Divvying up the costs of the twin tunnels: Metropolitan Committee is updated on the BDCP’s cost allocation discussions

Metropolitan Water District headerAt the September 23rd meeting of Metropolitan Water District’s Special Committee on the Bay-Delta, Metropolitan Manager Steve Arakawa updated the committee on the status of the cost allocation discussions for the Bay Delta Conservation Plan (BDCP). These discussions focus on how the costs will apportioned between the State Water Project and the Central Valley Project, as well as how those costs then would be apportioned between the individual contractors that would receive water from the project.

(Note: This is the second of two-part coverage from this meeting.  Part 1 is here:  Director Mark Cowin updates Metropolitan’s Bay Delta Committee on the Bay Delta Conservation Plan and addresses EPA’s comments, plus Randy Fiorini of the Delta Stewardship Council on the Council’s five priorities)

Mr. Arakawa said that the State Water Project contractors, the Central Valley Project contractors, the State of California and the federal government all have some role in implementing and funding the BDCP. The BDCP itself is made up of different components, including habitat restoration, actions to address other stressors, and a new water delivery system, he noted. “The costs are applied to each of these entities, so the conveyance, the costs of capital, O&M, as well as its portion of contribution to recovery is on the water contractors side, and then the other more general public benefit would be on the side of the two governments, the state of California and the federal government,” he said.

Arakawa_Page_05Mr. Arakawa then presented a map showing the areas served by State Water Project contractors, noting that there are state contractors as far north as Lake Oroville and as far south as the Metropolitan service area, and in between, the Bay Area, the southern San Joaquin Valley and the Central Coast. “So when talking about the State Water Project and talking about the interest in a reliable system in the BDCP, it extends pretty significantly statewide through the State Water Project system,” he said.

Arakawa_Page_06He then presented a map of the Central Valley Project, pointing out that the Central Valley Project has contractors in the Sacramento Valley, the Bay Area, and the San Joaquin Valley. “The CVP on the federal side also has a very extensive water delivery system that much of the state counts on,” he said.

Arakawa_Page_08Mr. Arakawa then discussed the basic information used to determine how the costs are going to be allocated. He presented a slide with the costs, noting that these costs are the same as in previous presentations and are consistent with the information that was part of the public draft EIR/EIS released in December of 2013. He noted that the total costs of the project, including capital costs and O&M for the facilities, the habitat restoration and the other measures total $24.75 billion; the cost of the conveyance facilities and its O&M is roughly $16 billion.

Arakawa_Page_09The water contractors would be funding the water conveyance portion as well as a portion of the contribution to recovery,” Mr. Arakawa said, presenting a slide showing the estimated costs and splits, and noting that this shows the division based on what was in the public draft documents. “When you add up the conveyance costs, capital and O&M, and then the share of the ecosystem, the portion that the water contractors would be responsible for as delineated in the documents adds up to roughly $17 billion. The remaining share, which is not broken down yet as it has not been formally decided on between the state and federal governments, the total is about $7.7-$7.8 billion.”

Mr. Arakawa said the split of the costs that is attributed to the SWP contractors is roughly $10 billion or 60% of the total costs for the state and the federal water contractors. “That rough 60/40 split is based on average deliveries so the cost split would end up being based on deliveries from year to year,” he said.

Arakawa_Page_11He then presented a slide with the three cost allocation alternatives, discussing each one in turn:

SWP Table A Contract Approach: This would be based on the current contract model in place today, with every contractor assigned a proportionate share of the costs. “For example, for Metropolitan, our contract amount is roughly 46% of the total amount for the project,” he said. “So when determining how much Metropolitan’s water would be, it would be 46% of the project supply for the year, so the Table A amount is a way of apportioning out the supply and the costs for supply amongst the contractors.” There are also fixed costs for the infrastructure and variable delivery costs, depending on the actual water delivered and the energy costs to deliver it, he noted. He also said there had been discussions about adding provisions for transfers, some of which are in existence today and some that would be additional provisions for contractor to contractor transfers that would help agencies manage their supply and costs.

Subscribed capacity approach: With this methodology, rather than using Table A contract amounts, each contractor would look at much capacity in the tunnel each contractor was interested in investing in and how much benefit are they looking to get out of that tunnel capacity, he said. “It’s still benefit based; the contractor would participate based on the desired capacity and the desired reliability level they are looking for. There would be payments based on fixed and variable costs, and again, similar to the first methodology, there would be interest in looking at some water management provisions and some water transfers that could help each agency continue to manage their supply.”

Payment on deliveries: This methodology is similar to how federal contracts work where a unit cost is established that is paid based on delivery of water, and then there is a reconciliation at some sort at the end of the year. He said this methodology ended up being eliminated due to both administrative challenges and financial issues.

The objective of the discussions was to get agreement amongst the state project contractors on an approach that worked for everybody, or for most, Mr. Arakawa said. “Something that’s simple enough or direct enough to implement and something that we would walk away saying it was equitable to all the contractors.”

He said also that in the discussions, there is a recognition that the situation for north of the Delta contractors that don’t rely on the Delta system is different than those contractors that do rely on the system, so there is discussion about not having the same obligation for north of the Delta contractors. “The amount of percentage of total project contract amount is about 2%, when you talk about the north of Delta contractors, so it doesn’t really swing the costs very significantly,” he acknowledged.

Arakawa_Page_13Mr. Arakawa then gave a more in-depth look at the differences between the Table A contract approach and the subscribed capacity approach. “With the Table A approach, the costs would be allocated based on Table A amount and the water supply would be based on Table A, so to the extent that the water reliability benefits that are provided by BDCP are transmitted to the beneficiaries through the Table A, that benefit would be steered in a similar way as our Table A amounts,” he said. “When looking at the other provisions, including the contractor to contractor water transfers, there’s an interest in updating some of the provisions that were included in the Monterey Amendment in the mid 1990s, similar to water exchanges, single year transfers, those kinds of things, and making the whole system of moving water from contractor to contractor more easily administrated and more viable to allow contractors to manage their supply.”

There would need to be some contract amendments to address the allocations of cost, transfer provisions, and other refinements, but the Table A approach is most similar to the existing contract and in terms of limiting the scope of contract amendments, this would probably be the option that would do the most of that, he said. “Similar to existing approach, your obligation to pay would be based on your Table A, and it would also be your obligation as an individual state water project contractor agency to work out water transfers and exchanges in order to manage water and to manage your financial responsibility.”

Arakawa_Page_14The second approach, the subscribed capacity approach, assigns costs based on the amount of capacity that the tunnel would provide and the amount of benefit that derives from having the tunnel as part of the BDCP, he said. “So contractors would elect to subscribe to certain capacity, and that would then translate to a certain amount of benefit that is derived from the BDCP, so it’d be proportioned based on the share of capacity that that contractor is subscribing to versus everybody else,” Mr. Arakawa explained. Noting that north of Delta contractors would be exempt, he said “Each contractor would have a decision to make, what their needs are, and how much capacity are they really looking for to manage and maintain a reliable Table A supply, but also to manage non-project transfers and have access to unregulated stormflows that show up in the Delta that have opportunity to store, so those are other reasons in addition to the regularly scheduled contract amount, why you would subscribe to capacity to generate benefit.

For those who chose to participate at a level less than their Table A share, that comes with less benefit as the benefit is tied to the amount of investment level, he said. “Think about the reliability of the Table A amount and how that Table A is delivered based on the regulations that are included in the Delta,” he said. “But also think about that in terms of transfer capacity and the ability to capture those heavy storm flows that occur in the wintertime as Metropolitan or other agencies that have invested in storage in order to capture those storm flows and manage those flows from wet year to dry year.”

If you’re participating at a different level, then you have less protection for catastrophic failure if the levees were to fail due to an earthquake,” he said. “The capacity in the tunnel does provide you the benefit of being able to move that water, assuming obviously that the tunnel infrastructure is able to sustain that kind of catastrophic event, which engineering work has demonstrated that you have significantly more reliability than the existing levee system.”

There would also be more reliable transfer capacity, he said. “If you have capacity that you’re subscribing to in the tunnel, the amount of predictive capacity to transfer water would be there as well.”

The two options, using Table A contract amount or by subscribed capacity, are in many ways similar because they allocate both costs and benefits, so it’s all a benefit for investment type of approach for either one, he said. “It comes down to how you up-front decide what each agency participation level will be,” said Mr. Arakawa. “With Table A, you start with an assumption that everybody is going to invest based on the Table A contract amount that is in their contract, but if you have some differences amongst agencies, that could be very small differences … but even with that, the Table A contract approach would provide a means of working out arrangements between contractors in order to fully account for the costs and to fully account for the benefits. In a way, if you find that most are at the 100% level of interest, then Table A probably makes the easiest, most desirable sense.”

If you’re finding that you have a great deal of variability between the contractors, and that they are not all coming in saying we want to be at the 100% contract amount, then you may be better looking at the subscribed capacity amount which allows agencies to determine what their needs are and what they elect to participate at, and then trying to work out how does the full cost of the full tunnel capacity and the tunnel facility be accommodated for,” he said.

The working assumption is that the outlier agencies or those who are not at 100% are not going to add up to a significant difference, he said. “We’re not thinking that we’re going to have 50% of the contractor group saying that they are not interested in investing to protect their supply. We are thinking it’s going to be significantly less than that, so in determining which of these options, Table A approach or subscribed capacity approach, I think we’re trying to close a gap that’s much narrower than that.”

Arakawa_Page_16He then presented a slide with an example calculation, explaining that the allocation shows the existing costs for state project supply and what the incremental costs would be in terms of millions of dollars, the amount of delivery in the middle, and the per-acre foot cost at the bottom. The first column shows the supply available with no BDCP and what Metropolitan’s costs would be at its full Table A contract amount, the next column if electing to participate in the tunnel capacity at an equivalent level of full Table A, and then the third column is if Metropolitan were to participate at 110%, what would the costs be.

At the top of the chart, it shows the existing state project charge of $495 million which is equivalent for what’s in our budget for 2014-15 and includes all of the fixed and operating costs for today’s system,” he said. “Then it shows the incremental BDCP charge, based on our estimated costs if we were to invest in BDCP and again at the 100% level or the 110% level. So as you can see, when you add those up, it shows a total amount of $907 million for a 100% participation level for Metropolitan.”

When looking at the 960,000 acre-feet of average SWP supply available to Metropolitan with the BDCP investment and opportunity to get the reliability of the supply that’s been lost in the past due to biological opinions, and being able to strengthen that reliability, getting closer to where we were back before those biological opinions, so if you look under the 100% participation, roughly 1.4 MAF of average supply, and then similarly for the 110% of the incremental supply available for that type of investment,” Mr. Arakawa said.

We believe that the BDCP investment is for overall reliability of the State Water Project so the investment protects all of the supply that we get from our SWP contract, and we’re displaying the existing SWP cost or charge and then the incremental BDCP charge,” he said. “But I think it’s really more important to think about the investment as overall reliability for all of our supply and what that cost would be, so the bottom line figures show on a per-acre foot basis, what that cost would be with BDCP investment, $652 per acre-foot, versus what it is today, $515. Recognizing if there is no BDCP investment, you would need to invest in other supplies – probably other supplies that likely significantly higher in cost. And then on the right hand side, the $661 per acre-foot which is the overall cost of supply when you consider the benefits of BDCP.”

Just to give you a measuring point, in August of 2013, we told you that the tier 1 rate, Metropolitan rate, was $847 per acre-foot and our estimated impact to rates would take that up to $985 to $1013 with those Delta improvements,” he said. “We haven’t yet gone back and redone that whole rate analysis, but I think today’s tier rate figure is somewhere around $890 and so that gives you a feel for the cost of Met water versus the cost of SWP water when you consider the line there that shows $652 per acre-foot.”

Mr. Arakawa said that a set of agreement principles seems to be emerging between the contractors. “It’s yet to be seen whether it locks in at this, but new conveyance has definable benefits and the benefits would basically flow to those who invest, so you’d have a proportionate share of those benefits, either in the Table A amount allocation or in the tunnel capacity approach, and that the ability to manage water from contractor to contractor provides added flexibility to manage both water supply and water costs,” he said.  “These models do assume that you’re going to have a significant level of participation. We’re not talking about trying to find a way to make up half of the SWP agency level investment; we’re talking about something much smaller than that in order to make things work.”

So in summary, the Table A approach starts with Table A contract amounts that are in our existing contract. It would be up to those individual agencies to work out individual transfers. On subscribed capacity amount, each agency would determine what capacity it’s looking for, based on the benefits, and then if the subscribed amount is less than the full capacity of the tunnel, there would need to be some additional work to fill in that gap and get transfer agreements between contractors to get a full subscription of the tunnel capacity.”

Mr. Arakawa said they would be continuing to work towards these principles at get closure as the end of the year approaches. “There also is a need to consider, once we’re past the planning stage, what’s next and where will the funding come from for anything that’s pre-construction for the BDCP,” he said. “That will be a topic for this committee that we will bring to you down the line, and then any kind of contract amendments that are needed would need to go through a contract amendment process like we did with the contract extension process, and those are discussions and negotiations that occur in public. It would be supported by environmental documentation, and then once the environmental document is completed and acted upon, that’s when a contract amendment would be executed by each agency, so I wanted to give you a feel for what’s in front of us past coming to an agreement on cost allocation.”

I’d be happy to answer any questions …

Director Steiner asked if all the agencies are presently staying in? Mr. Arakawa replies that it’s the same as in the past; nobody’s changed since then. (He did not elaborate on which contractors he was referring to.)

Director Steiner asks about costs; Mr. Arakawa acknowledges that the costs do need to be updated, and when they are, they will return to the Board with those figures.

Arakawa_Page_16Director Steiner asks Mr. Arakawa to bring up slide 16. “Let me see if I can understand this. We have the no BDCP column, and that shows us getting all of our state water project deliveries for Table A without the BDCP, is that what that first column is?,” she asks.

Correct,” Mr. Arakawa replies.

I know one of the questions that’s been repeatedly asked is will there will be any new water as a result of the BDCP, and the answer has been pretty steadily no,” asks Director Steiner. “So I’m trying to understand what the incremental water then is of the 431,000 and the 100% – is that from somebody else? Or where is that incremental water coming from?

That’s a very good question,” said Mr. Arakawa. “What we set out to do was to restore the reliability that we had prior to the biological opinions – pre-Wanger, that’s been the board policy. I would say the best way to talk about the supply level that we’re trying to maintain is the average supply that we’ve had over the last 20 years, plus or minus some percent, but within that range, that’s what we’re trying to do.”

That explains a lot on this chart,” says Director Steiner. “So the first one is the Wanger water that we’re talking about and it’s possible that we could build the BDCP and end up with just the 960,000, but a reliable 960,000 …

That’s correct,” says Mr. Arakawa. “Absolutely. I think the investment in the system is to provide reliability to all of the supply …

And that’s one of the goals, obviously,” said Director Steiner.  “And then the 100% is pre-Wanger, so putting back what we got before. Before Judge Wanger cut all the …

This chart is based on if you were able to invest in the BDCP, how much supply could you reliably count in with an assumption, and that assumption is that the outflow level is the low outflow level of the decision tree,” said Mr. Arakawa. “So that supply would be reduced if you’re at the high outflow level of the decision tree. You recall the decision tree – there were the ranges, the low and the high, so this example is based on what kind of supply could you get back if you were at the low outflow scenario.”

But it also contemplates us getting water from other agencies who are going to take their water,” said Director Steiner.

This doesn’t account for transfers,” explained Mr. Arakawa. “All it does is say is if Metropolitan chose to subscribe at a slightly higher capacity, 110% versus 100% of our Table A, what kind of difference would that make, but it doesn’t make any assumptions as far as water transfers from contractor to contractor.

When I saw 110%, the movie The Producers came to mind, so I was trying to figure out how you get 110% of something,” she said. “The 431,000 could be additional water that will come from just simply doing the tunnels, and we’ll have more water that’s available up there from snow or rain or …

It would be SWP contract water and it’s just restoring a portion of the water that was lost due to the Wanger decision,” Mr. Arakawa said.

When I take the difference between our present rate of $847 to the $985 or the $1013, and I come up with 138 for the low number, and I times that by 1.7, I’m going to come out with only some $200 million, so the incremental cost is $412 million, so I was trying to figure out where the cost was for the rest of the money,” said Director Steiner.

I’m not sure I followed all of that, but I think you were trying to take the rate analysis and figure out how does that fit with analysis,” he said. “We haven’t really gotten to that point yet. I really just wanted to give you a measuring stick that we presented back in August, and I think it’s a fair point that we should come back to you and show you a more refined analysis as it relates to rates.”

Mr. Chairman, I would ask that we try to put these figures together with rates, just so we know what we’re talking about because I can’t get those two numbers to come together,” asked Director Steiner. “That doesn’t mean I’m a mathematical whiz, but …

These two approaches that you’re working on, they are both take or pay, right? Agreed upon take or pay contracts?” asked Director Peterson.

Yes, you would have your share of costs and you would be responsible for paying in that year for your share,” said Mr. Arakawa.

It wouldn’t go from one to the other. The last question I had was, so if you do a transfer through the tunnels, the incremental costs goes down? Or does it not?” asked Director Peterson.

If you’ve invested in a capacity in the tunnel that allows for transfers, then it gives you a lot more flexibility to be in the market and to transfer water from north of the Delta to south of the Delta,” said Mr. Arakawa. “If you don’t invest in the tunnel, then you’re relying on a greatly restrained through-Delta system, or you would paying for tunnel capacity on an as-needed basis, which could end up a significant cost.

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