Metropolitan Bay Delta Committee hears presentation on treasurer’s BDCP affordability report, plus an update on SWP BDCP contract negotiations

Metropolitan’s Special Committee on the Bay Delta hears a presentation on the state treasurer’s report which found that both urban and agricultural contractors can afford the project; plus a brief update on the State Water Project contract negotiations regarding allocation of costs of the BDCP

At the January meeting of the Metropolitan Water District’s Special Committee on the Bay Delta, the committee heard a presentation on the latest report to be issued regarding the  Bay Delta Conservation Plan from the State Treasurer’s Office titled, Bay Delta Conveyance Facility Affordability and Financing Considerations.

Metropolitan Seal from lobby floorArnout Van den Berg, Senior Resource Specialist,  began by noting that the study was requested by the California Resource Agency and commissioned by the California Debt Investment Advisory Commission (CDIAC). The purpose of the report is to assess the affordability of the Bay Delta Conservation Plan, and examine financing considerations and risks to the project, he said.

He then gave the key findings of the report:

  • The study found that the cost of the Delta conveyance facility is within the range of urban and agricultural users capacity to pay.
  • On average, the supply costs for with the Bay Delta Conservation Plan is competitive when compared to alternative supplies.
  • However, dry year cost per acre foot is high, but this can be mitigated with things like storage, transfers and exchanges, and financial reserves.
  • For agriculture, the Bay Delta Conservation Plan was found to be affordable for high value crops like fruit and nut trees and vegetables.
  • The CVP contractors will need to develop a financing mechanism to fund their share of the water facility, and they will likely need to agree to take or pay contracts, or create a rate stabilization fund.

He noted that the report is based on capital and O&M costs as laid out in the 2013 Bay Delta Conservation Plan, which includes $14.6 billion for the water facilities, $1.5 billion for the operation of those facilities over a 50-year period, and $1 billion for the water contractor’s share of the mitigation costs, which totals to $17 billion in 2012 dollars that is to be funded by the state water contractors and the Central Valley Project contractors.

The report examined the capital financing and operating costs under three different operating scenarios: a base case, a best case, and a worst case scenario. Mr. Vandenberg explained that the base case was based on the capital costs as laid out in the Bay Delta Conservation Plan, but the figures in the report are presented in terms of year of expenditure dollars, which are commonly referred to as nominal dollars. “This makes the figure seem larger as the costs are escalated out over time, so the $14.6 billion in capital in 2012 dollars is actually equal to the $19.7 billion in year of expenditure dollars, and this would include a 36% contingency on the water facilities,” he said. “They also assume that the bonds would be issued this year at a 6% interest rate with a 40 year term.”

For the worst case, they increased the base capital costs by 30%, and they added a contingency on the water facility of 20%; they also delayed the project by two years, and increased the interest rate to 8%,” he said. “For the best case, they decreased the base capital costs by 10%, they lowered the contingency to 10%, and they decreased the interest rate to 5%.”

MWD Jan Treasurer Report_Page_05Mr. Van den Berg then presented a figure from the report showing the base case annual contractor costs over time, noting that it is key to understanding the report’s findings. “The green bars show debt service costs, rising quickly initially as bonds are issued to fund the construction, and then level off as the last bonds are issued in 2028,” he explained. “The red bars on the bottom show pay-go for some minor capital expenses and O&M costs. The report then defines peak costs as the average of the highest ten years, so in this case, it’s $1.6 billion. The remainder of the report looks primarily at the impact driven from those peaks.”

He pointed out that the numbers are expressed in nominal dollars, or year of expenditure dollars. “The treasurer’s report is primarily presented in nominal dollars because the report is geared toward the public finance community, who is more familiar with nominal dollars,” he said. “But while nominal dollars are helpful for determining bond financing, it does not work as well when trying to determine present day rate impacts as it has the effect of making the expenditures seem larger, because they are expressed in terms of the value of the dollar in the year they are spent.”

MWD Jan Treasurer Report_Page_06He then compared the results from the treasurer’s office report to Metropolitan’s own analysis. First, he presented a similar slide with the numbers converted to 2015 dollars. “One thing you’ll notice right away is that the peak and current dollars occurs much sooner; approximately when the last bonds are issued with a peak of $909 million.”

MWD Jan Treasurer Report_Page_07He then presented a cost summary for all three scenarios, noting the $909 million in yellow is from the base case from the previous slide. “The State Water Project share can then be calculated by assuming a contractor split of either 50/50 or 60/40 for SWP/CVP and finally, Metropolitan’s share can be estimated by using Table A. This yields an annual peak cost of between $211 and $253 million for the base case scenario, and we can now compare these results to Metropolitan’s estimates.”

MWD Jan Treasurer Report_Page_08He presented a slide with the three different scenarios from the treasurer’s report, as well as Metropolitan’s estimate. “Looking first at the top row, we have Metropolitan’s share of cost which can be converted to a unit cost by dividing by Metropolitan’s sales. We are using $1.7 MAF that was used for the 2013 budget, and then we can calculate a retail rate impact assuming a 20 hundred cubic feet average water bill and a 50% reliance on Metropolitan.”

For the treasurer’s report, the retail rate impact ranges from $2 a month for the best case to $5 a month for the worst case, while Metropolitan’s estimate of up to $5 a month falls between the base case and the worst case from the treasurer’s report, as Metropolitan used the base case capital dollars but more conservative financing and cost share estimates,” he said.   He noted that Metropolitan’s BDCP estimate has been incorporated into the ten year rate forecast that is included in the budget to achieve an overall rate increase of between 3 and 5% per year.

To assess the affordability for agriculture, the study looked at agricultural production and cost data for the Westlands Water District, the largest south of Delta CVP contractor, and the Kern County Water Agency, the second largest SWP contractor, he said. They then developed a water payment capacity for three different categories of crops: permanent crops, such as fruit and nut trees and grapevines; vegetables such as tomatoes and lettuce, and field crops such as corn and alfalfa, he said.

MWD Jan Treasurer Report_Page_09The payment capacity assumes a 10% return on investment and has been converted to 2012 dollars, so this answers the question how much can they afford to pay for water; this is then compared to the costs of water,” he explained. “Historically, the State Water Project cost for Kern has averaged about $100 an acre foot and the historic water costs for Westlands has averaged about $109 an acre-foot. When these historic costs are added to the cost of the BDCP, the average water cost ranges from $213 to $301 an acre-foot, as you can see by the green bar going across the chart there.”

One thing that you can see is that the payment capacity for permanent crops and vegetable crops is above the average cost of Delta water with the BDCP, but the payment capacity for field crops is far below,” he said. “In fact, the payment capacity for field crops is also below the average historic cost of either $100 or $109 if you’re Kern or Westlands. But overall, the authors found that given the production mix, the costs that they would face is within the range of what they can afford to pay, and to mitigate the cost increases, farmers could change the mix of crops produced, that is shift way from field crops towards higher value crops and look at further water improvement efficiencies.”

During the discussion period, Director Wunderlich had some questions about the methodology used for assessing the affordability for agriculture. “Are they factoring in a comparison with an alternative way of getting the water that would be needed, or are they just saying here’s how much the water would cost, and as part of that scenario they would not be getting all the water they want, how are they doing that comparison … ?”

Mr. Van den Berg replied that they didn’t do the analysis in that way. “All they did was they calculated the farmers ability to pay is, so basically they looked at what they produced, how much that is worth, and then back-calculated how much they could then afford to pay for water and still make a profit.”

That assumes they are going to have amount of production and they are going to need a certain amount of water for that production, and they are not factoring in how they are going to pay for that water by a means other than the BDCP,” said Director Wunderlich.

You’re correct, they did not look at alternatives.”

Director Wunderlich continued: “Also, it seems like it’s not factoring in, or tell me if it did, that if going forward in the future to be able to get the water supply that we all need, people are going to have to pay more for water, the price of our crops may go up, so when they are calculating their 10% return, is that just assuming that crops get sold at the same price as now? Or is it acknowledging that as water becomes a more precious resource, it’s going to be reflected in the price that we pay for things?

Mr. Van den Berg replied, “The way they did the math is they looked at historic data, so they basically looked at what has previously happened and those are the rates that …

So based on my two comments, I would suggest that they are presenting misleading information,” said Director Wunderlich. “They are keeping some things fixed … they are just changing the price of water and they aren’t changing other things that would change.”

I think what the analysis is trying to show and I think it’s accurate as far as it goes is that given current agricultural conditions, is it affordable? And they are saying yes, on average, as its conceived right here, and I think that is as far as the analysis is going,” said General Manager Jeff Kightlinger. “They aren’t making predictions in the future, because for one thing, it’s very unclear, in fact fairly improbable, that there really is replacement water for agriculture …

That’s why I was saying I think this is an unduly pessimistic assessment because it’s not factoring in that the changes that will exist in the time period after this project is in place,” said Director Wunderlich.

That’s exactly right,” said Mr. Kightlinger. “It’s a conservative estimate, saying at this moment, is it affordable, yes, and your alternative is to go out of business …

This is a snapshot, both sides in 2012, right? The value of the crops in 2012 and the everything that comes out of 2012, so it’s a snapshot in time, it’s not how things will be … ?” clarifies Director Peterson.

Mr. Van den Berg affirms. “Right, it’s not a forecast …

Director Lewinger notes that the unit costs on slide 8 is melding the costs together for all of Metropolitan’s wter deliveries. “The project is going to add roughly 200,000 acre-feet of supply to Met … ?,” he asks.

It depends if you look at the high or low outflow scenario,” replies Mr. Van den Berg.

Director Lewinger continues. “Please when you show a table like this, you also need to show the incremental cost – what’s that 200,000 acre-feet of water costing us per acre-foot? If you do the math, it’s anywhere from $710 an acre-foot in the best case, low unit cost to $2000 or $1900 an acre-foot in the worst case high cost. … The average of all of those is right around $1000 an acre-foot, and that’s what we’re paying for that incremental supply, long-term, and we need to keep that number in our minds. As Director Wunderlich pointed out, we’re going to be considering other sources of supply, other alternatives, and what we should be comparing it against is this increment of supply. It’s a big chunk. It’s 200,000 acre-feet forever and ever, hopefully, but it’s $1000 an acre-foot, all-in.

I would just comment that it’s A number we should keep in mind, it’s not the only number in the sense that the whole point of a project like this is to safeguard the existing 50% of the SWP from seismic risk, climate change, etc,” replied Mr. Kightlinger. “So that insurance of safeguarding the entire state water supply is a blend across all the supplies, so I think you need to look at both the incremental as well as the insurance estimate.”

Director Lewinger then asks about pre-construction costs. “We have a cash flow problem, don’t we? On pre-construction costs, we’re running out of money before the state is going to be able to issue any debt, so what are the discussions going on as to how we’re going to handle the financing of the preconstruction prior to the state being able to issue any more debt?

On our side, we’ve basically said that there is no additional money available from us until we get to a decision point, record of decision, and so we basically asked to scale the work and the budget and the timeline so that those match,” says Assistant General Manager Roger Patterson. “That’s what makes me nervous. The longer they are burning, analyzing, and talking with EPA and all of those kinds of things, it increases the likelihood that they are going to come down to a pinch at the end. I will say that there has been some additional funding provided for some of the planning efforts on the federal side, and it kind of goes into the same pool, about $4.7 million recently, so we actually have about half of that is a cushion over what the current timeline and budget is, but $2.5 million on a $240 million planning effort is not a big cushion … “

This project needs friends, just to have the political backbone to say yes, we’re going to go forward,” says Director Evans. “Is this chart likely to gain any friends or lose any friends or put more backbone behind the non-friends of this project?

At least to me, this reinforced what Jeff and I have been hearing from the agricultural community, and that is, if the project could come online right now, they have the ability to pay their share on an equal footing with us,” said Mr. Patterson. “ … Some folks have said that ag can’t afford to pay for this and they are leaving; they haven’t. They’ve been sticking in there, they’ve talked about continuing to pay 50% as we go forward with some of these additional costs … “

Since this basically is a confirmation of what we already know, everyone sees in it what they’ve already seen,” says Mr. Kightlinger. “Those people who don’t’ like it says this confirms what I saw; those folks that like it say this confirms what I saw, and those folks who are ambivalent remain ambivalent.”

A brief update on State Water Project contract negotiations regarding the BDCP

Kevin Donhoff, alternate representative for Steve Arakawa in the SWP contract negotiations, gave a brief update where the process is at.

He began by noting that there are two processes going on in regards to the State Water Project contracts; he will be giving an update specifically on the negotiation between the Department of Water Resources and the State Water Project Contractors that will describe how the costs are allocated among the state contractors for the costs associated with the Bay Delta Conservation Plan. “We anticipate that it will also provide some refinements which will provide more flexible water management provisions, and that’s important because those more flexible water management provisions will enable the contractors to better utilize their State Water Project supplies and get a benefit in return,” he said.

The second process is the process to extend the contract terms of the State Water Project for an additional 50 years; agreements were reached last fall and that process is now going through the environmental review process, he said. “That process ensures that we have access to SWP supplies and that we can actually benefit from a BDCP for another 50 years, and that’s 50 years from 2035, so that will be going out to 2085,” he said. “It also provided some financial management restructuring within the state water contract that will better enable us to track and manage the financial situations in the SWP.”

SWP ContractorsHe then presented a map showing where the State Water Project contractors are located throughout the state, noting that there are contractors in the upper Feather River watershed, two sets of contractors in the Bay Area, agricultural contractors in the San Joaquin Valley, Central Coast contractors, and then Southern California. Metropolitan is the largest state water contractor with almost half of the Table A supplies under contract, he said.

There are two alternatives being considered for allocating the costs of the BDCP. “The first is what we’re referring to as the Table A contract approach which is similar to the existing way costs are allocated on the State Water Project for water supplies,” he said. “Metropolitan has a 46% share of Table A, roughly half, so we would pay about half of a new project moving forward. There’s been another alternative proposed, and that’s subscribed capacity and that would be comprised of contractors picking and choosing capacities that they would desire to participate in and the payments would be fixed associated with that. It could be implemented, but it would be a very difficult alternative to implement moving forward, so we prefer the Table A approach and that’s where our focus has been, at least in the initial discussions.”

The first contract amendment negotiation session was on December 10. It is a public process as are all amendments to the state water contracts, as required after Monterey. “At the end of every meeting, there’s a provision for oral and written comments to be made. There were a number of public interests including NGOs that were there, and some provided comments. We anticipate more comments moving forward.”

We’re hoping to complete the process by the end of this year,” he said. “The next meeting is scheduled for February 17, and in between there’s been a number of caucus meetings among the state water contractors where we’re trying to get organized and develop further the positions of the state water contractors.”

That concludes my presentation.”

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