[env-trinity] Harvest of cash: Kern County agency buys public water low, sells high

[Tom Stokely]

My apologies for the tardiness of this article to you, but I've been on vacation for a couple of weeks.  The article is still quite relevant.   
I once asked David Fullerton, architect of the Environmental Water Account, what would happen when funds for the EWA ran out.  His response was "the fish will die."  It seems to have come to pass with decline of the Central Valley salmon stocks, as well as the Delta's Pelagic Organism Decline (Delta smelt, etc.).
This article is relevant to the Trinity River because it is my understanding that some of the EWA funds came from the CVPIA Restoration Fund, which water and power sales from the Trinity River contribute to, and sometimes come back to the Trinity River Restoration Program.
Tom Stokely
 
Harvest of cash: Kern County agency buys public water low, sells high
Contra Costa Times- 8/9/08

By Mike Taugher  


Delta fish suffered a crippling decline while taxpayers paid nearly $100 million to a Kern County water wholesaler for an environmental protection program that was largely ineffective, a Contra Costa Times investigation has found.

 

In the process, the wholesaler sold water to the state for as much as $200 an acre-foot and last year bought water from the state for as little as $28 an acre-foot.

 

The Kern County Water Agency was the biggest buyer in a program that delivered discounted Delta water in a way that now appears to have been particularly harmful to the environment. It also was the biggest seller of water to an ill-fated, publicly-financed state program meant to protect the same environment, the investigation found.

 

The Kern agency collected $96 million in taxpayer money — nearly all of it borrowed on the bond market — for sales to an "environmental water account" that was shelved after seven years at the end of 2007, records show.

 

While state water officials took steps to ensure they did not directly repurchase the discount water, the exchanges amounted to "classic arbitrage," where investors exploit price differences in financial instruments, said Barry Nelson, a water policy analyst at the Natural Resources Defense Council.

 

"What makes this arbitrage so remarkable is they're buying the water and selling the water to the same entity, using water that should never have been pumped in the first place," Nelson said. 

 

The newspaper's investigation, which spanned six months and involved dozens of interviews and reviews of hundreds of pages of documents, some of which were obtained through the California Public Records Act, reveals: 

 

  Regulators were kept in the dark as the California Department of Water Resources delivered far more discounted Delta water than was specified in its environmental permit — more than four times as much in 2005. The permit contained restrictions that were supposed to protect Delta smelt, a tiny fish whose population has collapsed along with a large part of the Delta's ecosystem. 

 

  Although state water officials took steps to keep the discount water sales to Kern County and the purchases of environmental water separate, those safeguards may have been compromised. Documents show Kern County water managers discussed trading water that was ineligible for sale to the environmental water account for water that was eligible in order to facilitate sales. 

 

  Some researchers believe that increased pumping of Delta water at times when the discount water deliveries were occurring — far in excess of permit limits in the past few years — may have contributed significantly to the ongoing collapse of Delta smelt, which triggered a court order last year sharply restricting Delta water deliveries and tightening water supplies in parts of the state. 

 

  The Kern water agency wrested control of the Kern Water Bank from the state in the 1990s by withholding needed local approval and eventually trading a small portion of its contractual water rights for the 20,000-acre site. The bank enhanced the region's ability to buy and sell water. 

 

  Proceeds from the taxpayer-financed water sales were distributed to Kern County landowners in some cases. In 2003, for example, the sales brought $1.4 million in net revenue to one of the water districts within the Kern County agency. That money, "a return on the substantial investment of the district in the acquisition and development of the Kern Water Bank," was distributed to landowners, according to meeting minutes from the Wheeler Ridge-Maricopa Water Storage District. The two water districts the newspaper has identified to date that distributed proceeds to landowners are controlled, at least partly, by some of the wealthiest land companies in California 

 

The story of how a powerful water agency was able to gain advantage in state water initiatives developed during the 1990s is coming to light as California's top political leaders once again try to deal with a broken water delivery system.

 

After a punishing drought that ended in the early 1990s, a series of deals were negotiated to stabilize water supplies and protect the environment. Rather than impose cutbacks on water users or accept some environmental degradation, the deals promised all sides' interests would be served by programs paid for with taxpayer-backed bond funds.

 

It didn't work. 

 

Instead, the spigot to the state's biggest water users flowed with record amounts of water from the Delta beginning in 2000.

 

And as Delta water pumping reached new highs — boosted in part by the new discount water program, especially in the past few years — several fish populations crashed, including Delta smelt, longfin smelt, striped bass and threadfin shad.

 

Pollution, invasive species and other factors are likely also to blame for the collapse, but Delta pumping was a major factor, biologists say.

 

The ecological crisis became severe enough that last year a federal judge stepped in and ordered sharp restrictions on Delta pumping. 

 

The result: Despite at least $3 billion spent since 2000 to improve Delta water supplies and the environment, the West Coast's largest estuary is experiencing an ecological collapse and Californians appear to be faced with years of uncertainty about the reliability of future water supplies.

 

The programs set up by the state to sell surplus water in wet years and to buy water for the environment were never directly linked.

 

But both were among the many initiatives that grew out of attempts to resolve water problems in California. 

 

The Kern County Water Agency was the largest participant in both, thanks in part to its takeover in 1995 of a 20,000-acre groundwater bank that the state purchased seven years earlier. 

 

It was in the bank that the Kern water agency stored about one-third of its purchases from the discount water program and from which it delivered about 60 percent of its sales to the environmental water account, according to the agency. 

 

At the same time, the new discount water program known as Article 21 was set up to encourage water agencies like Kern and the Metropolitan Water District of Southern California to buy surplus water during wet periods and store it in local reservoirs. 

 

Under Article 21, the agencies buy the water for the cost of pumping it. The idea was that once the water was stored in the southern part of the state, it could be used in dry years when less Delta water is available.

 

But in recent years the water districts took far more Article 21 water than was authorized by the U.S. Fish and Wildlife Service, and some researchers now think that an increase in Delta pumping during winter — the same months when Article 21 water is delivered — might have contributed significantly to the ongoing Delta smelt collapse.

 

"It really looks like that was a hit on the head," said Bruce Herbold, a fisheries biologist at the U.S. Environmental Protection Agency.

 

Separately, the environmental water account was supposed to provide supplemental protection for the Delta without restricting water users.

 

The Delta is home to hundreds of species and a crucial link in the migratory paths of birds and salmon. It is also an unrecognizable version of its former self, badly degraded by pesticides, pollution and invasive species. 

 

But the water deliveries from the Delta command the most attention. 

 

Inevitably, especially at the high levels of recent years, pumping water to more than 23 million Californians and 2 million acres of farmland degrades habitat and kills fish, larvae and eggs.

 

The environmental water account was set up to counter that problem by giving regulators greater flexibility to slow Delta pumping to prevent fish from being sucked into the pumps. 

 

But the water account also put regulators on a budget. If they wanted to decrease pumping rates, they had to keep water users whole by delivering water from the account.

 

Despite the bond funds, the environmental water account never had enough money or provided as much water as planners promised. In addition, the original plan was to use the environmental water account to supplement existing environmental water assets. But a key court ruling reduced the other assets, forcing the environmental water account to make up the difference.

 

In other words, the account was not as big as promised and it had to buy more than was expected.

 

After spending nearly $200 million in public funds, the environmental water account expired at the end of 2007. 

 

Despite the expense to taxpayers and the continued decline in environmental conditions, both programs worked well for Kern County.

 

The $96 million in sales to the environmental water account since 2001 was more than twice as much as sold by any other water agency in the state, records show. Half of all the money spent by the environmental water account went to the Kern agency.

 

And the bulk of the purchases were financed with the proceeds from environmental bonds authorized in 1996 by Proposition 204 and in 2002 by Proposition 50, meaning taxpayers will be paying for those purchases for years to come, with interest.

 

The price taxpayers paid for environmental water, before interest: typically between $170 and $200 per acre-foot. 

 

Kern paid much less.

 

The price for Article 21 water varies, but last year Kern paid $28 per acre-foot. And, in 2007, the average price it paid for all Delta water — both Article 21 and its standard contractual water — was $86 per acre-foot, according to the Department of Water Resources.

 

Kern County water officials said the $170 to $200 per acre-foot they charged the environmental water account was appropriate to cover the cost of their water plus the expense of building, maintaining and operating the infrastructure to store the water and deliver it back to canals.

 

They also said a portion of the proceeds was set aside to buy replacement water in dry years. 

 

And state water officials could not get water to thirsty parts of the state at a better price, they said.

 

"We were the most economical game in town," said James Beck, general manager of the Kern County Water Agency.

 

The state Department of Water Resources, meanwhile, only bought "previously stored" water — basically, Delta water that was injected into Kern County aquifers during the wet years of the late 1990s.

 

But minutes of meetings show Kern County water managers discussed and performed trades to accommodate sales to the environmental water account — and to save the expense of actually pumping the water out of the ground.

 

In other words, although a lot of water was sold to the environmental water account from the aquifers beneath Kern County, those transactions were often paper trades that resulted in relatively little water actually being pumped out of the ground. 

 

During a May 2003 meeting, for example, water managers made note of the fact that despite "substantial" sales of water from Kern County to the environmental water account, the region's groundwater had not been drawn down much because most of the sales were achieved through trades and other exchanges, "rather than outright sales and extractions," according to minutes from a meeting of the Wheeler Ridge-Maricopa Water Storage District.

 

Beck, meanwhile, said that in some cases his agency sold Article 21 water directly back to taxpayers. At least 3 percent of the water sold to the environmental water account came directly from Article 21, according to figures provided by the agency. That water would have been eligible for sale to the environmental account so long as it was stored in the late 1990s.

 

"It's a little bit of a shell game," said Jim White, an environmental specialist at the California Department of Fish and Game. 

 

"It's not as if they (the state Department of Water Resources) were selling Article 21 in 2006 (and buying it back the same year). But you could say, what difference does it make?"

 

It was "water laundering," said a critic at an environmental group that sued over the agreements that resulted in Kern getting the water bank and the water discount.

 

"People ask how we could spend billions of dollars and still have the fish crash. This is the type of thing we were setting up," said Mindy McIntyre, a water policy analyst at the Planning and Conservation League.

 

"In the end, the public ends up paying," she said. "Not just with loss of species, but then bond funding and, of course, a water crisis."

 

Since 1995, the Kern County Water Agency bought 1.2 million acre-feet of water under Article 21, making it the biggest purchaser of that category of water, according to a tally of annual purchase records compiled by the Times. The next biggest purchaser was the Metropolitan Water District of Southern California, which bought about 830,000 acre-feet.

 

Those numbers are higher than environmental regulators expected, and the Department of Water Resources in recent years delivered far more Article 21 water than was approved in the endangered species permit that was meant to protect Delta smelt.

 

The U.S. Fish and Wildlife Service permit called for 168,000 acre-feet of Article 21 deliveries in an average year. In 2005, state water managers delivered a record 730,000 acre-feet in a year that was only slightly wetter than average.

 

Kern County alone took a record amount that year, 453,000 acre-feet. 

 

An acre-foot is enough water to cover a football field with 1 foot of water, or enough generally for two families of four for a year, meaning Kern's share of discounted water that year was enough for 3.6 million people or enough to irrigate 150,000 acres of farmland with 3 feet of water.

 

The higher Article 21 deliveries were the result of Kern County water officials becoming more sophisticated about how to schedule their water deliveries, said one top state water official.

 

"A lot of this was a cost saving mechanism," said Jerry Johns, deputy director of the Department of Water Resources. 

 

"They got smarter about how to request this stuff, rather than us changing the rules. These guys are not stupid."

 

Normally, when an endangered species permit is violated, the agency holding the permit — in this case the Department of Water Resources — would be expected to ask regulators to reopen the permit for new analysis and modifications.

 

That did not happen.

 

Instead, the U.S. Bureau of Reclamation, a federal water agency that was also a party to the same Delta water permit, asked for a new permit in July 2006. 

 

Its request did not mention the state's Article 21 deliveries. 

 

Rather, the federal agency requested a new permit because Delta smelt numbers were falling drastically.

 

The overdeliveries, meanwhile, went unnoticed by federal regulators because they never expected the Article 21 program to be a significant source of water.

 

"There wasn't a great focus on how much it was because it was supposed to be infrequent," said Fish and Wildlife Service spokesman Al Donner.

 

Because the permit is being rewritten to correct other legal and biological deficiencies, nothing is expected to be done about past over-deliveries of Article 21, Donner said.

 

The environmental toll of what happened is unknown.

 

But one leading theory about what may have contributed to the Delta fish crash suggests that pumping out of the Delta during the early months of the year could have been particularly damaging to Delta smelt and other fish.

 

It is during those periods that genetically superior smelt spawn, some researchers now believe. If pumping in those months killed the early-spawning fish and their offspring, it might have removed the fish that had the best chance of survival. 

 

If correct, the theory would place a finger of blame on the State Water Project, and in particular the increased water deliveries that coincide with Article 21 deliveries.

 

In retrospect, the possibility of a link between increased deliveries of Delta water to places like Kern County and the collapse of the Delta's environment appears foreseeable.

 

In 1991 — two years before Delta smelt were listed for protection under the Endangered Species Act — a U.S. Fish and Wildlife Service regulator warned that if the Kern Water Bank, which at the time was owned by the state, were opened, it would lead to increased pumping out of the Delta and harm to fish, specifically Delta smelt and winter-run chinook salmon.

 

"The reason for this concern is that water storage capacity within the Kern Water Bank would be filled through additional water exports from the Delta averaging approximately 90,000 acre-feet per year," said the 1991 letter from the agency.

 

That prediction, which was at least roughly on target, appears to have gone ignored.#

http://www.contracostatimes.com/ci_10152127?nclick_check=1&forced=true

 
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