METROPOLITAN BAY DELTA COMMITTEE: Committee members discuss financing construction of entire Cal Water Fix project

At yesterday’s meeting of Metropolitan’s Special Committee on the Bay-Delta, the entirety of the meeting was devoted to discussion of financing the entire Cal Water Fix project.

Prior to the start of the discussion, five members of the community, including LA Waterkeeper and Food and Water Watch, spoke in opposition to the Cal Water Fix project, citing ratepayer impacts and stating preference for developing regional solutions, such as conservation and water recycling.

Bay-Delta Initiatives Manager Steve Arakawa began by noting at the last Water Planning and Stewardship Committee meeting, Committee members asked for additional information, so he would be discussing the economic analysis and additional modeling analysis received subsequent to that meeting; Assistant General Manager would discuss the alternative financing considerations.

Economic analysis

An economic analysis of implementing stage one of the California Water Fix was prepared by Dr. David Sunding, a professor of economics at UC Berkeley.  He conducted a cost benefit analysis for various cost-sharing and financing scenarios which are discussed in the report as well as a quantitative analysis of the monetized benefits of water supply reliability, water quality, and seismic reliability.  The analysis also includes a qualitative discussion on climate change resiliency and adapting to climate change.

In his key findings, he indicated that Cal Water Fix with stage 1 construction would provide positive benefits versus cost for state water contractors, and that’s for both in the urban area and the agricultural sectors,” Mr. Arakawa said.  “The analysis looks at Stage 1 construction with the capacity divided with up to 5000 cfs for State Water Project and 1000 cfs for potential federal water contractors, and he similarly provided those cost benefit analyses and concluded that would have a positive benefit cost outcome as well.”

Dr. Sunding’s analysis also considered how water would be managed between contractors and the trading of project costs and benefits, or moving benefits to those contractors willing to take on the cost which would be particularly beneficial to agricultural contractors, and alternative means of financing the costs, including federal programs with interest rates that could reduce cost impacts and improve the cost benefit outcome for all participants.

Water quality benefits

Water quality analyses have been done for both stage one and the Cal Water Fix project in completed form.  Both the staged project and the full project provide improvements in water quality parameters of electrical conductivity, total dissolved solids, and bromide, Mr. Arakawa said.  In dry years, the staged construction would provide improvements in electrical conductivity, TDS, and bromides at 16%, 15%, and 24% respectively; full construction would provide a greater benefit in those constituents, he said.

Considering that export water quality is one of the objectives of how to manage the facilities and the Delta operations, and the project is actually operated to meet all of the Delta standards as well, there’s certainly integration and balancing of how to meet all of these various objectives, so the analysis provides that for both the 6000 staged implementation and for 9000 cfs Cal Water Fix, both of those provide water quality benefits in dry type conditions.

Staged Implementation and Stormwater Capture

Committee members also asked staff to consider what type of operational flexibility would be provided by the 6000 cfs staged implementation with respect to stormwater capture.  In any given year, there are multiple storms that occur in the Delta that cause heavy runoff and high peak flows; a small portion of those flows could be captured and stored, and being able to store water to be retrieved when managing through droughts is important.

It’s a key way that our service area has been able to manage through some cutbacks on the Colorado River earlier in the 2000s and also weathering through a couple drought periods,” said Mr. Arakawa.

He presented a chart which illustrated what a staged 6000 cfs implementation would provide, using an example shown to the Committee earlier for the winter of 2012-2013.  “It’s about a 200,000 acre-foot reduction in capture, compared to the Cal Water Fix at 9000 cfs, so it still provides for the ability to capture these storm flows during periods when the peaks are coming through, but at a lesser amount.”

Water transfer capability

The California Water Fix project would provide additional capacity for water transfers, which would allow for greater opportunities for water transfers from north of the Delta to south of the Delta .  Mr. Arakawa presented a chart calculated from the historic period from 1922-2003, which includes dry years to wet years; the graph shows the capacity (not water supply) that would be available to manage water transfers.

The gold colored line on the chart is the existing capacity to manage water transfers; it is much lower because the system as it exists today is limited by regulations to help protect fish, and so there are few opportunities to allow for transfers beyond the normal managing of state and federal water project supplies; the blue line is the transfer capacity with the full Cal Water Fix project, and the green line is the 6000 cfs staged construction.

We normally look at the median or 50%, because during dry years, those are years when those likely not very much water for water transfers; there is a lot of capacity in dry years, but probably not a lot of water,” he said.  “In the really wet years, the system is already filled up with water, so we look at the 50th percentile as a measure.  For entities like Metropolitan that have the ability to store and retrieve water, it provides opportunities to manage water in these those in between years of maybe 40% to 60%. The difference is for the 9000 cfs, there was 1.1 MAF in any given year of capacity to move water from north of the Delta to the south, and with a 6000 staged implementation, it’s about 800,000 acre-feet, so a difference of about 300,000 acre-feet.

Reverse flow analysis

The reverse flow analysis considers how the federal and state fishery agencies, and the biological opinions on the federal side, have looked at water project operations in the south Delta affect fish.   “In the discussions through BDCP, the Bay Delta Conservation Plan all the way through Cal Water Fix, this idea of reversal of flow towards the export pumps has been a prominent discussion when talking about the operating criteria and how to protect fisheries,” he said.  “In their view, trying to reduce the time periods and magnitudes of reverse flow towards the export pumps in the south Delta during the critical period for fish of January through June, so this analysis looks at what would the reverse flows be on average during that period, considering all the various hydrologic conditions, wet to dry.”

Reverse flows today average -2172 cfs in the Old and Middle River channels moving towards the export pumps (shown in yellow on the map.)  With the new intakes and 9000 cfs, modeling shows about +50 cfs on average; for staged implementation at 6000 cfs, it’s -405 cfs.  “That’s the average of a range of hydrologies, but it gives you a measure of how it’s doing in trying to create a more natural flow patterns downstream towards where water drains into the upper San Francisco Bay,” he said.  “In all of the discussions on BDCP or Cal Water Fix, these flow reversals have been a prominent part of what the fishery agencies have been looking at in terms of how fish were potentially entrained in the export pumps, and how habitat is preserved for fish in the middle of the Delta.”

Alternative financing considerations for 9000 cfs

This portion of the presentation was given by Assistant General Manager Roger Patterson.  He began by Two weeks ago at the Water Planning and Stewardship Committee meeting, there was a request to consider the issues of Metropolitan acquiring the unsubscribed portion of the project beyond what the State Water Project has committed to.  Since that time, staff has been looking at what was committed to by the State Water Project, and evaluating conditions for Metropolitan to step up and essentially acquire and finance the balance of that.

About 35-45% of the project is unsubscribed at this point, so it’s definitely a sizeable investment, said Mr. Patterson. “We have thought about how do we secure that investment so that we have the ability to essentially manage it over time to the benefit of Metropolitan and recover our costs in providing benefits,” he said.  “We’ve had some discussions with the state, and one of the ideas there is we would probably want to enter into a new additional contract between Metropolitan and the State of California, specifically for this additional investment that we would make that would go above and beyond what is provided for in our base State Water Project delivery agreement.  We’ve started thinking about what would the terms of such a separate agreement be, so that we would have the assurance that Metropolitan could manage this investment and the assets associated with it.  Any revenue derived from the use of the facility by others or the sale of certain portions of it by Metropolitan would come to us and would not be mixed in with anything else associated with the State Water Project, so just to be clear that those terms were clearly identified as something we would want to do.”

The other issue is the actual financing, and the thought is to handle the financing through a finance JPA similar to what has been discussed for the project.  “Our obligation as Metropolitan would be delineated as debt service for that portion of the investment associated with this additional acquisition that we would take on, so we would be on the hook for debt service for that, and any revenues that we derive from use of the facility could go towards a portion of that debt service over time,” he said.

Staff has also been discussing whether or not to pursue option or offloading agreements with others; such agreements would spell out the terms and conditions for when a portion of the asset could actually be sold or assigned along with all the obligations to any other interested water contractors.

In many ways, this has a little bit of a P3 kind of approach, but it’s really a public-public kind of a partnership where we would make an up front investment, and then to the degree we chose to offload portions of all of that investment, we want to make sure we can recover the costs that Metropolitan’s putting into it,” Mr. Patterson said.  “We want to make sure we can essentially recover the risk premium associated with stepping up for this part of the project under the conditions that it’s under now, so we’re going to make sure that we fully recover that investment plus the risk associated with it at the same time.”

There are additional benefits to moving the entire project rather than the staged implementation as the project was optimized at 9000 cfs to provide maximum benefits, he said.  “The ability to manage pumping where the fish are not is one of the key benefits of the project.  Then, to the degree that you can do that, you lay the foundation for major restoration in the Delta, where you can then start matching flows with habitat restoration in the Delta, because now you have the flexibility to manage flows in way that works for the habitat, but also works for the water supplies associated with the project.  That’s something that is there in a staged project but it’s much more significant, quite frankly, in the 9000 cfs project.”

Our goal has always been to try and get to an average net zero on reverse flows in the Delta,” Mr. Patterson continued.  “There’s kind of a crossover point in there where the 9000 gets us slightly on the positive side.  With the staged approach, we’re still averaging about 400 cfs negative reverse flows on average, and we could manage with that, but again it’s just a little more constrained and not quite in the same ballpark as the other.

The State Water Contractors and others involved in the decision to invest in the project are really looking at water supply with and without the project.  “If you take that approach, when you move from the 9000 cfs facility to the stage 1 approach, the costs drop about 1/3,” he said.  “Building one of the two tunnels drops the overall cost of the project for stage one by about 1/3, and the water supply benefits associated with the project, they also drop by about 1/3.  Not quite, but pretty close to 1/3.  So if you are an investor only in stage 1 and you can meet your needs there, you can eventually come out about the same as if you bought a slice of the big project and you got certain benefits … that’s certainly a consideration for us as well as other districts out there.”

What really changes is the overall ability to deal with things such as seismic events and climate change, Mr. Patterson said.  The ability to recover from that a seismic event is better with the larger facility.  The ability to capture the storm flows during periods of high flows where all fish flows are being met is important, and the ability to provide for water supply is related to the size of the facility.  “Whether you’re at 6000 or 9000, they kind of track the same, although there are days when you’re in between, so it isn’t exactly a 1:1 ratio, but the ability to meet water supplies as we see climate changes in the future where we get more of these kind of runoff events, it’s a little bit better.  We can certainly manage fish take and reverse flows so these are some of the considerations that we need to think about as we move forward.”

General Manager Jeff Kightlinger reiterated that staff is working through the analytic process right now, looking at pros and cons.  They have had meetings with the state and other contractors who are curious about this after reading accounts in the press.  “We have made it very clear to the state, what we would need in terms of the contractual types of protections for our board to even consider something like that; the state assigned attorneys to take a hard look at what they could and couldn’t do and so they are working with our legal staff in working through it.”

The Governor joined this meeting with the contractors briefly, and he did say we need to get moving, Mr. Kightlinger said.  “Whether it’s a staged approach or the full project, he gave direction and really encouraged everyone to explore both on the same track simultaneously and to make a decision in the weeks to come, so we’re working on that.

DISCUSSION HIGHLIGHTS

The floor was then opened for discussion.

Director Larry McKenney said that the reverse flows issue may be really important down the road.  “What do you think the scenario looks like if we go to one tunnel and we continue to then have these reverse flows, -405 average, and how that affects the ability of non-project participants to be able to pump in the south Delta, and how much conflict that creates for them?”

That is a major consideration,” replied Mr. Patterson.  “In reality, that’s what’s been driving most of the biological opinion requirements, and the restrictions in the biological opinions that are affecting water supply.  One thing that I do believe and that is reverse flows will be restricted to whatever degree they need to by the fishery agencies to avoid jeopardy with these species, and absent a change in the way we’re going, they are likely to get more restrictive over time.  That’s what we’ve seen, and so I think we should plan to see tighter and tighter restrictions to mitigate these reverse flows, and to the degree you’re only option is to pump out of the south Delta, then your water supplies are going to be significantly reduced in order to get there.  It gets to how much flexibility do you have to manage around that, because that’s a requirement that we’re going to have to meet.”

Is there a path conceptually to an approach where we say we finance the remaining part of the project so that the whole part of the project can move forward, that that will preclude project non participants from continuing to divert the way they do now,” said Director McKenney.  “Does it mean everybody then has to play through the project?

I think it means one of two things,” said Mr. Patterson.  “If you’re not participating, you’re right to divert is in the south Delta, and you’ll get your share of that, and that will become less over time.  To the degree you want to move water through the facility, then you’re going to have to pay, and you’ll have to pay those that have invested in the facility.  Those are the two choices that you have.”

Director Lorraine Paskett asked if the project gets constructed, and while there is additional capacity, is there any risk that the actual water flow and water availability change because a shift in practice at the end of the Delta or some other way water is managed and we don’t realize the water supply, potentially?

Absolutely,” said Mr. Kightlinger.  “Conditions can change and you might not see the water supply benefits.  Director McKenney focused on reverse flows being critical criteria.  I personally believe that climate change is the number one driver here, and every model is showing more rain, less snow, and the ability to capture storm flows is going to be the driver of value, which is what the project does.  It does give you that ability to capture storm flows quickly.  That is, to my mind, the number one driver to take a hard look at building something larger rather than smaller at this time.”

Director Fern Steiner asked, “when you talk about the fact that we would be getting capacity, but we’re not getting more water necessarily, and if people don’t sign up for those shares and if the CVP continues to say it’s still too expensive … these safeguards you’re talking about building in are only as to the financing.  So what does that mean if they don’t participate and we’ve taken on their construction obligations?  Are they going to still get their water?”

They would be restricted presumably to pumping out of the south Delta,” said Mr. Kightlinger.  “So they would get much less water than they would otherwise get if they were pumping through the tunnel system, so they would be getting less water and they would have to decide are they willing to pay more to get more water, or they’re going to live with less and not pay.”

“And the water that they aren’t getting?” asked Director Steiner.

Then that leads to some other issues,” said Mr. Kightlinger.  “You’ll recall there’s a certain amount of non-project water that is the potential growth in that project.  The non-project water that would be captured by the larger facility, that presumably is a benefit accruing to Metropolitan because we’ve invested in that, so we would be getting access to more water in that area, but that would fall within our existing water rights in the State Water Project.

Director Steiner asked about the safeguards from the state that are being discussed.

They would be essentially the contractual ability to manage that portion of that we financed, and should Metropolitan wish to offload or sell that capacity to Westlands or Friant or whoever has decided they need to invest in this project, that we get to set the terms and conditions; the state doesn’t get to come and say, ‘we decided is this is a fair price,‘” said Mr. Kightlinger.  “It would be our choice what we would do and when we would do it.  If we chose to keep that capacity because it was incredibly valuable for us, that would be our choice as well.  If we were allowing parties to wheel water through our capacity, that we would set the terms and conditions.  Obviously we’d have to make it legally defensible, but it would be our calculation, our decision, on where, when, how, and how we would do that.  If the state said, we want to really control that, I would come back and say, I don’t think this makes any sense for us at all.  We would, to my mind at a minimum, have that protections for this to make sense for us to do it.”

Director Barry Pressman asks for further analysis on what would happen if Metropolitan builds the whole project and no CVP contractors wanted to participate.  He also noted that when politics gets in, protections disappear quickly, so if the CVP contractors are without water and Met is the source, and they don’t want to pay our price or they are financially incapable of it, that could be an issue.”

We’ll take a look at both of those,” said Mr. Kightlinger.  “I just want to say, obviously we’re not going to answer every question to your satisfaction today.  To my mind, we’re getting a lot of input on things we’re going to bring back and analyze.  Just on the last point, briefly, Director Atwater brought it up when he asked us to take a look at this.  Metropolitan had negotiated within California’s 4.4 MAF, we negotiated to get 1.25 MAF of water rights within our 4.4 MAF, and that was the premise on which we were going to build the Colorado River Aqueduct.  Negotiations became hard with our agricultural friends, and they got the best of that, and Metropolitan only got 550,000 AF within California’s 4.4 MAF. The board was faced with a decision then: should we build a 550,000 capacity aqueduct or build the full plan, and we built the full plan.”

People have tried to have their own version of how they would move water through that aqueduct, but we prevailed in our view on how to charge for it and how to manage it,” continued Mr.Kightlinger.  “We have kept a full aqueduct for 70 some years, roughly full, because a lot of things we didn’t foresee in the 1930s came true.  The capacity has become incredibly valuable, so that’s the analysis that we would have to look at.  I understand politics change over time, but owning infrastructure has proven valuable as well.

Director David De Jesus asked, “If the state has given a percentage allocation and everyone has divvied that out, and this project is not about water but it’s about capacity, how would they wind up getting less water if they’ve been allocated a certain amount?  Because I’m assuming from your comment that if they got less, we got more through the facility?

That’s part of our discussion with the state,” said Mr. Kightlinger.  “Our interest in providing greater capacity, those benefits would have to accrue to Metropolitan, so in other words, if you hadn’t built the facility and you were only going to get a 40% allocation but because the facility now, you can get a 50% allocation because you don’t have the challenges of reverse flow, those who aren’t fully participating in the funding should not be bumped up to that greater allocation; that benefit should accrue to Metropolitan.  We’ve made that very clear to the state.  It may not be a challenge on SWP side if everybody’s fully funded, so that may not be as complicated as it turns out, but we have made that clear.

Another director asked how the Bureau can participate if they haven’t done a Record of Decision on the project.

I don’t know if it’s a Record of Decision, but the Bureau of Reclamation is a co-petitioner of DWR and the State Board for permits to essentially allow diversion of water for either project through the tunnels,” said Mr. Patterson.  “So if that proceeding goes as anticipated, then the Bureau in fact would have the ability to move CVP water through the tunnels, provided the rest of the mechanism was there – ie you have capacity and you’re paying for capacity.

Director Cynthia Kurtz asked if other participants have expressed interest to buy some of the capacity that would be available from the full project.

Yes, Santa Clara has expressed an interest in joining in that and maybe in helping finance the entire thing,” said Mr. Kightlinger.  “They want to explore that with their board.  Westlands has expressed an interest in option-types of contracts and other as well to varying degrees, so all those would have to be explored.”  He noted later on in the discussion that these conversations are just in the preliminary stages.

“If all of the CVP contractors said the project is too expensive for them, why do we think that if we build it, they’ll want to buy capacity?,” asked Director Keith Lewinger.

Correction, they did not say that,” said Mr. Kightlinger.  “What they have said is that they felt the risk of upfront financing was too difficult for them, but the actual price of the water that would be delivered, was acceptable to many of them.  It was the financing risk that was the challenge, so that’s different than saying it’s too expensive.”

Director Larry Dick said, “I wish to make sure I get this into the report that we get.  I can’t express the disappointment that I have in the leadership out of Sacramento.  Now they want to be in a hurry.  We spent a decade and a quarter of a million dollars, and now they want to be in a hurry.  We waited for the leadership which they promised us, and now they want us to catch up. … I wish that there was some way I could say just to go to heck in a handbasket, but we’ve got to take care of the people we represent, and I think we do have to hurry.  … You don’t dive into a creek until you whether you’re on rocks or not, and that’s what we’re trying to do here.  I would ask that with the survey and the study and the numbers that we’ve received, I’d like to have as cast iron agreement as possible on anything we might sell, like the right to transfer water.

“I know that organization the size of Met and organization the size of the ones we do business with, there will people who don’t agree with whatever we give them,” continued Director Dick.  I don’t want to be tied up in court on moving water to help somebody else.  We need protections.  Can we get them legislatively?  Can we get a formula that goes into this and becomes part and parcel to this?  What is the best way to protect us?

Director John Murray said that what was missing from this presentation was an analysis of reducing our reliance on imported water by one-third or some number.  “In our current budget proposal, I don’t see the same kind of urgency in our proposed budget that the Governor apparently sees in moving this forward with respect to conservation.  It would be smart for Met to come in aggressive on conservation, provide the requisite staffing, provide the requisite resources, and really aggressively go forward with how much can be conserved and therefore ultimately make us less reliant on imported water as some of our member agencies are doing today.  San Diego, LA, and others.  So I think any analysis without our having included within it what we can save through conservation and developing new sources of water, recycled water, etc, is really an incomplete analysis.”

Director Murray continued,As we move into our budget discussions, I for one want to see an aggressive commitment to conservation.  I know some of my colleagues that have had some meetings that didn’t go so well on that, and so I hope some changes are going to be made and we’re going to see a reflection in the budget that would I think certainly be more accurate.  I think it certainly would keep Metropolitan out in front on some of our broader responsibilities, which is not just reserving capacity or creating capacity in the State Water Project, but also other innovative things that I think Met has I think sometimes supported and needs to do even more of here with regard to other sources of water.  So as we go forward, conservation and reducing our reliance on State Water Project water or imported water in general needs to be part of any future presentation on this if we’re really to evaluate one tunnel, two tunnel, or anything else.”

Director Mark Gold asked when this issue might go before the board for a vote.

My goal is to bring it to the board in April,” said Mr. Kightlinger.  “If we can develop the information necessary to do that.  Obviously we’ll be discussing it at the March board meeting, and discussing it further at the March 4th Tuesday, and my hope is to have it sufficiently flushed out for action by April.”

I’m deeply concerned about the south Delta and the lack of certainty in this approach,” said Director Gold.  “One of the big selling points of the tunnel approach is that you’re minimizing the impacts on the south Delta which has just been decimated … It’s one thing having a conversation with you guys; it’s another thing trusting Westlands on what they are going to do on the Delta, just based on history.  They are the last entity I would trust from the standpoint of preserving the south Delta in any way, shape, or form.  I get the reliability argument very well, we’ll get cleaner water from upstream, less susceptibility to sea level rise and so keep the salinity in check, but at the end of the day, we see what happens when things get hot and heavy, when the farmers are getting their allocation of water in south San Joaquin and the tactics that we’ve used to move forward on, everything from rolling back the endangered species act and fighting that tooth and nail to being in court forever to signs plastered on the roads that we drive up, so where in this agreement is there going to be some sort of assurance that this happens and Met gets their water but at the same time, and it’s not going to be business as usual, pumping as much as possible, decision year after year with no certainty …  To me the big area is what’s going to happen in the south Delta, and the fact you’re even assuming there’s going still going to be reverse flows with the one tunnel solution, it just scares the hell out of me, and so I’d love to get more information on this … “

Director Paskett asks, “How are we as an agency going to use this opportunity to ensure that the operation of this project is going to be in the best interest of habitat and habitat restoration, and is that part of what you’re negotiating on behalf of us?”

We are definitely giving it a lot of hard thinking,” said Mr. Kightlinger.  “You’ve touched on one of the most challenging aspects of this.  The 9,000 cfs facility was the designed to maximize benefits for environmental purposes, to really sync up well with Cal Eco Restore, and to preserve the current operational partnership that you have between the SWP and CVP.  That works through the COA and how the biological opinions work.  When you have one project shifting to changing its point of diversion, another CVP staying primarily in the south Delta … it doesn’t really necessarily work for what we’ve designed for Cal Eco Restore.  We’re definitely eroding benefits, it provides real challenges to how the COA would work, and it puts the two projects in competition instead of in partnership and how to sync their operations.  Now you would have CVP people saying we need to maximize south Delta, we need to politicize that issue as much as we can, and that’s not appropriate because we’re the one who made the investment to do the more environmentally friendly investment.  How we would work that with the state and federal project at odds with each other, trying to work these out in the state and federal legislatures is challenging … “

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