May 5, 2004 - From the February, 2003 issue

MWD's Planning Offers Insights Into Agency's Strategy For Loss Of Supply From Colorado River

As the state and the nation await a resolution to the Imperial/San Diego water negotiations, Metropolitan Water District continues to pursue and amass supply for its Southern California customer base. MIR is pleased to present the testimony of Jeffrey Kightlinger, General Counsel and Debra Man, Vice President of Water Transfers and Exchanges for Metropolitan in front of the California Assembly Water, Parks and Wildlife Committee in which they discuss MWD's water supply and the negotiations surrounding the Quantification Settlement Agreement.

As you are aware, California has long used more than its basic 4.4 million acre foot apportionment of the Colorado River water. We are entitled under federal law to use surplus water when it is available, but it is clear that surpluses will be less frequently available as a result of growth in the other Colorado River basin states. California has acknowledged its need to wean itself from this extra water. Under a flexible plan adopted by the state's Colorado River Board (the 4.4 Plan or California Plan), California has identified steps that could be taken to gradually reduce its use of Colorado River water. The United States Department of the Interior (DOI) responded by adopting Colorado River Interim Surplus Guidelines (ISG) to allow California to take more surplus water than would otherwise be expected to be available for 15 years. A predicate of the continued application of the ISG was an agreement among Metropolitan, the Imperial Irrigation District (IID) and the Coachella Valley Water District (CVWD) to cap agricultural water use by IID and CVWD. It also was expected that IID would reduce its water use and sell conserved water to CVWD and the San Diego County Water Authority (SDCWA). Metropolitan would have the ability to use other conserved water (e.g. All American Canal lining water and Palo Verde Irrigation District (PVID) conserved water). This agreement was the QSA.

On January 1, 2003, DOI suspended the ISG because of the failure of four California water agencies and the federal government to reach agreement on a QSA and related documents. As a result, California's right to use up to 800,000 acre feet of surplus Colorado River water this year is suspended. Metropolitan lost access to more than 35% of its expected Colorado River supply while IID lost access to less than 7% of its expected supply. Interior Secretary Gale Norton somewhat mitigated Metropolitan's loss when she reduced IID's 2003 water order by 200,000 acre feet. Most of that will be made available to CVWD and PVID for agricultural purposes, but Metropolitan is expecting to receive about 60,000 acre feet of that amount.

Metropolitan's Current Water Supply Situation

At a special board meeting on January 6, 2003, Metropolitan staff briefed its board on the situation. The message that was provided and widely reported upon in the press was simple. This is a very serious matter, but it is not an emergency. The reason that there is no emergency today is our contingency planning for our region and our nearly 18 million customers. As a prudent utility manager, Metropolitan has developed redundancy to protect the reliability of its entire water system. Two years ago, Metropolitan began aggressively preparing for the possibility that Metropolitan's Colorado River supply could be curtailed- by either drought conditions or the failure of the QSA. Over the past ten years, Metropolitan has maximized its existing storage options and today has over 2 million acre feet of water in storage. That is about the equivalent of Metropolitan meeting one year's total firm demand without a single drop of water from either the State Water Project or the Colorado River.

Additionally, Metropolitan prepared operational plans to rely more heavily on planned storage in local groundwater basins, shifted imported delivery schedules to the high demand summer months, accelerated residential and outdoor conservation and ocean desalination programs, and entered into a series of dry-year option contracts with water districts and farmers in the Central Valley. Significant new long-term agreements were entered into with the San Bernardino Municipal Water District and Kern Delta Water District, adding up to 120,000 acre feet of dry-year water transfer capability. Together with our Semi-Tropic and Arvin-Edison programs, we now have up to 310,000 acre feet of annual dry-year yield that can be called upon during droughts.

As a result, Metropolitan has a diverse portfolio of resources to satisfy demands over the next two years even in a worst-case scenario of a Colorado River reduction coupled with a drought on the State Water Project and continuing record dry conditions in Southern California. Under normal hydrological conditions, these programs will cover Metropolitan's needs for the next six to 10 years. And Metropolitan is committed to continuing to invest in a comprehensive plan complete with a full range of programs to cover our region's demands for the next 20 years regardless of the status of Colorado River surplus water.

The Foundering of the QSA

For better or worse, the QSA was designed to be only as strong as its weakest link. Failure of any key component of the QSA would cause the entire agreement to terminate. The water agencies negotiated with each other for a number of years on the various components of the QSA. Together with DOI, and with the support of the State of California, we made remarkable progress on a number of important issues. The ISG was adopted in recognition of this progress; federal rules for inadvertent Colorado River water use overruns and pay backs have been promulgated; agreements have been completed among Metropolitan and the states of Arizona and Nevada for shortage sharing; SB 482 by Senator Sheila Kuehl was signed into law to resolve certain fully protected species issues; the Legislature had authorized and appropriated funds to line the All American and Coachella Canals, and a number of complex environmental documents had been completed and adopted in a timely manner.

However, one important component of the QSA, the IID/SDCWA transfer, encountered significant difficulties. The proposed transfer has long been politically controversial within the Imperial Valley and that controversy heightened as we approached the signing deadline for the QSA. Also, the environmental documentation for the program, all developed by IID after the initial QSA had been agreed to two years ago, indicated that the program could have significant environmental impacts on the Salton Sea and its surroundings. The documentation indicated that the mitigation of these impacts would greatly increase the expected cost of the transfer.

To limit the potential impacts of the transfer to the Salton Sea, the parties contemplated an interim period of land fallowing as a means of conserving water that would be less harmful to the Sea. But fallowing had been expressely forbidden in the IID/SDCWA transfer agreements because of the controversy in the Imperial Valley over fallowing.

To resolve this issue, the State Legislature facilitated a negotiation under the leadership of former Assembly Speaker Rober Hertzberg that culminated in a reduced delivery and a longer ramp-up period for transfers to SDCWA and CVWD and a revised QSA that was acceptable to all. Among the highlights of this plan were the following: The plan cut in half the amount of water that IID was to transfer to SDCWA for the first 15 years and called for this smaller transfer to SDCWA to be based, in part, on interim land falowing to avoid environmental impacts to the Salton Sea. To help make up for the reduced amount of transfer water, Metropolitan volunteered to make a significant portion of the water from its proposed PVID conservation program available to SDCWA and IID. And $20 million was earmarked for any potential third-party impacts associated with fallowing.

The boards for Metropolitan, CVWD and SDCWA formally accepted the changes to the QSA and directed staff to move forward. IID withheld action until December 9, 2002, when it rejected approval of the QSA environmental documentation (the PEIR addendum) and consequently the compromise QSA.

Among the reasons IID cited for rejection of the proposal was the concern that the environmental risks of the transfer were too large. As you may recall, the IID/SDCWA water transfer had been negotiated and agreed upon by SDCWA and IID before they had conducted an environmental analysis. To limit their risk, IID and SDCWA had from the outset decided to cap their environmental liability at set amounts before there was any environmental analysis to indicate what those costs actually were. IID contracted with SDCWA to not spend more than $30 million on environmental costs while SDCWA capped its exposure at $2 million.

It is now clear that these amounts are inadequate to pay mitigation costs associated with this transfer. The IID/SDCWA estimate of environmental costs for just the impacts within the Imperial Valley, excluding impacts to the Salton Sea, are about $135 million in present value dollars. The cost of this environmental mitigation spread out over the term of the transfer appears to be in the range of $300 to $600 million. Costs to restore the Salton Sea would be in addition to these costs.

Because of the large shortfall between the parties' planned transfer mitigation expenditures and the real costs, it became apparent that this transfer could only go forward with significant subsidies from an outside source. Consequently, on December 31, IID proposed that significant financial guarantees be made by the state to cover the risks in the transfer and that the QSA be executed in the hope that these financial infusions would be forthcoming. If this funding did not develop, IID's bottom line was that the transfer and the QSA would terminate.

DOI anticipated this proposal and consistently stated that it constituted a significant deviation from the requirements of the Interim Surplus Guidelines and that such a revised QSA would not meet the requirements of the ISG for a credible plan to reduce California's long-term dependence on Colorado River water.

DOI made it very clear that a QSA with new "off-ramps" would not be acceptable to DOI and that the ISG would be suspended on January 1, 2003, if there was not an executed QSA without new off-ramps. CVWD, MWD and SDCWA informed IID that the proposed financial "off-ramps" had to be removed and that a QSA would not be executed unless it was acceptable to DOI and would not result in suspension of the ISG.

Despite this notice, on December 31, 2002, the IID board approved a proposal that contained new off-ramps objectionable to the other parties to the QSA and to DOI. These new off-ramps included the following:

• Demand for a $150 million loan guarantee by the state, which if called upon would become a grant to IID;


• Demand for $200 million from Proposition 50 to pay for environmental costs to be distributed in a manner directed by IID;

• Demand that Proposition 50 funds be placed immediately into an interest bearing account for the transfer's benefit;

• Demand for payment to IID of $50 million of the $200 million in requested Proposition 50 bond funds for "make-up" water to be used for Salton Sea;

• Provision to allow IID unilaterally to shorten the term of the QSA from 75 years to 45 years; and

• Provision for joint and several liabilities for Metropolitan, CVWD and SDCWA for unexpected environmental costs, shortfalls in environmental funds and for post-QSA environmental impacts.

In addition, IID's negotiators asserted orally the right to terminate any transfer unilaterally if it felt another party to the QSA was not complying with its terms and refused an amendment to the QSA that would have precluded that result. The QSA parties were advised of the terms of IID's ultimatum at the 11th hour. The parties rejected it on the grounds that it was unreasonable, would not meet the Department of Interior's test for keeping the Interim Surplus Guidelines in place and for an approved Secretarial Implementation Agreement and could not be adequately understood in the time permitted. Moreover, none of the negotiators had the authority to agree to such terms in the absence of their respective boards considering and approving them.

Moving Forward

As it stands today, the QSA was not executed by the December 31st deadline and the Interim Surplus Guidelines have been suspended. This is an unfortunate development for California that will necessitate the use of other water resources to meet this shortfall. But, as stated earlier, this will not result in a water emergency due to prudent contingency planning.

It is possible for the Interim Surplus Guidelines to be restated. If the parties can agree on a QSA without off-ramps, the Secretary of the Interior has indicated that the ISG can be renewed. We should also be honest that this does not appear to be an easy task or one of certain success, absent a policy decision by the State of California that it will assume the transfer costs and risks that IID and SDCWA have for long said they would not.

The DOI and the other basin states have expressed grave reservations about reinstating the ISG in the midst of a record setting drought in the Colorado River basin if there is any chance that the QSA could abruptly terminate. The other basin states clearly feel that the Secretary took the right course of action in suspending the ISG as stated in their letter of January 8, 2003. In addition to the unacceptable new off-ramps noted above, DOI has concerns regarding a basic feature of the IID/SDCWA transfer IID's complete lack of specificity regarding the conservation methods that IID plans to use to reduce its water use. At this late date, two years after the developments of the QSA, IID has still not revealed how much of the reductions will result from system conservation, how much will result from on-farm conservation, how on-farm measures will be funded, how farmers will be compensated, how the water savings will be verified, how community impacts funds will be distributed, whether sufficient farmers will enroll in the program, etc. Until these details are clarified, it is unclear whether or not there really is a viable transfer program. This certainty is essential if we are to avoid facing another off-ramp down the road where farmers for a variety of reasons say they will not produce the transfer water.

Consequently, any attempt to revive the QSA will require commitment from all parties to drop demands that the QSA contain new off-ramps and contingencies. The parties will also have to agree to a firm schedule to putting forth a credible program with sufficient detail to allow farmers to enlist in the program up front and to allow for a reasonable assessment of the program's true environmental impacts. Without these commitments at the outset of any further action, we will simply see a return to the situation of the past few years: endless negotiation without progress on the most fundamental issues raised by this program. As we have learned, wanting to do the transfer and making it happen are not the same.

The Salton Sea also remains a troubling problem. There may be a role for pilot programs or expanded studies that could be made possible by application of Proposition 50 funds. More information on the Salton Sea and potential solutions would add some certainty regarding the environmental risks in this transfer.

Furthermore, we need guidance from this legislatitve body on whether Sacramento would support the IID demand to spend another $200 million of state bond proceeds and potentially $150 million for a state loan guarantee, if needed, for the IID/SDCWA transfer.

Another issue that will now have to be resolved is a lawsuit just filed by IID. IID's suit challenges the Secretary of the Interior's role as watermaster for the Colorado River and will complicate any effort to reach agreement.

As we stated earlier, Metropolitan is committed to the QSA. Metropolitan's board adopted the principles for finalizing a compromise QSA agreed to by all of the parties in October. We are still willing to adopt a QSA that meets those guidelines. While we are hopeful that this can still be done, realistically it can only be done if the hard issues are dealt with up-front in a forthright manner.

Finally, Mr. Chairman and members of the Committee, we clearly recognize that we need to make it through these difficult times with a plan that we, the rest of California, the other basin states and DOI can rely upon. A safe, adequate, reliable and reasonably price water supply requires resources, planning and hard work to manage risks. Metropolitan has committed the resources to do our part. We are willing to work with anyone in good faith to make and execute a sound plan. But if the Legislature determines that the state does not want nor has the means to meet IID's new demands, rest assured, that with your support, we will find a way to do the job Californians expect us to do, without undue reliance on the water resources of others in the state.

Thank you for the opportunity to appear before you. We would be delighted to answer any questions from the committee.


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