On April 10, Metropolitan Water District (MWD) approved, with little analysis, a hastily conceived plan that greatly increases their "Waterfix" commitment
from $4.3 billion to a blank check for 65% of the project (currently estimated at $10.8 billion). Most of the additional cost is from MWD committing to finance the project's "unsubscribed capacity," which is defined as 1/3 of the $17+ billion project. The "unsubscribed capacity" exists because the agricultural serving Central Valley Project made a rational decision not to finance their share of the $17+ billion Waterfix tunnels, and MWD's last minute reversal is a desperate attempt to fill this financial hole and get it approved before the full risks of the plan can be understood. While this vote commits MWD to 65%, they are also negotiating exchanges with State Water Project agricultural contractors for portions of the other 35%, so it seems probable that MWD's final share will be 75% or more.
Due to likely Brown Act violations, MWD will be revoting on the additional financing on July 10. In a letter denying the Brown Act violation while announcing the revote, MWD argues that there was no violation because the vote must be viewed in light of the "robust discussion" around the tunnels in over 10 years of planning. I agree with that, this last minute change to the financial plan must be viewed in light of 10 years of staff describing a completely different financial scenario; ten years of staff wrongly stating that farmers will pay for the majority of the project; ten years of staff insisting MWD's share is only 26%; ten years of staff saying there will be no farm subsidies; and ten years of staff dismissing analysis (by me and others) that correctly predicted that farmers would and could not pay their share and that MWD ratepayers or taxpayers would subsidize the project.
In fact,
most of the agenda packet for the meeting in which MWD commits an additional $6.5+ billion to the project are white papers and analysis that do not even contemplate that MWD would pay more than $4.3 billion, or how non-participation of the CVP could affect project operation. This new deal hasn't received a fraction of the previous analysis, and it is clear that many are uninformed and confused about what this change means. MWD staff say that CVP agricultural contractors are expected to pay them back in the future by renting the tunnel capacity from them,
a plan with remarkable parallels President Trump's plan to have Mexico reimburse U.S. taxpayers for building his border wall if Congress approves up front financing.
MWD board members still do not have key information they need to consider before making risky, multi-billion dollar commitment from their ratepayers. This information includes:
- The "Master Agreement" with DWR that describes the management of the "unsubscribed capacity." The board wasn't even provided a draft agreement, just a powerpoint slide that lists what staff hopes will be in this critical agreement.
- An analysis of whether the unsubscribed capacity arrangement in the master agreement will stand up to legal challenge, does not infringe on others water rights, and complies with the California constitution (notably Propositions 218 and 26).
- An independent benefit-cost and financial analysis of the additional "unsubscribed capacity" investment, including a robust analysis of risks and unintended consequences.
- Since staff argue they will be repaid by CVP farmers, they should provide some evidence that this expectation is reasonable. If they couldn't get a formal agreement, it seems there should be a minimal expectation of a letter of support from CVP that signals their intent to use and pay for this capacity. In addition, how about a serious independent analysis that shows why it would be in CVP farmers economic interest to pay these costs.
Last weekend, I finally watched the March 27 workshop meeting where staff reviewed the unsubscribed capacity deal. As far as I can tell, this meeting is the only information on the unsubscribed capacity deal prior to the vote, and months later, is still the best information out there. I found the meeting alarming. MWD staff did not adequately convey the risk of the financing scheme to the board, and made a number of questionable and misleading statements throughout the meeting. Some of the board members (those who voted No on April 10) asked good questions, but did not receive good answers from staff.
Below are some more specific comments on this financial plan after watching the March 27 workshop.
This deal increases the already high risk that the tunnels will never provide the additional 1.3 million acre feet (maf) of water supply reliability claimed by MWD staff.
The 1.3 maf of water supply benefits is the result of MWD staff using an alternative no-tunnel baseline than is used in the EIR/EIS and various regulatory permits for the tunnel. In the WaterFix permit documents, the incremental water supply benefit is just 0.2 maf, not 1.3 maf, because the no-action baseline is different. The difference between the MWD staff estimate of 1.3 maf, and the 0.2 maf in the EIR/EIS, is that the official permit project description includes new south Delta pumping restrictions as part of the WaterFix project, whereas the staff analysis puts these new south Delta pumping restrictions into the no-tunnel baseline (and thus takes them out of the WaterFix project).
When all the SWP and CVP contractors are participating equally, this baseline argument is kind of abstract and academic although it is critical to the assessment of the benefits, costs, and environmental impacts of the tunnels. However, it is no longer an academic debate when the CVP is out and MWD is financing "unsubscribed capacity." When all entities are participating, the touted 1.3 maf water supply benefit are the 2 projects working together to "protect" water they are currently diverting from future reductions. But when MWD staff is using this speculative no-tunnel baseline assumption to define the additional water supply benefits they will receive for the extra investment, the additional water supply is water that goes to the CVP under current regulations. Thus, in this unsubscribed capacity scheme, MWD staff is using this speculative future baseline to argue that financing the full WaterFix
will give them control of water supply that CVP currently diverts from the south Delta. That is a very different argument, and MWD board members should be very, very skeptical of that it will actually work that way.
Surprisingly, MWD staff patted themselves on the back for being consistent with this 1.3 maf yield assumption since way back in the BDCP days. Stubbornly maintaining the same wrong position even as the facts change is nothing to boast about. It was a speculative assumption under BDCP, but MWD staff stuck with the 1.3 maf water yield estimate even though shifting from BDCP to WaterFix (and losing the BDCP's section 10 ESA permit) reduced the primary rationale for this assumption. And now the non-participation of the CVP further reduces the justification for this optimistic water supply assumption, but MWD staff is sticking with it - just like they stuck with their claim farmers would pay. Good luck wrestling that water away from the CVP if they don't pay for the tunnels (not to mention environmental needs).
Financing "unsubscribed capacity" substantially increases project risks. Three of the projects' biggest risks to MWD are amplified by this deal.
- Cost overruns.
- Farmers don't pay.
- Future environmental regulations restrict the north delta intakes.
These have been big risks for MWD all along, but they are magnified here because this deal makes them positively correlated. For example, if the project has construction cost overruns like most megaprojects - it greatly increases the risk that farmers will choose not to pay MWD to use the "unsubscribed capacity" because the costs will be too high. In contrast, in the framework staff described for 10 years, all participants would have been equally on the hook for cost overruns, but the vast majority of cost overrun risk falls on MWD now. In light of this, the MWD board should request an independent and updated cost estimate rather than rely on an old outdated, cost estimate.
As mentioned above, when the tunnels shifted from the BDCP to the WaterFix, MWD lost section 10 ESA assurances against future regulations and thus accepted much greater risk that the north Delta intakes could be restricted in the future. That risk further increases with farmers not participating (which is more likely with cost overruns), because there will be a powerful political constituency arguing to pin future environmental problems in the Delta on the tunnels instead of the south Delta pumps where they divert. The biological opinions and other analysis of the tunnels to date suggests that it won't be hard for the CVP to get scientific support for stronger restrictions on the north Delta instead of the south.
MWD staff said they cared about risk reduction and wrote this principal on their powerpoint slides, but the reality is that this financial deal increases financial risk even more than the increase in their cost share.
Staff comments about exchange contractors, wildlife refuges, and CVP ability to access the tunnels don't sound right.
MWD staff is wrong that this financing approach maintains consistency with the approved project.
Maintaining consistency with the project that has received some permits (and is still under consideration for others) was touted as a major advantage to MWD financing the full 2-tunnel, 3-intake project rather than scaling down to a single-tunnel, "phased" approach. While this keeps the physical infrastructure the same as in the permits, I am told that implementing the proposed "master agreement" in the way MWD staff describes would create big changes in operations (including upstream reservoirs, the south Delta intakes, and the distribution of export water south of the Delta). Thus, it will result in big changes to the environmental and water supply impacts of the project, and could easily add permitting delays that are comparable to the single-tunnel approach.
Staff is wrong that farmers will repay them, and that the farmers need them to finance the "unsubscribed capacity" because of cash flow.
Staff is right that this is a better deal for CVP farmers, but it is not for the reasons they say. CVP farmers benefit from MWD financing the "unsubscribed capacity" deal because it a) shifts the risk of cost overruns and other problems from them to MWD, b) gives them a decade or two to find ways to shift their cost share onto someone else, and c) allows them to pass on the deal all together if it isn't beneficial to them (which it will not be unless a subsidy materializes).
With the cash flow during construction argument, MWD staff is just making something up that sounds plausible, but it is less credible than a pitch from a used car salesmen. Westlands and CVP contractors can do the same thing while financing their share themselves by capitalizing some or all of the interest on the bonds. Goldman Sachs described these options in their presentation to Westlands using a cash flow argument, and it is a common argument/structure for infrastructure bonds. MWD staff claims that they would be repaid by farmers for fronting the money, including all the accumulated interest, which is no different to the CVP than financing it directly with capitalized interest.
Of course, staff also mentioned that the Sustainable Groundwater Management Act (SGMA) will make this water more valuable to farmers in the future. They are right about that one. The primary substitute for surface water is pumping groundwater, so SGMA will reduce access to that substitute and will increase the value of water. I have seen estimates that it could drive willingness to pay up to $500 or $600 per acre foot. There are some limits to high how it can go, as there are still other alternatives to get water than paying for the tunnels. Lower cost options could include lobbyists, lawyers and campaign contributions, and the most costly options are to let the land growing less profitable crops go fallow, or go buy a farm somewhere else. Even those high-cost options are likely to be cheaper than spending billions on tunnels for meager water supply improvement.
MWD staff made a terrible comparison between MWD's investment in the unsubcribed capacity to a private investor in a private/public partnership.
This analogy begs the question of why aren't private investors financing the unsubscribed capacity instead of MWD? Unlike private investors in a public-private partnership, water agency staff (and boards) are risking other people's money, not their own. Private investors would never touch this deal, and neither should MWD.
MWD staff blames the Bureau of Reclamation, but this financial mess is their own fault.
These financial issues were entirely predictable, and in fact were predicted 6 years ago. MWD staff acts like the Bureau of Reclamation surprised them with an unexpected change. Really? No one ever seriously believed exchange contractors and wildlife refuges would pay because they don't benefit, and the CVP contractor with the most potential gain, Westlands, have been in doubt since the beginning and had their planning costs subsidized.
This mess of a financial plan is a direct result of the Department of Water Resources (in alignment with MWD staff and state water contractors) to ignore their own guidelines about about feasibility studies and cost-benefit analysis, and their push back against every attempt to require an independent analysis of financial feasibility, and economic benefits and costs. I can recall sitting in multiple Assembly hearings in recent years while MWD staff argued against bills that would have required the state to follow its own guidelines on financial feasibility and benefit-cost studies. Rather than fighting against independent financial analysis along the way, MWD staff should have supported proper financial and economic analysis. Then they could have been developing and analyzing the feasibility of alternative financing approaches years ago, not coming to their board with half-baked financial schemes at the last minute.
I am sure others have many more questions to add to mine. Hopefully, MWD staff will take advantage of the additional time to fill-in the numerous critical information voids and provide their board with adequate information and analysis to make a commitment of this magnitude. I am not expecting that, but maybe some MWD board members will use the opportunity to get more information and reconsider their vote.
