Groundwater Management Workshop, Part 3: Financing mechanisms for groundwater management

On March 24, the California Natural Resources Agency, the California Department of Food and Agriculture, and the California Environmental Protection Agency held a workshop to gather ideas, proposals and feedback on sustainable groundwater management actions.

The third panel focused on financing mechanisms for groundwater management.  On this panel, Ellen Hanak, Senior Fellow from the Public Policy Institute of California; Michael Markus. General Manager of the Orange County Water District, Dave Bolland, Senior Regulatory Advocate for the Association of California Water Agencies; and Robert Reeb, Executive Director of the Valley Ag Water Coalition.

Ellen Hanak, Public Policy Institute of California

Ellen Hanak began by reviewing what agencies need funding for. Agencies need to be able to cover the costs of management and oversight on basin water use, groundwater levels, and other basin characteristics, as well as the potential to use and work the basin, she said. “These are really monitoring tools and sometimes include infrastructure, such as specialized wells or modeling,” she said. “There’s been a lot more progress made in California in the last 20 years.” Agencies also need money to implement recharge and conjunctive use programs and to purchase supplemental water, which is not just imported water, but also recycled wastewater and stormwater as well, she said.

Hanak 1If you’re going to manage the groundwater basins, you need money to do all of those things and you need to get it from somewhere,” Ms. Hanak said. “But there’s another reason why you need money or fee authority and that’s prevention of excessive use through a fee, a surcharge or a penalty. It’s especially important in places that are not adjudicated where people don’t have their individual use rights, so you have to be able to say okay at a certain point, it’s going to get really expensive if you use more.” She noted that some groundwater agencies in the state do have that capability.

Some groundwater management agencies which have been established for a long time are typically the result of an adjudication or a special district act arrangement, and oftentimes have a special fee authority to charge basin users, she said, pointing out that this is different from the more loosely-managed AB 3030-type entities.  According to DWR’s website, there are 13 special act groundwater management agencies created by the legislature, she said. “We found evidence of five of them, the larger agencies, are charging fees – that includes Santa Clara, Orange County, Pajaro Valley, Fox Canyon, and the Desert Water Agency in Coachella. There may be others out there that are doing it, it just wasn’t easily available for us to find quickly.” The amount these agencies charge varies depending on what the cost of replacement water is, but also sometimes by ag versus non-ag users, location, or level of use, she said.

There are 22 adjudicated basins, most of them in Southern California, who allocate use rights, she said. Some of them charge replenishment fees; those fees tend to be uniform fees that are linked to the costs of replacement water, she said.

In some of these basins, there is the ability for water users to pay each other to help manage a sustainable yield, and so both in Chino and Mojave, there’s an active water market where essentially you’re paying somebody else not to use their water,” Ms. Hanak said. “This might be something to think about in some of these other non-adjudicated areas where tree crop farmer or orchard crop farmer might want to make sure they have reliable supplies over the long term and pay another farmer who doesn’t have that kind of investment to forebear his or her water use.”

So how do all of the other management entities without special authorities to get money? “I’m going to use a technical term here: they scrounge around for funds,” she said. “That’s kind of an art and a lot of talent goes into that. Scrounging around means looking for local tax revenues, seeing if the local urban users like in Sonoma County are willing to throw in some cash, and probably in some cases, some of the big irrigation districts are also putting some money, but that can’t go very far. That’s not going to get you replacement water, but it might help you with monitoring and getting some good conversations going.”

In some places, such as Kern County, there’s an ability to operate groundwater banking for third parties as a way to raise funds for infrastructure to help with conjunctive use management, as well as state bonds which are a valuable source of funds. According to DWR, as of late 2012, about $350 million had gone into groundwater storage projects from Prop 13, Prop 50, and Prop 84, she said. “Obviously those funds are useful but it can’t replace the ability for locals to do better,” she said.

Prop 218 is an issue, said Ms. Hanak, noting that her outlook was much less optimistic until a case was decided at the appellate level last fall for the Pajaro Valley Water Management Agency. “This was a Prop 218 case and in our view, the court really came down on the right side,” she said. “At least for now, this is the precedential case. The Supreme Court chose not to review. The basic idea is one that water agencies are facing more generally, which is are the courts going to interpret the substantive provisions of Prop 218 which require the fees to a water user be proportional to the cost of service to their property, and only reflect the services delivered to that property? If you interpret that very narrowly, you can go down a rabbit hole with something like groundwater management where the exact benefit and the exact impacts at this point in time for replenishment or management activity are not going to be identical across the basin even though hydrologic connections mean that if I’m upgradient and I’m pumping or I’m inland from the coast and I’m pumping, I’m going to affect the guys who are right on the coast and who are going to be experiencing the salt water intrusion.”

The lawsuit against Pajaro Valley involved the fees the agency was charging for replenishment of augmentation, with the argument that the litigants were not benefitting enough from the fees. “The appellate court ruled that it is an integrated basin, it’s a water service, and that things like paying for recycled water and stormwater recharge are all relevant and no matter where you are in the basin, it’s relevant,” said Ms. Hanak. “That’s a very important thing for all those entities who really have that kind of special authority and I think you want to think about that in terms of what authority would be given to the other folks.”

As part of that decision, the court ruled that it is a water service, which means that it’s still subject to the accountability and transparency required with public noticing and a public hearing on any rate increases, but it does not require a direct vote of the water users every time you want to raise the rates,” she said. “That’s really important, because what we found in our study looking at the water sector is that the only parts of the sector that are in good shape are those where they have that transparency and accountability at that level, but they don’t have to actually get people to vote affirmatively every time they want to raise the rate, and those are the urban water utilities and the wastewater utilities.”

The main area for solutions is to extend the more flexible authorities similar to those given to the special act districts to the AB 3030s,” she said. “My read of AB 3030 is that there are a lot of voter hurdles there still, in addition to probably not enough flexibility of that kinds of things that they can charge for. … I don’t think you want people to have to go to the voters every time they want to raise a rate.”

Michael Markus, Orange County Water District

Michael_Markus_Page_02Michael Markus began by giving a little history about his district. The Orange County Water District was formed in 1933 by a special act of the state legislature that encompasses 229,000 acres in Orange County, providing groundwater for about 2.4 million people, he said. “We are a non-adjudicated basin, so anyone within the basin can sink a well within the basin, pump water out, and they can pump actually up to 100% of their water supply as groundwater. However, that water cannot be exported outside of our service area, so all the groundwater has to be used within the district boundaries.”

The District is governed by a 10-member Board of Directors who are the decision makers, he said. Seven are directly elected and three are appointed. “In April of each year, the Board will set the Basin Production Percentage, or the BPP, and that’s the percentage of groundwater that can be pumped out of the basin,” he explained. “Currently our BPP is 70%, and that means anyone within the groundwater basin can pump 70% of their total water demands as groundwater. The other 30% they have to purchase from outside sources, which in this case, is the Metropolitan Water District.” He noted that the Board also sets the Replenishment Assessment, which is the funding mechanism for the District’s operations and capital improvement programs.

Michael_Markus_Page_04The Board also sets the Basin Equity Assessment, or the BEA, he said. “I mentioned that anyone can pump 100% of their water supply as groundwater. For anything at or under the Basin Production Percentage, the BPP, they pay the Replenishment Assessment, which is currently $276 an acre-foot. If they exceed that, they have to pay what we call the Basin Equity Assessment, of BEA, and that is an economic disincentive to pump groundwater. The BEA is normally equivalent to the cost of imported water, which is currently about $600 an acre-foot, so that $900 an acre-foot is what the equivalent rate of Metropolitan Water District would be.” He said it works very well, with few entities exceeding the BPP, but if they do, they are assessed the BEA and that limits the amount of groundwater being pumped beyond what the Board of Directors sets for the BPP.

Even though we were created by the state in 1933, we have gone back to the legislature to amend the act several times,” he said. “One of those times was in the mid 1950s when we started to assess the Replenishment Assessment as we didn’t charge it in the beginning. We collected ad valorem taxes and that helped fund the District at that time. As the pumping began to grow, urbanization took place, and we found the need to purchase water from Metropolitan to help fill the basin up and build projects so that’s when we started assessing the RA.”

The RA is $138 an acre-foot, and everyone pays the RA, including ag users,” he explained. “We then have the additional RA which is only used by the urban pumpers, and that’s equivalent to another $138 an acre-foot, so urban pumpers are assessed the RA plus the additional RA or currently $276 an acre-foot. The ag pumping gets the same water for $138 an acre-foot.

At one time, there used to be orange groves in Orange County, but things have changed and they no longer exist, he said. Currently, only 1% of the extraction out of the basin is for agricultural use, or about 3000 acre-feet out of a total of 300,000 acre-feet per year. “The way we structure this may have to change over time due to Prop 218,” he said. “We shouldn’t have dual rates; we should only have one rate, so we may be changing … but currently, this is the way we are set up.”

Michael_Markus_Page_06Historically, the replenishment assessment fee has risen, he said, noting that when he came to the District in 1988, it was $42 an acre-foot, and since then, it’s jumped to $276 an acre-foot. “In fact, we’ll be proposing to our Board an increase to $294 an acre-foot next April,” he said. “Why is this important? We’ve done a lot of expansion and we’ve invested in infrastructure to help improve our ability to capture water in the basin. We haven’t necessarily looked to grant funding or the state, although we have taken advantage of it where we can, but we’ve raised our rates to help support our growth in the basin.”

There is also the Groundwater Replenishment System, the largest planned indirect potable reuse project in the world which produces 72,000 acre-feet of water per year, he said. “This has become an important source of supply to the groundwater basin, particularly in times of drought. It’s a reliable source. Our board has decided to expand that, that’s why we’re raising our rates even a little bit more, so next year at this time, that project will be producing 103,000 acre-feet per year, or 100 million gallons per day. Ultimately, we can go up to 130,000 acre-feet and we’re looking at developing that final expansion right now. Potentially 5 years down the road, we’ll be supplying 130,000 acre-feet of recycled water per year of supply to the basin.”

Michael_Markus_Page_07He then presented a graph showing the different sources of the District’s water. He noted that the yellow bars are natural rainfall. The brown bars are recharge base flow, which are Santa Ana River flows. “The Santa Ana River normally is dry as are most rivers in Southern California. However, this one has water in it all the time because in the Upper Santa Ana watershed, they discharge their wastewater into the Santa Ana River; it flows downstream and we capture it. Those flows peaked in 2005, and have steadily dropped off as they are doing more recycling in the upper watershed, so there’s less water being discharged to the river, so we have to find additional sources beyond that.”

The District also utilized stormwater flow through an agreement with the Army Corps of Engineers who operates the Prado Dam in Corona. “We have an agreement with the Corps to store water behind the dam, so that we can capture it during the winter and slowly release it so we can put it in our groundwater basin. That is an important source of supply for the basin.”

The purple bar that starts in 2008 is the recycled water, so you can see that that adds a real component to the supply into the basin,” he added.

Michael_Markus_Page_08He then presented a slide that depicted groundwater basin levels from the mid 50s to present day. “We are a managed groundwater basin so our overdraft goes up and down,” said Mr. Markus. “You can see in the mid 50s it was extremely low; in fact sea water intrusion was taking place, wells were being taken out of service. This lead to the development of a sea water barrier in the mid 70s, but it does go up and down. We try to manage it also. We have triggers. If the overdraft gets below 300,000 acre-feet, our Board will purchase more Met water. We’ll actually buy untreated Met water for $700 an acre-foot and put it into the groundwater basin and let the groundwater basin act as a water treatment plant and then pump it out. It’s actually cheaper for our urban users than to purchase that $1000 an acre-foot from Met. But it costs a lot of money and takes a lot of investment.”

Our policy is to invest in local projects, such as the recycled water project, that gives us local supply reliability, he said. “We wanted to avoid basin adjudication. We do have the ability to change our Basin Production Percentage, for years it was at 75%, about 6 years ago, we dropped it as low as 62%, so it does give us a very effective tool to be able to manage overdraft. If we keep on overdrafting and the source of supply aren’t there for the basin, we can restrict pumping, and that’s what we would do.”

We want to maintain uniformity of costs and access to the groundwater basin and treat all parties equally; we have no power to restrict pumping, we only can set rates paid to pump, and then conjunctively operate with Met’s imported water system, so conjunctive use is very important,” he said.

And when there is excess water in the wet years, we have to find a way to put that in the groundwater basins so we can use it in the future, he added.

Markus 1Regarding Prop 218, “OCWD at this time doesn’t believe it’s subject to 218, although this is being still litigated with different agencies,” he said. “The reason we say that is virtually all the production within OCWD is by retail water agencies, and entities, and to the extent we sell the water, we’re more like a wholesale agency – that’s how we would characterize ourselves. As an agency focused on groundwater, our RA is always complied with most of the substantive requirements of 218; as an example, RA revenues are used not only to manage and protect the groundwater the producers pump, and we don’t collect any more RA than is necessary to run our operations. So even though we may not think that it pertains to us, we still make an attempt to comply. We do send a notice out notifying our groundwater producers, and there’s about 19 major producers, about 100 total pumpers of groundwater in our agency, and we do that so that we feel meet the procedural requirements of 218.

Recent court decisions indicate that the courts in the future may apply 218 to groundwater management agencies like us so we’re waiting for the inevitable to happen and we’ll adjust to it when it does,” Mr. Markus added.

Dave Bolland – Association of California Water Agencies

Dave Bolland began by saying that the Association of California Water Agencies represents both urban and agricultural water districts that stretch up and down the state. “They have all kinds of different models for managing water resources,” he said. “Many of the agencies just are surface water agencies, some are conjunctive management agencies, many are agricultural water districts,and a lot of them are urban districts.”

Bolland 2ACWA has been focused on groundwater issues for a long time, putting together a groundwater framework in 2010-2011, he said. “The groundwater framework captured some of the principles that we had for management standards and best practices to present to our members as well as an educational vehicle for the public and policymakers,” he said. “The landscape, in terms of groundwater management, how it works, many of the things that have been said today are in that document, including case studies of well managed agencies and how their authorities work to manage groundwater.”

ACWA acknowledges that the issue of groundwater overdraft is a challenge, and the sustainability issue is a concern so recently, ACWA assembled a board-level task force of about 12 to 14 people who represented agencies around the state, he said. They were tasked to review the fundamental framework document and propose some specific answers, particularly on the issue of authorities and tools. The comprehensive document is just about complete; it will be discussed at the board meeting on Friday, and be made public thereafter, he said.

Regarding funding in the broader context of water management, “as engineering-oriented organizations, we tend to identify what we need to do, and then identify the revenues, based on a fee basis, and then basically charge our customers for the product that they get,” he said. “The product is not just the molecules of water, it’s the management that goes into that water, and we have a pretty good track record in terms of urban water management around the state for agencies that are able to generate the funds that they need to generate at a local level and make sure that the consumer is essentially paying for the product they get.”

Unfortunately with groundwater management, there are a lot of different realities out there,” he said.

Some agencies are faced with the challenge of not being able to levy fees as the special districts have the authority to do, he said. “So state does need to identify uniform, comprehensive authorities – a whole array of fee generating and financing authorities for water agencies that try to manage groundwater, and create those as a menu that’s available to those water agencies, no matter what their particular governmental structure is.”

There are a lot of different governance models, and many agencies have been pretty resourceful in getting various types of grants and loans that have been made available, he said. Some of those funds have been used to build capacity at the local level to manage groundwater, collect data, create models, and other investments, he said. “So from a policy perspective, we recognize the need to continue that success and that we need significant bond monies to be invested in water management of all types, particularly understanding that conjunctive management is the vehicle that California has been most successful in using. We recognize that groundwater is a resource particularly for storage and that state monies are needed to invest in groundwater storage, so we’ll be advocating in the coming bond a significant amount of money to be put aside for groundwater storage.”

We’ll also be looking for significant investment going forward in providing grant funds for agencies that are willing to and able to create groundwater banks,” he said. “We think there’s a real opportunity for revenues from that, and that those revenues could be reinvested in robust groundwater management.”

Significant new and comprehensive authorities will need to be given to the local agencies to these local agencies to fund the kind of investment needed for groundwater management and capacity building, he said. “We do know that a lot of agencies in our state have been doing some successful things and they are funding it. It’s hard but they can do it. They make the case, the beneficiaries have been willing to pay and so we consider that as a model that needs to be perpetuated going forward.”

We also recognize the fact that there are a lot of agencies that lack the authorities, and maybe lack the ability to frame the severity of the question in terms of modeling and monitoring, or maybe lack some planning standards or lack a definition about what a sustainable groundwater management model will look like at a local level, so they haven’t been able to make the case to the folks who are using those groundwater,” he said. “So we believe with the planning authorities and with more robust modeling and monitoring that would occur at the local level, the case can be made and that fees can be raised at a local level to support that sustainability going forward.”

Incentives and possibly requirements and responsibilities are needed to make a uniform field in terms of what the planning responsibilities are, defining what sustainability would mean, having locally-adopted enforceable indicators, and having the agencies levy fees necessary to manage the basin sustainably, he said.

Through modeling and monitoring of conditions and painting a picture for the local users of the costs going forward of failure would help make the case for the relatively modest investment that needs to be made on a per-acre, per acre-foot basis going forward for those agencies, he said. “We do want to make sure we preserve the right of the local agencies to generate their own mechanisms for management as well as funding and fees going forward, and that’s important because making that case locally is more sustainable in the sense that folks are invested in the outcomes – it’s not a top-down approach, and we think that’s the model going forward.”

We need to grapple with all the issues in a holistic way – surface water management, recharge, storm water, flood management investments, so if we make the case for the needed investment, we believe that our agencies and local agencies statewide can be doing a lot more conjunctively and in a holistic way at the local level, with a lot of technical assistance and funding from the state along with accountability, he said. “These are hand in glove. You can’t really make a case for paying a fee unless you’re faced with the downside of not doing it. … Given the complexity of the situation, you can’t really talk about financing independent of those backstop authorities and those planning authorities.”

Robert Reeb, Valley Ag Water Coalition

Robert Reeb began by noting that he represents the Valley Ag Water Coalition, which is a lobbying coalition that’s been active in Sacramento since 2006. The Coalition includes about 45 mutual water companies, ditch companies and local water districts in the San Joaquin Valley from Stanislaus County to Kern County.

Reeb 1The membership of the coalition supports local groundwater management and they have moved since 1992 to prepare and adopt AB 3030 groundwater management plans,” he said. “But they’ve had some difficulty in taking a plan and actually doing something with it, and so the Coalition has written legislation that proposes to amend AB 3030 to provide greater clarity for local agency authority to impose assessments on groundwater production in order to finance groundwater recharge, water supply development, distribution system infrastructure, and other means to replenish overdrafted basins. Existing law allows the local agency through its AB 3030 to adopt certain powers under the Water Replenishment District Act and to charge for groundwater pumped, but it is not clear how a district requires the registration of wells, and metering of wells, and the reporting of groundwater production in order to implement groundwater charges.”

Our members believe that if groundwater producers were required to pay for the quantity of water they pump, in addition to their pumping costs, that local agencies could further encourage conservation of limited groundwater resources and more equitably allocate the costs of importing or producing local water supplies to sustainably manage groundwater basins,” he said, noting that the proposal clearly specifies the procedures that a local agency would follow so that they would have confidence that these charges are properly imposed and would be defensible.

He said there are two issues that prevent local agencies from implementing their plans in a way that would sustainably manage an overdrafted groundwater basin:

  1. The first is that the Water Replenishment District Act only authorizes a uniform assessment, so as a local agency relying on that authority, you would not have authority to adopt a tiered rate, he said.
  2. The second is that the Water Replenishment District Act was written based on two basins down in Southern Los Angeles County that had been adjudicated, so when you look through the Water Replenishment District Act sections that AB 3030 references you find that the local agency has to annually produce an engineering and survey report that establishes the safe yield of the groundwater basin, and that identifies the amount of overdraft in the previous year, as well as to estimate the overdraft in the upcoming year, he said, pointing out that a local agency that’s not an adjudicated groundwater basin is not likely to be able to have that information to even begin to make that test in the WRD Act.

Our proposal would enact an alternative assessment method to the WRD Act that would permit an AB 3030 local agency to incorporate a tiered pricing strategy,” Mr. Reeb said. “We envision this tiered pricing approach as to where users of larger amounts of groundwater who put a greater strain on the basin or those putting groundwater to new uses which puts an additional strain on the basin that has not been previously experienced, that they can be charged higher rates to reflect the higher costs to the local agency to obtain additional imported water or develop local water supplies.”

Under the proposal, groundwater charges could only be imposed after a process to adopt or amend an AB 3030 plan, which includes transparency and due process with an opportunity for landowners to reject the plan through a majority protest process, as well as comply with Prop 218. “Through this legislative approach that we are proposing, the local agency could require the registration of groundwater extraction facilities, could require measurement of groundwater, could mandate the reporting of groundwater production, and the payment of an assessment on a per acre-foot basis,” he said. “The legislation would provide the local agency with enforcement mechanisms, from the imposition of administrative civil penalties, to access the courts for injunctive relief.”

We don’t view this proposal as the end all or be all to what needs to occur this year with respect to groundwater management, but we think we could take the important tool of AB 3030 Groundwater Management Plans and really make it the path forward for local agencies to raise revenue locally to expend locally in order to achieve sustainable groundwater management for the basins that they overlie.”

Our final thought would be in our opinion, the farther that California this year moves toward regulation of groundwater at the state level, the greater the focus will be on protecting the groundwater resources to the detriment of production agriculture in the San Joaquin Valley and the rural communities, the social fabric, the related businesses and jobs that rely on that,” he concluded.

Discussion highlights

Michael Markus is asked to discuss how Prop 218 applies to the retailers – specifically, if OCWD raises their rates every year, don’t they have to do the same, and go through a 218 process?

They do and they normally blame us,” he said, noting that sometimes, depending on the economics, they can pump the less expensive groundwater and their costs go down. “But for the most part, they do go up because it is a melded cost of our groundwater rate and the Met rate also, and Met rates have gone up pretty substantially. … so generally speaking their rates do go up, although, not necessarily that extraordinarily, more to the tune of maybe 2 or 3% a year, but they still do have to go through the Prop 218 noticing and they all do comply with it.”

With regards, to Prop 218, Dave Bolland said there was one other case that’s had a chilling effect and that’s the San Juan Capistrano case. “That’s an urban water case in which they tried to bundle recycled water into their rates, and they had reasonably profound rate analysis that they tried to sell, but the judge in that case didn’t get it, didn’t follow it. In that case, we’ve got amicus brief, and it’s in an appellate status but that sets sort of a reverberations around the state. … there’s still doubt out there and clarity about what are the rules of the road.

One thing I will say is that a lot of our agencies have navigated successfully the 218 process,” continued Mr. Bolland. “We don’t hear stories of failed elections that often. There are some stories out there but in general, agencies are willing and able to lay out the structure and they don’t get challenged mostly, and they mostly get their rate elections successful and they are able to continue doing their business … it’s not an impassable barrier, but it is a significant speed bump out there that we’re facing going forward …. “

Coming tomorrow …

What should the state’s role be as a backstop to ensure sustainable groundwater management?  Lessons from Stanislaus County,the Paso Robles area, and more are discussed in the fourth and final panel posting tomorrow.

For more information …


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