June 23, 2004 - From the February, 2001 issue

CALFED's Environmental Water Account: LAO Suggests Need for Definition & Oversight

One of the most interesting elements of the CALFED program for restoring the Bay-Delta is its reliance on a so-called Environmental Water Account, which would allow state and federal agencies to immediately draw on an existing pool of water when supply reaches dangerously low levels, rather than restricting delivery by the State or Central Valley Water Projects. But with last year's ROD providing little detail on its mechanics, the State Legislative Analyst's Office has released the following report suggesting oversight hearings be held before further funds are disbursed.

Water Problems In Bay-Delta

Over the years, a number of interrelated water problems have developed in the San Francisco Bay/Sacramento-San Joaquin Delta Estuary ("Bay-Delta"). These problems include deteriorating water quality, declining fish and wildlife populations, eroding levees, and uncertain and unreliable water supplies. To address these problems, a collaborative state-federal process called the Bay-Delta Program (CALFED) was formed. As one of its many proposed solutions to Bay-Delta water problems, CALFED recently began to implement a program referred to as the "Environmental Water Account" (EWA).

Bay-Delta Solution Includes Environmental Water Account

Purpose of EWA. One of the many components of CALFED's framework is the creation of EWA. The EWA is a water management strategy designed primarily to address two problems-declining fish and wildlife populations and unreliable water supplies. While CALFED plans many other programs and projects to address these problem areas, some at substantially greater cost than EWA, the program is nonetheless viewed by CALFED as an important component of its overall solution to Bay-Delta problems.

The purpose of EWA is to increase the reliability of water supplies to urban and agricultural users while assuring that sufficient water will be available for the protection and recovery of endangered and threatened species in the Bay-Delta. The EWA would accomplish this by making available a supply of water that can be used for fish protection, on a "real-time," as needed basis. This is in contrast to the less flexible regulatory requirements currently imposed on the state and federal water projects under endangered species laws.

In general, the current requirements place operational restrictions on water projects based on "typical" fish behavior. These requirements control matters such as the timing and amount of water that can be pumped into aqueducts or released from storage. Because these requirements are based on typical fish behavior and circumstances, they can result in too much or too little water being provided for fish protection at any point in time. Instead, EWA's focus on providing water in response to actual circumstances and needs for fish protection should result in Bay-Delta water being used more efficiently.

The creation of EWA would not override current endangered species laws, and would not prevent listings of threatened and endangered species in future years. Nor would EWA eliminate any existing operational requirements (referred to as the "regulatory baseline") placed on the state and federal water projects to protect fish. Rather, the goal is to reduce the potential for additional restrictions on the state and federal water projects in future years that curtail water deliveries to agricultural and urban users. If this objective is met, water supplies should become more reliable.

How EWA Would Work. The CALFED currently plans to operate EWA as a four-year program, after which time the program would be evaluated to determine whether and how it should continue. The EWA is analogous to a bank account. Water "deposited" into the account will be acquired largely through purchases from willing sellers. Water could also be borrowed or be freed up for the account by making changes in how water is delivered from the state and federal water projects. Water in the account will be withdrawn when existing restrictions and requirements on the state and federal water projects (the regulatory baseline) do not provide sufficient water to protect fish at a particular time.

Based on estimates made by the state and federal fishery agencies, CALFED has determined that 380,000 acre-feet of water is needed in the account annually. The CALFED also proposes that an additional 200,000 acre-feet of groundwater be stored as a contingency reserve. Water used from this reserve would be replenished so as to maintain a 200,000 acre-feet reserve.

The CALFED plans that the program will be managed by the three state and federal fishery agencies, in "coordination" with the two state and federal water project opera

tors and other stakeholders. Details of how these five agencies and "other stakeholders" will have input into EWA's management and make decisions have yet to be worked out. Initial acquisitions of water for the account will be made by DWR and the federal Bureau of Reclamation. The process for making acquisitions in future years, however, has yet to be determined.

Funding for EWA. The CALFED has estimated average annual costs of $50 million for each of the four years to purchase water for EWA, in addition to the costs for power generation and to manage the program. The CALFED does not yet have a plan to finance EWA. However, the five fishery and water project agencies have agreed that EWA be funded jointly by the state and federal governments and that there would not be increased costs to parties contracting for SWP and CVP water delivery.

For 2000-01, CALFED anticipates that state funding of $60 million for EWA will come from the $135 million General Fund appropriation in the 2000-01 Budget Act for CALFED programs and projects. However, these funds are available only if legislation is enacted that certifies that the planned use of funds is consistent with the approved environmental documents for the CALFED program framework. Federal funds to support EWA have not been appropriated in federal fiscal year 2001.

The CALFED plans to initially fund EWA by borrowing from Proposition 204 bond funds and repaying the Proposition 204 account with General Fund monies when they become available. We think that such borrowing is contrary to the Legislature's intent that General Fund expenditures for CALFED purposes await the enactment of legislation. Therefore, we recommend that the Legislature direct the administration not to authorize this borrowing by CALFED.

The 2001-02 Governor's Budget proposes $30 million (mainly bond funds) for EWA. Federal funding to support EWA in 2001-02 is uncertain at this time.

Issues for Legislative Consideration. The EWA represents an entirely new program for the state [raising] a number of policy and operational issues, as well as issues about the program's impacts and accountability. Many of these issues have yet to be resolved by CALFED. We think that the Legislature should evaluate the major issues in determining whether an EWA ought to be established and before potentially substantial state funds are committed to its operation. If the Legislature finds that the concept of EWA has merit, we recommend that the Legislature enact legislation to define EWA and to provide for oversight of its operation.

Policy Issues

Should There Be EWA in the First Place? For the Legislature to assess the merits of EWA, the costs, benefits, as well as other potential impacts, of such a program should be examined.

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What Is the State's Role, Particularly in Terms of Funding? If the Legislature approves the creation of EWA, it should also determine the appropriate state role to implement it. In particular, the Legislature should determine the extent state funding should be provided.

Should the Regulatory Commitments Be Put in Statute? We think that putting [a state or federal] regulatory commitment in statute has both advantages and disadvantages. For example, putting the commitment in statute would provide greater certainty that future water deliveries would not be reduced [to SWP and CVP]. As a result, parties may be more willing to sell water to EWA today. On the other hand, by putting the commitment in statute, the Legislature may feel obligated to fund EWA in future years at levels that allow the commitment to be met. This may limit the Legislature's flexibility to determine its future funding role, given that it has yet to evaluate the outcomes and impacts of an operational EWA.

Operational Issues

How Should EWA Be Governed? The governance structure identified by CALFED for EWA is vague. It is not clear how the five fishery and water agencies will cooperatively manage the account among themselves and with an unspecified number of stakeholders. The involvement of so many parties in EWA's management could make decision making cumbersome.

We think that more details on the proposed governance structure should be provided to the Legislature. After evaluating CALFED's proposal, the Legislature should statutorily specify the governance structure. We think that the Legislature should consider assigning management responsibility to a smaller, rather than larger, number of entities to create a more efficient and accountable decision making process.

For What Purposes Should EWA Water Be Used? Some parties have expressed concern that water deposited in the program's water account might also be leased or sold to meet growth in water demand by agricultural and urban users, rather than as a means to address environmental water needs. We think that the Legislature should specify the eligible uses for water deposited in the program's water account. For example, the Legislature might specify that EWA water be used solely for the benefit of threatened or endangered species and their habitat. Alternatively, the Legislature might provide some flexibility, for example, by authorizing EWA water to be transferred to nonenvironmental users in exchange for habitat improvements.

What Amount of Water Is Needed to Make EWA Work, and Can the EWA Acquire This Amount? A number of parties have questioned whether CALFED's estimate of an annual need of 380,000 acre-feet of water for EWA is the "right" number. This issue is particularly important because the five fishery and water agencies designated to implement EWA have committed to purchase additional water if the 380,000 acre-feet amount proves insufficient for fish protection. As a result, the funding needs for EWA are uncertain.

Even if the 380,000 acre-feet amount turns out to be sufficient for fish protection, it is questionable whether this amount would be available for purchase from willing sellers. If this amount of water is not available for purchase, then EWA is unlikely to meet its goal of avoiding additional future reductions in state and federal water project deliveries. Thus, prior to determining whether EWA merits state creation and funding, we recommend that CALFED be directed to provide information to the Legislature to support its assumptions about the amount of water likely to be available for purchase by EWA.

What Is the Role for Scientific Review, and How Should It Be Structured? At recent congressional hearings on Central Valley water management, some legislators expressed concern about the lack of scientific peer review of the EWA proposal. While CALFED proposes that a scientific panel be established, there are few details on how the panel would conduct its review. We think that a scientific panel could serve an important role in determining such fundamental matters as how much water should be in the account to protect fish species. Additionally, the scientific panel could assess the effectiveness of EWA in improving endangered species protection and recovery and water supply reliability. We think that the Legislature should define the panel, by identifying its composition and responsibilities, how it will be funded, and how the panel's input should be incorporated into the operations of EWA.

How Can Water Transfers Be Facilitated? The acquisition of water by EWA would involve "water transfers"-the sale or lease of water rights or of contractual rights to be supplied water. However, there is a need for clearer, more consistent water transfer laws in order to facilitate water transfers in the state. In particular, there is a need to clarify and/or strengthen laws governing:

• Access to and the cost of utilizing water conveyance facilities, such as aqueducts, for purposes of water transfers.

• Protection afforded "third parties," including local economies, that are impacted by transfers.

Since water transfers must be facilitated for EWA to operate, these issues must be addressed if the program is to work effectively.

How Can Water Storage Capacity Needs Be Met? For EWA to work well, it must be flexible enough to release water in a timely manner to meet fish protection needs efficiently. This would require adequate capacity to store water transferred into the account as well as to access that water. With or without EWA, the Legislature will increasingly be called upon to address needs for increased water storage in light of projected growth in total water demands.

Accountability. Most parties view EWA as an "experiment." However, there is currently no mechanism through which this new program would be held accountable to the Legislature.

If EWA proceeds, we recommend that the Legislature require CALFED to periodically report to the Legislature on the actions taken under EWA, and to provide an in-depth evaluation after the program's initial four years. Specifically, the reports should include information on the (1) amount, cost, and source of water deposited to date in the program's water account; (2) extent to which EWA has prevented additional endangered species-related requirements for water projects that reduce water deliveries; (3) impact of EWA on endangered species protection and recovery; (4) impacts of EWA on the water transfer marketplace and groundwater resources, and any other observed adverse impacts that need addressing; (5) breakdown of funding sources to date, and projected future funding needs for EWA; and (6) any recommended statutory changes to improve EWA's effectiveness. We think that this information would enable the Legislature to evaluate EWA's effectiveness in creating more flexibility and reliability in the water supply system while providing sufficient water for fish protection and recovery.

This report was prepared by Mark C. Newton, with the assistance of Kelly Crowley, under the supervision of Dana Curry. The Legislative Analyst's Office (LAO) is a nonpartisan office which provides fiscal and policy information and advice to the Legislature.

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