Hang around with Metropolitan Water District people long enough, and sooner or later you'll hear talk about a "strategic plan."

It's a concept that dates back to the pyramids-it simply means tackling a complicated task in a long-term, systematic way. A form of strategic planning took place in the 1920s, when Southern California decided to build the Colorado River Aqueduct, and banded together into the Metropolitan Water District of Southern California.

Fast-forward to the 1990s. A number of economic, environmental and political elements were converging at once at Metropolitan, which had grown to more than two dozen cities and water districts serving 17 million people.

"Metropolitan, for a long time, had been concerned about being so dependent on water sales for revenue, and that the fluctuation in water sales places undue risk on Metropolitan and its member agencies," said Brian Thomas, MWD chief financial officer.

"Over 80 percent of our costs are fixed, yet 80 percent of our revenues are dependent on water sales," Thomas said.

Metropolitan hoped to correct that imbalance, and so did Wall Street bond rating agencies.

Meanwhile, there were continuing demands from Northern California and the environmental community for the Southland to reduce water usage. Environmentalists had long been saying that market-style pricing of water would help. Sacramento lawmakers wanted reassurance that Metropolitan was using market-style efficiencies.

"We wanted to send clear price signals for efficient water management within the region," said Debra Man, senior executive assistant to the general manager.

MWD member agencies were also taking a close look at how Metropolitan sold water.

Metropolitan was like a major contractor, bundling all its charges into one flat rate for services. One of those costs involved "wheeling,'' or the price charged for cost of using Metropolitan's pipes to move water from a third party. San Diego County Water Authority's protracted negotiations over the price of wheeled water from Imperial Irrigation District had led it to seek an unbundled rate, Man said.

But San Diego wasn't the only one.

Like somebody remodeling a house or a business trying to cut costs, the member agencies wanted the ability to shop around and hire someone who might be able to offer a particular service or product for less.

Then there were the intertwined issues of water reliability and fiscal integrity.

Metropolitan's member agencies wanted to ensure that they would have supplies during a drought. Indeed, that's why they joined Metropolitan in the first place.

Metropolitan general manager Ronald Gastelum said the romanticized view of Metropolitan is "all for one and one for all…That is a myth."

Metropolitan is like any cooperative; it needs a certain amount of money to fund its long-range plans, and it makes those commitments based on financial commitments from each member, Thomas said.

Metropolitan is obligated to make those investments, but "there is no commensurate responsibility (or obligation) for anyone to buy Metropolitan water," Thomas said.

But it often costs less to tap into local supplies, so among local water districts, "the game is to avoid buying Metropolitan water."

If an agency suddenly starts recycling large amounts of water, or buying from a third party, it might "roll off" the system and buy significantly less Metropolitan water. The costs of running Metropolitan would be shifted to other members. San Diego and other agencies wanted to know if there were way for member agencies make long-term commitments.

There were other issues too. If a rapidly growing water district created need for a major capital expansion, how should that cost be shared fairly with the other agencies? If an agency was contributing property taxes to Metropolitan, should that count as a credit against its water rates?

Metropolitan needed a solution that would tackle all these problems at once.

What they came up with was the strategic plan.

It included a governance reform package that reduced the 51-member MWD board to 37 members. There was also an employee-driven reorganization plan designed to shift Metropolitan's focus from an engineering, project-building agency to a customer-service entity.

"But Metropolitan, at its heart, is a financial structure," Gastelum said.

The solution would need to involve a rate plan.

Metropolitan needed a mechanism that would solve many of these problems at once. It turned out to be a trend-setting proposal to draw up long-term contracts for a basic, relatively inexpensive supply of water.

Contracts could provide the long-term reliability that agencies wanted. The board could set the contracts at a level that would allow agencies to consume water at levels they had done in the past, but that growth beyond that would come at a premium. Agencies could also opt for smaller contracts and develop their own supplies with Metropolitan's help.

Thomas noted that the San Diego County Water Authority had introduced a bill during the 1999-2000 legislative session that would have mandated such contracts. The combination of San Diego's advocacy and Metropolitan's need for a fixed revenue source prompted other Metropolitan members came up with a compromise plan.

"We didn't just make this up. It was through the input of the member agencies," said Debra Man. "The member agencies wanted choice. They wanted to be able to select what supplies they'd like…We had to unbundle our rates so people could decide whether they wanted to buy water elsewhere."

The past two years of looking at water-pricing policy could be compared to cooking a complicated entrée. The Metropolitan board ordered up a fiscal cookbook, thumbed through the pages and picked their preferred dish. Then they settled on a recipe, with a general idea of the ingredients: In December, the rate structure won overwhelming endorsement from the Metropolitan board.

The challenge is to come up with the proper balance of ingredients and arrive at something that is close to everyone's taste.

The action plan marked one of the most sweeping rate structure overhauls in the agency's 72-year history.

The business community likes the rate structure because it allows for more reliable supplies during droughts, and environmentalists like it because it reduces the Southland's demands on the state's water supply and provides better watershed protection.

Here are some of the highlights of what the rate structure could achieve:

Long-term security: Metropolitan's cooperative structure allows agencies to obtain water at a cost that would be out of reach if they tried to obtain it on their own. However, the system has significant fixed costs for importing water from Northern California and the Colorado River, and for keeping its vast system of reservoirs and pipelines in good condition.

If Metropolitan can't cover those costs, it means higher water bills and less money invested in water quality, conservation, along with infrastructure investments that avert water shortages.

Metropolitan took steps toward ensuring that member agencies continued to support the system, even when they weren't buying water. That led to a readiness-to-serve charge, which, as the name implies, covers the ability of the system to serve a customer when needed.

The rate structure retains the readiness-to-serve charge and takes a major step beyond that.

Water contracts: Under the two-tier system, agencies can get relatively inexpensive water under voluntary contracts, while obtaining higher-priced water from a backup pool.

Metropolitan gets a clear idea of how much water its members want MWD to provide, while the budget planners get a clear idea of how much they'll be spending for MWD water over the next several years.

The beauty of the rate structure is we "no longer have a roll-off problem," Gastelum said.

When a city or water district ponders a long-term contract, they have two basic questions: "What if we order too little to meet our future needs?" and "What if we order too much and end up with water we can't use?"

The contract system provides enough flexibility to give agencies the ability to control their own destiny.

A key provision allows for unused contractual allotments to be traded among agencies.

But, some agencies ask, what happens in a catastrophic event? What if demand drops because a major water-using employer moves away? What if a crisis knocks out a local water well, causing local supplies to dwindle?

To deal with that issue, the board will discuss adding an emergency relief provision.

Another issue to be decided is how much of Metropolitan's imported supplies will be available under the lower-cost contracts, and how much will be reserved for the Tier 2 pool. Depending on where the line is drawn, there could be varying impacts on the finances, operations and drought planning for MWD, its member agencies, and the customers they serve.

Demystifying rates: The rate structure lifts the veil of secrecy from Metropolitan's pricing system. Agencies will see how much they pay for treatment and electrical power. Just as hotel chains post rates for peak and off-peak use, Metropolitan will provide a similar price schedule to encourage members not to use pipes during the "overbooked" summer months. Most of the charges will be based on volume; those who use the system the most will pay the most.

Water stewardship rate: This pays for Metropolitan's financial support of conservation, water recycling, desalination and groundwater conjunctive use programs (the latter are programs where surface water and groundwater are used in combination to meet an agency's needs, such as storing imported water in underground reservoirs).

Metropolitan is often called the region's drought insurance, and this is another example of updating the policy to fairly allocate future costs, Gastelum said.

"Insurers reward customers who reduce demands on the system. They grant discounts to non-smokers, or to those who use anti-lock brakes or smoke detectors," Gastelum said. "Those who don't take such steps pay higher premiums, but in the long run, everyone benefits because of the reduced number of claims."

By passing SB 60, the Legislature had ordered Metropolitan had to spend more on promoting conservation and local water supplies. This just spells out what the amount going toward those investments, Man said.

The stewardship rate has strong support from environmentalists and others who want to reduce the Southland's demands on the state's water supply. They have carried the day against those who say that Metropolitan shouldn't be paying for programs that reduce reliance on MWD water.

Promoting water markets: An efficient water transfer market needs a formula that allows non-Metropolitan water to be moved through Metropolitan's conveyance system of aqueducts, pumps and distribution pipes at a price that fairly covers MWD's cost of capital, operations and maintenance. The system access charge imposes the same price for use of the system whether the water comes from MWD or a third party. That paves the way for an open, competitive water market.

Dealing with growth: A growth charge will be assessed on fast-growing areas and others that exceed 110 percent of their annual demand. Over the coming months, Metropolitan will have a broadly-based study on implementing a fair, workable legally sound plan allowing members to pass along these charges.

Other issues to be tackled during the coming months are the types of contributions (such as property taxes) that should be credited against an agency's water bill. A separate-but crucial-issue is the ongoing work on the Water Surplus and Drought Management plan that will determined the policy for allocating water during shortages.

"The strategic plan is the polar opposite of something like electricity deregulation, which was hatched in a series of 3 a.m. meetings," Gastelum said. "We've been working on this for years, and it's all coming to fruition in the coming months. 2001 is going to be one of the most important years in Metropolitan's history."

See December 2000 news release.

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