Title: The Model Water Transfer Act for California An Urban Perspective
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Title: The Model Water Transfer Act for California An Urban Perspective
Physical Description: Book
Language: English
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Spatial Coverage: North America -- United States of America -- Florida
 Notes
Abstract: The Model Water Transfer Act for California An Urban Perspective
General Note: Box 11, Folder 2 ( 17th Annual Water Management Seminar - 1998 ), Item 13
Funding: Digitized by the Legal Technology Institute in the Levin College of Law at the University of Florida.
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Bibliographic ID: WL00002776
Volume ID: VID00001
Source Institution: Levin College of Law, University of Florida
Holding Location: Levin College of Law, University of Florida
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The Model Water Transfer Act for California
An Urban Perspective











Introduction


Over the last two decades, there has been growing consensus that
voluntary water transfers will play an integral role in meeting California's changing

water needs. This consensus, however, is only part of a larger transformation

taking place in the state's water resources policy. In response to increasing costs

and rising environmental concerns, there has been an unmistakable shift away from

the development of new water projects toward support for better management andt

allocation of already developed supplies as the primary means of meeting the
state's water demands. Although urban water managers throughout the state

acknowledge the need for further development of .California's water supply system,
it is clear that water transfers -- together with groundwater banking programs,

water conservation and reclamation, and conservation pricing -- will play a larger
role in ensuring that urban communities continue to have a reliable, high-quality

water supply in the future.


The allocation of water and water rights via market mechanisms is intended
to create incentives to increase the overall efficiency of water use and allow for the
transfer of water to applications that have greater economic value. Furthermore,
the market allocation of water is seen as a more efficient and less contentious
means of allocation when compared to allocation through government planning or


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reallocation by administrative means. Despite consensus in many areas and the
passage of legislation intended to promote water transfers, the market allocation of
the State's water resources has not yet reached its potential. Impediments still
remain that must be addressed before water resource managers may fully employ
water transfers to meet their needs. The proposed "Model Water Transfer Act for
California (Model Act)" provides a framework to address these remaining
impediments.


As a regional water wholesaler, The Metropolitan Water District of Southern

California (Metropolitan) has been at the forefront of efforts to establish water
markets through both the development of transfer programs and through support
for legislation that encourages and facilitates water transfers. An example of these

efforts is Metropolitan's 35 year agreement with the Imperial Irrigation District (lID)
signed in 1989. This agreement secures additional long-term supplies for the
region by establishing a water conservation program designed to conserve up to
106,000 acre feet of water per year which will be available for use by
Metropolitan. To address short-term supply needs, Metropolitan has been an active

participant in the Governor's Drought Water Bank (Bank) acquiring a cumulative
total of approximately 225,000 acre feet of water in the 1991, 1992 and 1994.
Metropolitan also a participated in the 1995 Bank in which option agreements were
negotiated that entitled option purchasers to acquire water at a set price. Although
none of the Bank's options were exercised, the establishment of an options market
is a positive sign for an evolving market.


Metropolitan support for transfer legislation has included both federal and
state initiatives. At the federal level, Metropolitan participated in the development
of the water transfer provisions in Title XXXIV of Public Law 102-575. This


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legislation increased the amount of water available for water transfer programs by

explicitly authorizing the transfer of Central Valley Project (CVP) water supplies

outside of CVP service areas and providing CVP contractors and water users the
ability to directly transfer water. In the state legislature, Metropolitan supported

Assembly Bill (AB) 3491 (Katz) in 1982, which created the first set of rules
designed to promote the transfer of water surplus to the transferor's needs or
water conserved by the transferor for the purpose of transferring it to another use.
In 1993, Metropolitan supported AB 97 (Cortese), a consensus-based approach to

develop comprehensive water transfer rules.


Framework for Change


Rather than developing a comprehensive set of water transfer rules to cover
all types of water rights, the Model Act would modify those sections of the Water

Code that contain the most serious obstacles to a mature and efficient water

transfer market. One such obstacle is the uncertainty caused by the multiple and

sometimes conflicting sections within Water Code that potentially govern a water

transfer. The Model Act addresses this confusion by establishing a single, unified
set of transfer rules that provides consistent, coherent procedures and standards
for review. Such clarity is essential to an efficient market as potential transferors

and transferees must feel comfortable with these procedures and standards before

they commit themselves to the review process.


In addition to creating uncertainty, the lack of a clear set of procedures and
standards for review makes development of water transfer agreements both time
consuming and cost prohibitive for many potential transferors and transferees. The
Model Act speaks to these concerns by creating an expedited review process for


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certain types of water transfers. This process would accelerate the review and

approval of those transfers that are the least likely to cause significant impacts on

other legal water users and the environment by placing limits on pre-transfer review

by the SWRCB and post-transfer review by the courts.


Since the concept of a market-based allocation of water and water rights

was put forward, concerns over the potential loss or reduction of the water right

associated with the transferred water has hindered the development of the transfer

market. In spite of the passage of legislation intended to assure transferors that

the temporary transfer of their water would not jeopardize transferors' rights,

concerns remain. The Model Act addresses these concerns by declaring that at the

end of a water transfer agreement, all rights in the transferred water shall

automatically revert back to the transferor. It further declares that neither the

transferee nor any other beneficiary of the transfer may bring a claim for a

continuation of the water supply.


The Model Act also addresses concerns that transferees may have regarding

alleged prior waste or unreasonable use of the transferred water by the transferor.

It does so by shifting the review for compliance with prior waste or unreasonable

use standards to the transferee's uses during the term of the transfer agreement.

Thus, the transferor's prior practices cannot become the basis for a reduction in or

divestment of the right during the term of the transfer.


Challenges remain


At this point, perhaps the greatest impediment to a fully-developed water

market is the lack of consensus on issues associated with the "wheeling" of water.









Wheeling involves the use of a third party's transmission facilities to deliver the
transfer water. The parties desiring to use other's facilities may or may not be
members or customers of the agency that owns the system. Comprehensive
wheeling regulations that are fair and equitable are crucial to making water markets
work.


Current regulations covering wheeling are found in sections 1810 through

1814 of the Water Code. These sections encourage and facilitate water transfers
by requiring agencies to make available 70% of the unused capacity in their water

supply systems for the purpose of wheeling water. These sections also provide for
the recovery of all costs associated with making unused capacity available

(including costs associated with regional water management programs) in order to

permit public agencies to remain financially whole. In contrast, the wheeling

provisions of the Model Act require wheeling parties to pay only the capital,
operation, maintenance and replacement costs associated with the specific facilities

utilized to wheel water as part of a transfer. By denying a wheeling agency full

recovery of all costs associated with making unused capacity available, this

proposed change would undermine the viability of regional and local water

management programs which would have significant impacts on water resources
management in California.


Through its Regional Urban Water Management Plan, and more recently

through the development of the Preferred Resources Mix for its Integrated

Resources Plan, Metropolitan and its member agencies have aggressively responded
to the changing policy environment with the development of a water resources mix
that balances local and imported resources. Historically, Metropolitan's primary
responsibility has been to provide for the supplemental needs of its member


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agencies by acquiring imported supplies and constructing the large regional
infrastructure needed to import, store, treat and distribute these supplies. As a
result of Metropolitan's efforts to develop local and regional programs, Southern
California's need for additional imported water supplies is reduced and the

operational flexibility of the region's water supply system is enhanced. An example

of these activities is Metropolitan's Local Project Program (LPP) which provides
financial incentives to local agencies to assist in the development of reclaimed
water supply projects. The LPP currently has 44 projects that will produce
approximately 185,000 acre-feet of water per year by 2014. One such project is

the 25 year agreement with the Irvine Ranch Water District. Under this program
Metropolitan provides financial support for the operation of a 10,000 acre-feet

water reclamation plant that produces water for landscape and agricultural uses.
Another example of these activities is Metropolitan's groundwater storage program
in the North Los Posas Groundwater Basin (Basin) located within Metropolitan's

service area. Under the program, Metropolitan, together with its member agency

the Calleguas Municipal Water District, will store up to 100,000 acre-feet of water
in the Basin which can be withdrawn upon Metropolitan's request to meet the
region's needs. Both these programs will help better manage existing supplies by
helping reduce or eliminate shortages during periods of drought and provide
valuable operational flexibility to meet the region's demands during peak periods
without increasing the need for imported supplies.


This reduced dependency on imported supplies has led to a reduction in

capital investments due to the elimination, deferral and/or downsizing of regional
infrastructure programs needed to accommodate these supplies. The reduction in
capital investments creates regional benefits for Metropolitan's member agencies in
the form of lower capital. Even if a particular local agency is not the direct


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beneficiary of such programs, all member agencies share the benefits of avoided
capital costs through lower water rates. By requiring wheeling parties to pay only
the costs associated with those facilities used to wheel water, the Model Act
allows these parties to share the benefits created by Metropolitan's water
management programs without paying adequate compensation. It does this in two
ways: first, the aforementioned avoided capital costs result in a lower capital cost
component of the costs reimbursable under the Model Act. Second, some portion
of the costs (replacement, operation and maintenance) of the avoided regional
infrastructure programs are transferred to the local and regional programs
(administrative, operation and maintenance), but are not reimbursable under the
Model Act. If Metropolitan had not developed these programs, these costs would
have been incurred and would be reimbursable under the Model Act. Metropolitan's
member agencies will be reluctant to undertake similar programs if they feel the
benefits are being shifted to nonmembers while they are bearing all the costs
associated with maximizing the capacity of the existing system. Thus, if
development of such programs which make capacity available are to continue, any
wheeling rate structure must allow recovery of all costs (development,
construction, operation maintenance and administrative) associated with these
regional water management activities in their wheeling rate.


In addition to the development of local and regional projects, Metropolitan
has developed a wholesale water rate structure that is designed to achieve certain
water management objectives through commodity pricing. Originally,
Metropolitan's sole source of revenues was property taxes. Without water to sell
until the Colorado River Aqueduct (Aqueduct) was complete, tax revenue was
necessary in order to pay for construction and other costs related to the
development of the Aqueduct. With the completion of Aqueduct, Metropolitan


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established a wholesale water rate structure designed to 1) raise sufficient revenue
to cover construction, operation and maintenance costs and 2) to allocate the

financial burden of these activities fairly among the member agencies. Over time,

the amount of revenue derived from property taxes has steadily declined as the rate

structure sought to recover a greater percentage of costs through bundled,
commodity based rates that reflected the cost of delivery, operation and

maintenance and a portion of the capital costs. By incorporating these costs into

the rate structure, consumers are given strong economic incentives to use existing

supplies more efficiently. In addition to bundled pricing, the water rate structure

also includes the Seasonal Storage Program (SSP), which was implemented in

1989. This program allows member agencies to purchase surplus water during off-

peak periods at a discounted water rate and is intended to stimulate the conjunctive

use of groundwater basins to better manage seasonal demands. In September of

1991, Metropolitan and other major California water agencies, together with the

environmental community and other public interest groups signed a landmark

agreement which incorporated conservation pricing into the Memorandum of

Understanding Regarding Urban Water Conservation Best Management Practices

(BMPs).


As a result of its conservation pricing policy, approximately 80% of

Metropolitan's revenues are derived from variable water sales, while nearly 80% of

Metropolitan's costs are fixed. Because of limitations on a public agency's ability

to run cumulative deficits or surpluses, this discrepancy between fixed costs and
revenues leaves Metropolitan vulnerable to revenue volatility resulting from
fluctuations in demand. In order to continue to promote conservation pricing
strategies, a wheeling rate must allow agencies wheeling water to generate
sufficient revenues to cover its obligations by allowing recovery of the same level


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of fixed costs from transportation-only customers as from customers taking
bundled services. Wheeling parties must fairly compensate the agency for its
capital investment (including the embedded costs of importing, regulating and
delivering the water) as well as associated operation, maintenance and replacement
expenses associated with the wheeling.


Furthermore, any wheeling rate structure should be designed to encourage
those water transfers that produce additional water for the region and to discourage
those transfers simply designed to shift the cost of paying for regional and local
infrastructure and regional water management activities to other members or
customers. The latter occurs when a member or customer of a water agency
utilizes that agency's system to receive transfer water, resulting in the
displacement of a water sale that the wheeling agency would have otherwise made
to the member or customer. Unless the wheeling parties have paid for a
proportionate share of the system's fixed costs, this unfairly shifts a
disproportionate share of the aforementioned regional benefits to that member
agency or customer while shifting a disproportionate share of the financial burden
of the system onto the nonwheeling member agencies or customers. Such
transfers threaten both the region's water management strategy and the financial
integrity of the existing water supply system. As is consistent with the existing
statute, any new legislation must ensure that the other members or customers of
the agency wheeling water will not be financially harmed by a wheeling transaction.


Another important wheeling issue is providing transferring parties with some
degree of certainty that they will be able to utilize unused capacity during the term
of the transfer agreement. The Model Act attempts to assure these parties that
when they enter into a wheeling agreement with an agency, the agency has


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determined that unused capacity exists and that capacity will be available
throughout the term of the transfer agreement. However, because of the variability
of California's water conditions and the likelihood of increased demands on urban
agencies' systems, it is not practical to force an agency to determine the availability
of capacity only at the time a wheeling request is made. In effect this creates
dedicated capacity within the wheeling agency's water supply system. In
Metropolitan's case, such dedicated capacity does not exist even for its member

agencies. In a large complex water supply system, priority must be given to the
flexibility needed to maximize facilities in order to address the various situations

that arise. While transferring parties must have some degree of certainty that they
will be able to utilize unused capacity, those proposing to wheel water must not be

allowed to displace existing customers or member agencies of the agency who
have paid for use the agencies' system.


Water transfers are an integral part of Metropolitan's Preferred Resources

Mix and will play a vital role in helping meet the water needs of an increasing

population and growing economy in Southern California. As such, Metropolitan will

continue to support water transfer legislation that advances the state's efforts to
maximize developed water resources. However, efforts to promote water transfers
cannot undermine the region's commitment to other water management programs

or work to the detriment of the regions other water users. In addition to benefits
cited above of, these programs have played another indispensable role in facilitating
water transfers by demonstrating to the agricultural and environmental communities
that, while urban areas are attempting to maximize their existing supplies and
facilities, water transfers are still necessary in order to meet the anticipated
demands of urban growth. According to Metropolitan's IRP, without further
regional and local programs, Metropolitan's need for water transfers would double.


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rWith the agricultural and environmental communities still wary that urban demands

for imported water will have devastating effects on agricultural communities and

the environment continued development of regional and local water management

programs will help reduce these fears and assists the further development of water

markets. However agencies must be compensated for these efforts. Critical issues

remain to be resolved but the Model Act provides a forum and a framework for

resolving these issues and moving water markets forward.







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