Importing Risk

The New York Times wrote this morning about the implications of unreliable water supplies in the obscure world of bond rating agencies.  The article features a new report by Ceres about the risks facing water and power utilities.  It underscores an interesting point.  For years, imported water supplies, particularly in the West, provided affordable, reliable water supplies.  Today, however, these traditional water projects are often importing risk, instead of reliability.  

For example, although the Los Angeles Department of Water and Power has a high bond rating, the study found that it also had “the highest risk score of all water utilities, based on tight restrictions on local water supplies due to environmental regulations and prolonged drought.  The municipal system, the nation’s largest, is also highly reliant on vulnerable water imports, including the Colorado River.” 

So what do I mean by importing risk?  In the past, it has largely been safe to assume that the supplies you get today from a traditional water project will be there tomorrow.  Especially for cities, understanding the risk facing different water supply choices has important economic -- and human -- implications.  After all, a cotton farmer can plan to fallow a field in a drought.  But it’s much harder to fallow a subdivision.  Urban demand can be “harder” than agricultural demand.  As a result, urban water managers must understand the risks facing the reliability of their water supplies.  And the risks facing imported water supplies are growing in California and the Southwest. 

This risk comes in many forms.  In the Bay-Delta, uncertainties regarding the future are largely a function of the ongoing collapse of the Delta environment and the precarious state of its levees .  On the Colorado River, today, that uncertainty is highlighted by a decade long dry spell and a record low level in Lake Mead.  When it comes to risk, climate change presents the wild card.  Climate scientists have reached a broad consensus that the Colorado River will be significantly drier in the future, and that California rivers will have less water flowing in them as well.  Climate change can also bring the risk of greater droughts as well more intense storms and floods. 

All of this means that if you bet the farm – or the city – on a traditional water importation project, the future looks riskier than it has in the past.  In contrast, when water managers invest in a water recycling project, or groundwater cleanup, conservation, or several other tools, they know what they’re getting – today and in the future.  These supplies are far less vulnerable to water rights challenges, declining fish populations, drought and climate change.  In short, they’re less risky. 

An understanding of these risks is one reason why more California water managers are proposing to be less reliant on the Delta and the Colorado River.  (Indeed, last November, the state legislature passed a bill establishing it as state policy to be less reliant on the Delta.)  In fact, the City of Los Angeles is planning to meet all of its future growth needs without additional imported water.  And the following graphic show dramatically how the San Diego County Water Authority is planning to reduce their risks – moving from a primary dependence on the Metropolitan Water District’s imported supplies to a primary dependence on what they see as more reliable supplies, coming from agricultural and urban conservation, wastewater recycling and other tools. 

The roller coaster ride that the American economy has taken in the past decade has shown the potentially disastrous effects of a failure to understand risks.  In the water world, the new Ceres study highlights the point at which water risk becomes economic risk.

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