Repost - Glimpsing California's Future by Tom Stroshane

Spillway News, Winter 2000.

California glimpsed an apocalyptic water future in the
long drought of 1987-92.

To understand what that horror show meant in 1994 when
the Monterey Agreement was negotiated surreptitiously by
DWR and a small group of State Water Project (SWP)
contractors, we must look to the past, to why things played
out as they did in events leading to 1994.

But first, a digression on economics.

SWP contractors do not pay for water. Instead, they repay
costs of building and operating facilities for collecting,
storing, and distributing water, and those facilities by law
must be paid for regardless of whether contractors receive
water in any given year.

An economic analogy for what was set up with SWP
beneficiaries goes like this: Suppose you take out a mortgage
to buy a home with three bedrooms and two bathrooms.
Then it turns out you don’t have enough people in your
family to keep the second bathroom and the third bedroom in
regular use. You have to pay the mortgage back monthly
regardless of whether you use the whole house or not.

Do you think your mortgage lender would sympathize or
offer to adjust your mortgage based on your actual use of the
house? No lender would, rest assured.

The contractors struck the same kind of deal with the
state of California in 1959 when the Burns-Porter Act was
passed, and which the voters approved in 1960: contractors
agreed to pay for the project knowing there could be years
when they might not get the water they wanted.

SWP contractors use a convenient fiction of “entitlements”
to water as though they were a legal claim on the
state to provide them with water. That fiction enables them
(and indeed, some environmentalists) to speak of “buying”
or “selling” water. But this conceptual sleight-of-hand hides
the fact that “entitlements” are not legal rights to SWP water
but merely an accounting device by which the facilities cost
of water is allocated to different contractors based on the
proportion of the facilities used to deliver water to each
contractor.

Overdrafting Groundwater

In the 1950s, San Joaquin Valley agricultural and
southern California urban interests pumped out far more
groundwater than they recharged into their aquifers.
“Continued reliance upon the ground water overdraft
would eventually exhaust the water supply and kill the
economy of the area, thus establishing the need for supplemental
water,” writes southern California water lawyer
Arthur G. Kidman. “Without ground water overdraft,
California’s development and prosperity probably would not
exist as we know it today.”1

Indeed, groundwater overdraft was used to justify
planning and building the State Water Project (SWP) in the
1950s. SWP water was intended by state leaders like
Governor Pat Brown to secure the state’s water future and
take pressure off overdrafted aquifers in the San Joaquin
Valley and south of the Tehachapis in urban southern
California.

But it didn’t happen that way. New water facilities were
relatively cheap at first, and the water they deliver is easy to
bring to new lands for cultivating crops or subdivisions.2
Once the SWP began delivering water in the late 1960s and
early 1970s, the groundwater overdraft continued (as it does
to this day), combined with land speculation in new crops
and sprawling housing developments.

 In the planning stage, SWP water was still expected to
cost more than water provided through the federal CentralValley Project (CVP). Agricultural San Joaquin Valley contractors, led by the Kern County Water Agency (KCWA), openly worried about this high cost, insisting on and gettinglocal tax-base subsidies for water and no acreage limitations on farmers receiving SWP deliveries.

In addition, the long-term contracts make available
“surplus water” not requested by other contractors at just the
cost of transportation charges. San Joaquin Valley contractors,
especially KCWA, were historically the largest users of
this subsidized “surplus water.”3

Surplus water, however, was last available in the SWP
system in 1987, the first year of the last drought. Resulting
from the 1987-92 drought and a changed political culture,
environmental decisions have further limited water exports
from the Delta systems (both CVP and SWP). Coupled with
changes brought about by the federal Reclamation Reform
(1982) and Central Valley Project Improvement acts (1992),
the era of cheap facilities for delivering seemingly unlimited
quantities of water in California ended.4

The 1987-92 drought — the longest in California since
the Great Depression — brought the economics of costly
SWP water to a crisis point for its two largest contractors,
KCWA and the Metropolitan Water District of Southern
California (MWD).

In the SWP’s early years, the average facilities cost of
delivered SWP water was low, around $25 per delivered
acre-foot to San Joaquin Valley contractors like KCWA. (In
comparison, the contract cost of delivered water from CVP
facilities was $8.) Then the facilities cost of delivered SWP water nearly doubled in the early 1980s when DWR signed
new electricity contracts.

But in 1991, the worst year of the last drought, San
Joaquin Valley contractors received just 45,556 acre-feet at
an average facilities cost of $1,041 per acre-foot that year.5
MWD faced a similar but less extreme financial visegrip.
Where MWD’s cost per delivered acre-foot had been
$170 in 1982, it more than tripled to $548 in 1991 when
MWD received just 19.5 percent of its 2 million acre-feet
entitlement.6

Permanent Shortage Scenarios

Though SWP contractors were never promised any
specific amount of water, permanent water shortages in
California seemed both plausible and horrifying to water
watchers (though water officials later denied this to the PCL
v. DWR courts7).

In late 1993, DWR received requests from SWP contractors
for water deliveries totaling 3.8 million acre-feet, far
more water than the SWP had ever delivered before. The
department “felt the requests were unrealistic,” reported
public policy analyst Dennis O’Connor of the California
Research Bureau at the time. “In response, they claimed
authority under the contract to modify the initial requests.”
DWR then reduced the requests to the largest amount from
each contractor delivered in the previous 10 years, establishing
a modified initial request for 1994 deliveries of 1.56
million acre-feet, less than half of the contractors’ original
request.

At its December 1993 meeting, MWD’s board of
directors deferred approving their annual payment of $413.8
million to DWR, delaying its $67 million January payment,
in hopes that its water bill strike would get DWR’s attention.8

The California Research Bureau also reported that
delinquencies in Kern County’s SWP payments were a
significant problem during and after the drought. Worse,
since SWP deliveries were near zero in 1991, “the banks
have been reluctant to lend money [to fund farmers’ annual
credit needs there]. Their reasoning is that the farmers no
longer have a reliable water supply, and so the land has
virtually no value.”9

The worst case scenario for Kern County was that SWP
contracts require KCWA to guarantee payment to DWR by
levying a district-wide property tax sufficient to cover the
bill. “Since farm land that doesn’t have a dependable water
supply is essentially worthless, the tax burden would
ultimately be carried by the City of Bakersfield,” observed
O’Connor at the time.10

The California Research Bureau also pointed out an
Armageddon scenario: “If environmental protection in the
delta requires additional SWP delivery cutbacks in the 1/2
million to 1 million acre-foot range, a distinct possibility,
there is a potential for widespread default among agricultural
users.”11

While probably exaggerated, let’s return to our mortgage
metaphor: They had trouble making the mortgage on SWP
facilities. San Joaquin Valley interests clearly overextended
themselves when they expanded cropped acreage in reliance
on an at-best uncertain imported water supply rather than
using the water to stem groundwater overdraft.

The SWP, which many of its critics also regarded as “a
tremendous asset to the state,” must have increasingly
resembled a hydraulic Ponzi scheme verging on collapse as
the events of 1994 crashed down.12

On one hand, the industry faced extended drought in
which seven of the previous eight years (counting 1994)
were considered critically dry (1993 being a wet year
exception).13 (In retrospect, maybe not such a bad idea...would have kicked the Feds out of the state.)

On the other hand, in the midst of drought DWR planned
the SWP to expand. Voters in Santa Barbara and San Luis
Obispo County approved hooking their counties up to the
SWP. Other areas, such as Butte County in the northern
Sacramento Valley, were considering taking delivery of SWP
water as well. San Joaquin Valley contractors were also
urging then-governor Pete Wilson to have the State of
California buy the giant Central Valley Project from the
federal government.

Before such a thing as the CalFED record of decision
(adopted this past September), not only was there little
prospect of adding new reservoirs to the State Water Project
or the Central Valley Project, but new water quality regulations
and key biological opinions under state and federal
endangered species acts promised to release more stored
water for ecological uses, which would reduce yields of both
the CVP and SWP from the Sacramento-San Joaquin River
Delta.

Dry weather, low runoff, and depleted reservoir storage
in 1994 only added to the pressure to restructure the SWP
and somehow resolve the crisis. No wonder California’s febrile water wars were white hot in 1994.

That year was also marked by an overheated — and
bipartisan — ideological drumbeat for privatization of
government facilities (including water delivery facilities)
blared widely in public discourse to herald a new age of
economic “efficiency” through private sector “discipline”
and unleashing an enrichez-vous ethic. Then-governor
Wilson was its staunchest apostle at the time.

In such a climate, DWR officials were placed on the
defensive by the financial vise-grip of SWP payments on
contractors. They offered little resistance under Wilson to
contractors’ claims to “entitlements,” and refused to view
litigation as a serious option in such a situation.

O’Connor reported that defaults could force the SWP into
financial crisis and jeopardize its AA bond ratings with Wall
Street, forcing taxpayers to bail out the system with infusions
from the state budget so that the water system’s bond
payments were honored.14

To SWP contractors, cloudy SWP water supplies raised
the specter of obscenely high water costs and meager
deliveries, since their SWP contract payments would stay the
same whether DWR delivered water or not.

As urban development creeps northward from Los
Angeles to Tejon Ranch in the Tehachapis, it is also plausible
that twin prospects of permanent water shortages and
substantial public debt in the SWP clouded the dreams of
San Joaquin Valley land owners and water agencies for
converting their lands to urban uses and to be the water
source for Valley cities of the future.

Article 18

As 1994’s crises wore on, DWR’s handling of short-term
drought water allocations and the specter of DWR declaring
a permanent water shortage in California led to furious
disputes between SWP contractors and DWR.

DWR was empowered to act during drought conditions
under the SWP contracts’ Article 18. Two of Article 18’s
provisions address the short and long-term effects of
drought, and how DWR is to allocate water to contractors in
such situations.

Under Article 18(a), in years when water is temporarily
short, DWR was to cut agricultural contractors’ deliveries
first by up to 50 percent, before cuts were required of urban
contractors. Contractors disputed DWR’s implementation of
Article 18(a) during the 1987-92, according to O’Connor,
when DWR based reductions on contractor requests rather
than on entitlements as Article 18(a) specifies. Requests are
typically lower than entitlements, so contractors got less
water than allowed under Article 18(a) than in these dry
years.15

Article 18(b) enables DWR to recognize a long-term
shortage of water and, according to O’Connor, with five
years’ notice to all contractors, recalculate a reduced delivery
capacity (the project yield) for the SWP, and reduce each
contractor’s pro rata share of entitlements under the new
yield. (Keep in mind: legally speaking, entitlements are
really an accounting device.)

In this charged setting, “we did do the Monterey Agreement
behind closed doors,” Tim Quinn, deputy general
manager of MWD, admits. But, he claims, the agreement’s
principles “only affected who paid and who got water among
the SWP contractors.”16 If it was only that simple (see
“Bloodless Coup,” this issue).

Redefining SWP Supplies

Though the Monterey Agreement was negotiated in
secret, as the Third Appeals Court decision in PCL v. DWR
bluntly states, the issues leading to the Agreement were
aired.17 In January 1994, 11 months before the Agreement
was concluded, the California Senate Committee on Agriculture
and Water Resources held a hearing on SWP financing.

At the hearings, SWP contractors and other interest groups
vented to legislators about the SWP’s repayment system.
“The source of this dissatisfaction varied,” wrote CRB’s
Dennis O’Connor at the time. “For some, it was how the
Department of Water Resources allocated water during
periods of water shortages. For others, it was the ‘take-orpay’
aspects of the contracts. Still others expressed concern
about the perceived misallocation of one of the State’s most
valuable resources.”18

SWP critics felt the project “may never reliably deliver
the official project yield” of 4.2 million acre-feet. SWP
average costs were far higher than promised in the 1960s and
varied wildly from year to year. Critics considered the “takeor-
pay” financing arrangements economically inefficient and
unfair.19

O’Connor laid out 20 “options for change” to the State
Legislature addressing at least one of the issues SWP critics
posed: changing short-term shortage provisions, permanently
reducing the official project yield, setting a fixed price for
water, promoting economic efficiency, reallocating environmental
costs, changing SWP administration (including
contracting out or privatizing SWP operations, proposals
then in vogue for “reinventing” government functions
leading up to the Republican Party’s “Contract With
America”), and changing technical features of the long-term
water supply contracts.

O’Connor’s report could have been a starting point for an
Article 18(b) alternative analysis in the now-defective
Monterey Agreement EIR. Published in August 1994, months before completion of the Agreement itself, O’Connor
says there were short-term equity problems with reduced
entitlement deliveries implementing Article 18(b), but he
saw that executing 18(b) would reduce the occurrence of
long-term shortages, increase the availability of surplus
water, and stabilize the cost per acre-foot of water.20

By invoking a permanent water shortage, the state could
redefine the SWP supplies so they could be operated more
reliably. But contractors would have to reduce their exposure
to drought by diversifying their water sources. In 1994, they
weren’t so ready to do that.

The Agreement’s framers and their EIR consultants
ignored O’Connor’s 18(b) explorations.

In the end, options that appealed to Monterey Agreement
framers included buying and selling entitlements, using
capital reserve funds to restructure SWP financing, and
eliminating the agriculture-first contract provisions concerning
drought.

The framers retained the SWP’s project yield of 4.2
million acre-feet (an acre-foot is about 326,000 gallons of
water). Now Monterey Agreement “paper water” entitlements
are marketed to new sprawling developments like
Newhall Ranch in Los Angeles County and Dougherty
Valley in Contra Costa County. The Monterey Agreement
thus propels construction of CalFED reservoirs and peripheral
canals closer to reality as California’s population
grows.21

The framers not only avoided choosing to invoke
Article 18(b), Principle 2b of the Agreement deletes it.

“Some contractors claim that if Article 18(b) is reinserted
and the Kern Fan Element transfer is invalidated, the signers
of the Monterey Agreement will not sign a revised Agreement.
But no one knows for sure,” says Plumas County
Counsel attorney Rob Shulman.22 Plumas County is a
plaintiff in the Appeals Court case that has stalled Monterey
Agreement implementation.

“It’s nuts to return the Kern Water Bank to the state,”
says MWD’s Quinn, himself a Monterey Agreement negotiator.
“If we lose, we’ll go back to the Legislature to fix the
problem.”23

“I think the Legislature is actually where this matter
belongs,” counters Antonio Rossmann, attorney for the
plaintiffs.24

NOTES

1. Arthur G. Kidman, “‘Connections’ Between Ground Water
and Surface Water," in Making the Connections: Proceedings
of the Twentieth Biennial Conference on Ground Water,
edited by Johannes J. DeVries and Jeff Woled, September
11-15, 1995, California Water Resources Center Report No.
88, p. 10. Overdraft in the Los Angeles region (where
groundwater was overdrafted for municipal and industrial
uses) was the justification for importing water supplies from
the north in the 1950s. See William Blomstedt, Dividing the
Waters: Governing Groundwater in Southern California, San
Francisco, CA: Institute for Contemporary Studies Press,
1992, p. 104.

2. Robert Gottlieb and Margaret FitzSimmons, Thirst for
Growth: Water Agencies as Hidden Government in California,
Tucson, AZ: University of Arizona Press, 1991, Chapters 3
through 5.

3. Michael Storper and Richard Walker, The Price of Water:
Surplus and Subsidy in the California State Water Project,
Berkeley, CA: Institute of Governmental Studies, University of
California, 1984.

4. Gottlieb and FitzSimmons, op. cit., note 2, discuss “the end
of cheap water.” But this confuses the issue, since it is really
water facilities that contractors pay for. Water is not for sale in
this system.

5. This average price of water is spread across six separate
SWP contractors in the San Joaquin Valley: Dudley Ridge
Water District, Empire West Side Irrigation District, Kern
County Water Agency, Kings County, Oak Flat Water District,
and Tulare Lake Basin Water Storage District. The bulk of
water received by these contractors was for municipal and
industrial customers served by KCWA. Kings County was the
only contractor to receive no agricultural water that year. Cost
per delivered acre-foot data calculated from California
Department of Water Resources, Bulletin 132-95: Management
of the California State Water Project, November 1996,
Table 5B (Annual Water Quantities Delivered to Each
Contractor) and Table 23 (Total Transportation and Delta
Water Charge for Each Contractor).
See also Dennis O'Connor, Financing the State Water
Project, Sacramento, CA: California Research Bureau, June
1994, pp. 63-65. See especially Figure 5.H, which bears out
O'Connor's remark about average SWP water prices heading
skyward.

6. Bulletin 132-95, ibid.

7. "There is then no question that the SWP cannot deliver all
the water to which contractors are entitled under the original
[long-term SWP water supply] contracts. It does not appear
that SWP has ever had that ability. Nor do defendants
suggest that full delivery of entitlement water is likely within
the life of the contracts. Nevertheless, defendants [DWR and
Central Coast Water Authority] dispute that a long-term
shortage exists. Defendants argue that requests [for water
deliveries] are the proper measure of shortage. They emphasize
that the SWP had been able to meet contractors' actual
requests for water every year except 1994, suggesting there
is no water shortage, let alone a permanent shortage." See
PCL v. DWR, pp. 28-29.

8. O'Connor, op.cit., note 5, June 1994, p. 53; California
Research Bureau, CRB Note, v2,n3, 15 June 1994, p. 3.

9. CRB Note, ibid., p. 4.

10. Ibid.

11. Ibid.

12. "...a tremendous asset to the state" quote from O'Connor,
Financing the State Water Project: Options for Change,
Sacramento, CA: California Research Bureau, August 1994,
p. 58. Hereafter cited as Options for Change. O'Connor's
reports are available free of charge by calling the California
Research Bureau at 916/653-7843.

13. This five-year streak, incidentally, is previously unknown
in DWR's records of unimpaired runoff in the Sacramento
River basin. Prior to the four-year streak of wet years ending
in 1998 in the San Joaquin River Basin's runoff record, the
last four-year streak of wet years was from 1914 through
1917. See California Department of Water Resources,
Preparing for California's Next Drought: Changes Since 1987-
92, Sacramento, CA, July 2000, Figures 4 and 5, p. 5. Glimpsing the Future

14. Three law review articles were published simultaneously
in Fall 1994 through the Hastings College of the Law Public
Law Research Institute addressing legal aspects of nightmare
scenarios: Peter Lee, "Modifying State Water Contracts:
Constitutional Takings Issues"; Michael Kometani, "The
California Water Resources Bond Act: Bondholder Security
and the Contract Clause"; and David M. Call, "Legislative
Impairment of Contracts Between the State Water Project
and Its Contractors" Public Law Research Report, Fall 1994.
These articles can be found at the Hastings College of the
Law web site at http://www.uchastings.edu/plri/fall94/.

15. According to DWR data, the average annual deliveries of
the State Water Project between 1967 and 1994 was 2.6
million acre-feet of water. Bulletin 132-95, op. cit., p. 133,
calculated from Table 10-5.

16. Tim Quinn, deputy general manager, Metropolitan Water
District of Southern California, personal communication, 17
November 2000.

17. PCL v. DWR, p. 8.

18. As Dennis O'Connor described the brouhaha over the
SWP in 1994 from interviews he conducted with water
industry participants at the time, "Each person defines the
problem(s) with the SWP's repayment system differently,
depending on their own personal perspective." Dennis
O'Connor, Options for Change, op. cit., note 12, p. 2.

19. Ibid., p. 3.

20. Ibid., pp. 17-21.

21. See PCL v. DWR, p. 32-33.

22. Rob Shulman, Plumas County Counsel's Office, Quincy,
California, personal communication, 22 November 2000.

23. Quinn, op. cit.

24. Antonio Rossmann, attorney at law, personal communication,
1 December 2000.