California Journal of Politics and Policy

In 2015, California entered a record breaking fourth year of drought. In April, responding to continuing drought emergency conditions, Governor Brown issued an Executive Order that directed the State Water Board to take a variety of actions to conserve water. The Executive Order was soon followed by an emergency regulation adopted by the State Water Board that required a 25 percent reduction in potable water use: the first mandatory statewide urban conservation requirement in U.S. history. Economic literature and practical evidence have demonstrated the effectiveness of tiered pricing in achieving water conservation. A ruling by a California Appellate court on the legality of tiered water rates in San Juan Capistrano showed that a California constitutional amendment, Proposition 218, posed potential barriers to a robust conservation-based, tiered pricing approach.  Proposition 218, approved in 1996, limited the ability of local government agencies to raise rates without a direct nexus between the fees and the increased cost. Studies assessed the advantage of pricing approaches over non-pricing approaches to achieve conservation goals and identified potential strategies to set water rates consistent with Proposition 218 that helped achieve conservation targets. Strategies were developed based on a review of rate-setting best management practices and their efficacy in three Southern California water agencies.  The strategies included setting rates based on the cost of different sources of supply, isolating various costs involved in water supply, incorporating conservation cost into rates, and including fixed cost as a higher percentage of the rate. Water supply scarcity continues to challenge California, but effective rate-setting approaches encourage conservation and comply with current legal requirements.