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A fundamental change in the way that Southern California's primary wholesale water supplier charges for water will bring significant long-term benefits to the region with improved supply reliability and continued investments in conservation, recycling and other progressive water management programs.
Culminating more than three years of debate and public input, Metropolitan Water District's board of directors last week adopted the new forward-looking rate structure that gives incentives for sound water management and the financial framework to support MWD investments in future water supplies.
"The degree of fairness inherent in this new rate structure won the approval of Metropolitan's board," said MWD Chairman Phillip J. Pace. "In all aspects -- from the uniform charge for system access to the way in which member agencies can submit purchase orders for water according to their projected water needs -- this new rate structure addresses many of the challenges we face in the changing water industry."
The new rate structure becomes effective Jan. 1, 2003, and includes two-tiers that use price signals to encourage water agencies to invest in cost-effective conservation, water recycling, transfers, desalination and groundwater programs.
In addition, the two-tiered structure allocates a greater share of costs to Metropolitan's member agencies that use more water in the future.
MWD Chief Financial Officer Brian Thomas said the key element of the new structure is the unbundling of rates.
"Unlike the status quo, where a single water rate includes cost for supply, conveyance, distribution, power and treatment, the new rates are broken down into separate commodity charges," Thomas said. "There are separate costs to treat, move and develop water supplies."
Unbundled rates facilitate the development of cost-effective water transfers by providing clear price signals, he said.
"Knowing exactly how much it costs to purchase and move water through Metropolitan's system allows member agencies and third parties to have solid numbers on which to base decisions on whether or not to develop new resources, or where to enter the market in terms of price," Thomas added. "Unbundled rates also alleviate the need to negotiate a separate wheeling rate since the cost to use Metropolitan's system is the same for a member agency or third party."
Ronald R. Gastelum, Metropolitan's president and chief executive officer, said unbundled rates also give member agencies more flexibility.
"Member agencies can purchase their imported water from Metropolitan, or use our system to transport non-MWD water," he said. "Metropolitan maintains its role as a regional water provider, but at the same time operates within a system that facilitates water transfers."
Another important new element of the rate structure is the introduction of voluntary purchase orders that allow member agencies to commit to a 10-year order. Under the purchase order, member agencies can pay for up to 90 percent of their needs at the lower-tiered price, while paying for water supplies above that amount at the higher second tier price.
The difference between upper and lower tier rates reflects Metropolitan's cost for acquiring new water supplies.
"Metropolitan will be able to address growing demands on the system by providing a way to pass appropriate costs of new supply development to those member agencies that consume more water," Gastelum said. "This will bring more financial security to Metropolitan and 'incentivize' conservation and recycling with minimal cost impacts on member agencies for the near term."
The Metropolitan Water District of Southern California is a cooperative of 26 cities and water agencies serving 17 million people in six counties. The District imports water from the Colorado River and Northern California to supplement local supplies, and helps its members to develop increased water conservation, recycling, storage, and other water-management programs.