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Investing in the Future of California’s Water Sector

April 21, 2015

Four years into a severe drought, California has just suffered one of the driest winters on record. Many of California’s reservoirs are less than half full, and the natural reservoir that we rely on for summer water, the Sierra Nevada snowpack, is at a historic low.

In late March, Governor Jerry Brown signed a billion-dollar emergency drought relief legislation package. And earlier this month, Brown issued an executive order mandating the first statewide water cutback’s in California’s history. The bulk of the drought money, about $930 million, is designated for the implementation of infrastructure projects, including $272 million for safe drinking water and recycling projects and $660 million for flood protection projects. This is a follow up to a series of actions that the state has undertaken in the last year in order to deal with the prolonged drought, including the passage of Proposition 1, California’s 7.5 billion dollar water bond; new state groundwater protections; and some legislative and regulatory measures to curb water use and expedite water recycling.

No one knows when the drought is going to end. As California gets ready to invest hundreds of millions of dollars to deal with the current drought, we should not lose sight of the state’s long-term challenges with water availability and reliability and how short-term solutions fit into an effective future water management strategy. Over the past century, California has depended heavily on large-scale centralized engineering solutions such as dams and aqueducts to enhance statewide water reliability, creating one of the largest and most complex water systems in the world. This system allows us to move water from some of the water rich regions of the state to where the water is needed for urban and agricultural use. Yet the current system is not sustainable in the face of increasing pressures from population and economic growth, climate change impacts, water quality, ecosystem and environmental degradation, and aging infrastructure. California has to shift its thinking by placing greater emphasis on a portfolio of solutions that can better tackle the variety of challenges that the state will face in the future.

The time is now for California’s water sector to turn the current water crisis into an opportunity to reinvent the water sector and plan for the future. In a recent Hamilton project report, we discussed how the energy sector fundamentally changed through a series of strategic government investments in Research and Development (R&D) and a shift in pricing policies and regulatory frameworks. This led to the creation of California’s Renewable Energy Portfolio Standard and the transformation of the electricity sector through the growth of new energy sources, such as solar and wind energy. Just as the current water crisis could help stimulate the adoption of new water approaches and technologies, California’s energy crisis of the late 90’s helped spawn these energy measures.

Innovative solutions that can transform our current water governance, manage demand, and enhance water supply in an unconventional way, all have to be on the table as part of drought response strategies. California can mimic the success it has had with the electricity sector and become the leader in transforming the water sector. It can establish new markets by strategically investing in R&D and reducing the risk and cost of scaling and commercializing innovative solutions. The emergency drought funds and the bond monies from Proposition 1 can initiate the transformation of the water sector in California by buying down the cost of new technologies and providing initial investment capital that can be leveraged to attract additional private and public monies. To enable this multiplier effect, some of these efforts have to be backed up by policies that can pave the water sector’s path to innovation. As we discussed in the Hamilton project paper, the water sector has to fundamentally change the way it values water as a resource by adjusting the water rate structure and pricing policies in a way that captures the full cost of delivery, decouples revenue from the quantity of water sold, and reflects the marginal cost of consumption and scarcity. Streamlining the regulatory framework and eliminating fragmentation in the water sector also can create a more innovation friendly environment.

The water sector is ready for transformation, and California has an opportunity to inject 21st century solutions to solve some of our short-term and long-term water challenges. It should seize that opportunity.

Editor's Note


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