Financing a Sustainable Water Plan for Texas: Part 2

Installment 2: Relationship Between Prop 6 and State Water Plan

Proposition 6 arose from debate about the need to “fund implementation” of the State Water Plan.  But, the current state plan may not be the best roadmap for expenditure of the new funds.   A few charts from the 2012 State Water Plan illustrate the concerns. .

 We’ll start with the plan’s projection of future water demand.

 

The biggest increase in of projected water demand growth by far is for municipal households and businesses.  This municipal demand projection drives the total projected 2060 capital cost of the water plan, accounting for $ 45.8 billion of the $53 billion total (86%).

The 2012 plan projections are based on the assumption that municipal demand will rise in direct proportion to population growth.  These projections do not consider changes in land use or changes in consumer behavior that have resulted in state household water use falling 8 % over the past decade.  As discussed in a separate analysis, the linear increase assumption is likely resulting in a substantial over-projection of future municipal demand. 

In any case, to meet this projected demand, the Regional Groups say they plan to steadily add new supply over the coming fifty years. (This figure includes new water supply for all types of uses, not just municipal, but municipal use accounts for the majority of the new projected supply).

But, here is how the regional water planning groups translate these water demand and supply projections into in state financing needs.

 

 

This graph looks dramatically different from the previous graphs.  In fact, a full 58% of the total amount of state financial support sought by the regional groups is requested for the first decade to serve a potential future demand that would not emerge for decades according to their own projection—and may not emerge at all if the projections are over-stated.

 

Remember that SWIFT would be a lending program where the loans are repaid by borrowers—borrowers that receive revenues from their customers. This means that what we build will be paid for by ratepayers and the loans must be repaid whether or not what is built is actually needed.  If actual demand is less than projected demand, then rates could have to be increased substantially to pay back the loans (not to mention the disincentive for conservation if demand falls short of projections).

 This is where the link to HB 4 and prioritization of projects becomes extremely important.  The prioritization process (which we have described previously here) was recognized by the legislature as essential to ensuring that state funds are efficiently managed for the greatest public benefit.  It is also an implicit recognition that not all the projects in the 2012 state water plan will need state funding (or will even be needed at all). 

 Thus, the prioritization process must ensure that state financial assistance from Prop 6 is both cost-effective and takes into account the possibility that future municipal demands may be substantially less than projected.  A slow but steady approach to investment in water supply strategies that will meet a clearly demonstrated need in the near-term would be the most fiscally responsible approach to management of the new Prop 6 funds.   And the prioritization process, carefully implemented, is the tool the Texas Water Development Board needs to structure that fiscally-responsible approach. 

 

One essential component of this slow but steady funding approach is investment in helping Texans to reduce their water demand (and save money) by implementing cost-effective efficiency measures.  These measures, given time to take hold, can postpone or even avoid the need for massive, expensive new supply projects.

 House Bill 4 requires the Texas Development Board to allocate some of the Prop 6 funds toward water conservation. Specifically, H.B. 4 directs the Board to make “premium financing” options available for conservation and water reuse, with at least 20% of the SWIFT funds meant to flow toward these purposes. Yet, many of the conservation strategies in the 2012 plan do not have an associated capital cost, making them unlikely candidates for recipients of the Board’s lending program. Whether Prop 6 funds managed by the Board can effectively be used to achieve this allocation toward water conservation is the subject of our next post.