California’s Future is “Distributed”

The water sector can benefit from the electric sector’s experiences as it made the arduous journey from “deregulation” in 1995, to where it is today: with a recognition that the key to California’s reliable energy future is “distributed” - distributed resources, distributed infrastructure, and distributed decision making. In this distributed future, customer-side technologies are key.

Drought has highlighted the State’s need for new technologies and new business models. As the State looks to water users to make “water conservation as a way of life”[1], it has become abundantly clear that building drought resilience cannot be done by the State and the water sector alone – every water user in the State, in every sector, has an important role.

The primary barrier to implementing high potential, near-term, cost-effective drought resilient technologies is that California’s water sector does not have the ability to fund customer-side programs that advance distributed water resources at a level anywhere nearly comparable to that of the State’s electric sector or its climate action (greenhouse gas reduction) programs.

A Statewide Distributed Water Resources Program is Needed

When the State sought to identify new technologies that could help build drought resilience, it did not go to the water sector – it went to energy (in the case of this project, to the Electric Program Investment Charge (EPIC) that is funding energy sector research and development), and to the Greenhouse Gas Reduction Fund (GGRF)[2] that invests in projects that can demonstrate measurable reductions in greenhouse gas emissions. Because each of these funding sources is authorized for specific purposes, none of which is explicitly water, uses of energy and greenhouse gas funds need to be structured in a manner that assures compliance with the respective statutes that authorized these funds: EPIC funds can only be used to achieve water benefits if energy benefits also accrue; and greenhouse gas reduction funds can only be used to fund water efficiency benefits if greenhouse gas benefits are also achieved.

It is interesting that although water is vital to all Californians, it does not have an equivalent of the energy sector’s public purpose programs that specifically invest in activities that create public benefits. The topic of a water equivalent of the energy sector’s public purpose programs has been raised in the past through multiple forums, but ultimately did not move forward for two primary reasons:

Water and wastewater services as a percentage of most residents’ and businesses’ operating costs are small when compared to energy bills, making it difficult to construct a public benefit surcharge that could raise enough funds to support a robust program while not significantly increasing the costs of basic water and wastewater services. That may change, as more investments are made in water sector resources and infrastructure to mitigate risks of drought and other events; however at least at present, it would be difficult to construct a water and/or wastewater fee that would be both affordable to customers and sufficient to support water demand side programs comparable to that of energy programs.
California’s water sector is comprised of thousands of municipal, community, special districts, and private water and wastewater utilities.[3] In California, three large electric utilities serve 88% of the State’s population (39 public utilities serve the remaining 12%), making it much simpler to implement a cohesive statewide energy program.

This is not a simple problem; and whenever the topic is raised, the water sector – comprised primarily of public agencies – become concerned about appearing to invite regulation (which they clearly do not want). Yet, having access to programs and funds that support customer-side drought resilient actions has considerable appeal; and given the fact that water year 2018 is once again dry (questioning whether California really ever left the 2012 drought), could be a very important mechanism for investing in drought resilient strategies and technologies. Given the two new bills signed by Governor Brown on May 31, 2018 that implement mandatory urban water use reductions over time, this issue is extremely timely – water agencies now have a statutory need to substantially reduce urban water use, and neither Senate Bill 606 [Hertzberg 2018] nor Assembly Bill 1668 [Friedman 2018] provide any financial assistance to help water agencies achieve the unprecedented requirement to establish and achieve stipulated water use efficiency goals. In short, the new “California Statutes on Making Conservation A California Way of Life” are an unfunded mandate.

Since it will likely take years to develop and implement a public investment program in drought resilience, it is not too soon to commence an exploration of options and to develop implement pilot programs to test different program theories and funding mechanisms. The dialogue will be more successful if it could be made perfectly clear that it need not result in regulating public water and wastewater agencies. Several potential approaches appear viable if the risks of regulation perceived by the water sector can be appropriately addressed.

Table 9. Potential Sources of Water Public Purpose Funds

Potential Source	Potential Opportunity
General Obligation Bonds. California Proposition 1 stipulated that “Special consideration will be given to projects that employ new or innovative technology or practices, including decision support tools that support the integration of multiple jurisdictions, including, but not limited to, water supply, flood control, land use, and sanitation.” While technology was considered, the funds were designated for public water agency improvements – no grants, incentives or loans were made available to customers (water users).	Award preference points to water infrastructure grants to public agencies that establish programs that help their customers implement distributed water resources and systems. Grant applications should adjust demand projections for water use reductions and customer-side wastewater treatment, recycle, and reuse. Public funds could be used to directly fund distributed water resources, provided that private use restrictions can be satisfactorily addressed. One way that might be accomplished is by procuring the distributed water resources created.
Create a Multi-Benefit Public Purpose Fund. Current programs with prescribed regulatory purposes often result in sub-optimal investment decisions. The Energy Commission noted in its 2005 IEPR that “… single focus [public investments] causes underinvestment in programs that would increase the energy efﬁciency of the water use cycle, agricultural and urban water use efﬁciency, and generation from renewable resources by water and wastewater utilities.”[4]	A pilot investment program could combine funds from electric, gas, water, wastewater, and greenhouse gas emissions reduction programs to compensate projects for the multiple resource, environmental, and economic benefits that they achieve. A composite statewide metric that computes incentives on the basis of the multiple benefits achieved would help to determine the amount of compensation (incentives) that should be provided to “cross-cutting,” multiple benefit projects.[5]
Create a California Water, Energy and Climate Investment Fund that mutual fund managers can include in retirement plan options. Californians could then select plans that invest a portion of their retirement funds in projects and activities that build drought resilience, energy sustainability, and environmental quality.	A fund of this kind would need to be investment-grade and appropriately risk-managed. Such a fund could be used to “procure” water and energy savings, and greenhouse gas reductions, as a public benefit. It could also potentially be used to provide low interest loans to local businesses that achieve the State’s water, energy, and climate vision.[6]^,[7]^,[8]

[1] Making Water Conservation a California Way of Life, Implementing Executive Order B-37-16, Final Report. Joint California Agencies: California Department of Water Resources, State Water Resources Control Board, California Public Utilities Commission, California Department of Food and Agriculture, California Energy Commission. April 2017.

[2] Also known as California Climate Investments. Proceeds from the Cap-and-Trade Program are used for a wide variety of purposes but must show that they reduce greenhouse gas (GHG) emissions in the State. Source: California Climate Investments website: http://www.caclimateinvestments.ca.gov/about-cci/.

[3] “Drinking Water Watch,” SWRCB website: https://sdwis.waterboards.ca.gov/PDWW/.

[4] 2005 Integrated Energy Policy Report. Energy Commission. Publication Number: CEC-100-2005-007CMF, p.150.

[5] See Figure 7. Multiple Benefits Created by Distributed Water Resources.

[6] In July 2018, a small food processing company in southern California advised that its planned purchase of a packaged wastewater treatment and recycled water plant has been deferred indefinitely due to the company’s inability to obtain a small business loan. Had it proceeded, this project would have reduced the food processor’s potable water demand by 80%.

[7] See Access to Capital prepared by the California Financial Opportunities Roundtable with assistance of a grant from the U.S. Department of Agriculture Rural Development, August 2012. Retrievable at http://www.indianaglink.com/wp-content/uploads/2013/09/USDA_Publication_ACCESS_TO_CAPITAL.pdf.

[8] See Appendix J: Comprehensive Valuation of Multiple Benefits for additional information.