Water transfers and the Delta Plan, part 4: The buyers and sellers' perspective ~ MAVEN'S NOTEBOOK

A panel of buyers and sellers discusses the time frames, procedural considerations, and the overall complexity of water transfers

Water transfers are transactions between sellers who may have excess supply or are willing to give up some of their current supplies, and buyers who need additional water supplies to meet their demands. California’s extensive infrastructure makes it possible for those in the northern part of the state to sell water to buyers in the southern part of the state, so long as the water can be moved through the Delta; however, these transactions can be complex, as well as very risky.

In this last of three panels from the Delta Stewardship Council’s September meeting, Dustin Cooper, a water attorney representing sellers of water in the Sacramento Valley; Frances Mizuno, Executive Director with the San Luis & Delta-Mendota Water Authority; and Steve Hirsch, Program Manager for the Metropolitan Water District give their perspectives on the water transfer process.

Note: This is part four of four-part coverage of water transfers. For previous coverage, see:

DUSTIN COOPER, Attorney/Partner, Minasian, Meith, Soares, Sexton, & Cooper, LLP

Dustin Cooper is an attorney with the Minasian Law Firm that represents both potential buyers and sellers of transferred water. Mr. Cooper began by presenting a slide with some of the examples transfers are encouraged and facilitated in state laws and policies.

“Of particular note is your Delta Plan, and the recommendation to improve water transfer procedures with a specific emphasis on streamlining the process,” he said. “And Governor Brown has also through a number of executive orders, attempted to further expedite and streamline the process.”

The need to streamline and facilitate transfers has to be contrasted and balanced with the responsibility to ensure that the transfer is done without any legal injury to legal users, the environment, or the economy of origin, he said. “You certainly want to facilitate transfers but you don’t want to do so that undermines the responsibility to ensure that there are no impacts from the transfer,” he said. “On the flip side, you don’t want to have a process that is so onerous or overprotective of avoiding injury or impact that it really acts to undermine transfers, so you want to keep those two principles in balance. You want to certainly facilitate transfers, but you don’t want to do so at the expense of the process.”

Mr. Cooper said that two years ago, he would have been very critical of DWR, the State Water Resoures Control Board, and the Bureau of Reclamation. “I thought they were too process heavy; it was very difficult to do transfers, very time consuming, but I want to commend those agencies because I think they have dramatically improved their processes to a point where it’s much easier. It is still certainly difficult, but the process is certainly improved. And I think this Council is to be commended because they really took your recommendation to heart and really implemented improvements in their process.”

Mr. Cooper then described the current process for water transfers, noting that there are a number of different steps and is somewhat dependent on the type of transfer being processed. “Generally buyers and sellers have potentially quite a big role in discerning whether this is a transfer they ought to proceed with or not,” he said. “Many transfers involve buyers and sellers that are public agencies, so there may be stand alone CEQA environmental review conducted. Many sellers are located in counties where there’s county ordinances that play a role and have a level of regulatory oversight. Many sellers also have transfer policies or are member units of larger public agencies that have transfer policies as well, so there’s potentially a number of regulatory layers, just at the buyer-seller level.”

The next level of regulatory oversight is by the Department of Water Resources, the State Water Board, and the Bureau of Reclamation. Mr. Cooper noted that in the staff report, there’s a statement that there might be a subset of transfers that eludes the oversight of those three agencies, but in his experience and that of his colleagues, they have never processed a transfer that didn’t involve at least oversight from one of those agencies.

“I can pose a hypothetical where that could occur, but I think once you start ticking off the characteristics of that transfer – you have to have a specific type of water right, a very specific type of seller, and very specific type of buyer – and once you stack all those unique characteristics on top of each other, it just doesn’t happen,” he said. “It could, but it would be infrequent and I think of a relatively small volume compared to the quantity of transfers that the three agencies are processing.”

“I consider the existing process to be in balance, that is there’s enough facilitation, there’s enough process to ensure that the transfer is responsible, and that it doesn’t impact third parties or the environment,” he said.

Mr. Cooper then turned to the impact on transfers if the Council fails to take action, thereby allowing single-year transfers to be considered as covered actions. “The first concern I have is that for most transfers, you would be duplicating or adding another layer of regulatory oversight – you would be analyzing a transfer that’s already been analyzed by at least one of those three agencies: the Bureau, the Water Board, and the Department.”

The greater concern is that transfers can be a divisive topic, Mr. Cooper said. “There folks in organizations that oppose transfers no matter what level of analysis or protections in place, and they do so just as a matter of principle,” he said. “If you consider a temporary transfer to be a covered action, it affords an opponent to the transfer and opportunity to kill the transfer really just by your process.”

He presented a slide showing the timeline. “Most transfers, given the number of variables involved, don’t really come together until April, usually later,” he said. “So if you were to require a certification of consistency and it was filed it on May 1, that starts your process. If there’s an appeal lodged, that appeal is not resolved potentially until late September, and as has been previously stated, the transfer window is only from July 1 through the end of September, so just the act of filing the appeal, whether it’s successful or not, has really negatively affected the ability to implement the transfer, and that’s a significant concern.”

Mr. Cooper then turned to the issue of recurring temporary transfers. “I really don’t think that’s the case,” he said. “Every transfer is unique, and there’s a number of factors that go into whether or not there’s going to be a transfer.” He then listed some of the variables:

Does the seller have adequate supply to make transfer water available? “In this last transfer season, the Feather River districts, many of them contracted for potential sales, and those districts on April 10 were notified that their supply was cut 50%, and as a result, nearly all of those transfers fell through. So until April 10, we weren’t quite sure whether we were going to be on the full supply side of the ledger, or on the cut supply side of the ledger.”

Does the buyer have demand? “The transfer market can be expensive, and it’s extremely risky from the buyer’s perspective. And I think many buyers tried to have regional supply reliability to avoid participating in the transfer market.”

Will there be capacity to move the water? “You can have a willing seller, willing buyer, agreements all in place, and you just get squeezed out capacity wise through the Delta. There’s not enough physical space to move the transfer water on top of any project water that’s moving through the Delta.”

“There are a number of variables, and you never quite know whether the stars will align and allow the transfer to move forward,” he said.

Mr. Cooper emphasized that each transfer goes through a robust analysis. “There’s a proposal, there’s in many cases a standalone CEQA analysis done by the seller, there’s a standalone regulatory review by whatever agencies are involved, and it must stand or fail on its own merits.”

If there is a seller that participates in consecutive years, those transfers tend to look very different, Mr. Cooper said. “The type of transfer involved may vary,” he said. “I have a client where in year 1, they participated in a groundwater substitution transfer and in year 2, they decided that was no longer prudent and they shifted to a land idling transfer, so the very method used to generate water for transfer can change year over year.”

Mr. Cooper then summarized the points of his presentation. “I encourage you to view the existing process as adequate,” he said. “The project agencies: DWR, the Water Board and the Bureau have taken your recommendation to heart and I think they’ve implemented measures to improve and streamline the transfer process, but not at the expense of allowing irresponsible transfers to slip through the cracks, so I think we’re on good footing there. I want to encourage you to take action to extend the current exemption that’s in place and don’t allow temporary transfers to become covered actions, because I think that will have a significant negative effect; it will actually do the opposite of facilitating transfers, it could put a significant barrier in place to future temporary transfers.”

“So thank you … “

FRANCES MIZUNO, San Luis & Delta-Mendota Water Authority

Frances Mizuno handles water transfers for the San Luis & Delta Mendota Water Authority, which is a Central Valley Project contractor. She began by noting that the Authority is a JPA consisting of 28 member agencies, 26 of which contract with the Bureau of Reclamation for their water supply totaling 3.3 MAF of CVP supplies. Water is delivered to the Authority members in San Joaquin, Stanislaus, Merced, Fresno, Kings, San Benito, and Santa Clara counties for the purposes of agriculture, municipal and industrial, and refuge supplies.

“Many of the Authority members have faced chronic water supply shortages since 1992 due to the implementation of CVPIA, the Endangered Species Act, the Clean Water Act, the Porter Cologne Water Quality Control Act, and particularly the drought,” she said. “Our agricultural service contractors are now faced with two years in a row of zero allocation and are likely to face another zero allocation next year.”

Ms. Mizuno said that their contractors have had to rely heavily on water transfers to provide a supplemental supply, and in the last two years, almost their entire supply. “The ability to transact water transfers in a timely manner is crucial to the survival of the people and the wildlife served by the Water Authority members,” she said.

The Authority has focused on transfers on areas south of the Delta to reduce the reliance on transfers that require the conveyance through the Delta, she said. “Shortages faced by the Authority members have supported additional transfers from willing sellers north of the Delta when there is excess capacity at the CVP and the SWP facilities,” she said. “The Authority has participated in north of Delta transfers in eight out of the past 15 years, all of which have been single-year transfers, only back to back transfers in the drought years, 2008, 2009, and the recently 2013-2015.”

Water transfers are complex; they do vary year to year and many of the parties involved in approving them are different, she said. For the Authority, the more difficult aspect of transfers is associated with the uncertainty regarding hydrologic conditions as each potential buyers need and each potential seller’s supply is dictated in a large part by hydrologic conditions and resulting CVP allocations. The hydrologic conditions and the CVP allocations are not sufficiently firm until March, and then many times, later than that, she said.

In addition, excess conveyance capacity for water transfers at the CVP and SWP facilities is generally only available if State Water Contractors allocation is 40% or below. DWR and Reclamation cannot make an initial allocation of available capacity until March, and that forecast could change based on changes to the CVP and SWP [allocations], and what additional rainfall that may occur after the March period, she said.

“Given these realities, most negotiations for water transfer agreements are not competed until late March and sometimes even later,” she said. “In particular for crop idling or crop shifting transfers where crop planting decisions must be made by mid-April, transfer approvals must be received before that time so then they know whether they have a transfer and whether they need to plant or they need to continue to do the planting. Therefore, timely approval of transfers must take place. Delay in approvals has and will likely result in less water being transferred.”

The Authority recently completed a joint NEPA and CEQA process with the Bureau of Reclamation that evaluates the potential impacts of a range of north of the Delta to south of Delta transfers from a range of potential sellers to a range of potential buyers that have expressed interest in transfers over the next ten year period between 2015 and 2024; the document evaluates transfers from CVP and non CVP sources of supply with water being made available through groundwater substitution, crop land idling, crop shifting, reservoir releases, or conservation. “All proposed transfers that rely on this document will still require the compliance with requirements of the water transfer white paper and still has to go through the approval process with DWR, Reclamation, and the State Board,” she noted.

“My experience with the CVP transfers that go to Reclamation for final approval, it is also reviewed by DWR – it isn’t just solely Reclamation review,” she added. “And for those that go through the State Board, there are transfers that all three agencies review.”

Water transfers provide a significant environmental benefits for the fishery resources, she said. “For example, Reclamation backed up 160,000 acre-feet of water transfers that we purchased this year in Shasta Reservoir to protect the cold water pool, a critical resource for winter-run salmon. This is a great example how transfers are being implemented to address environmental issues in addition to meeting critical water supply shortages,” Ms. Mizuno said.

“It is important to note that in order to facilitate these benefits to the environment, the buyers are the ones taking all the risk,” she said. “The risks are if the water will be released and conveyed south of the Delta, the risk of large carriage losses, and the risk of water remaining in south of Delta storage until demands increase in spring of 2016 – an enormous risk investment valued a minimum $105 million.”

Lastly, Ms. Mizuno also stated her appreciation for the progress made at the Department of Water Resources, Reclamation, and the State Board. “Over the past two years, they have made tremendous improvements in streamlining the process,” she said “However, much of the regulations that are in play eliminates much further streamlining that can take place, so it is much appreciated by the Authority.”

Ms. Mizuno then addressed some of the things she had heard in previous panels. “One of the panelists mentioned that if we did not do water transfers, then we would have more water remaining in storage north of the Delta,” she said. “In reality, that doesn’t take place because what sellers are doing is either crop idling – if they didn’t transfer, they would be planting and therefore using that water, and that water would not be remaining in play, so eliminating transfers doesn’t reduce usage north of the Delta.”

“The other factor is that as many of the previous panelists indicated, we don’t know everything,” she said. “We are still learning. Even though we’ve been doing transfers 25 years, there are still a lot of unknowns. Groundwater substitution and surface water interaction is one of those, and that’s why the DWR – Reclamation white paper is a draft paper. It is ever changing. As we learn more, things are added to there to try to protect the water rights, environmental resources, and so forth.”

“We can’t just stop transfers because we don’t have all the answers,” she said. “We want to perform responsible transfers as buyers because if we don’t do so, we can’t sustain the water transfer market. In order to do that, we have to have responsible transfers, and we understand that if there are impacts, we are mitigating. That is what the purpose of the white paper is – to ensure the mitigation is happening and to make sure that we have responsible transfers.”

STEVE HIRSCH, Metropolitan Water District

Steve Hirsch began by noting that he has been with Metropolitan Water District and has been doing water transfers for the last 15 years. He began by discussing the role of water transfers in Metropolitan’s water supply portfolio. “In any year, we really have a wide range of scenarios we have to plan for in Metropolitan,” he said. “Roughly speaking, if there are wet conditions on the Colorado, Northern California, and cool temperatures in Southern California, demands are low, so we could need to store a million acre-feet and we’re searching for places to put water. Conversely, if it’s dry in Northern California, dry on the Colorado, and hot in Southern California, we’re needing to develop 1 million acre-feet, and transfers and storage is one way we do that.”

Metropolitan has done a good job increasing storage capacity by building the 800,000 acre-foot Diamond Valley reservoir, as well as building groundwater partnerships with hundreds of thousands of acre-feet capacity, he said.

“A key part of our strategy is taking the water in wet years that we can and sticking that into storage reservoirs, be it in the ground or surface, and the converting it to dry year water by relying on it in dry years,” he said. “Water transfers, while we think about them every year, oftentimes we’re just pulling water out of storage instead of being active in the market, so for Metropolitan water transfers are an important tool, but they are a limited tool for us.”

In his experience, Mr. Hirsch said he’s purchased water from both pre-1914 and post-1914 water right holders and all of these transfers have involved some form of regulatory oversight. “I think that there’s this thought that there might be a subset of transfers out there that exist where it’s going to slip in through the cracks and has no oversight whatsoever,” said Mr. Hirsch. “I am not aware of any of those transfers if they exist, and if they have existed, Metropolitan has not been involved in them.”

“You’ve heard that transfers are already very difficult and there is already considerable amount of regulatory oversight,” he said. “I would argue that the water transfers that we work on actually face a higher level of regulatory oversight because of the biological opinions that limit the movement of transferred supplies from July through September.”

“So I think the question that you’re asking is, is there additional regulatory oversight that is needed? and I would concur with Dustin that if you added transfers as a covered action and had the process that’s been laid out with the chance to appeal and the extended delays, it would be a major impediment to transfers,” he said. “I think it’s important for the Council to focus on do we have a problem here? Is there lack of regulatory oversight?”

He then turned to the question of one-year recurring transfers. “If we could have in place long-term transfers with the Sacramento Valley interests, we would like to do that – I think anybody who is doing annual transfers would like to do that and we’ve tried to do that,” he said. “I’ve met with Dustin’s clients years ago, and I think one of the main factors that kept them from wanting to pursue that was inability to agree on price. What might seem to be a good price this year, five years from now, are they going to look bad to their neighbors for selling water on an annual basis for more, so that was a major impediment to doing that.”

There are other concerns with long-term transfers. “If you do a long-term transfer, will you need the water next year, or year 3 or year 4?” he said. “Will there be capacity to move water through the Delta? It doesn’t take a high allocation on the State Water Project to run out of capacity to move transfer supplies so these are the reasons you are not seeing long-term transfers north of Delta. You’ve got this Delta in the middle of it.”

Mr. Hirsch said he would be very surprised if there was any buyer or seller who was continuing to do one-year transfers because they felt the regulatory oversight on long-term transfers is too significant. “That’s not the motive here for sticking to one year transfers. There’s just the reality that you don’t know if you have a physical connection between buyer and seller in most years because of the capacity issues in the Delta,” he said.

Mr. Hirsch then lastly turned to the progress the DWR and the Bureau have made in processing transfers. “The first time I really cut my teeth on transfers was 2003, and the white paper we have been referring to came out in 2002 and that was a hard pill to swallow for a lot of people to have these rules laid out. … In subsequent years, it was difficult on an annual basis because we didn’t know if those rules were going to be totally thrown out and replaced by new rules year to year, or sometimes the rules would come out with no public process at all, so there was just a total lack of transparency.”

“Lately they are more transparent – that when they make changes they discuss them with us beforehand and we give them feedback on that. This year, we actually had Department staff just come over and meet with us as individuals but just sit down and say how are things going, where can we improve here, so whether that’s the drought, so whether that’s the Governor’s orders, whether that’s this Council’s recommendation, I’m not sure, but I think you’re partly responsible for that so I want to end by thanking you for the recommendation that you made to the Department to engage with us more.”

Discussion highlights

Councilmember Susan Tatayon said that given what Dr. Herbold said earlier about being anticipatory, and maybe going two years instead of one year, she asked if there was room for an options-based two year transfer program. Would it help this issue of recurring transfers? Would we be better able to anticipate impacts?

Ms. Mizuno pointed out that it would be difficult to do, because from one year to the next, they don’t know what their allocation is. “We’ve gone from one year where we had 25% to the next year we had 40% and next year we had 80%,” she said. “If we have 40% or higher, we’re not in the transfer market. In fact that we don’t know what the conveyance capacity at the pumps are in any given year. Every single year, we’re always asking DWR what’s the capacity looking like so that we can make a decision whether we have opportunities for transfer or not. So it does make it very difficult because it does change year to year, and we don’t even know until at least March each year.”

“I was thinking making it options-based would address some of the uncertainty,” said Ms. Tatayon.

“We would like to do that, anything longer term would be great,” said Mr. Hirsch. “I think from the seller’s standpoint, agreeing to the prices for two years is difficult. We’ve seen dramatic shifts in the prices paid for transferred supplies, so I think that would be hard for them. Metropolitan did do options in 2003, and I know Dr. Herbold laid out that it’s easy to anticipate when its dry, and let me tell you my experience in 2003, we paid the option, next year is dry, SWP at the time was 45%, so exercised our options in March, paid the seller, we said no, we’re going to buy your water, and this ability to anticipate what’s next. … well, Awesome April turned our 45% allocation to a 90% allocation which totally closed out the ability to move those transferred supplies through the Delta, so much of that water went out to the ocean. So it isn’t as predictable scenario as Dr. Herbold laid out.”

“I think there’s a misperception that sellers are clamoring to participate in transfers,” said Mr. Cooper. “That’s really not the case. I’m sure there are some sellers but most are reluctant transferors. They are doing so because they sense the need, but there’s this counterbalance where the seller does not want to become the next reservoir for California, they don’t want to be the solution to these problems. So there’s significant policy considerations for the seller, when you start talking about should we commit to a multi-year transfer and is that in our best interest? At the end of the day, many of the sellers are ag districts which have landowners that are farmers, that’s their business and they enjoy farming and all things being equal, they would much prefer to go farm their ground then participate in a water sale.”

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Water transfers and the Delta Plan, part 4: The buyers and sellers’ perspective