California has a serious, ongoing problem with drought, and the state has many users competing for this finite resource. California Water Code Section 1460 establishes that “the use of water for the municipality or the inhabitants thereof for domestic purposes shall be considered first in right, irrespective of whether it is first in time.” If domestic municipal water use is “first in right,” then why is such use the governor’s first target for mandatory cutbacks? For now, that question can remain rhetorical. Let’s explore how conservation of residential water use can best be managed now. The following recommendations about areas to explore are in addition to those that are currently advocated by many water agencies (use of water saving appliances and valves, xeriscaping, etc.) or that are contained in my prior statement at http://riskandpolicy.org/californias-drought-what-should-be-done-now/ .

First, I think that water conservation efforts should correlate with (a) reasonable customer usage patterns and (b) reasonable environmental considerations. Currently and in general, residential water pricing is calculated as Total Water Costs plus Profit divided by Total Water Delivered allocated to an arbitrary banding scheme (or, more accurately, to a complex banding procedure similar to that embedded in the Show-Me Ratemaker Software [see, for example, https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CC0QFjAC&url=https%3A%2F%2Fsouthwestefc.unm.edu%2Fdocuments%2FShowme41Water%2528clean%2529.xls&ei=nck1VcXaKcS_sAXI_4DwCg&usg=AFQjCNF71w7G7NqCfSCLL0bs-pRVPGSTEg&sig2=mimvnyHB50Jd9y7fACI5-A ]). I believe, however, that objective allocations based on data such as updated, reference evapotransporation zones (ETo) could send more accurate price signals to ratepayers and potentially enable better long range planning of consumptive water rates. While I realize that ETo is currently unrelated to ratemaking, I think that appropriate use of evapotranspiration (ET) zones coupled with appropriate model, local water users based on reasonable usage patterns could be the basis for superior residential water ratemaking. For example, water rates could be tiered into three bands. Tier one rates would correlate with base indoor use. Tier two rates would correlate with base outdoor use. Tier three rates would reflect excessive usage. This would be a water-budget based inverted rate tier scheme. Bands reflective of realistic water use (which is directly correlated to ETo) would signal more customers into second tier prices. (Ideally, I think, in general, that second tier ranges should be increased in water volume, and the ratio between tier two and tier three rates should be dramatically increased to induce elasticity.

Of course, since PUC Decision (D.) 86-05-064 sets forth water rate design policy by segregating a water utility’s revenue requirement into fixed and variable components, the weighted total of the tiered rates would need to sum to the utility revenue requirement.  Also note that compliance with Proposition 218 is critical (see, for example, http://www.contracostatimes.com/breaking-news/ci_27954117/california-drought-court-rules-tiered-water-rates-violate ).

Second, the residential retail pricing of water should be regulated such that there is nonterritoriality of water rates within retail water providers. Currently, there is a Babel of water rate schemes that vary from Zip code to Zip code (or even within Zip codes). Such ratemaking is inconsistent with nonterritoriality of water rates within water wholesalers. I am concerned about the fairness of this pricing and its potential for Robinson-Patman price discrimination.

Third, the state should advocate in favor of The Fracturing Responsibility and Awareness of Chemicals Act (H.R. 1084, S. 587) which would define hydraulic fracturing as a federally regulated activity under the Safe Drinking Water Act and require the energy industry to disclose the chemical additives used in the hydraulic fracturing fluid. This would help preserve our state’s groundwater resources.