Thirsty S. California turns to market for water

THE BALTIMORE SUN

CADIZ, Calif. - Faced with projected shortages in the years ahead, Southern California is close to concluding an agreement that would introduce market forces into the management of its most basic resource - water.

The Metropolitan Water District, the government agency that delivers water to nearly 17 million people in the region surrounding Los Angeles, is within weeks of concluding its first contract to buy large volumes from a private company, Cadiz Inc.

Under the terms of the nearly concluded contract, officials on both sides say, Cadiz Inc. (pronounced KAY-deez), one of the state's largest farming interests, will provide the agency each year with as much as 47 trillion gallons (or in the industry measure, 145,000 acre-feet) of water.

There have been many issues to overcome in this unusual deal - already some environmentalists are threatening litigation - but none are greater than the psychological hurdle of whether the private sector should be allowed to play such a large role in the management of this critical commodity. About all that the experts agree on is that the impact will be large, and that in time there are likely to be more private players and less government control.

"No question, this is introducing a whole new era," said Norris Hundley, a professor emeritus of history at the University of California at Los Angeles who is the author of "The Great Thirst: Californians and Water, 1770's-1990's."

"The marketing of water is really new and will have a big impact. We're just seeing the tip of the iceberg of what's possible."

The proposed deal comes when Californians are already questioning the role of market forces in the delivery of basic resources. An unprecedented spike in power and natural gas prices, combined with critical power shortages, has led many to wonder if the state's experiment in energy deregulation was such a wise move.

But even as some state officials call for more government controls on energy, Southern California's water planners feel they have no choice but to head down the road to a freer market to overcome what they describe as a sort of slow-motion supply crisis that will play out over the next two decades.

Federal government and court decisions have reduced how much water California will be able to take from the Colorado River, pushing the region into trouble. The Metropolitan Water District has changed only reluctantly, and had to take on a new general manager to carry out the new ideas, but it has now embraced the market-oriented approach.

"For years, the Met assumed the world would be a certain way," said Ronald Gastelum, the new manager. "There was a certain arrogance. After the first court decisions, people were saying, 'Well, at least we have the Colorado River surpluses.' Then those got taken away, too. What we're now saying is: 'OK, that's reality. Let's make the best business deal.'"

Cadiz is offering that deal, and it has almost no competition, a fact that heartens the British entrepreneur who runs it, Keith Brackpool.

"The one thing I don't have to worry about when I wake up in the morning is that someone else has just solved California's water problem," said Brackpool, who calls himself a farmer but lords over his company out of offices that command a sweeping view of the Pacific in Santa Monica. "If you do the math, the price of our water just soars."

The water would be pumped from an aquifer deep under the Mojave Desert at this sun-blasted old rail stop about 200 miles east of Los Angeles, where today the company operates a farm of scientifically managed, laser-straight rows of bushy lemon and orange trees and grapevines.

The math is particularly cheering for Cadiz, which has been losing substantial amounts of money every year. It lost $8.6 million on $115 million in revenues last year, and is expected to be in the red again this year. The deal with the Met could make a gold mine of this site in the desert, where temperatures can reach 130 degrees.

Achieving that will require tough negotiations and political savvy, something Cadiz has worked hard at. Brackpool was a large contributor to Gov. Gray Davis' election campaign and has been appointed by the governor to serve on several advisory boards related to natural resources and growth. In addition, the company named to its board last year Tony Coelho, formerly a powerful Democratic congressman from California's Central Valley and a former chairman of Vice President Al Gore's presidential campaign.

"I don't think anybody knows the value of that water, - that's how valuable it is," Coelho said.

Los Angeles pipes its water in from the Owens Valley in Northern California. The rest of Los Angeles County and the surrounding counties rely on the Met, which transports federal allocations of Colorado River water through an aqueduct that cuts across the desert 35 miles south of here.

The law now grants California 4.4 million acre-feet of water a year, but it has been taking about 5.3 million acre-feet, much of that at the expense of Arizona and Nevada. That will not be possible for too many more years. As a result of the court decisions and a directive from the Interior Department, California and the Met will have to cut back to the official allotment before 2020.

Gastelum, the district's new manager, took over last year with a mandate to ease the transfer of water, and to push much harder on plans to save it.

The Met's arrangement with Cadiz has two components. Under the first, surplus water would be diverted from the Met aqueduct in wet years and transferred through a 35-mile underground pipeline to the Cadiz property for storage. For a fee, the water would be sprinkled into shallow spreading ponds, where it would seep slowly underground.

The Met and Cadiz would split the roughly $125 million to $150 million cost of the pipeline and pumping stations.

In dry years, the stored Colorado River water would be pumped out. The Met would pay Cadiz about $90 for each acre-foot of water stored and then returned.

Under the second more hotly disputed part of the plan, Cadiz would sell as needed to the Met up to 145,000 acre-feet a year of water pumped up from an existing aquifer deep under the desert here. The fee would initially be about $230 an acre-foot and would rise over the years.

Once the final deal has been negotiated and the Met and Cadiz boards have approved it, the two will face perhaps the most critical hurdle. An environmental impact statement would have to be approved by the federal Bureau of Land Management, an approval that environmental groups have vowed to fight in court. Environmentalists contend that the existing underground water would be pumped out faster than it could be replenished. If that happens, they argue, springs in the region may dry up, killing wildlife such as bighorn sheep and coyotes.

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