Improving Resiliency for Large-Scale Water Suppliers Facing Drought-Related Financial Risk

Hydrologic variability presents significant challenges to water providers in terms of managing supply risk, but resilient systems must also manage the corresponding financial risk. During drought water providers pump less water, make fewer water deliveries, and earn less revenue. Meanwhile, their costs are mostly fixed, with a large fraction linked to debt service resulting from the capital-intensive development of water supply infrastructure. The consequent budget shortfalls can be very disruptive and must be managed effectively if this critical infrastructure is to remain resilient in a future that involves increasingly frequent and severe droughts. For this research, an object-oriented model was developed that integrates hydrologic and financial systems to provide new insights into ways in which large water providers can better quantify and manage their financial risk and establish strategies for promoting greater financial resiliency in the face of climate change. This work involves a case study of the Central Arizona Project (CAP), one of the largest water providers in the Western U.S. that serves nearly 6 million people (e.g., Phoenix, Tucson), as well as large tracts of irrigated land and the demands of several Native American tribes. Current reductions in CAP's access to Colorado River water will reduce its water deliveries by 40% this year, resulting in substantially lower revenues. In response, CAP will raise its wholesale water prices significantly so that it can meet its costs. As an alternative to increasing wholesale prices, CAP could consider reducing the financial risks of hydrologic uncertainty by utilizing some portion of its reserve funds or leveraging its ad valorem tax. Results suggest that CAP's use of reserves could limit annual price increases to 10% or 15% per year through 2028, but to limit annual price increases to 5% under drier conditions would nearly deplete existing reserves in a few years.