“[Practically] Free Hetch Hetchy!”
(San Francisco Fights To Keep Its Water Subsidies)
© 2004 by Joshua D. Baker
When the Bush administration sent its $2.3 trillion budget to Congress in February, many Republicans criticized its record projected $521 billion deficit, while Democrats decried it for, among other things, gutting social and environmental programs. San Francisco and its environs, however, received an especially unpleasant shock. Page 620 of the budget’s appendix announced the administration’s intention to raise San Francisco’s fee for the use of Hetch Hetchy Reservoir from the current annual payment of $30,000 to $8 million per year. The resulting outcry has reignited long-standing debate about the propriety and future of the Hetch Hetchy Water and Power System, which has not had a rate increase since the Great Depression. Although the proposal is becoming wrapped up in (and arguably stems from) broader partisan political battles, it deserves attention -- and support -- on its own merits.
The story of the creation of – and opposition to – the Hetch Hetchy System is among the more familiar environmental and municipal tales in our country’s history. Hetch Hetchy is a three-mile long valley of exposed granite faces and waterfalls just to the north of Yosemite Valley. It has been contained within Yosemite National Park’s boundaries since the park was formed in 1890. As early as the 1880s, however, officials in the growing city of San Francisco began pursuing the right to dam the valley in order to tap its resource potential – a seemingly unlimited supply of cheap water and hydroelectric power.
In 1913, California congressman John Raker introduced legislation on San Francisco’s behalf to permit the damming of Hetch Hetchy Valley. There was an immediate public outcry. The New York Times lambasted “the water-power grabbers” of San Francisco for submitting “incomplete, erroneous, and false evidence” in support of “a power project under the guise of providing a water supply for San Francisco.” Despite other unfavorable media coverage and opposition from the fledgling Sierra Club, well-funded San Francisco lobbyists and then-Secretary of the Interior (and former San Francisco City Attorney) Franklin Lane persuaded Congress and President Woodrow Wilson to make the Raker Act law. Construction on the O’Shaughnessy Dam began the following year, and Hetch Hetchy Valley was submerged under 117 billion gallons of water.
Although the origin of the Hetch Hetchy System is well known, significantly less public attention has been paid to the system as it now exists. The San Francisco Public Utilities Commission (“SFPUC”) oversees the massive enterprise, which includes 21 reservoirs, 25 tanks, 2 water treatment plants, 23 pump stations, 40 miles of tunnels, and 1,470 miles of water pipes. It delivers more than 260 million gallons of water per day to 2.4 million people in San Francisco and nearby Alameda, San Mateo and Santa Clara Counties. Eighty-five percent of the system’s water supply originates as snowmelt that collects in Hetch Hetchy Reservoir and its two sister reservoirs in the Sierra.
In addition to water delivery, the SFPUC also operates four hydroelectric powerhouses that collectively generate 1.6 billion kilowatts of energy each year. That electricity is used to power San Francisco’s municipal buildings, the MUNI public transit system, the international airport, and all of San Francisco’s 40,000 streetlights. Electricity is also sold to Central Valley irrigation districts and public agencies in the greater Bay Area. The sale of electricity has proved extremely lucrative for San Francisco. Of the $130.5 million total revenue that is forecast in the SFPUC’s operative budget for fiscal year 2003-04, $108.5 is attributed to the sale of hydroelectric power.
San Francisco’s use fee for the right to submerge one of Yosemite’s two spectacular valleys is statutorily capped at $30,000. In the 90 years since the Raker Act’s passage, the Bay Area’s population has increased nearly four-fold, and its average home cost has jumped from $5,000 to a nation-high $427,000. San Francisco, however, still enjoys the use of, and considerable profits from, the Hetch Hetchy System for the same price it paid during the Great Depression. Moreover, the Raker Act includes no provision to account for the diluting effect of inflation. The $30,000 that Congress deemed a fair payment in 1913 translates into more than $540,000 today, and the discrepancy between the two figures grows with each passing year. Thus, San Francisco’s fee for Hetch Hetchy has effectively not even been fixed for the last three-quarters of a century – it has been steadily decreasing, and continues to decrease annually.
San Francisco will be hard-pressed to defend the sufficiency of the current Hetch Hetchy fee. Environmentally conscious public officials frequently call for resource extraction on federal lands to be assessed based on the resource’s “fair market value.” Such analysis often focuses on what a comparable extraction would cost if it took place on privately owned land. In Hetch Hetchy’s case, such an evaluation would need to account not only for the resource itself – 95 billion gallons of water removed from publicly owned land each year – but also for the opportunity cost – the public’s loss of use of the now-flooded valley. Any independent appraiser assigned to determine the fair market value of such a use would unquestionably assign it a monumental – perhaps unattainable – price. Even if San Francisco’s current pittance were inflation adjusted, it would not approach what would be required of a private entity for comparable rights.
San Francisco enjoys an advantage not only over private entities, but over other municipalities as well. The Seattle metropolitan area also receives water and energy from a trio of dams constructed on national park land. Seattle’s reservoirs in North Cascades National Park, however, do not enjoy San Francisco’s permanent exemption from fee renegotiation. Seattle’s use fee, which was recently increased, is equivalent to approximately $160 in direct costs and lost hydroelectric revenue per managed acre. That amount dwarfs not only the measly seven cents per acre that San Francisco currently spends, but also the $19 per acre that the Bush administration has proposed. Applying the same rate to the SFPUC’s 417,000 managed acres of Hetch Hetchy watershed would result in an annual fee of $66.7 million, more than eight times the amount the Bush administration seeks.
The amount the SFPUC receives for its services further illustrates how dramatically undervalued San Francisco’s current fee is. The SFPUC transports approximately 95 billion gallons of water from the Sierra to the Bay Area annually. The sale of that water generates more than $19 million in revenue each year. But, as the New York Times presciently observed nearly a century ago, San Francisco’s real financial benefit from Hetch Hetchy is the sale of power and energy. Hydroelectricity revenue currently exceeds $108.5 million per year, of which tens of millions of dollars are pure profit for the SFPUC. All told, San Francisco’s annual Hetch Hetchy revenue exceeds its annual use fee by more than 430,000 percent.
Moreover, San Francisco is continually looking for new ways to profit from Hetch Hetchy. The SFPUC now bottles and sells Hetch Hetchy water, despite objections from environmentalists such as Ron Good, executive director of Restore Hetch Hetchy, who called the project “another example of San Francisco exploiting the natural resources of Yosemite National Park.” Former Mayor Willie Brown purchased the first half-liter bottle in March 2003 for $1.25, equivalent to $9.46 per gallon. Profits are returned to the city, without benefit to the surrounding suburbs or the national park from which it flows.
Although San Francisco’s current Hetch Hetchy fee is incredibly low, the city’s normally “green” news media and public officials howled in protest when they learned of the proposed increase. The editors of the San Francisco Chronicle, which just days before had lamented a Bush administration “gift to lumber companies” and had previously decried “the administration’s intent to favor polluters and extractors,” called the proposed lump-sum increase “outrageous” and suggested that it is politically motivated. Peter Ragone, spokesman for San Francisco Mayor Gavin Newsom, also called the proposal “outrageous” and stated that the city government would do its utmost to defeat it.
Following suit, House Minority Leader Nancy Pelosi, D-San Francisco, issued a statement declaring that the proposal is “totally unacceptable” and vowing opposition. California Senator Dianne Feinstein, a former San Francisco mayor and member of its Board of Supervisors, labeled the increase “a raid on city coffers” and promised to undertake an investigation. Senator Feinstein’s statements echo her position in the mid-1990s, when an administration last attempted to raise the Hetch Hetchy fee. Then, she successfully led the effort to kill the proposal. Feinstein and Pelosi each hold a 91 percent score on the League of Conservation Voters’ “National Environmental Scorecard” over the last six years. Neither has publicly articulated a rationale for not holding San Franciscans to the same resource compensation standards to which they wish to hold cattle ranchers, loggers and miners.
Arguments Against the Increase
Arguments put forth in opposition to the proposed increase thus far have not been compelling. First, opponents have complained that they received insufficient notice of the proposed increase. San Francisco, however, received the same amount of notice as any other party with a stake in the proposed federal budget. Furthermore, the president’s proposed budget will undergo a number of Congressional hearings before (potentially) taking effect in October. Until the budget is finalized, the city can – and undoubtedly will – organize opposition and attempt to defeat the increase.
Second, opponents have protested that any increase of such magnitude cannot fairly be imposed without phasing in payments to cushion the blow. The increased fee, however, would amount to less than one-third of one percent of San Francisco’s 2003-04 general fund expenditures, and would be dwarfed by other line items – notably including homelessness and other services for the poor – that the city pays without complaint. San Francisco’s resistance to paying for perhaps its most essential service seems even more misplaced in light of the extremely low rates its residents currently pay. A typical four-person San Francisco household is charged barely $173 in water fees annually. Under the affordability index developed by the United States Environmental Protection Agency (“EPA”), “an annual water rate of $328 or less is considered affordable in California.” Based on the EPA index, which is cited on SFPUC’s own web site, a San Francisco household can absorb an additional $155 annually before its water payment is considered “unaffordable.” The proposed Bush administration increase, less than $14 per household annually, is not even one-tenth that amount.
Third, opponents have argued that Hetch Hetchy-related payments that San Francisco makes to the federal government other than the use fee should be considered when assessing the propriety of the proposed increase. San Francisco spends approximately $1.7 million annually on ranger patrols and other security measures around Hetch Hetchy Reservoir, and an additional $3.5 million annually on environmental mitigations along the Tuolumne River. The payments, however, are motivated by economic self-interest, not philanthropy. Hetch Hetchy water is sufficiently pure to exempt San Francisco from expansive federally mandated filtration requirements. If the water’s quality declines, San Francisco might be forced to construct water treatment facilities costing billions of dollars to return to compliance. Selling the water for industrial applications, particularly in the high-technology sector, would also become more difficult. In 2002, Intel Corporation alone bought and used more than one million gallons of Hetch Hetchy water daily in its Santa Clara, California wafer-making plant. In order to avoid such cost-prohibitive treatment requirements, San Francisco pays to safeguard the purity of its resource. While such endeavors benefit the park and its users, the benefit is incidental.
The city’s most notable Hetch Hetchy-related expense is a $3.6 billion overhaul of the entire system. Such a huge expense is financially burdensome, but it is also a creature of San Francisco’s own making, and it benefits neither the federal government nor American taxpayers. As the San Francisco Chronicle reported in September 2002, during now-Senator Feinstein’s mayoral tenure the city began diverting what ultimately amounted to $670 million away from the Hetch Hetchy System and into the city’s general fund. The siphoning of funds was finally halted in 2002, but more than two decades of favoring profit redistribution over vital repairs and upgrades had caused system-wide decay. This was demonstrated in November 2002 when a major pipeline ruptured and spilled 70 million gallons of water before the leak could be sealed. Then, when workers attempted to re-open a gate that was closed during the repairs, another malfunction locked the gate halfway open, halving the Bay Area’s water supply for another four days. Although San Francisco was solely responsible for – and the only beneficiary of – the monetary diversion, ratepayers in nearby suburbs are nonetheless being forced to pay for over half of the repairs.
Not everybody opposes the proposed increase. The $8 million fee payment would go directly to Yosemite National Park, and would increase Yosemite’s budget by one-third. The ramifications of such a dramatic cash influx have not been lost on Yosemite’s administrators and political representatives. Yosemite spokesman Scott Gediman stated succinctly, “It’s a good thing, and we support it.” Representative George Radanovich, R-Mariposa, whose district includes Yosemite, also praised the plan, saying that it was fair that San Francisco pay for using a vast swath of Yosemite, and that the fees could significantly improve other areas of the park.
The proposal’s benefits, however, extend beyond the park’s borders. While at first blush the price of San Francisco’s water supply seems like a local, or at best a regional, issue, the artificially low price is the result of a national subsidy, paid for by every American taxpayer regardless of where they live or whether they benefit. All Americans are being denied the right to use a stunningly beautiful portion of one of the country’s premier national parks. San Francisco’s boondoggle is particularly unfair to residents of cities such as Seattle who are paying astronomically more for similar privileges on comparable public land. Increasing the annual Hetch Hetchy fee to at least the proposed amount may not rectify the problem, but it immediately improves the situation.
The proposed increase may also heighten public awareness and understanding of water conservation issues, methods and practices, especially by urban consumers. San Francisco and its suburbs may be prompted to undertake beneficial water conservation efforts, including rebate programs, reductions in daytime water usage, replacement of inefficient equipment, or increased use of recycled wastewater on parks and golf courses. When the increase is inevitably passed through to ratepayers, the consumption habits of the Bay Area’s residents and businesses may be influenced as well.
A public fight regarding the proposed increase may also draw more attention to broader issues of resource extraction. Other extraction activities such as drilling, grazing, logging and mining also significantly impact public lands. Their undertakers, however, are rarely required to compensate the federal government at fair market rate for a resource’s value or fully mitigate any damage caused while obtaining it. As a result, American taxpayers often heavily subsidize resource extraction. Taxpayers spend as much as $500 million annually to administer grazing on 170 million acres of public lands overseen by the Bureau of Land Management. San Francisco’s water subsidy is no better. Efforts to demand fair value from other resource users will ring hollow if the champions of those efforts are not subjected to the same standard.
Finally, turmoil over the fee increase may cause sufficient public scrutiny of the Hetch Hetchy System that alternatives to the reservoir may finally be seriously entertained. As Sprek Rosekrans, policy analyst for Environmental Defense, commented, “reminding everybody that they are using a spectacular area of a national park for a reservoir will help open up the debate on whether it’s the right place to store water or whether we should find a different place.” The Sierra Club and other environmental groups persistently ask the SFPUC to study the feasibility of removing O’Shaughnessy Dam. They have been universally repudiated, even after then-Secretary of the Interior Donald Hodel suggested the option be considered in 1987. The damming of Hetch Hetchy was the result of money, influence, and the environmental philosophy of a different era. It counts among the great environmental defeats of all time. A seemingly innocuous line item in a budgetary appendix may finally help nudge San Franciscans, and then Americans, toward correcting that misstep.
San Francisco has been at the vanguard of the environmental movement since the movement began, including the founding of the Sierra Club there in 1892. Perhaps no other American city takes as much civic pride in public awareness and activity on environmental issues. But the normally environmentally-conscious city that so often protests federal subsidies to “the rich,” “Corporate America,” and “polluting industry” is scrambling to evade similar accountability now that its own financial interests are at stake. Raising San Francisco’s annual fee from its historical token level will immediately benefit one of our finest national parks. It may also help advertise the true costs of below-market resource usage and emphasize other broader problems. That the Bush administration could better manage the budget to avoid deficit spending, or that other resource uses should be subjected to comparable market increases, should not discourage Congress from capitalizing on an opportunity in a budget not otherwise friendly to the environment. It is an important first step toward beneficial and long overdue change.
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