the ending has yet to be written.

We do know that after months of Stage Three alerts, rolling blackouts and looming price hikes, few would call the Golden State's "deregulation" of electricity a resounding success. Certainly not the state's many business owners and consumers, who are facing rising electricity prices for an increasingly unreliable supply.

The water community itself has not been immune to skyrocketing electricity prices. Metropolitan Water District will see its total power costs for operation of its Colorado River Aqueduct more than triple this year. State Water Project power costs will nearly double.

But higher operational costs are only the tip of the iceberg when water officials talk about the impact electricity deregulation will have on their own industry. During the last five years, a number of special interest bills dealing with water rates and the ability to set rates have been introduced in what many say bears an uncomfortably close resemblance to what has happened with power.

"There is no doubt there is a serious threat that what happened to power could happen to water," said Jerry Jordan, executive director of the California Municipal Utilities Association. "No doubt at all."

The water industry has been watching what's happening with electricity, strategizing ways to avoid the problems plaguing energy suppliers in the state. "The lesson we learned from the restructuring of the electricity industry was that what works in one industry may not work in another," Jordan said.

Water is different than power, natural gas, telecommunications, and other industries that have been deregulated. "There is absolutely no substitute for water," said Brian Thomas, Metropolitan's chief financial officer. "While power can be generated in new and different ways, water cannot."

A clean and reliable water supply is an absolute necessity for survival, particularly in a desert region like Southern California. Providing that supply for the future takes foresight and long-term planning, efforts traditionally carried out by public agencies aiming to protect the consumer from the open market's price volatility and also from supply shortages.

"Open markets are powerful, efficient and ruthless," Thomas said. "Markets are rarely in equilibrium; they are most often in shortage or surplus, which can result in rapid and dramatic price swings."

In California, where water shortages are not unknown, Metropolitan and its 26-member agencies have invested billions of dollars in programs that extend the useful life of the state's water resources.

"Southern California learned serious lessons from the last drought," said Ron Gastelum, Metropolitan's CEO and president. "We increased our investment in conservation programs and renewed our commitment to continue these types of programs well into our future. In the past 11 years, we have spent more than $220 million in conservation programs, $1.2 billion in recycling programs, and increased our water storage capacity by nearly 600 percent."

Other efforts to increase the reliability of the arid region's water supply include planning for the coming decreased allotment from the Colorado River by exploring dry-year transfer agreements as well as facilitating wet-year storage of water from the State Water Project, which stretches most the length of California.

These long-range strategies may be in jeopardy, though.

The issue of how to determine fair compensation for water "wheeling" (moving water from one area to another) has been recently debated in the California Legislature. While these bills will not likely have any action taken on them in the near future, the fundamental questions they try to answer are still important. How should those prices be set? Who should set them? What costs should be included in price?

Some parties support incremental cost pricing rather than a more comprehensive, "postage stamp" pricing, in which users of the system pay a uniform system charge that incorporates system-wide costs rather than point-to-point costs. These system-wide costs would include the costs of long-term programs, such as water conservation and recycling.

California State Senator Jim Costa (D-Fresno) is one of several state legislators watching the water wheeling issue closely. "Any new wheeling statute should ensure that available space in existing facilities can be used at a fair price. Setting a fair price should not include a simple 'postage stamp rate' that paints with too broad a brush. Wheeling rates should include considerations of the state's broader water policy and provide incentive for private firms to add to California's available water supplies," said Costa.

MWD officials believe that using the postage stamp rate, rather than a point-to-point pricing system, ensures that each of its customers shares in the costs of long-term programs, such as water conservation and recycling.

This long-range planning is seen as absolutely necessary by many in the water industry. "One of the biggest mistakes in the (energy deregulation) process was the removal of the utilities' 'obligation to serve,'" Jordan said.

"Instead of asking the utilities to plan ahead, to build or procure sufficient resources to serve their constituencies, they are now obligated only to connect to the customer and procure power, when needed, on the spot market," he said. "This more traditional obligation to build sufficient resources, at least for core customers, must be reinstated. And when we're talking about water, people need to be very careful before giving up that long-term planning to the market forces."

Importing water to meet today's needs only solves today's problems. Planning for a reliable, high quality and affordable water supply for years to come is vital to the economic health of Southern California.

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