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$16 Billion Delta Tunnels May Hit Taxpayers

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You could end up paying for this at tax time. | Photo: Christina Hendricks, some rights reserved

A plan to build two huge tunnels to shunt fresh water around the Sacramento Delta is supposed to be funded entirely by the people who receive the water. But taxpayers may end up paying a substantial amount of the tab.

That’s according to documents obtained by the Stockton-based environmental group Restore the Delta that discuss the cost of the California WaterFix project, which is projected to cost at least $16 billion to build. According to an unpublished 2015 draft analysis obtained by the group, California WaterFix would require a federal subsidy of nearly $4 billion in order to be cost-effective for agricultural water users.

That runs counter to state promises that the tunnels project would be funded entirely by water users. And even with a federal bailout, most of the project’s expenses may end up being paid for primarily by Southern California households.

“I believe that next to Delta people, Southern California people will be the most harmed [by this project],” Restore The Delta’s executive director Barbara Barrigan-Parrilla told KCET.

California WaterFix’s hefty price tag comes as no surprise. The project would involve burying two 30-mile long, 40-foot wide tunnels as much as 150 feet under the Delta, bringing fresh water from intakes near Clarksburg on the Sacramento River to the State Water Project’s Banks Pumping Plant near Livermore. There, the water would be pumped into the California Aqueduct for use by farms and cities, most of them in the Central Valley and Southern California.

The tunnels purport to address a significant problem with California’s existing water delivery system by bypassing the Delta. At present, the Banks Pumping Plant and its federal counterpart, the Central Valley Project’s Jones Pumping Plant, pump water directly from the southern Delta, reversing the flows of some rivers and sloughs, and causing salt water from San Francisco Bay to infiltrate the Delta’s freshwater ecosystem.

The revised version of the Peripheral Canal, now an underground project called the Dual Delta Water Conveyance (often referred as the twin tunnels), is still on the drawing board as it undergoes state and federal environmental review.
The revised version of the Peripheral Canal, now an underground project called the California WaterFix, is still on the drawing board.

By shunting Sacramento River water directly to the plants through tunnels instead of through a circuitous network of Delta channels, California WaterFix would, in theory, provide benefits to Delta wildlife and cleaner water for Southern California farms and cities.

But critics charge that the tunnels, capable of diverting the entire flow of the Sacramento in dry years, would provide justification for increased water exports from an ecosystem already reeling from both exports and drought.

And while the state has long pledged that no taxpayer funds would go toward the project’s construction costs, the November 2015 cost-benefit analysis obtained by Restore the Delta projects that making water users pay for the whole project could prompt agricultural users to opt out altogether.

The analysis, prepared for the state’s Natural Resources Agency by U.C. Berkeley economist David Sunding for the consulting firm the Brattle Group, found that even with a $3.6 billion boost from the federal government or some other source, California WaterFix still didn’t make economic sense for agricultural water users. “Under the currently negotiated operating criteria,” Sunding writes in the report, “the WaterFix does not provide benefits in excess of costs for most agricultural water users.”

While Sunding did find that the project made economic sense for urban water customers, dissatisfaction from ag water companies could make that a whole lot more complicated. Among the documents Restore the Delta obtained through its Public Records Act request was an April 8, 2016 email from David Sunding to the Hallmark Group, a financial services firm hired to act as program manager for the WaterFix project. In the email, Sunding mentions a draft “exit ramp” option available to WaterFix customers who choose not to stay with the project, and a discussion of which remaining customers would pick up their financial obligations.

Keeping the California Aqueduct full may not be easy from now on. | Photo: Wikimedia Commons

If disenchanted agricultural water companies merge onto that exit ramp, one company likely to be asked to pick up their share of the expenses is the Metropolitan Water District, the project’s largest potential customer. MWD agreed in 2014 to bankroll the project’s pre-construction expenses on behalf of other State Water Project customers.

A September 2014 memo detailing a draft agreement between MWD and the California Department of Water Resources (DWR) said that — at least in the draft agreement — MWD would be financing up to $400 million in pre-construction costs by issuing “commercial paper,” a finance industry term for short-term unsecured promissory notes.

And that raises the possibility of another route by which taxpayers might end up footing some of the bill for the project: MWD has the authority to levy property taxes, the proceeds from which the company typically uses to fulfill debt obligations. In the 2014 draft agreement, DWR would collect money from other SWP customers to pay down those companies’ share of MWD’s debt. But if those companies are unable to pay, MWD property owners could end up shouldering that burden.

“Metropolitan water users will pay for the tunnels four ways,” Barrigan-Parrilla told KCET.  “Higher water rates, property taxes, state taxes, and federal taxes.”

Unsecured commercial paper is an instrument available only to companies with impeccable credit. That option may not be open to all prospective WaterFIx customers. The Westlands Water District, to pick the most obvious example, had its credit rating dinged after revelations that the district had misrepresented earnings to potential bond buyers. As a robust company that will account for at least 27 percent of whatever water supplies the WaterFix project delivers, it’s not hard to imagine MWD — and its customers and taxpayers — being asked to shoulder more and more of the project’s costs if ag customers fall by the wayside.

“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.”
Roger Patterson, MWD

MWD spokesperson Bob Muir downplayed the potential cost of the WaterFix project to SoCal households. “We project the impact on our customers will be $5 per family per month,” Muir told KCET. He said that Met’s projected contribution to the whole project would run between three and four billion dollars, and pointed out that the company already pays half a billion a year for its share of water from the State Water Project. “That’s a flat fee,” Muir said. “We pay that regardless of how much SWP water we get each year.”

Muir couldn’t comment on whether the 2014 draft agreement reflects current financial agreements between MWD and DWR over preconstruction financing for the WaterFix project. MWD General Manager Jeff Kightlinger has informed his Board of Directors that MWD won’t spend any additional funds on the project until a financing agreement is in place. And in April, at a statewide water conference sponsored by Capitol Weekly, MWD Assistant General Manager Roger Patterson told attendees that MWD has no interest in going it alone on California WaterFix. “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.”

At that same conference, panelist Jeff Michael, Director of the Center for Business and Policy Research at the University of the Pacific, implied that MWD isn’t the only water company thinking about financing its WaterFix expenditures through property taxes:

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.

Earlier this year, project proponents were hoping to complete both financing agreements and environmental review of the project by the end of the year. That’s becoming increasingly unlikely as we reach October, and with each year’s delay costs of the project increase.

All this for a project that may not bring southern water users any additional security if the drought hangs on. University of the Pacific's Jeff Michael pointed out in a response to Sunding's draft cost-benefit analysis that Sunding based his benefit figures on the assumption that the tunnels would provide four times as much water as the project's own environmental documents assume. If an updated analysis now being prepared by Sunding addresses this, it may be that the drought itself makes the state's main drought defense strategy not worth the cost.

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