California Water Fix: Paying for the Delta tunnels

I want to open by offering a brief legislative disclaimer.  I’m not here speaking on behalf of the official policy of the Pro Tem of the Senate, who as many of you know, his constituents represent the rapacious Southern California water agencies who are trying to steal Northern California’s water; and at the same time, as a resident of Clarksburg, California, I’m not here representing my neighbors, otherwise known as the people with pitchforks and torches who show up at my driveway in the evening when I get home.  I’m here speaking as a staff person for the fun and happy branch of California government known as the legislature.

This panel was titled ‘Fiscal Impacts’; I interpret the costs that we’re talking about as the costs of what is now recently been rebranded as the California Water Fix.  California Water Fix is the project, and most people refer to that as the Delta tunnels.  I’m going to briefly do a quick flyover of the project’s recent history, I want to go through some of the amusing names that it’s had over the years, talk about some key fiscal issues, and I want to say up front, I’m not a fiscal expert, I’ve relied on the outstanding people at the Legislative Analyst’s Office to sort through those issues, although we do hear about these issues in the legislature and in the budget sub committees so I have more than a passing familiarity with them; then the series of regulatory approvals that are coming up that affect the fiscal impacts and the cost of the project; then wrap up with some open questions.

Most of you know the project history here.  When I was young, it was called the peripheral canal; I remember the term, ‘New Hope Cross Channel’, the hope was lost, and so was the channel.  Then we moved into the robust era of CalFed; it’s not a savings and loan, it’s a California and federal government collaboration on restoring and fixing the Delta and moving water through more efficiently.  That ended in the early 2000s with the so-called Record of Decision.  Then in more recent times, we moved to something called BDCP which stood for Bay Delta Conservation Plan; it was an earlier iteration of the current project which had the ambitious goal of achieving both the construction of the tunnels, but also the broader restoration of the Delta.  I’m not sure quite when but in the last year or so, the Governor and the proponents of the project scaled it back to what is now called California Water Fix which is really just the tunnels and the mitigation associated with it.

Some basic facts for you … the overall cost of the project looks like at the moment in current dollars to be about $15-16 billion.  $15 billion is for the actual design and construction of the project, $800 million at the moment is for direct environmental mitigation.  Of course all of those numbers could change to some extent based on the environmental documents and other permitting issues that are coming up in the next few months and years ahead.

The broader restoration of the Sacramento-San Joaquin Delta has been severed, and is being pursued under a different but related process called Eco-Restore, and so the costs associated with that broader effort are severed from some of the costs that I just mentioned.

One of the most complicated issues isn’t so much how much the project is going to cost (although that’s complicated enough), but as I understand it, it’s who is going to pay for it.  This has gotten interesting in recent months.  My understanding is that the project will be funded through revenue bonds, although it’s not clear what agency or entity in government – state, local, or regional – will issue those bonds … I’m not sure how that will sort out.

Regardless of who issues the revenue bonds, however, it’s pretty clear that this notion that the beneficiaries are the water contractors, both state and federal who obtain the water, are going to pay for that.  There are provisions of the contracts that the water contractors have today that are part of the SWP and have existed since the Burns Porter Act that I think at least some would argue govern how those costs would be allocated and have essentially suggested this is an addendum to the SWP and it’s not a new project of itself.

There’s also a split between the federal contractors and the state contractors, and it is unclear at this point who is going to pay how much.  Based on the information that we’ve been provided from the LAO and others, generally and if you look at historically, it’s sort of a 55/45 split.

Within the state contractors themselves there are 29 contractors.  Needless to say Met is the biggest by far and probably will be paying the biggest piece of that.

Then as citizens of the state, we all ask how much is this going to cost me and my constituents?  Of course,  there’s the cost of the property taxes that many of the agencies, specifically Met, Santa Clara, and others use ad valorem property taxes, and then there’s the sale of water and the water rates that all of us pay, and that would be the ultimate source of the funding.

This all looks like it’s really easy so far, right? Just in looking at the chart that the Department of Water Resources gave us in the budget subcommittee, roughly 2 weeks ago, the kind of go-time issue this summer is really the CEQA and NEPA documents that need to be approved. But there are at least five or six other approvals that are coming along that range from things that will happen later this year for permit approvals and other reviews that extend into 2020, so there’s a lot still to be done on this.

I want to wrap up my time by asking some of the questions that might provoke some of the other panelists, questions like, do the tunnel supporters have it together?  There’s a real question here as to whether this push is going to result in going forward.  It sounds like the financing and some of the permit approvals are somewhat still unformed or at least not as formed as they should be, and needless to say, those things are going to need to be done.

The legislature does not have a direct role, unless and until Assemblymember Eggman’s bill passes, but the Legislature’s role is really reviewing some of these cost issues and permit issues, but it’s not a direct up or down vote on the tunnels, but the question arises if this is really go time, is it going to come together in the way the proponents of the Delta tunnels hope it will.

Will the state and federal agencies, particularly the federal agencies who have been resistant to issuing some of the environmental approvals actually go forward with those approvals?  Will the financing plan come together?  Obviously the concern here is will the money come together and will the people who are going to pay that money actually go forward?  I heard recently that Santa Clara Water District is at least discussing and may have actually approved putting the cost of the tunnels before their voters, which would be an interesting wrinkle in all of this if it were to proceed.

Will the cost figures themselves hold up?  We talk about this as if it’s a $15-16 billion project, but everybody knows time is money, and the more time that passes, the more expensive it gets and that means more costs to the public and to water users.  I don’t want to be overly provocative, but I would ask the question if you had $16 billion to spend on fixing water as Water Fix suggests, is this the best way to spend it?  And is it going to actually accomplish the outcomes that are being looked for?

We all know that the Delta more broadly is in something of an ecological collapse, and even with a more efficient way of moving water around the Delta, the question becomes … if the Delta is collapsing, one wonders if the water going through it and the projects that are running aren’t fixable?  I’m sure they are, I didn’t mean to suggest anything pejorative but it’s certainly a question that needs to be looked at.

Then in my world, Jerry Brown is gone in two years.  The question is where is the next Governor going to go?  This is not the approval of a building in downtown Sacramento or a new park facility in the Central Valley; this is a major once in a generation kind of investment and undertaking.  This Governor and frankly prior governors have generally been committed to it, but the question of the various iterations and the various names that have been put on this, dating back to the 1970s suggest that it’s been a very, very long haul, and it’s oftentimes not something that lends itself well to the branches of government that tend to turn over in 4 to 8 years.  The stick-to-it-ness needed to get this across the finish line, not just this summer and fall but going forward and into the next decade is really a question that arises.

So that’s my presentation.  I do want to say one other thing.  This is an incredibly important and wonderful topic, but I do want to also leave you with the fact that there are a lot of other things going on in the water world that I’m sure that John will have a conference on at a later date that are also important to the future of water in California.

I’m an economist at Berkeley, and for the last several years, I’ve been studying some aspects of the California Water Fix related to the economics, the benefits and the costs to different groups, but also the financeability of the project.  These are related questions, but they are different questions.  The way I like to phrase it sometimes is I could cash out my retirement plan and buy a Ferrari.  I probably have the money to do that, but that’s not to say it’s a good idea.

The financeability of the project is about whether or not the ratepayers who will get the water have the free cash flow to pay back the bond holders.  We’ve analyzed that, that’s been looked at by the state treasurer’s office.  I think for the urban agencies, there’s no question that this project is affordable.  Economic activity in the urban areas that is serviced by the project is about a trillion dollars per year; total debt financing for the urban agencies assuming some split of the costs would be in the several hundred million dollars a year range, so there’s no comparison, it’s just fractions of a fraction of a percent.  So for the urban areas, I think there’s no question that the project is affordable.

For ag, it is a closer call.  The costs that would be allocated under the simple scenarios that we’re modeling now, the costs that would be allocated to agricultural areas are again a sort of closer call for them in the sense that it is a relatively large amount of money compared to their revenues and profits.  That’s been analyzed by us and by other people including the treasurer’s office and they came out in the positive on that question.

But I think the real economic issue here is whether or not the Water Fix is a good idea, and whether it’s generating benefits that are in excess of the costs.  Kip talked about the construction costs and operating costs being in the $16-17 billion range; those are consistent with numbers that we’re working with, and the way that we’ve analyzed this is we break down the benefits into a couple of different categories.

The way economists think about benefits and costs of a big infrastructure project like this, it’s really a matter of comparing two states of the world.  One is the world with a facility in place; the other is the world without it.  To understand whether the Water Fix produces benefits, you’ve got to play out for yourself mentally and we need to play it out analytically what would the state look like without the tunnels in place, and that requires looking into the future, making some predictions about the likely path of environmental regulations, and how other factors like seismic risks over the longer term and climate change plays out and how it affects level of deliveries, environmental outcomes, water quality, and then comparing that to a world with the tunnels in place.

We’ve looked at several categories of benefits for the Water Fix.  The first is the water supply benefits.  Here the story is roughly that we have a current level of deliveries that is projected to decline over time as environmental regulations in the Delta get stricter and impose more restrictions on operations of the pumps, and so the Water Fix basically maintains the status quo, pretty close, and it prevents a future decline, so in that sense it’s like an insurance policy.  So the water supply benefits are one factor.

The second factor is water quality because with the tunnel in place, the current thinking is that about half of the water taken out of the system would come from the north Delta intakes, and because water quality is much better up there than it is in the south Delta, the salinity of water taken out and delivered to cities and farms would be lower than at present, and that has a benefit worth actually a couple of billion dollars to water users.

Third category is resilience against natural hazards, in particular earthquakes, but also high water events such as floods.  We all know that the Delta system is particularly vulnerable to earthquakes and in particular the levees.  Because the Water Fix would be taking water from the North Delta to some extent, if something were to happen and the Delta were to go out, the water supply system would be relatively less impacted than if the tunnels weren’t in place, so that’s a third category of benefits.

Over the longer term, we’ve looked at climate change and in particular sea level rise.  What the modeling that we’ve been given shows is that 140 cm of sea level rise, which was considered to be on the aggressive end and now is not considered to be aggressive at all, 140 cm of sea level rise would reduce Delta exports by about half.  With the Water Fix in place, the impact of sea level rise would be almost nothing.  So just like with the water supply benefits related to environmental restrictions, increasing the resilience of the system with respect to climate change is really preventing a loss as opposed to increasing the amount of water that is taken relative to the status quo.  So again, think of it like an insurance policy.

Looking at all of those things together, we’ve concluded that the benefits of the project do outweigh the costs when looking at all of the users together.  I think the remainder of the issues to be worked out are related more to cost allocation, because not every user group has the same willingness to pay for water and not every user group has the same ability to absorb a shortfall.  Because of that, there’s some room to move the costs around, maybe the water moves around too; these are the discussions that are happening right now.

So I’ll leave it there for opening remarks and look forward to the discussion.

Metropolitan is a major player in the project.  We have roughly 19 million people within our service area.  The State Water Project is about 30% of the total water use in Southern California; we get about 25% from the Colorado River and then local supplies provide the remaining 45% or so.  Our business model is to meet all of our future demands in Southern California by continuing to build on and enhance local supplies; that includes conservation, which is providing us with a demand reduction of over 1 million acre-feet per year at this point and we continue to ramp that up.  Total demand in Southern California is about 4 MAF on average, maybe 4.5 MAF, so conservation is a big component of us being able to go forward.

Over the last 15 years, we went through a new operating scheme on the Colorado River.  In 2003, we lost half of our supply into Metropolitan when the Quantification Settlement Agreement was entered into by California.  We’re junior, which means last in line.  All the ag contractors in California are ahead of us, so when we needed to cutback as a state by 600,000 AF and that all came out of Metropolitan’s supply.  Through a lot of money, a lot of expenditures and partnerships, we’ve rebuilt that supply, so the last two years during the drought, we were able to bring in basically 1.2 MAF from the Colorado River, so we feel like at least in the near-term, we’ve sort of put ourselves back in a position to maintain the status quo on the Colorado.

The State Water Project is the next order of business for us.  It’s very similar in that we are continuing to lose supply and reliability on the State Water Project … I will say project fatigue has set in a bit.  When you have a name change in the last segment, that means it’s gone on for a long time.  We’re roughly ten years into this last segment on BDCP/Cal Water Fix.

Metropolitan is about 27% of the project.  We have used the metric since the inception of the project that when you get to the end point, we call it ‘costs follow water’.  And so the idea is that if over time, you use 20% of the water, you’ll pay 20% of the cost, and that’s the general metric that we’ve used.  So following that, when we look at the cost of the project, about $4.5 billion would come to Metropolitan.  For us, it’s looking at that kind of investment to essentially stabilize the supply reliability, understanding there are no guarantees on these kinds of things.  Whether that kind of an investment is the smart way to go versus doing something else to ensure our supply reliability at a similar level; that’s really the question we have in front of us.

We’ve just met the last two days with Metropolitan’s board; we had a board retreat in the luxurious Omni in downtown Sacramento, and basically the board said that we’re ready to make a decision.  By this fall, we need to have the key permits, which are the Endangered Species permits, the EIR-EIS finalized, and a cost allocation and a financing plan.  If we can have those things by this fall, the fall usually means December 31^st in project parlance, I think we then will have, at least in our view, what is needed to make a decision of whether we’re in for this project.  Frankly, we’ve invested $252 million in planning, we’re not spending any more money at Metropolitan on planning.  We’ve analyzed this thing 16 ways from Sunday, we think we know what we need to know, it’s a matter of really boiling down an immense amount of information so that policymakers on our board have what they really need in front of them in order to make the decision on this.

The cost allocation, it’s a key piece.  I continue to hear that so-and-so may or may not be in, but we don’t know.  I think there’s some sort of a wishful expectation on what will happen, and we’ll see what happens there.  On a unit cost, it’s about $150 an acre-foot increased cost for all the water that moves south of the Delta, so that’s the unit cost. People like to go increments here and there.  Every entity and there will be 50+ districts that will have to make decisions, they’ll look at things differently.  When you really look at what it takes to pay the bills, that’s the O&M and meet the bond payments, it’s about $150 at current interest rates.

For Metropolitan, by the time we pump and treat and blend with our Colorado River water, it will raise our rates about $175 at Metropolitan, and we’re at $942 this year.

So that’s the lay of the land.  In my view, we’re sort of out of time and out of money and out of patience and we need to make a decision.  I can’t see how we drag this into subsequent administrations without a decision.  It is a long slug, even if the decision is made to go ahead, we’ve got three and a half years of design and pre-construction activity, and another 12 years or so – it’s a long haul in order to put a project of this size in place.  They don’t happen in a hurry and every two to four years, political leadership changes, sometimes it’s 8, but some piece of it, and this is really a project that is tied to not only the State Water Project, which this will be a facility of the state project, but it also is a key component of making the Central Valley Project work which is the project that is owned by the Bureau of Reclamation.  I used to run that for eight years so I’m pretty familiar with the goods and the bads as it relates to that project.

I’ve worked in 13 states, this is the most fun project that I’ve had a chance to work on, and I’m ready to bring it to a decision.

I wish we had a chalkboard so we could do some math on the board, because I just did some on my sheet here.  Roger said $150 an acre-foot at the 5 MAF that we ship a year, and $150 x 5 is $750 million a year, and that’s not going to come close to paying the debt service on this project.  The projections that I’ve seen start at $1.2 billion a year on the low end, so I think we need to sharpen our pencils on the math on this project a little bit more.

I appreciate Capitol Weekly putting the fiscal panel at the beginning. It would be nice to have a description, but I think if the economic and fiscal issues had been put at the beginning of the Bay Delta Conservation Plan, we’d be in a much better place right now.  They didn’t really start looking at it until six or seven years into the project.  And I think they designed a project that’s not going to fly.

A few things to remember.  One that’s been touched on already quite a bit is that the water projects are primarily an agricultural project.  If costs follow water, and that’s the business plan that we have now, the vast majority of the costs would have to be paid by farmers.  If you follow the water news at all, you know that farmers have had a bit of a problem dealing with the planning costs of the project, let alone the financial payment costs of the project.  Certainly the largest agricultural water district was penalized by the SEC for the bonds for their planning costs.  There’s other information that’s problematic here.

The second thing to understand is the financing and the environmental performance of the project are directly linked, but they both depend critically on how much water we export from the Delta, relative to this world of what happens if we don’t build the tunnels.  And so they are linked together, certainly you do have to play out the future without the tunnels.  When Dave and I fight about this thing, it’s primarily about that future without the tunnels.  I actually use a lot of Dave’s research so we don’t argue about other things.

I like to follow the EIR, the official documents of the tunnels.  You have to play out the future of the world without the tunnels and the EIR is our official project description.  When they are talking about the business case, they adopted a different view of the world of California, a world with much faster growth, much tighter environmental restrictions without crediting the environmental benefits of those restrictions and so it will be interesting.  I haven’t seen a benefit-cost analysis for the Water Fix itself.  I heard that was coming out last year, so maybe we’ll see that shortly.  Dave did release a draft on the BDCP.

It’s important to recognize that a lot of people were interested in this when it was the BDCP, and the support for the plan is falling off, and that’s just because the plan has changed.  People are less interested in it now than they used to be and there’s good reason.  Back in 2007 when people were looking at this and the PPIC puts some books out about it, we were talking about a surface canal that cost $3-4 billion.  They said water exports from the Delta would be about 6 MAF a year; some optimists were saying 6.5 MAF, so that’s up to 1.5 MAF yield over where we are today.  There’s claims that it would benefit fish and endangered species as part of a habitat conservation plan.  That habitat conservation plan gave exporters regulatory assurances, reduced their risks, and said they wouldn’t have to contribute additional water or money if things didn’t work out according to the plan. There was a lot of talk about the huge benefits of protection from an earthquake.

That was the vision, and when people talk about whether it was worth it, they often lapse back and start talking about what I call nostalgia, the vision that was put forward a decade ago, a vision somebody may have had in the 60s or 70s – but we need to talk about the project we have today.  It’s estimated to cost us $16 billion, up by a factor of four over the past couple of years, the water exports are about the same as we have today, about 5 MAF.  The EIR says about 250,000 AF of yield relative to the future, so it’s costs are up by four times, water supply divided by five compared to where we were in the past, so that’s going to cause a lot of supporters to fall away or to have second thoughts.

The Water Fix isn’t a habitat conservation plan anymore.  The name change isn’t just marketing; it’s that it didn’t reach the standards of restoring and improving endangered species. The standard it’s trying to reach now is to not put them in jeopardy; that’s not improvement, so we don’t have the environmental benefits, and we’ve learned a lot more about the levees and earthquakes since then, and while there certainly is a risk there to be concerned about, I think the disaster to water exporters is not what we used to think.

So, in summary, the cost allocation has been brought up a lot.  Two final things I’ll say about financing.  One is that financing the tunnels during a drought could be a real challenge.  The bond issues – the creditors aren’t going to care whether you have a drought or not, they are going to get paid, and so some of the analysis that has looked at the agricultural users hasn’t looked at their ability to withstand a drought.  How would they have fared the last couple of years if they had to come up with a billion dollars in debt service in addition to these things?  That’s going to create some major financing requirements and some big reserve requirements, and potentially some step up requirements for the bonds that are going to be a challenge.

So I’ll leave it at that …

You may be thinking what is the Nature Conservancy doing on an economist panel.  We are very involved; we have been a leading proponent of the last five water bond measures that generated about $15 billion just on the conservation side.  Tied to the most recent one, Prop 1 was a legislative product and a little under a third of that bond is really dedicated for environmental purposes.

But I want to really underscore the point that’s been made by the panel which is the real challenge of this project is there’s a cost allocation challenge here.  How much of this cost is born by the project proponents, how much is born by the state of California at large, and how much is born by the federal agencies?

I want to start out in thinking about this issue of habitat.  It’s not just a conceptual thing.  We have the most engineered water system in the world and with that has come a price.  We’ve frankly treated the environment as an externality kind of hanging out here rather than something that ought to be kind of a base cost in our thinking about how we’re operating and are we willing moving water in a sustainable way vis a vis climate change, vis a vis the need for water efficiency, regional self reliance, and thinking about how we all get a lot more efficient in water usage as a key part of the equation.

These are not abstractions.  We are at the edge of ecological collapse in the Delta, and what that means today is that we’re looking at record low fish counts for winter-run and for spring-run salmon that are threatened and endangered.  We’re also looking at record low runs for the fall-run, which is that last commercial anadromous fish out there in California and really has an iconic attachment to this whole system that we’re talking about.  We’re looking at the pelagic species which are really a good indicator – the Delta smelt, the longfin, sturgeon and these are really indicator species for how we’re treating the system as a whole.

Back when we were talking about the BDCP and 100,000 acres of habitat to be restored in the Delta, the base price of that is in the range of $3 billion, and that’s a significant investment that we really need to make if we’re going to reach sustainable water management in the Delta.  That really did not price in the importance of assuring adequate flows to make sure that habitat is functional.

Then step back a little further and look beyond the Delta.  There’s a Central Valley recovery plan that’s been adopted for salmon in the San Joaquin and Sacramento systems.  If we begin to prioritize the projects there and think about what would it take to enhance floodplain which is also good for flood management as well as for salmon, and how do we start to design the system in a smarter way before we get to the Delta.  That’s an additional billion and a half of projects that we really need to build into our thinking about how we get around the road to recovery of these fisheries that are part of what make these rivers and streams special, and that are a part of what define us as Californians and really make our state unique and special and why we’re here.

We’ve got to figure out a much more rational system at the front end when we have these conversations that is fully including the importance of environmental restoration.  I would define that as sustainable water management, because I think that when you begin to unbundle and identify either the Endangered Species Act or the Clean Water Act as the villain, I think that’s the wrong place to start.  I think we need to really have a bigger conversation that recognizes that we’re losing these fisheries that are a part of these systems because we’re not taking care of these rivers, streams, estuaries, in the right way.

We’re all in this together.  Roger’s customers are environmentalists.  We’re wrestling with very difficult questions, and I think it’s fair that none of us are happy with the status quo.  It’s clearly not working, and from a water quality and endangered species perspective, the trajectories are going decidedly the wrong direction.  We approach this from the basis that we have to find solutions, but those solutions have to include a predictable, fair allocation that’s based on realistic assumptions of what the payer responsibilities are going to be for all in full environmental mitigation.

Similarly we do need to assign in an upfront way what the public costs are of making these projects sustainable is really going to be, and yes, that does include bonds, it does include a role for the federal government, and without those elements, this equation isn’t going to come together.  If we identify those variables as a + b + c = blank, we really need to fairly apportion those costs on the front end so that we have an honest picture of what that all-in sustainable water management investment is going to be.  I think that’s the real big picture challenge that’s before all of us.

I don’t think we know that.  There’s a lot that we don’t know.  But I agree with Jay. This is why I was a proponent of the habitat conservation plan approach which was to try to get everything on the table where you’re looking at all of the stressors and multiple species to try and make a bigger investment.

I look at the recovery plan from NMFS for salmon and it goes throughout the watershed, it has lots of great ideas in there, and it’s sitting on a shelf.  Like joint ventures that we have for waterfowl, we need this joint venture idea for salmon where we decide what we’re actually going to do, how we’re going to do it and how we’re going to pay for it, because we need the bigger investments.    You build the tunnels, that isn’t going to solve these species issues.  It helps with reverse flows and some of the drivers we’ve seen just on the way water moves … we’re in an estuary here and if you go down there, it doesn’t look a lot like an estuary.

We need to take this bigger view and we need to figure out how to invest in it.  All we do is bicker back and forth about this and that, and I think there’s a tremendous amount of creative thinking and ability as the bigger community in the state to take on some of these things.  We’ve got report after report that sit on the shelf.  Metropolitan spent $30 million of our money up in the Sacramento Valley doing things for salmon.  We paid to remove the dam that was blocking Butte Creek up at Western Canal.  We built the siphon.  Those are just little things, we need to do bigger things to make it go and have a chance at having a more sustainable system.

Robert said good things about habitat conservation plans, and I will as well.  When the Water Fix was revised, we ditched the habitat conservation plan and kept the tunnels.  I wrote on op-ed three years ago published in the Sacramento Bee that said, let’s ditch the tunnels and keep the habitat conservation plan.  The reason is that the habitat conservation plan generates a lot of benefits for the water agencies; it also would be a lot cheaper, so if they are looking for some long-term stability over the project’s operations, those are the sorts of things that are a part of habitat conservation plans and are negotiated in return for the investment in habitat and conservation improvements.

There are a lot of alternatives to the Water Fix, and that’s one that hasn’t been discussed much that I would throw out there.  I think the agencies themselves would get a lot of benefit from a no-tunnel habitat conservation plan, and it would cost a lot less for them and for the people of California and they could invest those resources in some other local alternatives.

The first thing you have to ask yourself to address that question is without the tunnels in place, what happens to environmental regulation in the Delta going forward.  … the EIR No Action Alternative, if that were guaranteed going forward, I don’t think we’d have the discussion about the tunnels.  But the point is that’s not guaranteed and in fact the trend over the last couple of decades has been towards continued declines as we move from D-1485 to D-1641, CVPIA to the current biops … progressive water quality regulations in the Delta imposed by the State Water Resources Control Board, and then the CVPIA was a federal legislative action that reallocated some water from projects to the environment.  The trend has been towards more restrictive regulations that reduce supplies, so the historic record is clear and from what I’ve seen it looks likely that’s going to continue.

The way we modeled this out is to say that the federal wildlife agencies have asked for certain conditions to be imposed on the projects with the tunnels in place; if you impose those same conditions in a world without tunnels, that being a predictor of what’s likely to happen in the future, the loss in water supplies is predicted to be about 1 MAF, so we’d go from about 5 MAF out of the Delta to around 4.  Now that’s a very different economic proposition than saying we’re guaranteed to have the EIR No Action Alternative or we think that’s even the most likely outcome.

Moderator Ben Bradford asks Roger Patterson if Met has planned for what would happen if the tunnels do not get built?

We have what we call an integrated resources plan.  We just finished updating it.  For us, we have to meet the needs of 19 million people one way or another, so we really look at, we’ve got four components basically in our plan: Conservation I talked about, it’s a key one, and we’re going to grow that; stabilize the Colorado River, we’ve done that … but we’re running on the edge on the Colorado as well, but we’ve made those investments.  The two main tools that we have to meet needs are: improving the reliability of the SWP or hanging on to the reliability and investing in local projects, so we’re investing in local projects.  It’s like building habitat; it sounds easy but really not.  They are hard to do, but we’re heavily invested in local projects, so it’s basically a trade-off of if you didn’t make this investment, where’s that going to drift to, and it isn’t just water supply.  It’s like real estate.  Not all things are created equal.

Before we make the decision at our board, we’ll lay that out, here’s what we believe we would need to do for local investments, and those are things like water recycling, we’re in the early stages of looking at the largest recycling plant in the world between Metropolitan and LA Sanitation District.  More desal, Carlsbad just came online.  50,000 AF it’s a billion dollars, and the next one you build will be more.  So it’s a matter of how you play those things together, and that’s how we’ll need to make the decision.

The other thing to keep in mind is the more local projects you do, the harder they get and the more expensive they get, and we’re counting on those to meet our future demand.  We’re still growing at 150,000 people per year in our service area, so that means in ten years, we’ve got another 1.5 – 2 million people in our service area, they like to be able to make sure that supplies work.  We’ll keep cranking on conservation but we’ve got to improve on local projects to meet reliability.  So that’s our business model, it’s really a trade-off and we’re the one entity that’s going to actually have to make a decision because we’re talking about a substantial investment and our board is a pretty smart, sophisticated board that’s going to want to have all of the information in front of them to do that, so that’s where we’ll lay that out and it will all be public.

We made the estimate and it’s based on the all-in costs as we’ve viewed them at high interest rate.  If you’ve ever signed a mortgage, you know that interest rate matters, and so when we say $5, that’s at 6.135% interest rate, which is quite a bit higher than current interest rates, so we’re trying to be conservative at this point.

I don’t Roger’s gone to the bond market with Westlands before, and 6.135 might not be – it’s also going to be off in the future, so I think conservative is warranted.  It’s a calculation basically, the biggest thing the calculation depends on is that the agricultural interests are in for the majority of the costs of the project, and if they are out, then that could triple, but is there a way to do that where the urban areas get more of the benefits.  I don’t know, we haven’t seen that business plan yet.

That’s one of the questions at least as I see it that exists and that’s the financing plan.  … The Central Valley ag districts, generally speaking, have been pretty silent on this.  In order to make this all come together, all of these parties have to come together around a comprehensive financing plan.  My sense is, just from my understanding, is that once these approvals that have to take place this year go forward, people are either going to have to step up or not, and if they don’t, we know the consequence of that as well.

Ben Bradford asked Roger Patterson if this is going to be spread across every water agency … would it be based on allocation … ?

It’s not done, but the model we’re on is every entity that receives water from the Central Valley Project and the State Water Project south of the Delta will pay all of the capital costs, all of the O&M, and all of the mitigation.  So then it gets down to and we’re going to see, if we have everyone participating in the project, that’s one thing.  Let’s just say ag decides you can’t participate, you’re not going to build a project.  Metropolitan is not going to build the project, because what we’re trying to do, the cornerstone of the project, is to change these reverse flows.  And some people said, well why doesn’t Met do it and just build a small pipe, well that doesn’t solve the problem, so the idea is spread it on everyone, that’s the beauty of having a large base, and then they sign a contract, just like we do now on both the CVP and the SWP or any other utility that I’m familiar with, and pay it back.

This is a panel on fiscal impacts and cost allocation and is the project financeable, and so from that perspective, the most relevant question, for the ratepayers, Roger’s agency and others, does this project make sense?  Is there a business case for it? Now the effects that you’re talking about are just as important, we’ve analyzed them, Jeff’s analyzed them, the EIR analyzed them in great detail, and also came up with a suite of several dozen mitigation measures. So yes, absolutely the local effects on the Delta region from construction and operation of the project are absolutely important.  From a statewide perspective, the focus of this panel is somewhat different …

Most of the water agencies around the state are embarking on pretty big capital plans to invest in their water reliability, and for many of them, for the first time, they are really bumping up against those limits of what their ratepayers can afford, so the issue to understand  here is that when you talk about these projects individually, whether it’s $5 a month or $15 a month and you put it into the whole plan, we are talking about a project that has the ability to crowd out and create problems for other projects that agencies would like to finance.  That’s a real issue with this project is that it could create problems for some projects going forward for some agencies.

Ben Bradford said, “When I moved here from Charlotte, North Carolina and heard our water director down there say essentially that we do not, as a nation, price water to what it’s actual value and cost is, that what we pay for essentially is how it gets to your tap, but we don’t actually pay the true cost of water.  In California, do we price water appropriately?

We have, with respect to water infrastructure, kind of a crazy quilt of local, state, and federal programs; for example after the Clean Water Act, the federal government subsidized massive investment in wastewater treatment plants.  Those costs weren’t paid by the ratepayers, they were paid by taxpayers nationwide.  Now one thing that I think is remarkable about the Water Fix, it’s going to be paid for almost exclusively by the ratepayers of the agencies who will take delivery of the water.  So in that sense, it’s closer to the model that economists have advocated in other sectors.  We don’t pay for highways entirely with user fees.  We have a whole complex of income streams that come into paying for road construction, but in this case, you do have a pretty clear user-pay principle.

I love this question because it tees up a real interesting dichotomy.  Everybody who is involved in a water agency would fall out of their chair to realize that North Carolina has unimpaired flow standards, which is if there weren’t infrastructure developed around the river, how much water would be left in the river.  The unimpaired flow standard in North Carolina is more than 70% so that’s where they start with is wanting to see rivers with 70% of their natural flow.  People here would be falling out of their chairs and coughing and choking and saying we can’t possibly live with that in California because we’ve so over allocated water in the system already. … If that’s what they’re doing in North Carolina, then how should we think about water in California.

How do we get to protecting flows that really do provide for sustainable overall water management?  I’m talking about groundwater and surface water management, integrated together, which kind of starts under the Sustainable Groundwater Management Act, but that law doesn’t actually come into real effect until 2042.  So what we’re really doing right now is kind of living in place where people are still gaming the system and developing as many wells as fast as they can around the state, which is actually depleting further instream flow, including in the Sacramento River and the San Joaquin, that ultimately are pulled out by surface water users, and so this is a really important question that you’ve put out … we’re not beginning to factor in sort of how we really absorb and allocate those costs around in a realistic way to protect all the values that we care about as Californians.

Dr. Sunding is right; this is a big step in the right direction compared to the 1950s in the way we federally fund and subsidize big water projects.  We have beneficiary pays, but it is important to note that urban water districts are talking about raising property taxes for this and not putting all of the costs into water rates, and so that would be a mispricing of water by paying for it with property taxes, which I understand is increasingly part of the plan.

We’re in a 60-day escrow period.  We paid $175 million the four plus a little; there’s a little piece of Chipp’s Island.  … We have not determined long-term what we would like to see happen with the Delta islands.  One thing we do know is that we’re not going to do a water project.  In fact one of the requirements of the seller is that they pull their request for the permits.  We would like to work with other landowners in the Delta and figure out what makes sense on these islands.  …  Is it more waterfowl, is there some mitigation kinds of things, are there carbon things, it there some way to reduce subsidence.  As you know very well, it’s below sea level, and so we would like to start working to sort of change the trajectory if you will of what’s going on there.

In the short term, we’ll continue the activities that are on the islands until we can think through and work through with others what makes sense.  I know it’s got people on edge a little bit … we haven’t figured it out yet.  One thing Met’s pretty good at is partnerships and trying to figure out how to make things go and we’ve got the money to do things – a lot of times, these lands move into public ownership and then they just sit, and they don’t really move towards what the objectives were when they were bought, so we want to make that happen, but do it in a responsible way.

Let me answer that in two ways.  From the perspective of urban agencies, this Water Fix, the Delta tunnels, don’t actually provide a whole lot more water during a drought.  I talked earlier about an incremental 1 MAF that occurs in wet years.  But what it does for agencies like Roger’s is to fill up the reservoirs more frequently and more deeply, so they are able to make it through a drought easier.  Same thing in agricultural areas.  The Water Fix provides water to them too primarily in wet years, which then replenishes groundwater basins; that’s another important public policy objective that is related to the Water Fix, so they are better able to make it through in dry periods.  So even though the Water Fix does not itself provide a lot more water in dry years, it is a drought mitigation strategy because it allows agencies to fill up their storage and make it through easier.

Longer term, drought is one thing, but I want to reemphasize longer term, climate change is something that we’ve got to start grappling with.  We’ve worked on this, I’ve done academic work on it with respect to water, it’s definitely relevant with respect to Water Fix – we have got to get serious about the fact that with any reasonable degree of sea level rise, it’s going to be much more difficult to take water out of the Delta.  The Water Fix from that perspective might be the first of many investments that we have to make in this state to make our infrastructure more resilient against climate change.  The modeling that we’ve been given shows that with just about 3 feet of sea level rise, people are projecting by 2100, that would reduce Delta exports by about half to Roger’s agency, and to agricultural agencies.  That has very large economic impacts, obviously, and the Water Fix does help to alleviate that, so in that sense, it is a climate change mitigation strategy.  The first of many that we might have to consider in California.

I do want to go back and emphasize that there’s a lot going on, and these good people up here are doing a lot on the drought.  The tunnels is not the only debate taking place in water policy; both the legislature and the governor have taken very aggressive steps to deal with the drought, with or without the tunnels, so I don’t want to let that sit.  The purpose of this conference is more focused on the California Water Fix, but I do think there’s a lot to be talking about with respect to the deployment of water bonds, the local and regional efforts to conserve and use water more efficiently.  Roger mentioned water recycling and a variety of other activities and investments that are underway, so there’s a lot of good that’s going on out there outside of this conversation about the tunnels.