METROPOLITAN SPECIAL COMMITTEE ON BAY-DELTA: Status on California Water Fix cost allocation discussions

Metropolitan Water District SealMetropolitan’s Special Committee on the Bay-Delta held its last meeting of the calendar year on November 17, 2016.  The majority of the meeting was taken up with the presentation on the California Water Fix cost allocation discussions.

Bay Delta Initiatives Manager Steve Arakawa said that the meetings to discuss the California Water Fix cost allocation have been increasing in frequency in the past month or so and progress is being made, although he emphasized that the concepts being presented are those that are currently under discussion and nothing has been finalized as of yet.  “Agencies need to talk to their boards and get a feeling for what is supportable or not, so that’s what agencies intend to do as we talk about this information going forward,” said Mr. Arakawa.

In terms of basic assumptions, there’s an assumption that there would be a split between the Central Valley Project and the State Water Project, and the focus has been on the Central Valley Project being apportioned 45% of the costs, and 55% being to the State Water Project contractors.   The costs would then be allocated among the contractors per their existing delivery contracts.

When you look at these basic assumptions, these are consistent with how the environmental assessments, the environmental impact report and such, have been set up, so that ties into the environmental review,” said Mr. Arakawa.

The discussions are also considering how there could be mechanisms to allow contractors to adjust their reliability and their cost, he said.  “So individually, if they are allocated costs based on existing delivery contracts, then they could look at possible mechanisms to adjust that – either upwards if they feel that their reliability needs in the future are greater than their existing contract amount, or they could adjust them downward, either to match a lower reliability or to match a cost that makes sense for their agency.”

3a_presentation_page_18He then presented a graphic showing the basic framework for how the costs would be allocated.  “For purposes of discussion, we’re roughly talking about a $15 billion capital cost for the tunnel pipeline project that would need to be allocated amongst the state and federal contractors,” he said.  “That’s the basic assumption; there are no other costs to be distributed to any other parties.  They are mainly contractor-paid … so there would be the first split, and then within the State Water Project, how that would be allocated, and then within the CVP, how that would be allocated.”

For the initial split, the current assumption is 55% State Water Project, 45% Central Valley Project.  “Over the long term, it matches the amount of delivery that’s been made to the State Water Project and the Central Valley Project,” noted Mr. Arakawa.

Alternative approaches that have been discussed include allocating costs based on the volume of water going through the north Delta facility and whether that water is for the State Water Project or the Central Valley Project; making the initial split of 55/45 and then adjusting and reconciled for the total deliveries over time; and a capacity share approach where costs are allocated based on an upfront agreement that a certain amount of capacity is for Central Valley Project and a certain amount of capacity is for State Water Project.

Mr. Arakawa said there has also been discussions that if there isn’t enough demand for capacity on either the State Water Project or the Central Valley Project side, there would be a remaining share that would be unspoken for.  “The discussion has been that if there’s an upfront split of 55/45, the State Water Project contractors would look at how they would apportion costs amongst them and whether any agencies are interested in increasing their reliability level or decreasing,” he explained.  “So conceivably you could go through that process and have the state project contractors fully subscribing to the 55%, or there’s the potential that maybe there’s a remaining amount that’s left over and that could be made available to the CVP or vice versa.  On the CVP side, they would go through a process and determine how their contractors would approach investing in the project and if there’s a remaining share, which could be made available to the State Water Project side.  So that’s a part of the discussion as well.”

3a_presentation_page_20For State Water Project contractors, costs would be apportioned amongst all the water contractors based on the amounts in their contracts.  “There are 29 contractors on the State Water Project side,” said Mr. Arakawa.  “The second step then would be after CVP/SWP split is how would those costs be apportioned amongst the State Water Project contractors, and how would the benefits be apportioned.”

Mr. Arakawa reminded the discussions so far on the principle that the costs are paid based on the benefits received, which in this context, it’s the amount of water that’s received.  “That basic principle still underlies all the discussions that we’ve had to date – that the costs would be allocated based on the benefits received by individual contractors,” he said.  “The current assumption is that all of the state project facilities, including Cal Water Fix, operate together.  And so in doing that, those costs that are related to Cal Water Fix would be apportioned to all the contractors based on their contract amounts that are in their contracts.”

He explained that ‘Table A’ refers to the contract amount of water expressed as a percentage, and is called Table A because it comes from Table A in the contract.  “So for example, Metropolitan’s share of the State Water Project is a little over 46%, and that means that we have the ability to get 46% of that available water that’s allocated in a given year; that’s our contract amount or our Table A amount.

For the purposes of allocating the costs of California Water Fix, State Water Project contractors would have their costs apportioned based on their Table A or their contract amount; however, over time, there has been discussion about North of Delta contractors not being included in the apportioning of costs, since they are north of the Delta and do not receive water delivery through these facilities, he said.

The idea here would be that there’s one supply allocation each year,” he said.  “Allocations would be made each year and they would be based on the contract amounts, and it would be similar to how water is allocated today.  It would be one combined project.”

However, alternative approaches have been discussed and are still being discussed to a degree, Mr. Arakawa noted.  “One example of that is that there would be a baseline allocation based on the facilities we have today to all contractors, and the non participants would be able to count on the baseline allocation, what you would get with the existing facilities, and what you would be able to get with how those facilities would be operated,” he said.  “Then there would be additional allocation for those that actually invest in the project.  And those that invest in the project would get an increase in their supply benefit because of the facility, and that cost would be split amongst the participants based on the amount of participation and cost that they’re incurring and paying for that investment.”

In terms of operations, Mr. Arakawa said there has been several discussions over the last few years on how those allocations could occur.  “There are methodologies that have been developed by the State Water Project contractors on how to allocate supplies under that situation, both with and without.  It does present some very unique challenges and conditions that need to be taken into account,” he said.  “That really has driven why the contractors on the State Project side have been considering how maybe costs could be apportioned based on Table A and adjusting your reliability level to get to their need.  So rather than having two separate allocations, have one allocation just because of the problems and the challenges that come up when you try to keep those two parts of the project separate.”

3a_presentation_page_22Mr. Arakawa then presented a chart titled, Adjustment for North of Delta Agencies, which lists all of the State Water Project contractors.  “There are five agencies that are north of the Delta, and they make up about 2.8% of the contract amount which is a relatively small amount compared to all the other contractors,” he said.  “These percentage amounts have been adjusted to reflect the possibility that the north of Delta contractors would not be part of the investment group and that the remaining contractors south of the Delta or that get export supplies from the Delta would be those that are paying.  So, for example, on Metropolitan’s side, without this adjustment, we’re just under 47%, and with this adjustment, Metropolitan is at 47.13%, so not too much of a change, compared to the base contract amount that’s in our contract … So this gives you a feel for the relative contract amounts and as the costs might be allocated, based on Table A shares or contract amounts; these would be the percentages.”

Mr. Arakawa said that there is a potential step 3 to the cost allocation that involves making further adjustments to the contract amount, based on an individual contractor’s needs.  “If costs are based on contract amount, then how do you address contractors that may have a need that’s different than automatically investing in Cal Water Fix under the existing contract and paying their share under their Table A amounts,” he said.

Each contractor probably has their own objectives.  We have our own objectives: what we have in our IRP and what our needs are; individual contractors have similar plans,” he explained.  “They would have the ability to adjust their reliability level that they get for their contract amount, based on what their individual needs are.  So they could add to their Table A contract amount, they could reduce it and have another contractor purchase that Table A amount, or they could maintain the amount that they have today.  They could potentially have a choice to do each of those, and under the State Water Project, there is a provision that allows for transfer of Table A amount, and so that’s something that’s an existing mechanism in the State Water Project contract.”

If there’s any kind of unique mechanisms or approaches that go beyond the permanent Table A transfer, there could be some benefit in actually clarifying in the existing contract areas where the contract is silent about what kind of transfers could be made outside of the regular permanent Table A transfer amounts,” he added.

Mr. Arakawa said the idea with this step is to allow the contractors to reshuffle and readjust to what kind of investment each of these agencies would make up until the time when the decision or commitments are made on Cal Water Fix.  “So at the time an agency is deciding if they will support Cal Water Fix with its associated funding agreements, there would be a concurrent decision made on any agreements that would allow them to adjust up or down with their Table A amounts,” he said.

There have also been discussions about allowing for additional water management provisions, such as additional details on how water could be transferred amongst contractors both short term and long term.  “There could be multi-year provisions for water transfers, there could be year by year or single year transfers, or there could be exchanges that clarify the contract on what’s available to individual contractors,” he said.  “This could be important because once all of the contractors make a decision on Cal Water Fix with reliability level or their Table A amount, they would benefit from having the ability to have adjustments as their needs develop out over time, so this is a provision that would allow for that over the longer term.”

Mr. Arakawa said that the discussions are ongoing, with the frequency of meetings picking up in recent weeks.  He noted that similar discussions are happening between Central Valley Project contractors as well.  “There are some differences between the Central Valley Project and the State Water Project,” he said.  “Instead of contract amounts, they have water delivery service agreements, as well provisions that provide for rights of contractors under shortages.  For example, San Joaquin River Exchange Contractors, those that are on the downstream end of the San Joaquin River, they have certain provisions in their contracts, given their higher priority water rights, and so the Central Valley Project side is dealing with those kinds of things.”

The discussions are ongoing, and the pace of meetings is expected to pick up.  “These are not proposals that DWR has weighed in yet on, but it’s taking into account what the State Water Project contract has in it so certainly it’s not blind towards that,” he said.  “The idea of moving forward from this would be based on the framework, getting an understanding of what kind of needs individual contractors would start to articulate, the magnitude of the adjustments that would need to be made in order to have a full investment strategy, and then be able to report back on that type of accomplishment or progress, and so that’s what we see happening next.”


Director Larry McKenney said that having a mechanism for one side or the other to reallocate water to the other side and having the ability to transfer water makes sense.  “It seems to me that Metropolitan should be really ready to step up if there’s an opportunity to gain more, because the population of the state’s going to grow and the value of the water is going to increase.  The history of this agency is to be visionary and prospective and to really see the value of water in the future, so I would think that would all be valuable to us.  The question I have is if you have those kinds of market mechanisms which tend to by force of the market, to optimize the use of the resource, and individual agencies might pick up more allocation through that process, are you concerned that the other part of the state will say, ‘no, we’ve said all along, the state policy is to reduce reliance on the Delta, we don’t want individual agencies picking up more capacity in the state project, because that’s opposite of our policy?’”

I don’t think so,” said General Manager Jeff Kightliner.  “Obviously anybody can make any argument they wish, but this isn’t about growing the pie – this is dividing up the existing pie.  It’s not expanding use of the Delta supply; it’s simply saying, are some people going to reduce some of their take and some going to grow theirs individually, but the overall pie is going to remain the same.”

So for instance, when we looked at transfers and exchanges as some of the things people are looking at, there are some agencies right now who expect to grow, and they expect to grow into their full Table A entitlement, but as they sit here today, they aren’t using it and so they would be paying for something they didn’t use,” Mr. Kightlinger continued.  “So they are intrigued with the idea – how about a ten year lease of a portion of our Table A.  Ten years from now, they’re going to need it, but in the meantime, someone with storage, ie Metropolitan or Kern groundwater bank, might want to say, we’ll pick up for that ten year period and we’ll be able to bank up and build up our reserves for that.  Will people say that is increasing use of the Delta water?  I don’t believe so; I think it’s keeping it all within the same family, all within the State Water Project, water that would otherwise go to the turnback pool or something like that, so there maybe discussions and arguments down the road.

So you’re guessing that the Delta Stewardship Council and others would say, as long as the State Water Project contractors as a whole aren’t changing use, then that doesn’t mean any agency is increasing their use … “ said Mr. McKenney.

I’m trying to limit the speculation on everything,” said Mr. Kightlinger.

During the Bay-Delta manager’s report later on in the meeting, Assistant General Manager Roger Patterson said he was pretty excited about the progress that’s been made.  “A couple of things Steve didn’t say.  We got past any differential payments for urban and ag; that’s not part of the discussion; this is everybody pays the same.  Everybody will be given this opportunity to decide where they go, so you can deal the opening hand, and that will be based on those percentages, and every agency will be given that decision.  On this last point, we haven’t had any agency at the table say, we want to opt out and say we want to fight over the baseline.  We’ll see; that’s the fun part of what’s going on.  It’s really pushing for it, so if you do the math on the table, Metropolitan, it was 47% of the 55%, so we’d be starting at 29.2%, so … that would be where Met would be.  We’ve always said 25-30, so we’d be at 25.9 to start, and then we’ll see what the other contractors are interested in.”

Director Robert Wunderlich asked for clarification on the entitlement to water.  “Let’s say there will be some non-participants, and non-participants will still get some water from the project.  Your initial thought might be to split the water between the water that comes from the tunnel and the water that comes from the southerly diversion.  Well, not all the water that was coming through the tunnel was made possible was because of the tunnels; if the tunnels weren’t there, some of that water still would have come from the southerly diversion.  How do you do that split?  Who is getting what piece of water?  Where’s the entitlement?  Then also connected with that, the Table A allocation is adjusted throughout the year, but it adjusts slowly.  One of the concepts of the tunnel is to have them in place to be able to have them in place to capture the large amount of water that might be available following a storm event.  How does that factor into this whole Table A process, when that would have to be a faster decision then what’s usually made with Table A?

Under the State Water Project contract, it’s recognized that a certain amount of the water that the state project develops is scheduled Table A water and that’s your contract amount; the project develops water by storing it in Oroville as rains occur or snowpack; then also as a certain amount of water shows up in the Delta,” responded Mr. Arakawa.  “Being able to store it as in San Luis Reservoir is another conservation mechanism for the project to generate yield.  And when the Department does its allocation studies, they look at how those reservoirs are operated, how much water is available, and then they allocate scheduled Table A.  There are situations, particularly in more recent years as the regulations have gotten constrained where water shows up in the Delta but there’s no place to put it in San Luis, and so that’s called Article 21 water.  Water shows up and then water contractors have the ability under the existing contract to take that water on an almost a real time basis; they make it available and then right away contractors need to say we’re ready, we have storage to take it.”

Director Wunderlich notes that’s the answer to the second half of the question, but not the first half; How do we work out the entitlement for non-participants?

That’s the challenge,” replied Mr. Kightlinger.  “Obviously, the contract itself is well structured for dividing this up between Table A, Article 21, and the capturing of those flows.  That part, we have an existing model that works well.  If we’re going to have some people opting out and using capacity, that’s new territory, and we’re working through that and we’re coming up with proposals on how to do that.”

We’re not starting from zero on that,” added Mr. Arakawa.  “If there was to be a with or without investment strategy for allocation, one approach would be that you have a fixed percentage difference between allocations for those who invest and those who don’t.  You basically agree up front that there’s a differential between those who invest and those who don’t on the allocation relationship, and you do that by studies that show what would you have gotten without the project and what would you get with the project, and then each year, you can determine what the State Project as a whole provides for, and you can allocate that to those who invest, but then those who don’t invest would get a lesser amount, based on that formula.”

The tricky part of that is that these systems operate together,” continued Mr. Kightlinger.  “You have the south Delta and the north Delta, when you start trying to track molecules, it becomes very difficult to manage and keep everybody on the same page as far as what they’re getting and what they are paying for.  So then you talk about maybe those who opt out are only getting water from the south Delta and so everybody is sharing in that percentage of what’s available in the south Delta, and that also raises some complications as well.  So the most straightforward way, Met staff believes that if you do it based on the existing contract Table A amount and then allow contractors to adjust what they are looking for, then the project can operate in more of an integrated way.  But these discussions are still ongoing.”

Other agenda items

Other agenda items were an update at the time on the State Water Board proceedings and a review of Metropolitan’s cost assumptions for the Cal Water Fix, which will not be covered in this post.  (Please see link to watch the webcast if you are interested in either of these items.)

In terms of the schedule, Mr. Arakawa said that the environmental documents are expected to be finished by the end of the year, although the endangered species act permits (ie, the biological opinion and the state’s 2081 permit) are not expected to be completed until March or April.  No decision will be made until both the environmental documents and the endangered species permits have been completed.

For more information …

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