Negotiations continue between the Department of Water Resources and the water suppliers who contract for water from the State Water Project. Some of the issues on the table include extending the length of the contracts from between 40 and 75 years, increasing the financial reserves for the Department of Water Resources, and increasing contractor input on financial management issues regarding operation of the project.
The State of California and the Department of Water Resources own and operate the State Water Project facilities. The contractors who purchase water from the State Water Project pay for the costs of the project under the terms of contracts that were signed in the 1960s. Most of these contracts are set to terminate in 2035, although a few do extend to 2042.
The main issue behind the renegotiations is the length of the term of the contracts. Currently, DWR can’t sell revenue bonds beyond the current end of the contracts, Deven Upadhyay, Group Manager for Water Resource Management, told Metropolitan’s Water Planning and Stewardship Committee on August 19th. “Right now, they are only floating debt that is 22 years in length,” he said. “ You can imagine that if you don’t extend the contract and they continue doing work on their facilities and floating bond debt, the debt service payments for those bonds as the payment window gets shorter and shorter will get higher and higher.” What the end date of the new contracts will be has not been decided as of yet; contractors are proposing the new contracts extend to 2110, and DWR is proposing to extend them only to 2075.
Another issue on the table are increased financial reserves for operation of the project. Mr. Upadhyay said DWR is citing periodic financial shortages as one of the reasons for this request, and he acknowledged that one of the provisions in the original contract requires DWR to amortize the operation and maintenance cost of the conservation facilities over the contract term, a unique provision not seen elsewhere, he said. “So the annual operations and maintenance costs associated with the conservation facilities are not paid based on what you need in that year; it’s amortized out over the contract term which historically has created challenges for DWR where the cash that they need to pay in a given year might be higher than what they are receiving from contractors.”
DWR is also looking to increase reserves in to have cash on hand for emergencies and catastrophic events. “Currently, our cash reserve is equivalent to about two weeks of operating expenses, and most utilities have considerably larger reserves than that,” DWR’s Carl Torgersen told the California Water Commission earlier this month. “We’re looking for about a 90-day reserve.” Discussions on this point are continuing; “the contractors want some tighter control over how that cash reserve is used, whereas we believe the director has to maintain flexibility and discretion in all areas of financing the SWP,” Mr. Torgersen said.
The contractors are also asking for more clarity in the billing process. “When DWR talks about their budget, it is very difficult for us as a contractor to see how that relates to our charges and the bill we have to pay to DWR,” Mr. Upadhyay said. “We are trying to achieve improvements that make it very clear that when DWR is having their budget discussion and they are talking to the legislature about their budget, that we’re very easily able to see how that translates to our statement of charges, and the decisions they are making on their budget, how does that impact our statement of charges.”
The contractors also want more input and approval on areas that affect their charges. “The key issue here is they keep pointing to DWR’s authority that has been granted to them to spend funds versus the ability of contractors to provide input and approval in the process in helping to manage our statement of charges and provide predictability for what those charges will be in the years to come,” Mr. Upadhyay said.
Mr. Upadhyay told the Committee that there seems to be a funding dilemma at DWR regarding charges for non-water supply purposes such as recreation, and that contractors are seeking assurances that the solution won’t increase their bills. “We’re not wanting to pay for those items,” he said.
Although not a central part of the discussions, the BDCP remains the elephant in the room. “Two of the contractors, Butte and Plumas, have put on the table participation in BDCP as part of these negotiations,” Mr. Upadhyay said. “From a financial perspective what they’ve said that they want to preserve the ability to opt out of BDCP. I will tell you that in these discussions they are very cognizant of the external discussions about BDCP that is not part of this negotiation.”
The contracts have to be extended in order for the BDCP to go forward, Mr. Upadhyay said. “It’s very clear that if we are going to make a decision and if there is consensus that we’re going to be building BDCP, it’s a significant capital outlay. You do not want to be financing $14 billion through 2035, and so we clearly we need a renewal for financeability. It’s going to be at a minimum, a 30-year bond, but we may be talking 50 year bonds. So this is going to have to be renewed to be able to do a BDCP.”
The Monterey Settlement Agreement requires that all negotiations for any extension of the state water contracts be done in public with public comment at the end of each negotiating session. While a number of NGOs have been attending and providing public comment, Mr. Upadhyay perceives that the negotiations weren’t what most expected. “They thought it would be tied more to the BDCP and the fact is that it really is not; it’s a discussion of the financial provisions of the contracts,” he said.
Negotiations continue today at the Tsakapoulos Gallery in downtown Sacramento. The outcome once negotiations are complete will be “Agreements in Principle” which attorneys will use to draft the contract amendments. DWR will then prepare environmental documents under CEQA and receive public comment. A legislative hearing is required, as well as final approval by the contractors. The process is targeted for completion by the end of 2014.
FOR MORE INFORMATION:
- Click here for information on the State Water Project negotiations from the Department of Water Resources.
- Click here for the update on State Water Project negotiations to the Metropolitan Water Planning and Stewardship Committee.
- Click here for the webcast of the California Water Commission that includes Carl Torgersen’s update on the negotiations to the Commission.
