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The Price of Water: Is Higher Better?

Molly Mazilu|CNBC Producer
Thursday, 30 Sep 2010 | 3:11 PM ET

San Diego County may be known for its famous coastline, but when it comes to fresh water, it has very little supply.

Steve Cole | Getty Images

The county “imports” 80 percent of its water, much of it from the Colorado River. Hundreds of miles away from its water sources, San Diego County residents pay a hefty price to get it there—both the pumping and the cost to maintain and develop an extensive network of infrastructure.

Farmers living in San Diego County’s agricultural area, Valley Center, now pay between $900 and $1000 per acre foot of water. (An acre foot is the standard measure for large scale water use in the U.S. It’s the equivalent of about 326 thousand gallons).

“In the last two years, the costs to our growers have increased by over 40 percent,” says Gary Arant, Valley Center Municipal Water District General Manager, “For most growers, especially tree crop growers, water costs represent about 75 to 80 percent of their overall production. So that's a tremendous impact.”

But conservationists believe prices should be even higher in order to change public behavior and discourage wasteful water use.

Liquid Assets - The Big Business of Water
Liquid Assets - The Big Business of Water

“If we priced water accurately, there wouldn't be any water shortages, period. It would eliminate, surely, 80 or 90 percent of the distributional problem,” says Bruce Babbitt, Secretary of the Interior under President Clinton. “We have essentially built a water supply culture in this country which says water should essentially be free. And you see the results in the way water is used, particularly in the arid regions of the west.”

Pat Mulroy, general manager for the Southern Nevada Water Authority disagrees. “There are economists that I argue with all the time who think that price alone will do it. What we learned is over the years, price just makes people angry at some point. They know they're not paying for what it really costs you to deliver that (water) and there is a threshold amount of water that every human being has a right to,” says Mulroy.

But price is having an impact on how water is used and distributed in Southern California. Included in San Diego County’s water cost is the price it pays to its southeastern neighbors in the Imperial Valley. Farmers who live in that region are the largest holder of Colorado River rights. They own more than 75 percent of the water California gets from the river.

Coping with Water Price Hikes
Growers in San Diego County's Valley Center have seen water bills increase 40 percent in the last two years. Gary Arant, Valley Center Municipal Water District general manager, discusses the impact on the region, while Gary Broomell, part owner of Triple B Ranches, shares how he is coping.

The reason: When the water rights were divided, they were granted to those who put the water to beneficial use first. They call this principle “first in time, first in right.” That means the farmers who came at the turn of the century, using the water to irrigate their fields, were granted priority rights.

Urban areas like San Diego and Los Angeles, which developed much later, lost out.

The water rights owned by the farmers in the Imperial Valley through its Imperial Irrigation District water authority are estimated to be worth more than $30 billion dollars. Yet they pay only a nominal fee for its use—$20 dollars per acre foot.

And that’s where San Diego comes in. “They (the Imperial Valley farmers) pay substantially less for water. They are directly adjacent to the Colorado River. They cannot afford to pay for some of the more sophisticated conservation projects," says Maureen Stapleton, San Diego County Water Authority general manager."

She adds, “We will pay a much higher price than they are able to afford themselves and ultimately they will implement conservation measures on farms and in their water system which will conserve water and ultimately that water is moved to San Diego.”

These projects include the lining of the All-American Canal, the Imperial Valley’s direct artery from the Colorado River. Once just an earthen canal, San Diego helped foot the bill to line the canal with concrete to save water from just seeping into the ground. In all, Stapleton says her county pays an average $650 per every acre foot of water sent its way. Over the life of the multi-decade agreement, it will total billions.

Dividing the Colorado
Brian Brady, Imperial Irrigation District general manager, discusses the water situation in the Imperial Valley, and family farmer Ralph Strahm talks about his participation in a water sharing program there.

In the short-term, the Imperial Irrigation District goes as far as paying some of its farmers to fallow (leave uncultivated) their land to provide enough water to satisfy its agreement with San Diego. The price tag: $75 per acre foot for the water they don’t use.

“Farming has risk. When we plant our crops, we don't know what our returns will be or even if we'll make any profit at all. So when we enter the fallowing program the way its structured here with the Imperial Irrigation District, we know that we'll cover all of our costs and make a profit so it gives us opportunities to use that money to maybe make improvements,” says Ralph Strahm, a third generation Imperial Valley farmer.

Participating in the program is a controversial choice for many farmers in the region because they see this water as vital to sustaining their way of life. “The essential element to their success and their families' legacies is the water that comes from the Colorado River. Without that, the dirt is worth nothing—there is no economic vitality and it is ingrained in the people here,” says Brian Brady, general manager of the Imperial Irrigation District.

The access to the additional water supply is critical, especially for the farmers of San Diego’s Valley Center. After already stretching many conservation techniques to the limit, avocado farmer Al Stehly is now experimenting with a new technique, planting his trees much closer together to cut back on water use.

American West
Avocado farmer Al Stehly explains to CNBC's Michelle Caruso-Cabrera one way he's trying to save water at his San Diego County grove. He believes by planting his trees closer together he can cut back on H2O without sacrificing production.

“I don't know if we can keep adapting and keep increasing our production and keep getting better to match the rising escalating cost of water I just don’t think we can do it,” Stehly said.

Meanwhile, his neighbor Gary Broomell, part owner of Triple B Ranches, is slowly transitioning his citrus trees to grapes, which use just a fraction of the water. He hopes to turn those grapes into wine.

Broomell fears high water prices will force farmers out of the area, much the way high land prices did to his family in Orange County. “If we want to stay and farm we have to look for something else,” says Broomell.

See more about the global water crisis, conservation efforts in the US and other countries, and how businesses are responding, in a CNBC Original Production, “Liquid Assets: The Big Business of Water,” Thursday September 30 at 9pm ET.

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