What price water? Its rates may double during decade.

Wholesaler MWD mulls schedule of heavy raises

Water bills paid by millions of homes and businesses in Southern California could climb sharply in 1993, and throughout the decade -- despite the current downpours -- as a series of projected rate hikes could double the price of most wholesale water by the year 1998.

Even as Southlanders are conserving 20 percent better than in 1988, utility officials expect frequent double-digit price increases that will annually push consumer costs to ever higher historic levels. Hardest hit could be refineries, restaurants, nurseries and other big water users.

Key to the projected rate hikes are plans by the Metropolitan Water District of Southern California, water wholesaler to 60 percent of the Southland.

This month, the MWD begins its annual process to review water rates. On Jan. 11, a key committee will propose a new rate, followed by public hearings in February and proposed adoption of it by the 51-member board of directors in March. The directors represent 27 retailing agencies that buy MWD water and resell it to homes and businesses. Essentially, the directors would hike their own costs, then pass them along to consumers.

The MWD staff has proposed a 22 percent hike this year, on the heels of last year's 21 percent increase. Despite heavy rain and snow around the state this winter, water officials said only a small dent was made in refilling depleted reservoirs and other water resources hammered by the 7-year-old drought.

The drought and other problems have trimmed secure supplies to 2.5 million acre-feet of water from 4 million in a "normal" year, said MWD Assistant General Manager F. Wiley Horne. (An acre-foot is 326,000 gallons, annual supply to two average homes.)

Also, Horne noted, environmental laws and lobbies increasingly have put streams and snowpacks beyond the MWD's reach. That pushes the giant water seller to chase more expensive sources, like desalination plants to harvest fresh water from the salty sea or reclamation technology to tap polluted underground supplies.

A 22 percent hike would raise the retailer's acre-foot cost to $392 from $322 currently. That rise amounts to only about 2 cents a gallon. Still, that's $292 more a month for a typical restaurant in Burbank, for example, which uses 100 times more than the average household. Burbank is supplied by a retailing agency that relies 100 percent on MWD water.

But a similar business in the upper San Gabriel Valley would see a $15 monthly bump, because that area gets just 5 percent of its water from MWD. Corresponding hikes for Torrance, Glendale, Long Beach and Los Angeles would amount to $248, $233, $175 and $134 a month, respectively.

These figures could be adjusted up or down by retailers who blend in other price adjustments related to their other supplies.

Some MWD directors, like James Rez, said the board will soften the 22 percent suggested by MWD staff, as it sometimes has in the past. Others disagreed and did not duck the annual escalations requested beyond the year 2000.

"This probably should have been done a decade ago," said newly elected board Chairman Mike Gage. Gage and Horne both said the wholesaler is playing catch-up, because it did not raise rates from 1986 to 1991 while infrastructure needs and population swelled.

Still, wholesale rates would double by 1998. That's excessive, said some board members, considering projected population will rise by only 10 percent and sales by just 17 percent during the same period.

"How do you explain this to the public? I don't know," said Marvin Brewer, a director representing Torrance's retailer. But, searching for a partial answer, Brewer concluded, "We're locked into fixed costs."

For instance, mandatory payments to the State Water Project for imported water from Northern California will rise to roughly one-half of the MWD's 1993 budget, up from 31 percent last year. Meanwhile, state officials plan to cut supplies to MWD by 46 percent.

Much of that loss could be made up by increased draw from the Colorado River, and from new sources, like reclamation and purchases from farmers -- at a price, said MWD General Manager Carl Boronkay, who announced his resignation last week.

The other key culprit for rate increases is the MWD's $5.7 billion capital projects plan.

A wild card in the equation is the MWD's new leadership. Gage will preside over his first board meeting this month. He will unveil his own cost-cutting plan, he told the Business Journal. Gage declined to give details last week.

The dynamics of water pricing are confusing to many business owners who ultimately are customers.

"If this is just another way to make more revenue, then it's not justified," said Executive Vice President David R. Fox of Sherman Oaks-based Hamburger Hamlet Restaurants Inc. "But if it's going to ensure that our water supply is more secure, then I think people would be willing to pay 10 to 20 percent more," said Fox, whose 21 Southland restaurants each pay $750 to $900 a month for water.

"Eventually, it'll be too expensive to do business here," steamed an executive at a giant L.A. beverage company. "If it becomes cheaper to produce (beverages) in Colorado and ship it to California, we might do it."

Business critics sometimes charge the MWD does little to cut its own costs. One target is the $42 million spent last year on consultants, in addition to some $100 million on staff salaries for its 2,000-employee force.

"We once hired a consultant to tell us that we need to hire consultants," said Tim Brick a director representing Pasadena's retailer.

"The MWD is really paying top dollar" for outside experts to do engineering, water-quality, personnel and other jobs, he claimed.

Horne said the consultants are cost-effective for short-term projects because they can be easily let go when the work is done.