Review of the Economic Components of State Water Policy Although the basic concepts of Fl0.rida 's water policies do not need to be changed; the policies do not provide sufficient economic incentives for developing alternative supplies and resolving serious conflicts. Improvements to existing water supply â€¢ development and funding mechanisms are needed in order to achieve affordable and sustainable water supplies and protect the environment. Purpose We conducted our review at the direction of the Joint Legislative Auditing Committee in response to a request fror}l the House Select Committee on Water Policy. Our review assessed whether state water policies contain sufficient economic incentives to nssure the availability of an adequate supply of water fc,r all reasonable an
for the ovcral I management of water resources in the state. One of the WMDs~ key responsibilities is to regulate water through consumptive use permits. WMD rules establish the threshold for permitting. The threshold is generally withdrawals exceeding I 00,000 gallons per day. The consumptive use permitting program is intended to ensure that water use is consistent with district objectives and is not harmful to the water resources of the area. Section 373.223, F . S . , requires consumptive use permit applicants to demonstrate that the proposed use is a reasonable beneficial use, will not adversely impact existing legal users, and is consistent with the public interest. Most permits may be issued for a period not to exceed 20 years; permits for a municipality, a governmental body, or other public works, may be authorized for up to 50 years. Upon expiration~ permits must be renewed and must meet the same criteria as an initial permit. WMDs are also required to carry out other activities that assist them in their planning ;ind rcgu latory decisions. These activities include scttin~ minimum ll
increasingly difficult to make allocation decisions that balance diverse needs, ensure effective and efficient use, and protect the resource. This is particularly true when the area of scarcity encompasses hundreds of square miles and thousands of water uses. For example, the efforts of the Southwest Florida WMD to limit or reduce permitted withdrawals resulted in extensive litigation and delays. A District investigation concluded that ground water withdrawals from an area well field system run by the West Coasf Regional Water Supply Authority had contributed to serious environmental impacts including loss of lakes, wetlands, and wetland dependent species. In 1994, the District issued an emergency order to reduce pumping by 4% at the well field because of conditions that existed within the region. West Coast Regional Water Supply Authority subsequently challenged the District's findings and emergency order. This dispute has not yet been resolved. The press has reported that agencies and local governments involved in the dispute spent an estimated $8 million on legal fees in the last two years. Expensive and time consuming conflicts are also occurring in the District"s Southern Water Use Caution Area due to its proposed rule to not allow any net increases in withdrawals from the Floridan Aquifer. The Water Resources Act was never fully implemented. Compounding the difficulties of addressing water shortages. key elements in the Act that were intended to prevent water over-allocation and adverse impacts have not been fully implemented. Two previous O~PAGA reviews of water management programs found that WMDs haw not dcn~lnped all the research and technical information required to fully meet all the requirements of the Act.: While progress has occurred since the issuancl' of the t\\'o OPP AGA reports, the most critical requirement that has not been fully implemented is the minimum flows and levels requirement. Minimum flows and levels define the l A Review of the Water Resources Mcpartmcnt ol l:11\ m111mcntal Pro1ccllllll anJ 1hc \\'a1c1 Management Oistricl~, Olli~c . qf Progr;m: Polic~ ! \nalysis :inJ < i11Hrr1mcnt .-\cco11n1:ibili1y. Fchruary 2~ ... l'.>Q:-. . Hqll,rt \:,, â€¢>-1-.~-I limit at which further withdrawals would be significantly harmful to the water resources or the ecology of the area. The absence of more definitive knowledge regarding the sustainability of the resource not only hinders water supply planning, it can mean, at least in some cases, that WMDs are allocating water through consumptive use permits without knowing if the withdrawal wi II harm water resources. 3 Water shortages and adverse impacts have occurred in some areas. Pumping from ground and surface waters has contributed to shortages in water supplies and damage to natural systems in some areas. The most serious and publicized adverse impacts occurred within the Southwest Florida WMD due to a combination of over pumping, periodic droughts, and tremendous population growth. The District has been experiencing long-term declines in water levels in the Upper Floridan Aquifer. Permitted pumping to meet agricultural needs and significant population growth demands have resulted in significant adverse impacts to ground and surface waters. Lake levels in Highlands and Polk rnunties have declined. For example. the size of Crnoked Lake. one of the most severely impacted lakes. has decreased from .-7~500 acres to 4,500 acres in the last 30 years. In addition, saltwater intrusion has affected numerous wells in coastal Hillsborough. Manatee. and Sarasota counties. Although the Southwest Florida WMD is developing a number of regulatory and non-regulatory initiatives to address these problems. it will take time before the benefits of these initiatives are realized. Competing \1vater needs illso exist in the southeast urban coastal an:as. agri~ulturnl areas. the Everglades. and Florida Hay. The South Florida WMD estimates that the southeastern portion of the state is likely to experience ,vater supply shortages in the future unless potential conflicts are resolved. It is questionable how well aspects of current state water policies will respond to additional scarcity, increasing conflicts, and increasing costs. Water resource planners estimate that water is expected to hc\.'.omc more scarce in the futun: . .,\s \\ al\..'r ht'Cl)mcs ' Water . Sup_ru, r,,tic\' Considcra1i,,ns . 11111.rrm Pwi,'1 Refl\,n . D1. lc111t--,:1 jl)l):-; I h,usc: Sd1.i:1 (;\ ; "1llilllll'(" 1111 W:itcr r,,hn S1;11f '
more scarce, other areas may begin to experience the types of conflicts that are occurring in the Southwest Florida WMD. The Water Resources Act bas limited mechanisms for valuing the resource. Florida: s approach to paying for water does not sufficiently consider the value of the resource. As a result, water continues to be undervalued even thpugh some areas of the state have very limited supplies. This undervaluing can encourage inefficient use. Current mechanisms. Water use permitting requirements do contain some consideration of economic value. For example, as part of the reasonable-beneficial use test, consumptive use permit applicants must show that the allocation is limited to an amount necessary for economic and efficient utilization. The reasonable-beneficial use test also requires the perrnittee to use the lowest quality source of water acceptable for the use, unless such use is not economically feasible. Resource is not fully valued. Historically. water has been priced as a free commodity in Florida. Users typically only pay for the direct costs necessary tn process and convey the water to where it is ultimate!~ used; users do not pay all the indirect costs of using water. Direct" costs are costs incurred by a water supplier such as pumping it out of the ground and transporting i1 to users. Indirect costs are associated with correcting or preventing environmental damage such as loss of wetland functions and salt ,,:uer intrusion: as well as lower property values. Indirect costs can also include costs associated with lost e(c.momic opportunities due to insufficient or limited water supply. By ignoring these indirect costs, water 1s incorrectly perceived as being relatively inexpensive. Pricing practices can also lead to situations where public water supply rates in areas experiencing scarcity are lower than for areas with sufficient s11pplie~ !\fan~ high-pc.'ptdatillfl areas han? llHVL'r unit llfh:ratin~ (llSts bccausl' they have paid off 111e..m: ,)f their equipment costs and can allocate the costs over a largl.?r pop11lat-ion . ; . : For,,:\!1\amplei : watt.r â€¢ " iltilit\'-'':. ' J. customers m St. Petersburg, an area where shortages have occurred, paid $6.40 per 5,000 gallons in 1995 compared to $11.20 in Tallahassee. an area "ith sufficient supplies. The lower rates in St. Petersburg are due in part to the fact that it has paid off a large portion of its equipment costs. However, these lo" rates do not include the costs of correcting environmental damage caused by over pumping. Value not always tied to resource. Because water is relatively inexpensive, pricing practices can also lead to situations where local governments use water rates to subsidize other local government functions. For example, cities may use water revenues to subsidize local services such as fire and police protection. Fully valuing the resource could make alternative water supplies more economically feasible. The practice of undervaluing the resource contributes to alternative water supplies, such as reuse and desalination. generally being more expensivetn develop than traditional water supplies. As a result. alternative water supplies are often not economi~all~ feasible in areas that rely on cheaper fraditional supplies. For example, market principles indicate that reclaimed water, a lower-quality product. should he less expensive than higher-quality potable water . J However, the reverse is generally true. The development of reclaimed water systems requires a significant investment in both the reclamation of the wastewater supply and the delivery to end users . However. if traditional water supplies were full~ valued. alteniative water supplies may be vie,,ed a:-being more economically feasible. Southwest Florida WMD staff contend that if water suppliers in that area had explicitly considered the full costs of ,veil field pumping in their rates~ they might have chosen an alternative other than continued reliance on ground water. Shortages have raised questions about the effectiveness of the competing applications process .... â€¢â€¢-------"'"daimnl walL'I ,:-,,;11, 1h;11 h;t, n:l't:l\t:,l al k;L,I ~,.-,,1hla1~ IIL;111111:111 ;11 ;1 d,m1c:stic wastewah:r treatment facilit\' and is then rcusL"d r.,r a discussiw, 0f water reuse. sec Office of Prog.;arn Pt,licy Analy~is and (i1wcnunc111 ,.\cct,untallility lkpl,n N,, . 9(~-td : Bcrvic~ -~f fh1, .8~~:,;.,,.: 'tâ€¢t' , . : ,~(
for resolving conflicts. The state s regulatory decision criteria used to allocate water does not provide sufficient economic considerations needed to more fully value the resource. The Water Resources Act allows the WMDs to reallocate water when there is inadequate water for all uses. As part of the competing applications process, the Act directs the WM Ds to use the public interest test to determine which competing reasonable-beneficial use best serves the public interest. In cases where the public intere~t is equal, preference is given to existing legal users. The competing applications process does not include a process for voluntarily reallocating permitted quantities. The competing applications process would require WMD Boards to take into account the relative economic productivity of various users and uses. Th is could potentially put the WMD Governing Board in the position of deciding between an agricultural and an industrial use. Opponents of the competing applications test argue that population and water demand pressures are too great. water resources too limited. and the options too complex to try tl) efficiently reallocate water solely through a regulatory program. Having the WMDs rely solely on the competing applications process could result an substantial costs for those users whose allocations are reduced or eliminated. Furthermore~ opponents of the competing applications test contend that these proceedings ~vould involve lengthy and comple:\ arguments and "\counter arguments that wou Id greatly slm\ WM D administrative processes. Volu nt:.a J") '. reallocations. In response tl) "atcr shortages in the District, the Southwest Florida WM D is proposing that voluntary reallocations of permitted quantities he allowed. subject to Governing Board approval. The District is advocating using a regulated voluntary reallocation process in the Southern Water Use Caution Area where the District has imposed a cap on new water withdrawals. As soon as this cap was imposed, water resources in the area became a valuable. limited resource. This ''market approach "hcrl' willing buyers and sellers make thc rcalln(ati~,n dc(1:-.id1h " mild be ust'
as whether it is cost effective to develop alternative water supplies. Given these concerns, the Legislature should consider the following three questions: I. Should water users pay the full costs of developing new water supplies? 2. What funding options exist for funding new water supplies? 3. What types of improvements are needed to encourage greater water use efficiency? Should water users pay the full costs of developing new water supplies? Water has been historically priced as a free commodity in Florida. Users typically only pay for the costs to process and transport water to where it is used. These pricing practices have helped to promote growth and economic development in the state. Furthermore, these pricing practices have helped to assure the availability of affordable supplies of water for all competing uses over the years. However, as costs of developing new supplies increase. the Legislature is faced with an important policy question. Should all users pay the full costs of developing ne~,~ water supplies or should the state supplement water supply development in some way? Local goveroments could opt to have new users pay most or all the costs of new supply. This could have a chilling. effect on economic growth and could lead to significant increases in water costs that could a
â€¢ â€¢ generate sufficient revenues to pay for expensive new water sources such as desalination or developing new well fields. The Governor's Task Force has identified several potential funding mechanisms such as local option taxes, gross receipts taxes, and a water use fee. A water use fee offers certain flexibility and advantages over other options and should be considered. One option is for all water users to pay a fee for the indirect costs of using the state's water supplies in addition to the current direct costs. Under this option all users, including industries that have their own well systems, would pay a fee for using the water. A water use fee could be used locally, regionally, or on a statewide level. One option is for the fee to only be assessed in those areas with environmental stress and where all uses cannot be met. Another option would be to have certain use classes pay a fee or to vary the fee by type of use. The issue of water use fees is not new to the water supply debate in Florida. The 1972 Model Water Code contained a provision for a graduated annual user fee to defray the costs of regulation. In 1989. the Governors Water Resource Commission recommended that the state assess a fee on all ~ater use and utilize fee revenues to pay for alternative water resource development, resource protection activities, water quality testing, conservation incentives and infrastructure improvement. During the 1991 and 1992 sessions. the Legislature considered but did not pass--bills to impose water use fees. In 1993. the Partners for a Better Florida Advisory Council induded)lllh.rng their legislative proposals the creation ,,r a Water Rl'ust' and Conservation Trust Fund to be funded hy \\ ater use fees. :\lfvantages. Water use fees could provide a method for paying for an administratively determined full \"cllue of ":Her and linking payments to benefits received. r ees would help to infuse a greater consideration of the value of the resource into the water supply decision-making process. Fees could be used to represent the full costs associated with l'll\.-irnnment:-11 damage and lost economic opportunity due 1,, :-\.;ir,:11, .-\ I 'JC) I stud~ l,f till. l'l.:nnomic impact of implementing a fee system found that fee rev _enues Cl,uld pr''' idc si!!nificant capitalization evei1 at fee 7 levels low enough to have no significant effects on water use sectors. Disadvantages. Fees could produce somewhat less revenues than may be expected because the fee would likely cause some reduction in use. Another concern about implementing a fee is administrative costs . Although other states that have implemented a user fee report few problems in administering their programs. some water managers in Florida express concern that fees would be expensive and difficult to administer. The fees also would raise costs for water-intensive industries such as agriculture. What types of imprQvements are needed to encourage greater water use efficiency? Regardless of how the Legislature chooses to define its level of involvement in water supply development policies. our review identified several strategies intended to improve water use efficiency. Adopt a policy lo use local and regional watrr sources first. One method for maximizing-water USl.' eftic ienc) is to require that areas consider local and regional water supplies prior to allowing interdistrict transfers of water. Under this policy, areas within South Florida would be required to maximize their supplies before transporting water from northern Florida . Chapter 373. F.S .. authorizes the transfer of water ffl'm l'll<: \VMD to another under l.:l'rtai11 c ircumstanc.?s The statutes define interdistril"t transfers a~ a l",,nsumptive water use which innllh''thc withdrawal of ground water from a point within ,,nc WM I) f, ,r use outside the ooundaries l,f th:ll district. l"hc: transfer of water across distrid boundaries tends to be controversial and, as such. ha~ seldom been authorized. A local-sources-first policy would require regions or local areas to be self-sufficient and to meet their water demands with withdrawals or supply systems within the area . h) 1hc greatest extent practicable . L,,cal snun:es l ,1tild pnte111ially inclmk a variety of s,,ur,.:'-:,; including ground water and surface water as well as
alternative supplies , such as reuse and desalination. Local sources would be defined by their proximity to the area where it would be used. Regions could be defined _ through a reg . ional water supply planning process or through areas served by: certain infrastructure configurations. WMDs could be responsible for dete'nnining whethe r local and regional water sources have been"maximized. Amend Ch. 373, Part II, F.S., to allow voluntary reallocations of supplies within stressed areas. In areas where water supplies are not adequate to meet demand, WMDs need an alternative method for making allocation decisions that will force a more efficient use of water. . â€¢ Pr~ponents cop!en~ that voluntary reall~ation . , allows mar _~e~s,.>_ to . 1help detennine what the most economically efficient uses are at any given time, while still protecting the . . , environment and ~ xisting . 1 legal . ~sefS. l!nder t~},~ . scenario , reallocations would only occur wheri it i~ economically beneficial for both parties (i. e., the ' reallocation would result in gains to both parties) and all permitting criteria can be met. Markets could potentially create incentives to develop water saving technologies in order to use less water. Critics of market approaches cite concerns . that Florida would end up with a system of water-rights holders similar to the system used in the western states . . However, the Legislature would not need , to attach . private property rights to , ;water use to create market incentives for efficiently and effectively reallocating water from restricted water: 1 sources _ and encouraging water use efficiency. . . The commodity being reallocated is not the right to own the water but the; right to a consumptive use pennit allocation for the time period specified in the pennit. Furthennore, . the WMD Governing Board could still deny a voluntary reall~ation application : in cases .of overwhelming , public interest. The sustainability of the , resource , for the public interest should be the overriding force . behind water allocation decisions ... : ,, : . lh accordance with s : I I .45(7)( ' d), F . S.~ we provided our preliminary and tentative review findings and recommendations to the Department of Environmental Protection and to the five water management . --districts for their review and response . We have incorporated into our report some of the comments from their responses. This project was conducted in accordance with applicable evaluation standards. Copies of this report may be obtained by telephone (904/488-10:!3 or 800/531-2477>: by FAX (904/487-3804) , in person (Claude Pepper Building , Room JI:!. 111 W . tvtadison S1.). or by mail (OPP.-\G1 .Rtport Production . P . O. Box 1735. Tallahassee . FL 32302). Web site : http://www. state.fl . us/oppaga/ Project S~pervised by: Julie Ferris (904i487-4256) Project Condt.-cted by: . Nancy DufoeW04/.487.9242):; , . :_:.,:~ 8