January 1995

Urban development, agriculture, and environmental needs (such as endangered species) all place demands on California's water supply. In 1990, the average annual developed water supply was sufficient to meet demand--that is, water supply and demand were roughly in balance. Given current trends, however, water demand is projected to exceed supply by 2020.

In 1993, the Department of Water Resources projected that demand would grow to over 66 million acre feet by 2020, exceeding projected supply by between 2.2 and 4.2 million acre feet annually. Addressing this projected shortfall between supply and demand, and allocating water efficiently, are major policy challenges for the coming decades.

The state's developed water supply comes from a diverse mix of sources. The single largest water source is local sources of ground water and surface water. Other important sources of developed water include the Central Valley Project (CVP), operated by the federal government, and the Colorado River. The State Water Project (SWP) provides about 8 percent of California's developed water supply.

From 1952 to 1991, funding to build the SWP totaled about $4.4 billion. The California Water Fund--which is funded with project revenues and tideland oil revenues-- provided about $508 million of that total. The remainder of the funding came from revenue bonds and general obligation bonds. When these bonds are finally paid off, it is estimated that contractors who receive water from the SWP will have paid for about 96 percent of the cost of building the project. The remainder is paid by the state, to cover fish and wildlife enhancements associated with the SWP, and the federal government, primarily for flood control benefits.

For 1994, costs to operate and maintain the SWP will total about $416 million. Most of these funds pay for labor and equipment, and for the cost of power to operate pumping stations. As with the cost of construction, fees paid by contractors cover about 96 percent of the annual cost of operating the SWP.

Water supply in California does not naturally occur where demand is highest. Much of California's rainfall occurs in the North, while much of the demand for water is in the South. As a result, the SWP is a complex system for storing and transporting water throughout the state, as shown on the map.

The need to store and transport large quantities of water creates its own challenges to formulating statewide water policy. For example, water being transported south must first make its way through the Sacramento-San Joaquin Delta, which has been a focal point of controversy for many years. In addition to supplying water, the Delta provides habitat for several endangered or threatened species, and an estimated 80 percent of the state's commercial fishery species live in or migrate through the Delta.

There are several options for allocating scarce water. These include using markets to promote water transfers, building new facilities, encouraging water conservation, and increasing water prices to manage demand. All of these approaches have been used to date in California, some extensively (such as building new facilities) and others to a lesser degree (such as demand management and water transfers).

Each of these options has advantages and disadvantages. Building new facilities, for example, increases the supply of developed water but entails costs for capital outlay and raises environmental concerns. Finding the optimum mix of options requires an analysis of the pros and cons of each option and the circumstances under which each option is most appropriate.

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