Recycled Water –Economic and Financial

Quandaries

21 November 2011Recycled Water Rulemaking Workshop II

CPUC, San Francisco, California

Richard A. MillsWater Recycling and Desalination SectionCalifornia Department of Water Resources

• Perceived cost (price) ≠ Marginal cost

• Agency marginal cost ≠ Social marginal cost

• Poorly planned project ≠ Water savings

• Reclaimed water user ≠ Reclaimed water beneficiary

Presentation Overview

• Water reclamation project components• Institutional relationships and economic

implications• Water reclamation project planning

context and cost impacts• Beneficiary discussion• Pricing and cost recovery

IRecycled Water:

What is it?How does it get to point of

use?

Recycled Water

• Water Code Section 13050(n):

“Recycled water” means water which, as a result of treatment of waste, is suitable for a direct beneficial use or a controlled use that would not otherwise occur and is therefor considered a valuable resource.

• Also called “reclaimed water” (WC Section 26)

Recycled Water – Key Characteristics

• Origin: Wastewater• Treated• Suitable for either

Direct beneficial use (piped to a point of use)

Controlled use (indirect but planned use, e.g., groundwater recharge) (based on legislative history)

Recycled Water –CPUC Policy Focus

• Assume source is treated municipal wastewater

Water Recycling

• Not defined in law• Involves any beneficial use of treated

wastewater• Involves treatment, storage, distribution,

and actual use of reclaimed water• Also called “wastewater reclamation”,

“water reclamation”, or “wastewater reclamation and reuse”

Los Angeles County2009 Water Recycling

LA County Public Works

LA City, Bureau of Sanitation

County Sanitation Districts of

LA County

1,822 AF (Alamitos)

47,555 AF (Montebello Forebay GW Recharge)

WRD347 AF

Long Beach

WD

Long Beach

WD

2,169 AF

4,645 AF

Pomona, Walnut

Valley, and Rowland

WDs

Cities of Bellflower, Cerritos ,

Industry, and Lakewood

Upper San

Gabriel Valley MWD

3,439 AF

6,467 AF

Central Basin MWD

1,054 AF

3,429 AF

4,07

7 AF

18 AF

1,246 AF

2,176 AF

401 AF

933 AF

63 AF

1,504 AF

2,032 AF

Various Cities

112,684 AF

LA City, Dept. of Water & Power

2,365 AF (Dominguez Gap)

35,5

74 A

F

37,9

39 A

FCity of Glendale

1,419 AF

3,429 AF

Burbank Water and

Power

Las Virgenes

MWD

148

AF 2,09

0 AF

5,17

4 AF

? AF

West Basin MWD

6,268 AF (W

est Coast Barrier)

28,768 AF

6,163

AF 15,780 AF

Cities of Manhattan Beach, El

Segundo, & Torrance

Golden State WC and Cal Water

559 AF2

Collection and treatment

Collection, treatment, and distribution

Supplemental treatment and distribution

Distribution

Injection barrier and recharge management

Brine

Direct retail customers

Institutional Relationships

• Wastewater and water supply agencies

• Wholesale and retail agencies• Reclaimed water suppliers and

purveyors• Agencies representing multiple

service areas

Infrastructure of Recycled Water• Sewage collection systems• Wastewater treatment for disposal and reuse• Additional wastewater treatment for reuse

(often not required)• Recycled water storage (daily operational or

seasonal)• Distribution system pump stations• Pipeline distribution system• Customer meters and valves• On-site facilities (not public infrastructure)

On-site Facilities

• Separate purple pipe plumbing• Retrofit of existing sites to convert to

reclaimed water• On-site reclaimed water treatment• Backflow prevention and cross-

connection controls To protect public potable water system To protect potable system on site

Cost Elements

• Planning & design• Capital costs (construction, land)• Operation, maintenance,

replacement• Debt service (financial analysis,

not economic analysis)

Who Will Pay?

• Sewer users• Reclaimed water users• Potable water customers• Regional, state, or federal

governments

IIPerceived vs Real Marginal

Cost

Potable Water System Structure Serving

Walnut Valley Water District

Institutional Relationships forWalnut Valley Water DistrictWater Reclamation Project

Who Develops Projects?

• New freshwater supplies Developed at regional and state

levels• Reclaimed water supplies

Developed at local levels (wholesale and retail agencies)

Disconnect in Cost Perception

• Recycled water developer does not perceive the marginal

costs of alternative new freshwater supplies

compares recycled water to wholesale price of freshwater

Perceived cost (price) ≠ Marginal cost

• Price = Melded average of past and current projects

• Price ≠ Marginal cost of existing or new water supplies

Agency marginal cost ≠ Social marginal cost

• Agency marginal cost = marginal cost of Either its own sources of supply or Wholesale price of purchased

supply• Local agency marginal cost ≠

True social marginal cost of ultimate source of supply

Viewpoint

• Sponsoring agency - considers only consequences

affecting this entity• Public (statewide or “societal”) -

incorporates all costs and benefits to whomsoever they may accrue

considers externalities

Rational Cost Decisions in Ideal World

• Seek alternatives that have the highest net benefit (or lowest net cost) to society as a whole

• Avoid alternatives that benefit only particular segments of society (e.g., agencies, customers)

• Role of economic analysis

IIIPlanning Issues and Cost

Implications

Seven Feasibility Criteria

• Engineering feasibility• Economic feasibility• Financial feasibility• Institutional feasibility• Environmental impact• Social impact and public acceptance• Market feasibility

Engineering Issues

• Water quality• Public health protection• Wastewater treatment alternatives• Storage and distribution system siting and

design• On-site conversions at water use sites• Matching supply and demand for

reclaimed water• Supplemental and backup water supplies

Water Quality

• User requirements• Health regulations

Market Assessment &Market Assurances

• Assessment – Identifying potential reclaimed water users and feasibility of serving them

• Assurances – Mechanisms to ensure users will participate in water reclamation project

Reclaimed Water Market Assessment

• Identify & characterise potential reclaimed water users

• Analyze feasibility of service (including pricing and on-site cost issues)

Market Assurances -Firm Commitments

• District owns land of use site• District leases land of use site• User contract• Mandatory reclaimed water use

ordinance (must be at retail level) Not effective for self-supplied users

Market Assurances -Other Forms

(not recommended)

• Broad water rights authority (Water Code Sec. 13550) Only enforceable by cumbersome water

rights process• Sale by reclaimed water use permit or

informal agreement without long-term obligation

Consequences of Market Shortfall

• Stranded costs in form of unused or under-used facilities

• Costs borne by potable and reclaimed water ratepayers

Reasons for Deficiencies in Use

• Original estimate of water demand too high• Undeveloped users never constructed• Developments occurred later than expected• Difficulties meeting permitting and reporting

requirements• Users never reached final agreement

Quality concerns Reclaimed water price concerns On-site conversion (retrofit) costs Inconvenience, etc

Reasons for Deficiencies in Use(continued)

• Distribution pipelines never added as planned Cost Lack of users

• Interagency agreements never secured Wastewater agency-Water purveyor Water purveyor-Water purveyor

• Reclaimed water supply inadequate to meet peak demands

• Public opposition (esp. indirect potable use)

Institutional Issues

• Duplication of service restrictions (Public Utilities Code)

• Contractual agreements between potable retailer & reclaimed retailer reclaimed supplier & reclaimed distributor

• Allocation of responsibilities construction, operation meter reading and billing customers sharing of costs and revenues

IVWho is the Beneficiary of

Recycled Water?

Why Reclaim Water?

• We should not reclaim water for the sake of reclaiming water: Reclaiming water is not a hobby

• We reclaim water to meet a fundamental need

Purposes for Reclaiming Water

• Fundamental Reliable water supply Public health protection Environmental protection and

restoration Regional economic development

(developing countries)

Purposes for Reclaiming Water

• Secondary Generate income for wastewater

agency by sale of effluent (mostly in areas adjacent to agriculture)

Satisfy need or request of a specific water user for water

Beneficiaries

• Wastewater agency and its ratepayers• Water suppliers and all their ratepayers

collectively• General public receiving protection from

water pollution (public health or environmental)

• Rarely: Only the users of reclaimed water

Potable Water Ratepayers as Beneficiaries

• Reclaimed water Augments water supply for community

development Improves reliability of supply during

shortages Delays need for new freshwater supply May be cheaper than alternative

freshwater supplies

Reclaimed Water Users as Beneficiaries

• Same shared benefits as for potable water users

• Greater ensured supply during water shortages

• However On-site costs, restrictions, cautionary

practices, worker or other exposure liability, potential supply interruptions during wastewater upsets, periodic cross-connection testing

Reclaimed Water User Perspective

• Doing the community more of a favour than helping themselves

• Expect to pay no more than would have paid for potable water

• Expect compensation for added on-site costs

VReclaimed Water System

Cost Recovery & Pricing Concepts

Concepts• Both potable and reclaimed water

ratepayers have comparable shared benefits

• Both potable and reclaimed water system costs should have shared cost recovery

• Potable and reclaimed water systems’ revenue shared

• Reclaimed water prices tied to potable prices

• On-site costs should be considered

Reclaimed Water System Revenue

• Connection fees• Fixed (monthly) charges• Variable charges

Uniform, declining block, increasing block rates

• Subsidies Potable ratepayers or regional, state, or

federal assistance Rationale: Potable cost savings or shared

benefits

Pricing Considerations

• Minimum rates (based on cost recovery)

• Maximum rates (based on customer alternative water sources) Customers may be in different retail

water service areas Customers may be currently self-

supplied

Self-Supplied Customers

• Potential for exchanging reclaimed water for water rights or groundwater allocations

Integrated Pricing

• Reclaimed and potable rates tied• Fixed differential or ratio• Consider other avoided costs or lost

revenues in service area, e.g., due to displacing delivery of fresh water

• Consider on-site costs

DWR Information

Water Recycling and Desalination Section http://www.water.ca.gov/recycling/

Rich Mills mills@water.ca.gov (916) 651-0715

End