Politics Report: Water Authority Faces Existential Crisis

I have a special podcast interview scheduled next week with Daniel Denham, the general manager of the San Diego County Water Authority. It could not come at a better time.

This week, San Diego City Councilmember Sean Elo-Rivera said it may be time for the city to begin discussing leaving or dissolving the Water Authority. It was a dramatic substantive follow-up to what seemed like radical, off-hand comments I wrote about a month ago from Councilmember Marni Von Wilpert, who was frustrated by the water rate increases city staff was asking her to approve.

The city of San Diego has been the steward of the Water Authority. City appointees have essentially controlled it for decades. They drove it to take on the massive debts, deals and projects that are forcing such high rate increases now. The suggestion that the city would now consider leaving it seemed ludicrous. One of the mayor’s top aides is the chair of the Water Authority and the city sponsored successful legislation to make it much harder for agencies to leave the Water Authority. But now the city leaving the Water Authority is apparently a thing.

“I think we have a responsibility to consider everything we need to consider to improve affordability in San Diego. If the current structure doesn’t make San Diego more affordable, then we’re acting irresponsibly to not consider structural reforms,” Elo-Rivera told me. (Axios was first with his suggestion.)

The city leaving the Water Authority isn’t actually a thing. If the discussion advances, it would be about dissolving the Water Authority.

How we got here: The Water Authority is finally facing the massive costs of the deals it made over the last 20 years to purchase desalinated water and water from the farmers in Imperial Valley. All of those are coming as local residents, farmers and businesses continue to use less water, which, paradoxically, means every drop costs users more.

The Water Authority bought the water as a wholesaler — those costs are fixed for the next two decades. People buying less water from it in the meantime means they all must pay more.

But that’s causing popular outrage. It hit a new high this week as the Water Authority prepared its long-term forecasts and planned rate increases. The Union-Tribune put as nice of a spin on the resulting discussion as possible. “San Diego County water rate hikes won’t be as painful as feared,” read the headline.

The projected potential hike was 12 percent next year! The city of San Diego was barely able to pass along rate hikes of 5.5 percent this year to its users and that provoked Von Wilpert to suggest what she did.

Yes, it could have been 20 percent or more but leading up to the meeting, the city demanded the Water Authority take big steps to change things going forward.

In a letter to Denham, the Water Authority general manager, Matt Vespi, the city’s chief operating officer, wrote that the city’s financial position was in jeopardy if the Water Authority didn’t make big changes soon. And one of the changes Vespi wanted is for the Water Authority to assume it will sell less water in the future.

“SDCWA must revise its long-term sales projections to align more closely with current and future demand trends and adjust budget and rates accordingly,” the emphasis was Vespi’s.

Elo-Rivera followed it up with his own letter saying he strongly supported Vespi’s letter.

“The recommendations contained therein are reasonable, achievable, and urgently needed. They reflect a pathway toward immediate rate relief and long-term fiscal sustainability for the City’s water customers,” Elo-Rivera wrote. (The two letters are both here.)

The problem is, the only reason the Union-Tribune could write that the rate increase is better than expected is because the Water Authority is assuming it will sell more water this year because of higher demand. If it assumes it will sell less water, that would mean higher rates sooner.

“Every single general manager who read [Vespi’s] letter says ‘What’s he talking about?’ Long-term, is this region, this board, ready to double down on double-digit rate increases? It makes rates higher, not lower. I do not think everyone at the city understands that,” Denham told me.

Vespi’s case seems to be that if lower demand is assumed, the Water Authority will have more stable rates and if it indeed does sell more water than planned, then it can manage debts better and pay some of them off.

“This action will reduce year to year sales variability and provide financial stability that can reduce the needs for higher levels of cash, rate stabilization reserves, and increases to fixed revenue all else being equal,” Vespi wrote.

I asked Elo-Rivera about the claim he was actually supporting increasing rates more now. Elo-Rivera waved it away: “Complexity is used as an excuse,” he said.

“People cannot afford to live here. One of the costs increasing at an alarming rate is water and the Water Authority has to figure out what it needs to do. It is unacceptable to me that there isn’t an acknowledgement from the Water Authority of the amount of struggle people are experiencing,” Elo-Rivera said.

The real fights coming: Dissolving the Water Authority would serve one major purpose: It may allow the region to get out of its deal to continue purchasing water from Imperial Valley, the Imperial Irrigation District, specifically. More than 20 years ago, we made that deal in a frenzy of efforts to secure water resources separate from the Metropolitan Water District. But now, combined with the Carlsbad desalination plant, we have more water than we need.

Denham thinks city officials are just uncomfortable with their own giant water deal: Pure Water, the wastewater recycling program.

He said Vespi and the city are pushing the water authority to lower assumptions of how much water it will sell so that it has to charge more for water so that the cost of the city’s wastewater recycling program looks more reasonable.

“This is about Pure Water. The higher the Water Authority rates are, the better Pure Water looks,” he said. When the city completes Phase 1 of Pure Water, it will need to buy 30 million gallons less water per day from the Water Authority, damaging the Water Authority’s financial position even further.

Denham denied he wants the city to halt its planning for Phase 2, which will eventually allow the city to provide itself almost half the water it needs going forward. Again, that would not be good for the Water Authority as things stand.

Denham said you still need the Water Authority to import the water for that process.

“When you flush the toilet for reuse, the water has to come from somewhere. The last time this region could rely on local supplies to do that was in the 1940s,” he said.

If the city dissolved the Water Authority, and abandoned its deal to purchase water from Imperial Valley, it would have to rely wholly on the Metropolitan Water District. Denham laid out that scenario. I’m just going to post his monologue on that:

“Our water from the Colorado River costs roughly $600 per acre foot. Nobody is going to get water at $600 per acre foot now. If you don’t have that, then you’re saying ‘We’re going back on Met.’ Well, take a look at where Met is. They don’t have that much water to supply San Diego. Do you put our region in the same situation as other parts of Southern California? They are still on water-use restrictions despite the fact that we’re in state of abundance. If you go to Met, Met must expand resource mix and enter into expensive projects. Those rate increases then still come and you’re right back in same spot you’re in but you don’t have local control. You’re back to the Stone Ages, beholden to Met and their resource mix and yet in the same spot financially,” he said.

What’s at stake: San Diego residents and businesses spend more for water than almost anyone else in the country and it’s only getting worse, quickly. When we’re excited about only a 12-percent increase next year, you know it’s bad.

The Water Authority has costs it can’t get out of. Denham wants to sell the excess water we have purchased. But that’s not easy. He must create a new market. In the meantime, his current customers are fleeing – two agencies left the coalition and now the biggest customer, the city of San Diego is threatening to. In short, the debts and costs are mounting and the Water Authority’s ability to bring in more revenue to cover them is constrained. The city and others may actually just refuse to pay more.

When an agency has debts it can’t pay and it can’t raise the money to pay them, it is insolvent. Denham and the other leaders of the Water Authority face nothing short of the challenge of saving the Water Authority or overseeing its demise.  

It will be fun to talk to him about it!

If you have any feedback or ideas for the Politics Report, send them to scott.lewis@voiceofsandiego.org.