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BDCP Financing Paper 3-7

BDCP Financing Paper 3-7

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Bay Delta Conservation Plan

Economic Benefits and Financing Strategies

“California’s investment need is relatively modest compared to the size of the economy. California is the 8th largest economy in the world with an annual Gross Domestic Product of $1.9 trillion. Investments for Ecosystem Restoration and Water Supply Reliability are also relatively small compared to current annual expenditures. Approximately $20 to $30 billion is spent annually for water services and water related programs. Water rates are lower than other household utility costs. Average monthly household water and wastewater rates are less than average costs for other utilities such as electricity, cable/satellite, cell phone… California’s investment need is substantial, but well within the capacity of California.” -Delta Vision Foundation

March 2012

BDCP Economic Benefits and Financing Strategies

Table of Contents
“I claim no magic for the solution of the problems of our state. Government is no place for magicians. The need is for common honesty, independence, governmental experience, hard work, determination to make progress, and a belief that ‘where there is no vision, the people perish.” -California Governor Earl Warren

Executive Summary I. Introduction and Background II. Economic Benefits of BDCP Implementation III. Financing the BDCP IV. Financial Cost Comparisons to Other California Water Infrastructure Projects V. Conclusion VI. Appendices

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List of Tables
1. 2. 3. 4. 5. 6. 7. 8. 9. Loss of Supply from Regulatory Actions Revenue Bond Debt Issues Project Construction Cash Flow Schedules Debt Service as a Percent of Assessed Valuation for Selected SWP Contractors Unit Costs for SWP Contractors Under Baseline Construction Estimate Unit Costs for SWP Contractors Under Low Construction Estimate Unit Costs for SWP Contractors Under High Construction Estimate Federal Contractors’ Debt Service Infrastructure Project Costs on a Per Capita Basis

List of Figures
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. BDCP Water Conveyance Facility BDCP Implementation Schedule Water Supply Cost Comparison in Southern California Probability of Flooding Due to 6.5 or Greater Earthquake Benefits of Salinity Decrease Drinking Water Quality Issues BDCP Capital and Operating Costs by Program Function Existing State and Federal Funding Sources Aggregate BDCP Debt Service Baseline Costs with Operations and Maintenance Expenses Baseline Construction Unit Costs Low Construction Unit Costs High Construction Unit Costs Comparable Water Infrastructure Projects Per Capita Costs

1. 2. 3. 4. 5. Water Delivery Assumptions Financial Sensitivity Analysis Revenue Bond Interest Rate Scale Historical Comparisons Comparison of Contemporary Water Infrastructure Investment Costs

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Executive Summary
The primary purpose of the Bay Delta Conservation Plan (BDCP) Economic Benefits and Financial Strategies paper is to document the current economic and financial information available about the BDCP program in an understandable format that can be used by policy makers, local elected officials, business organizations, labor leaders and other key stakeholders to evaluate the “financial feasibility” of the BDCP. The Economic Benefits and Financing Strategies paper is one element of a comprehensive public education and outreach program being undertaken by the Southern California Water Committee (SCWC), in collaboration with the State Water Contractors, Inc. with funding by five Southern California State Water Project contractors. As part of the public education and outreach activity, SCWC plans to disseminate information on the BDCP program throughout Southern California and to other key policy makers statewide. This public education and outreach program is closely coordinated with the ongoing efforts of the State of California, the U.S. Department of the Interior and other organizations to provide accurate and factual material in an understandable format for the public. Beginning in the 1930s California and the federal government have jointly invested billions in the development and operation of the Central Valley Project (CVP) and the State Water Project (SWP). The water supplies from the CVP and SWP serve about two-thirds of the residents and provide irrigation supplies to over 40 percent of irrigated farmland in California. The BDCP planning effort began about five years ago. The BDCP planning and environmental analysis budget is approximately $250 million and is funded almost exclusively by the CVP and the SWP water contractors. The goal is to develop a comprehensive plan to meet the historic California legislative co-equal goals to restore and protect both the ecosystem health and the water supplies in the Sacramento-San Joaquin River Delta (Delta). A major component of the BDCP is the Delta water conveyance project to move water from the Sacramento River through, around or under the Delta to achieve these co-equal goals. The estimated cost for the largest water conveyance proposed alternative is about $13 billion in 2011 dollars and it would take 10 to 12 years to construct. The broad economic benefits of the water conveyance project are: • Increased water supply reliability by reducing the risks of catastrophic collapse of the Delta levees and seawater intrusion of the estuary that would dramatically affect the environment and potentially shut off water supplies to over 25 million Californians and millions of acres of farm land, resulting in significant economic impacts on the California economy similar to other global natural disasters (e.g., Katrina flooding, earthquakes in New Zealand, Chile and Japan). Improved drinking water quality by conveying lower salinity water with less urban, indus- trial and agricultural pollutants for 25 million Californians.

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Creation of approximately 170,000 jobs by building the water conveyance facilities and building and maintaining wetlands restoration projects in the Delta.

The BDCP program will be a major public works program in California. The Delta water conveyance facilities portion of the BDCP program is planned to be solely funded and financed by the beneficiaries of the water supply, which are the SWP and CVP export contractors. The current estimated capital costs and long term operating costs will likely be funded through contractual amendments to the existing SWP and CVP contracts and fully repaid over time through issuance of municipal tax exempt revenue bonds and annual operating revenues. The estimated average unit cost per acre-foot (AF) for all current Delta exports would be approximately $150 to $200 per acre-foot for the CVP and SWP export contractors. If the Delta water conveyance project investment costs are compared to other recent water infrastructure projects in California, the BDCP water conveyance project, on a per capita basis, is affordable in that other projects have been built at a greater per capita cost. The per capita cost of the BDCP water conveyance project (assuming the most expensive alternative) is comparable on a per capita basis to other water infrastructure projects built during the past 20 years in the San Francisco Bay area and Southern California. The one exception is the Metropolitan Water District Diamond Valley Reservoir/Inland Feeder Project which is less than half the per capita cost. And, from a historical southern California perspective, the BDCP water conveyance project is significantly less expensive than the Metropolitan Water District’s (MWD) Colorado River Aqueduct (1931) or the State Water Project (1960) when the relative project capital costs are compared to the respective assessed value of the property served at the time each project was planned and approved.

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I. Introduction and Background
In November 2009, the historic water legislation package was signed by Governor Arnold Schwarzenegger providing the framework to move forward on a comprehensive plan to restore and preserve the Sacramento-San Joaquin River Delta (Delta) while improving the reliability of water supplies for the state. This legislation created the co-equal goals of water reliability and environmental restoration/preservation. A major component of the Bay Delta Conservation Plan (BDCP) is the water conveyance project (Project) to move water through, around or under the sensitive Delta ecosystem. The current total estimate of the most expensive alternative conveyance project is $13 billion in 2011 dollars. This paper summarizes some of the economic benefits associated with this investment and compares this investment to similar recent and historic projects. Finally, the paper describes the financing and cash flows associated with such a construction project, along with an estimate of the impacts of these costs on water suppliers that will be responsible for funding the annual debt service and operating and maintenance costs of the Project. There are several motivating factors cited by the proponents of the Project, including improved water supply reliability, water quality and direct economic benefits associated with jobs that are created as a result of the Project construction and operations. In addition to these benefits, the Project provides important protections against sustained supply interruptions due to failure of the Delta levee system as a result of earthquakes or other natural disasters. Finally, the Bay Delta Conservation Plan is a comprehensive strategy to restore the environment of the Delta and to address the impacts of water diversions on endangered Delta fish species (e.g., Delta smelt). Overall, these economic benefits would result in lower water treatment costs, lower salinity impacts and more jobs, as well as a healthier Delta environment. For purposes of this paper, we have analyzed the financing costs associated with the largest contemplated Delta water conveyance project – a 15,000 cubic feet per second (cfs) capacity tunnel under the Delta. As shown in Figure 1, the water conveyance facility consists of two tunnels that would divert Sacramento River water near Hood and transport the supply to the Clifton Court Forebay. Water would then be pumped by the Harvey O. Banks Pumping Plant on the State Water Project (SWP) and the Jones Pumping Plant on the Central Valley Project (CVP). This part of the Project is currently estimated to cost $12.7 billion. In addition, another $300 million is expected to be expended in environmental mitigation costs for the Project, bringing the total cost to $13 billion. A fundamental assumption is that the cost of the water conveyance project would be fully paid by the SWP and CVP contractors. Further, as part of the analyses used in this paper, it is assumed that all users would pay the same approximate unit cost per acre-foot for water moved through the Project. It should be noted that the other costs associated with the comprehensive environmental restoration of the Delta would be funded through a combination of other revenues which all beneficiaries would bear some responsibility for funding. This “beneficiaries pay” allocation of the Delta Ecological Restoration Program is currently being developed.

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Funding responsibilities for the Delta water conveyance facility will be apportioned between urban and agricultural water users from the San Francisco Bay Area, the Central Valley and Southern California, all of whom would benefit from improved water quality and supply reliability under their contracts for SWP and/or CVP water supplies. The SWP and CVP Delta export water contractors are expected to pay for and finance the construction, operation and long term maintenance of any new Delta BDCP facilities, as well as the environmental mitigation for the Project. Other portions of the habitat restoration and other actions, such as water quality improvement and invasive species removal, may be financed and paid for by other sources such as state and federal agencies (e.g., proposed 2012 Water Bond). These restoration costs are estimated to range between $2.5 and $3.5 billion. The schedule for BDCP implementation is shown in Figure 2.

Figure 1. BDCP Water Conveyance Facility

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BDCP costs and funding sources are still preliminary and the Department of Water Resources (DWR) has initiated a BDCP Financing Working Group. Final costs and funding are dependent upon final engineering design and actual construction of BDCP facilities, adopted actions, and implementation of conservation measures ultimately included in the final BDCP. In addition, costs and funding will be dependent on multiple inter-agency cost sharing agreements with both public and non-profit/private cost sharing partners for the conservation measures. It is also anticipated that other sources of the BDCP environmental restoration funding will be developed over the next five years (2012-2017) as part of the 50-year financing plan for the implementation of the BDCP. Water supply, reliability and quality improvements require significant capital expenditures. Over California’s history, investment in water infrastructure has occurred after great debate and on various scales. This paper summarizes some recent projects in terms of their capital cost and the financial cost borne by the respective service areas to provide some perspective on the magnitude of the capital investment associated with the Project. In addition, historical comparisons with the Metropolitan Water District’s 1931 voter-approved Colorado River Aqueduct and the 1960 voter approved State Water Project provide a context for the Project’s relative costs and financial burden to its customers. Finally, this paper provides a financial analysis of the capital construction using revenue bonds, estimating future annual debt service payments, and the relative unit cost for the combined SWP and CVP export contractors. The financial analysis also estimates the Project debt service and includes sensitivity analyses based on different cost-sharing scenarios and assumptions.
2010 Conservation  Plan EIR/EIS Permits Restoration Engineering Procurement Construction 
Preliminary Final Design Procure Equipment Land Acquisition & Construction Public  Final Draft Bio Op Near‐Term Habitat Restoration Implementation








2018 2019 2020 2021 2022 2023

Working Draft

Public  Final Draft


Figure 2. BDCP Implementation Schedule

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II. Economic Benefits of BDCP Implementation
The Delta is a vitally important ecosystem and home to hundreds of aquatic and terrestrial species, many of which are unique to the Delta habitat. It is also a critical part of California’s water conveyance system. The Sacramento and San Joaquin River watersheds provide the freshwater supplies for the CVP and SWP export facilities in the Delta. The two projects combined provide water supplies for 25 million Californians in the San Francisco Bay Area, the Central Valley, central coastal communities and Southern California. In addition, these water supplies support very diverse agricultural products, including over half of the domestically grown fresh produce in the U.S.. The Delta and its waterways also provide transportation corridors for ships and boats and is a popular recreational destination. Historically, the Delta was a vast tidal marsh and floodplain with meandering channels and sloughs. But today it is a dramatically altered environment with man-made levees and dredged channels constructed to support the urban and agricultural economies of the region and the State. The State of California initiated the BDCP planning process over five years ago in collaboration with the federal government, conservation organizations, water agencies, local governments and many other public and private organizations to improve the Delta environment to meet the coequal goals: • • Restore and protect the ecological health of the Delta Restore and protect water supplies

The BDCP includes a 50-year plan to ensure compliance with the federal Endangered Species Act (ESA), the California Endangered Species Act (CESA) and the California Natural Community Conservation Planning Act (NCCPA). The BDCP “conservation plan” is also subject to environmental review under the National Environmental Policy Act and the California Environmental Quality Act. The BDCP draft plan includes alternatives for water flow and conveyance, habitat restoration and protection. The BDCP is a comprehensive, complex and very challenging planning effort to develop and implement. The economic benefits of the BDCP are numerous and significant, and can be categorized into four areas: • • • • Increased water supply reliability Restoration of the Delta ecosystem Improved water quality Protection of water supplies from a potential catastrophic collapse of the Delta levees from a combination of earthquakes, flooding and sea level rise

The water conveyance facility is expected to improve the reliability of deliveries from both the

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SWP and the CVP. While water deliveries will still be influenced by hydrology and weather, the Project is expected to restore deliveries to approximately the same level of historic reliability as before the court decisions and regulatory actions that reduced pumping to protect endangered fish with the implementation of the BDCP and the successful recovery of the fisheries. Table 1 below provides a summary of reduced supplies resulting from those decisions.

SWP AND CVP WATER DELIVERY REDUCTIONS SINCE 2007 (Compared to Operations Under D1641)
2008 2009 2010 SWP 510,000 251,000 750,000 CVP 222,000 190,000 310,000 TOTAL 732,000 441,000 1,060,000

Reference: Wilkenson, Best, Best & Krieger. Ventura Annual Water Symposium (April 21, 2011)

Table 1. Loss of Supply from Regulatory Actions (Acre-feet of water) Figure 3 below shows the relative cost of other supply alternatives to meet the future reliability needs of Southern California. Water conservation and water use efficiency is also reducing retail water demands in compliance with the SB7xx 20 percent per capita reduction by 2020. Many Southern California cities and water districts have documented that they are already in compliance eight years ahead of schedule. In addition, the other alternative water supplies, stormwater, recycled water, groundwater recovery and desalination would not eliminate the need for Delta water supplies. The SWP supplies and water delivery system are a critical base supply imbedded in the local water infrastructure for a significant portion of Southern California, including, the Santa Clara River watershed, Upper Santa Ana River watershed, the Antelope Valley region and Mojave River watershed.


Incremental Supply Cost  ($/AF)

$2,500 $2,000 $1,500 $1,000 $500 $0

$960 ‐ 2,000/AF $300 ‐ 1,300/AF

$1,040 ‐ 2,300/AF

$1,600 ‐ 2,000/AF

Local Supply Avg. ~ $1,400/AF


Groundwater Recovery



Figure 3. Water Supply Cost Comparison in Southern California

• MWD estimates


Source: MWD IRP, October 2010 and SDCWA memorandum on Unit Cost of New Water Supply Alternatives, Sept. 15, 2010

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The risks of relying long-term on the existing Delta levee system have been poorly understood until a series of geotechnical studies were completed, beginning in 2005, to quantify the risks of levee failure. Numerous Delta islands are at risk of inundation because decades-long agricultural practices have caused peat soils to oxidize and then cause the island soil elevations to subside to below the Delta water line. Many Delta islands have long-term risk of inundation due to levee failures caused by seismic events or floods with a greater risk of faiure if sea level increase in the future. In a New York Times magazine article dated July 2011, UC Berkeley engineering Professor Robert Bea warned about the potential risks of failure of the Delta levees.1 Below, we explore the costs of catastrophic levee failure and the risks to Delta levee integrity associated with earthquakes, floods and sea level rise induced by climate change. Levee failure in the Central Delta, the area that the DWR predicts is most vulnerable, would have several negative impacts, with immediate consequences and far reaching effects. Flooding of Delta islands would act as a vacuum, hydrologically drawing saltwater from the San Francisco Bay were the flooding to occur in the summer or fall months. Besides saltwater intrusion, the depth of the islands may create a sink for water contaminants from the San Joaquin and Sacramento Rivers, with significant impact on water quality. If multiple levee collapses would occur during low freshwater inflow into the Delta may result in the cessation of SWP/CVP pumping in the South Delta, as the higher saline water would not meet water quality standards. In addition, upstream SWP and CVP project supplies would be needed to repel the saltwater, further impacting freshwater supplies. Multiple levee failures may also have profound ecological impacts, turning a saltwater and freshwater estuarine system potentially into a saline inland sea. In addition, Delta agriculture would suffer profoundly, as inundated islands would be unsuitable for growing. Even if the levees were subsequently restored, the island soil would have been inundated with saltwater, which may be difficult to reverse. As a result, the long term impacts on the Delta ecology could be significant. Figure 4 shows the probability of a 6.5 magnitude earthquake in the Delta. As shown in the graphic, there is a 66% probability that a 6.5 magnitude quake will hit the Delta region by 2032 or within the next 20 years (USGS Delta Seismic Risk Report, 2005).


Bea, Robert, California’s Next Nightmare, New York Magazine, Times July 2011

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Figure 4. Probability of Flooding Due to 6.5 or Greater Earthquake (USGS, 2005) Further, other infrastructure improvements crossing the Delta would be damaged. Power lines, natural gas pipelines, railroads and state highways would be put at risk. The economic impacts of a 6.5 magnitude earthquake are large and have been estimated as follows: • • • • Delta levee repairs estimated at $2 billion Residential and business impacts if outage lasts 30 months of $8 to 14 billion Economic output losses of $12.8 to 36 billion Job losses of 65,000 to 230,0002

These risks are compounded by the impact of climate change. Climate change could result in sea level rise from two to six feet over the next century, increasing the probability of levee failure under flooding and normal tidal actions. In addition, according to the Public Policy Institute of California (Managing California’s Water, February 2011), climate change models project up to 80% loss of Sierra snowpack by 2050. There has already been a trend toward less snow and greater runoff, increasing the frequency of floods and heightening the risk of levee failure. Less snowpack also increases the need for water supply reliability because of the loss of “nature’s reservoirs.”

2 Dave Sunding, Urban Losses from Earthquake-Induced Water Supply Disruption in the San Francisco Bay / Sacramento - San Joaquin Delta Estuary, Berkeley Economics Consulting, September 2011.

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Water Quality Benefits The BDCP conveyance system would also provide improved water quality and economic benefits. Reducing salinity in Delta exports from approximately 250 mg/L to 100 mg/L has substantial economic benefits to Southern California.3 As shown in Figure 5, reducing salinity from 250 mg/L to 100 mg/L provides an economic benefit of approximately $200 million annually in 2011 dollars.

Annual Benefits of 150 mg/L Salinity Decrease in  Imported Water Supplies (in $ millions)
Recycled Water, $10 Groundwater, $31 Residential, $73 Utilities, $17

Agricultural, $29 Commercial, $21 Industrial, $10

Figure 5: Benefits of Salinity Decrease

3 Metropolitan Water District /Bureau of Reclamation Salinity Management Study, Final Report June 1999; dollars escalated to 2011 using the Bureau of Labor Statistics inflation calculator.

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These costs are expected to increase in the future because of the State Water Resources Control Board (SWRCB) Recycled Water Policy (March 2009) for maintaining long term salt balance. Groundwater replenishment with low salinity SWP supplies is preferred by groundwater basin agencies over the much saltier Colorado River supplies that range from 500 to 700 mg/L. Improved drinking water quality is also a significant cost savings to the urban water utilities. Over the past 20 years urban water utilities from the San Francisco Bay Area and Southern California have collaborated through the California Urban Water Agencies (CUWA) to analyze the Delta source water supplies from a drinking water perspective. CUWA has published numerous technical reports and engaged nationally recognized experts to evaluate the Delta water quality and drinking water treatment technologies to meet drinking water regulations. The most recent report, Drinking Water Treatment Evaluation, was published in April 2011 and is the basis for the cost estimates to comply with future drinking water regulations if Delta water quality is at various levels of bromide, trihalomethane (THM) and total organic carbon. Improved drinking water quality benefits would result primarily from reducing the bromide/THM formation potential in the Delta supplies, which has public health benefits and significant lower water filtration/treatment costs to all SWP/CVP urban contractors south of the Delta. According to the CUWA report the savings in operation and maintenance costs at water treatment plants could be in the range of $115 to $325 million a year.4 1 In addition, CUWA estimated that absent improvement in source water quality, it is projected that $3 to $8 billion worth of new capital improvements would need to be constructed to treat lower quality supplies. Figure 6 describes these drinking water quality issues including TDS, bromide, and THMs, as well as the impacts on treatment.

Figure 6: Drinking Water Quality Issues

4 California Urban Water Agencies Drinking Water Treatment Evaluation, April 2011 and further studies will evaluate the treatment requirements and cost impacts of future drinking water regulations.

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Direct Economic Benefits In addition to the broader economic, ecological and societal benefits of improved conveyance, construction of the conveyance facility would in and of itself produce a positive economic impact, particularly given California’s currently depressed construction sector. The Brattle Group, an economic consulting firm, recently completed an analysis of the jobs that would be created by various BDCP conveyance alternatives. The paper, authored by Mark Berkman, David Sunding and Michelle Tran, employs conservative assumptions, looking at jobs created by the construction and operation of the Project. Analytically, the paper uses IMPLAN, an input-output model used by California Department of Finance, California Department of Transportation, DWR, SWRCB, Army Corps of Engineers, the Bureau of Economic Analysis, the Bureau of Land Management and the Bureau of Reclamation. The model estimates that the larger 15,000 cfs tunnel creates 129,193 jobs, of which 13,938 jobs are direct, 75,689 jobs are indirect and 39,566 jobs are induced. The model estimates that the smaller tunnel option, 3,000 cfs, creates 78,875 jobs, of which 8,130 jobs are direct, 43,109 jobs are indirect and 22,636 jobs are induced. In addition, the model estimates 40,500 jobs would be created from the BDCP wetland mitigation and restoration program implementation activities. The direct economic benefits described are a sampling of job gains from the BDCP Project implementation as opposed to a more comprehensive review that would include an analysis of the broader economic factors affecting overall employment in the Delta. A recent report by the Public Policy Institute of California (“Transitions for the Delta Economy” January 2012) exemplifies a broader look at future economic shifts in the region. The PPIC report found a net gain of jobs for the Delta region long-term even though agricultural jobs are forecasted to decline. The increase in jobs is primarily from a forecasted increase in water related recreation activities. The long-term economic impacts of the Delta region from implementing the BDCP and the other actions (e.g., Delta Stewardship Council, Delta Protection Commission plans and policies) will require additional analyses and modeling studies. But future changes in the Delta economy and ecosystem over the next 50 years are inevitable.

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III. Financing the BDCP
The capital costs of the BDCP Project conveyance facilities are approximately $15 billion (DWR BDCP Technical Memorandum November 2010) with construction financing. This $15 billion cash flow estimate is used to forecast the revenue bond debt service and to include the impact of inflation on the current estimate of $13 billion for the most expensive Project alternative under evaluation. As shown in Figure 7, most of the capital costs are for the BDCP conveyance facilities. The annual operating costs for the 50-year period include all the four primary BDCP functions habitat restoration, management of stressors, program oversight and water conveyance.

BDCP Capital and Operating Costs by  Program Function
$ M, midpoint cost estimate $25,000 $20,000 $15,000 $10,000 $5,000 $0

Operating Costs Capital Costs

Figure 7. BDCP Capital and Operating Costs by Program Function (DWR, Nov. 2010) Funding for BDCP program implementation is anticipated to come from the following sources: • • Water users: the water conveyance and associated environmental mitigation would be entirely paid by SWP and CVP contractors Other sources: funding for ecosystem habitat restoration, other stressors and program management have been discussed, but a definitive financing plan has not yet been finalized

Existing state and federal programs and voter-approved water bonds have significant funds available to finance the early years of the ecosystem habitat restoration, other stressors and possibly the program management costs. Figure 8 on the next page is a summary of these existing funding sources.

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Existing State and Federal Funding Sources
$800 $700 $600 $500 $ M $400 $300 $200 $100 $0 OCAP Biological Opinions Water Bonds (Prop 50, 84, 1E) Federal CALFED (annual appropriations)

Figure 8. Existing State and Federal Funding Sources

While this funding is uncertain given the long time horizon of a 50 year financing plan, the Water Bond of 2012 would cover most of the unfunded need for BDCP habitat restoration and stressor programs for the initial 10 to 20 years. The OCAP Biological Opinions already require ongoing monitoring and studies for predator control, non-physical fish barriers and floodplain habitat creation. DWR estimates about $700 million is thus already committed to these activities that overlap with BDCP. Even without the Water Bond, other funding sources, including annual federal appropriations under the CALFED program (current annual appropriations of approximately $60 million), can be utilized for the initial BDCP restoration projects in the near term (5-7 years). While the contracts described below and financing plan for the Project are still to be developed and negotiated, the following structure is utilized in the analyses of capital costs and subsequent cash flows associated with any debt financing. It is important to note that the assumptions regarding ownership and operations are provided for completeness, and it is acknowledged that other ownership and operating structures are possible. But, with the exception of the very important consideration that the federal government will not own any of the Project, the remainder of the ownership and operating assumptions would not alter the financing impacts in any material way. In certain instances we include an acknowledgment of certain alternatives which, while currently under consideration, are not part of the analyses. The base case assumptions include the following: a. A variety of different ownership structures are under consideration. These include one in which the DWR would own the share of the Project for the State Water Project Contractors and the federal contractors (through the San Luis & Delta-Mendota Water Authority or other public agency) would own their share of the Project. Direct Bureau ownership could raise significant control issues for the federal contractors, as well as issues with respect to tax exemption of both the state contractor and federal contractor debt. Other ownership structures include ownership by a joint powers agency or by another state department. As noted above, the important consideration for

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financing analysis is that there is no federal ownership. b. DWR has the legal authority to construct the Project; such construction would be in accordance with an appropriate agreement with federal and state contractors to help ensure DWR’s performance would be on budget and on schedule. While alternative delivery methods (e.g., joint powers agency construction and financing) may be considered to take advantage of potential cost or schedule advantages, such an arrangement is not currently the base case being reviewed. Additional arrangements can be considered in the future. For purposes of this financial analysis capital costs and operating costs (including power costs) of the Project would be paid by both the state and the federal contractors. The actual allocation of costs between the SWP and CVP is subject to future negotiations but the assumptions for this financial analysis are summarized below: • • • 60 percent of annual cost (debt service, operating costs and power costs) of the Project would be paid by the state contractors on a budget basis. 40 percent of the annual cost of the Project would be paid by the federal contractors on a budget basis. While annual costs would be initially allocated as described on a budget basis, there would be a “true-up” at the end of each year based on actual deliveries. For purposes of this initial analysis, debt service would be allocated to the contractors on the basis of the 60%/40% assumption. This true-up is consistent with the objective that all users pay the same unit cost on a dollar per acre-foot basis for the Project.



For cost allocation purposes, deliveries would include all deliveries south of the Delta, including exports that may not use the new Project conveyance facilities but are required under existing SWP and CVP legal agreements. The state and federal contractors are currently exploring ways to minimize fluctuations of annual costs caused by variations in water deliveries between the state and federal systems as well as variations of deliveries among contractors within the state system and federal systems. The working assumption is that appropriate reserves or other policies would be put in place prior to commencement of operation to smooth such fluctuations. SWP contracts would be extended on a long term basis (50+ years) prior to any construction financing to ensure that debt can be paid over a 40 or 50 year period, and state contractors have the ability to pass through debt service costs as they do today. To the extent that financing would be done by two or more entities (e.g., DWR and a federal contractors joint powers agency), financing between the state and federal contractors would be coordinated to assure comparable financing schedules, amortization schedules, etc. This coordination would be done through development of a common




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“financing plan” or through the use of a joint powers agency to coordinate issuance of the state contractor and federal contractor debt. But, for purposes of the base case, it is assumed that there would be a coordinated plan of finance, with separate issues for the state contractors (e.g., through DWR) and the federal contractors (e.g., through a joint powers agency such as the San Luis Delta-Mendota Water Agency). Debt Financing For purposes of this analysis, a common financing plan would include four debt issues. The Project costs would be financed with tax-exempt long-term debt. The base case utilizes four different series of bonds – each with a term of 40 years. This structure programs the construction funding into four phases. The first series would fund two years of construction. The second and third series would fund one year and two years of construction, respectively. The final issue would fund the balance of the construction expenditures of about $2.5 billion (see Table 2, Revenue Bond Debt Issues, below). Each bond issue would have a period of capitalized interest to mitigate the debt service during the construction period.
2015 Series 2017 Series 6/1/2017 6/1/2017 2057 $3,800,760,000 6.133% $2,000,000 $6/bond 1 Year 2018 Series 6/1/2018 6/1/2018 2058 $5,815,645,000 6.132% $2,000,000 $6/bond 2 Years 2020 Series 6/1/2020 6/1/2020 2060 $ 2,595,270,000.00 6.134% $2,000,000 $6/bond 2 Years

Dated Date Delivery Date Last Maturity Par All-in TIC Cost of Issuance Underwriter's Discount Capitalized Interest

6/1/2015 6/1/2015 2055 $3,931,145,000 6.135% $2,000,000 $6/bond 2 Years

Table 2. Revenue Bond Debt Issues The cost of issuance (not including the underwriter’s discount) is estimated to be 1% of the cost of financing. On the conservative (that is, higher cost) side, the underwriter’s discount is expected to be approximately $6/bond. Both the Project Fund and the Capitalized Interest are invested using the 2-year treasury rate as of September 2011, 0.75%. The chart in Figure 9 depicts the resulting level debt service from the four issuances. The interest rate scale utilized in the base case is shown in Appendix 3. The financing interest rates are assumed at a 95% confidence interval of interest rates over the past decade rather than simply today’s historically low interest rates. Sensitivity analyses discussed on the following page show the impact of interest rates that are 200 basis points higher than the base case.

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Table 3 below details construction cash flows used in this paper’s low construction cost, baseline and high construction cost scenarios. These characterizations are based on the American Society of Civil Engineers classification criteria for project definition. The low cost scenario is 20% below the baseline and the high cost scenario is 30% above baseline. Note all scenarios assume costs inflate at 2% per year and that construction begins in 2015. For escalation purposes, 2011 is used as the base year. Construction is broken down into four phases to correspond with the four debt issues in our model. Phase I 2015 2016 Allocation Low (-20%) Baseline High (+30%) Low Inflated Baseline Inflated High Inflated 10% $ 1,016 $ 1,270 $ 1,651 $ 1,100 $ 1,375 $ 1,787 15% $ 1,524 $ 1,905 $ 2,477 $ 1,683 $ 2,103 $ 2,734 Phase II 2017 25% $ 2,540 $ 3,175 $ 4,128 $ 2,860 $ 3,576 $ 4,648

Cashflows (2011 $)
Phase III 2018 2019 25% $ 2,540 $ 3,175 $ 4,128 $ 2,918 $ 3,647 $ 4,741 10% $ 1,016 $ 1,270 $ 1,651 $ 1,190 $ 1,488 $ 1,934

Phase IV 2020 2021 10% 5% $ $ $ 508 635 826

Total 100% $ 10,160 $ 12,700 $ 16,512 $ 11,584 $ 14,481 $ 18,823

$ 1,016 $ 1,270 $ 1,651 $ 1,214 $ 1,518 $ 1,973

$ 619 $ 774 $ 1,006

Table 3. Project Construction Cash Flow Schedules (based on BDCP Schedule in Figure 2, dollars in millions)

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$ in Millions

Total Debt Service
Level Debt: $1.1 Billion
$1,200 $1,000 $800 $600 $400 $200 $0 2016 2021 2026 2031 2017 Series 2036 2041 2046 2051 2056 2015 Series 2018 Series 2020 Series

Figure 9. Aggregate BDCP Debt Service As shown in Figure 9, using the financing assumptions detailed above, the annual debt service would average approximately $1.1 billion from 2021 through 2055. These annual debt service costs would be collected over deliveries that are expected to be equal to the median delivery of 5.9 million acre-feet per year. As a result, the cost of debt service would be about $186 per acre-foot (AF). In order to assess the financial burden of these projects on the contractors, the costs on a per acre-foot, per capita and per acre basis are summarized in Table 5. Of the 29 State Water Project contractors, the Metropolitan Water District of Southern California, Kern County Water Agency, Antelope Valley-East Kern Water Authority, Coachella Valley Water Agency, Tulare Lake Basin Water District, San Bernardino Municipal Water District, Mojave Water Agency, Castaic Lake Water Agency, Alameda County Water District, Zone 7 Water Agency, Palmdale Water District, Desert Water Agency and Central Coast Water Authority are examined. These agencies account for approximately 91.2% of the State Water Project Table A contract amounts.

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Baseline Costs with O&M Expenses



 $150.00 Baseline Construction Estimate  $100.00 Baseline Construction + O&M


 $‐ 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052

Figure 10. Baseline Costs with Operations and Maintenance Expenses As previously noted, the cost of debt service on the project is estimated to be about $186/AF. However, this is only one way to evaluate the cost, as many agencies pass on the cost to landowners via property taxes. As seen in Table 4, the resulting debt service costs for the major state contractors would range from 0.0052 % of assessed valuation in Santa Clara Valley Water District’s service area to about 0.20% in Kern County.
2025 Midpoint Debt Service PMT Metropolitan Water District of Southern California Kern County Water Agency Coachella Valley Water District Castaic Lake Water Agency SBVMWD Mojave Water Agency Santa Clara Valley Water District $303,687,956 $156,130,403 $21,980,240 $15,124,820 $16,300,489 $13,154,780 $15,887,416 Assessed Valuation $2,049,000,000,000 $78,441,000,000 $54,433,000,000 $33,339,000,000 $25,584,000,000 $35,211,000,000 $303,346,820,000 Ratio 0.0148% 0.1990% 0.0404% 0.0454% 0.0637% 0.0374% 0.0052%

Table 4. Debt Service as a Percent of Assessed Valuation for Selected State Water Project Contractors Tables 5, 6 and 7 detail debt service payments under the three construction scenarios. As mentioned above, we have used capital cost estimation guidelines developed by the American Society of Civil Engineers to develop the three construction scenarios.

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Metropolitan WDSC Kern County WA* Antelope Valley-East Kern WA** Coachella Valley WD Santa Clara Valley WD Tulare Lake Basin WSD San Bernardino Valley MWD Castaic Lake Water Agency Alameda County WD Zone 7 Palmdale Water District Desert Water Agency Mojave Water Agency Central Coast Water Authority

2025 Debt Service Payment $ 303,687,956 $ 156,130,403 $ 22,464,806 $ 21,980,240 $ 15,887,416 $ 14,127,408 $ 16,300,489 $ 15,124,820 $ 6,672,715 $ 12,808,276 $ 3,384,020 $ 8,857,234 $ 13,154,780 $ 7,226,550

Baseline Construction Estimate
Assessed Table A Valuation (in Quantities Millions) 1,911,500 $ 2,049,000 982,730 $ 78,441 141,400 $ 19,984 138,350 $ 54,433 100,000 $ 296,474 88,922 $ 180 102,600 $ 25,584 95,200 $ 33,339 42,000 $ 48,037 80,619 $ 39,462 21,300 N/A 55,750 $ 8,910 82,800 $ 35,211 45,486 N/A $/AV Acres $/Acre Population $/Capita $91 19,000,000 $30 839,631 $15 557,330 $34 288,688 N/A 1,682,585 $74 < 20 N/A 661,546 N/A 287,000 N/A 328,325 N/A 226,000 N/A N/A 73,000 N/A 445,000 N/A N/A $16 $186 $40 $76 $9 N/A $25 $53 $20 $57 N/A $121 $30 N/A 0.015% 3,328,000 0.199% 5,223,309 0.112% 1,472,000 0.040% 640,000 0.005% N/A 7.849% 190,000 0.064% N/A 0.045% N/A 0.014% N/A 0.032% N/A N/A N/A 0.099% N/A 0.037% N/A N/A N/A

Table 5. Unit Costs for SWP Contractors Under Baseline Construction Estimate
Note: N/A is shorthand for “not available” *Statistics for Kern County **Statistics for Antelope Valley and East Kern Valley

In addition, costs are broken down on a per-acre foot basis based on estimated deliveries. These percentiles are calculated from actual historical deliveries and a median estimated delivery of 5.9 MAF. The different levels of delivery include the median (or 50% exceedance level), a delivery amount that has been exceeded 20% of the time, and one that has been exceeded 80% of the time. See Appendix 1 for a detailed tabulation of deliveries.

Baseline Construction Per Acre Foot Costs
 $350  $300  $250  $200  $150  $100  $50  $‐ 20% Exceedance 50% Exceedance Figure 11: Baseline Construction Unit Costs 80% Exceedance

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In addition, we evaluated the impact if construction costs were lower than estimated in Table 6 and the cost impact on a per acre-foot basis in Figure 12 (see below.)

Metropolitan WDSC Kern County WA* Antelope Valley-East Kern WA** Coachella Valley WD Santa Clara Valley WD Tulare Lake Basin WSD San Bernardino Valley MWD Castaic Lake Water Agency Alameda County WD Zone 7 Palmdale Water District Desert Water Agency Mojave Water Agency Central Coast Water Authority

2025 Debt Service Payment $ 242,975,780 $ 124,917,389 $ 17,973,725 $ 17,586,032 $ 12,711,262 $ 11,303,109 $ 13,041,755 $ 12,101,122 $ 5,338,730 $ 10,247,693 $ 2,707,499 $ 7,086,529 $ 10,524,925 $ 5,781,845

Low Construction Estimate
Table A Quantities 1,911,500 982,730 141,400 138,350 100,000 88,922 102,600 95,200 42,000 80,619 21,300 55,750 82,800 45,486 Assessed Valuation (in Millions) $ 2,049,000.00 $ 78,440.73 $ 19,983.69 $ 54,432.96 $ 296,474.11 $ 180.00 $ 25,583.52 $ 33,338.67 $ 48,037.12 $ 39,461.98 N/A $ 8,909.87 $ 35,211.00 N/A $/AV Acres $/Acre Population $/Capita 0.012% 3,328,000 $73 19,000,000 $13 0.159% 5,223,309 $24 839,631 $149 0.090% 1,472,000 $12 557,330 $32 0.032% 640,000 $27 288,688 $61 0.004% N/A N/A 1,682,585 $8 6.280% 190,000 $59 < 20 N/A 0.051% N/A N/A 661,546 $20 0.036% N/A N/A 287,000 $42 0.011% N/A N/A 328,325 $16 0.026% N/A N/A 226,000 $45 N/A N/A N/A N/A 0.080% N/A N/A 73,000 $97 0.030% N/A N/A 445,000 $24 N/A N/A N/A N/A N/A

Table 6. Unit Costs for SWP Contractors Under Low Construction Estimate
*Statistics for Kern County **Statistics for Antelope Valley and East Kern Valley

Low Construction Per Acre Foot Costs
 $250  $200  $150  $100  $50  $‐ 20% Exceedance Figure 12: Low Construction Unit Costs 50% Exceedance 80% Exceedance

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Finally, we looked at the high construction cost estimates to see the impact on unit costs. As shown in Table 7, the unit cost rises for each SWP contractor and Figure 13 indicates that the unit cost rises to just over $350/AF under this “worst case” scenario.

Metropolitan WDSC Kern County WA* Antelope Valley-East Kern WA** Coachella Valley WD Santa Clara Valley WD Tulare Lake Basin WSD San Bernardino Valley MWD Castaic Lake Water Agency Alameda County WD Zone 7 Palmdale Water District Desert Water Agency Mojave Water Agency Central Coast Water Authority

2025 Debt Service Payment $ 394,756,419 $ 202,950,026 $ 29,201,443 $ 28,571,567 $ 20,651,657 $ 18,363,866 $ $ $ $ $ $ $ $

High Construction Estimate
Assessed Valuation (in Table A Millions) Quantities 2,049,000 1,911,500 $ $ 78,441 982,730 19,984 141,400 $ 138,350 $ 54,433 100,000 $ 296,474 88,922 $ 102,600 95,200 42,000 80,619 21,300 55,750 82,800 45,486 $ $ $ $ $ $ $/AV Acres $/Acre Population $/Capita $119 19,000,000 $39 839,631 $20 557,330 $45 288,688 N/A 1,682,585 $74 N/A N/A N/A N/A N/A N/A N/A N/A < 20 661,546 287,000 328,325 226,000 73,000 445,000 N/A $21 $242 $52 $99 $9 N/A $25 $69 $26 $74 N/A $158 $38 N/A 0.019% 3,328,000 0.259% 5,223,309 0.146% 1,472,000 0.052% 640,000 0.007% N/A 190,000 N/A N/A N/A N/A N/A N/A N/A N/A 0.083% 0.059% 0.018% 0.042% N/A 0.129% 0.049% N/A

180 10.202% 25,584 33,339 48,037 39,462 N/A 8,910 35,211 N/A

21,188,600 19,660,377 8,673,696 16,649,159 4,398,803 11,513,299 17,099,572 9,393,613

Table 7. Unit Costs for SWP Contractors Under High Construction Estimate
*Statistics for Kern County **Statistics for Antelope Valley and East Kern Valley

High Construction Per Acre Foot Costs
 $400  $350  $300  $250  $200  $150  $100  $50  $‐ 20% Exceedance Figure 13: High Construction Unit Costs 50% Exceedance 80% Exceedance

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The federal CVP contractor allocation of the costs are shown below in Table 8.

2011 Allocation 870,000 400,000 200,000 1,900,000 Percentage 25.82% 11.87% 5.93% 56.38% 2025 Midpoint Debt Service $ 114,079,806 $ 52,450,486 $ 26,225,243 $ 249,139,806 20% Exceedance $ 637,466 $ 293,088 $ 146,544 $ 1,392,167 $/Acre $ 179 $ 179 $ 179 $ 179 50% Exceedance $ 609,258 $ 280,119 $ 140,059 $ 1,330,564 $/Acre $ 187 $ 187 $ 187 $ 187 80% Exceedance $ 395,391 $ 181,789 $ 90,894 $ 863,497 $/Acre $ 289 $ 289 $ 289 $ 289

Exchange Contracts Refuges Urban Ag service

Table 8. Federal Contractors’ Debt Service (based on baseline construction cost scenario).

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IV. Financial Cost Comparison to Other California Water Infrastructure Projects
The BDCP capital costs have been suggested by some critics as very expensive and possibly unaffordable. During the past 20 years, comparable water infrastructure projects have been completed throughout California, primarily for urban areas. These water infrastructure projects were developed for the following key purposes: • • • Upgrade aging water infrastructure based on seismic geotechnical and structural engineering needs (earthquake risks) Emergency storage Drought storage and supplemental supplies

Six comparable projects that were built since the early 1990’s are summarized in Table 9 below: 1. 2. 3. 4. 5. 6. 7. MWD Diamond Valley Reservoir/Inland Feeder project is primarily an emergency storage facility but also provides drought and water quality benefits SDCWA Emergency Storage Project is being built to enhance reliability of the water supply of San Diego in the event of seismic disruption EBMUD Freeport Project is primarily a water supply reliability project for Alameda and Contra Costa Counties with supplemental CVP supplies SWP Coastal Aqueduct and Central Coast Water Authority Project, which consist of SWP conveyance and treatment facilities for San Luis Obispo and Santa Barbara Counties SPUC’s Hetch Hetchy Project is being repaired to protect against future seismic events, current building codes and drinking water regulations Contra Costa Water District’s Los Vaqueros Project is a reservoir to improve water quality and provide emergency storage ( currently the Phase 2 expansion to 160,000 acre-feet is under construction) BDCP Delta Facilities

The comparison is a simple total capital construction cost divided by the population served to calculate $/capita as show in Table 9 below and Figure 14 (see Appendix 5 for additional background information on these water infrastructure projects.
Project MWD Diamond Valley Lake / Inland Feeder EBMUD Freeport Project BDCP Project SDCWA Emergency Storage Project CCWD Los Vaqueros Project SWP Coastal Aqueduct and CCWA Project SFPUC's Hetch Hetchy Project Cost $ $ $ $ $ $ $ 3,100,000,000 517,000,000 13,000,000,000 1,500,000,000 570,000,000 575,000,000 4,600,000,000 Population 18,000,000 1,300,000 25,000,000 2,800,000 550,000 430,000 2,500,000 $/Capita $ 172 $ 398 $ 520 $ 536 $ 1,036 $ 1,337 $ 1,840

Table 9. Infrastructure Project Costs on a Per Capita Basis (Source: All cost and population numbers are taken from agency financial reports and other agency published information). Page 27 | SCWC / PFM

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Comparable Water Projects Per Capita Cost
 $2,000  $1,800  $1,600  $1,400  $1,200  $1,000  $800  $600  $400  $200  $‐ SWP Coastal Aquaduct and CCWA Project SDCWA Emergency Storage Project MWD Diamond Valley Lake / Inland Feeder SFPUC Hetch Hetchy Project CCWD Los Vaqueros Project EBMUD Freeport Project

Figure 14. Comparable Infrastructure Projects Per Capita Costs As can be seen in Figure 14, the costs of the BDCP Project on a per capita basis are significantly lower than the actual costs per capita for the Contra Costa Water District Los Vaqueros Project, the SWP Coastal Aqueduct/Central Coast Water Authority Project and the San Francisco Hetch Hetchy Project. Also, the BDCP Project on a per capita basis is very similar to the San Diego County Water Authority Emergency Storage Project, somewhat more expensive than the EBMUD Freeport Project and about twice the per capita cost of the MWD Diamond Valley Lake/Inland Feeder Project.

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BDCP Economic Benefits and Financing Strategies

V. Conclusion
“It was a fundamental concept of the 1933 Central Valley Project Act (California Legislature) and the Burns-Porter Act that the areas which benefit from the water supplies made available and the power generated by system facilities should repay the full allocated costs, including interest, incurred in providing those services.”51 —The Burns-Porter Act: A California High Water Mark The BDCP facility construction and implementation is a very large undertaking. Construction will take a decade or more and is projected to cost about $13 billion (2011 dollars). This would be a very large public works project. But is it too big or too expensive? By historical standards the original Central Valley Project as proposed and adopted by the State of California and the Colorado River Aqueduct during the Great Depression and the State Water Project (voter approval in 1960) were financially more challenging projects to implement based on the financial burden to their customers. In addition, the Burns-Porter Act passage in 1960 demonstrated that one of the largest revenue supported bonds globally could be approved by the voters and be repaid by the SWP contractors. The questions of affordability and financial feasibility were common concerns throughout the development of the SWP during the 1950’s and the 1960’s. Furthermore, in the early 1970’s the construction of certain SWP facilities, including the planned Delta facility, were deferred and delayed because of budget and revenue shortfalls during Governor Ronald Reagan’s tenure. During the past 20 years, many urban water supply reliability and emergency storage type projects have been built that on a per capita basis were significantly more expensive to the customers. Therefore, based on this comparison of the relative urban per capita cost, the BDCP financing primarily through water supply beneficiaries (the SWP and the CVP water customers) is financially feasible. As the PPIC report “Managing California’s Water” (February 2011) documented, we have a water crisis facing the State with threats of: • Extinction and decline of native species • Catastrophic floods • Water scarcity • Deteriorating water quality • Decline of the Sacramento-San Joaquin Delta environment As a result, the PPIC team highlighted in its conclusion of Managing California’s Water that “... without bold action, California will be subjected to a succession of protracted water crises.”


The Burns-Porter Act: A California High Water Mark, by Harvey O. Banks and Jean O. Williams, 1984.

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The economic benefits of the BDCP project implementation are significant: • Restored water supply reliability through achievement of co-equal goals by implementing the BDCP, which would avoid potential loss of Delta supplies from environmental regulations. From 2008 to 2010, regulatory actions and court orders reduced SWP and CVP supplies by over two million acre-feet. Drinking water quality improvements, including a significant reduction in salinity concentrations, and cost savings in drinking water treatments costs from reduced levels of bromides from seawater intrusion and lower total organic carbon (TOC) from in Delta watershed sources. Protecting against natural disasters. The future probability of earthquakes, flooding and sea level rise all have the likelihood of causing a catastrophic collapse of some of the Delta levees and flooding of the islands with seawater. Saltwater intrusion could cause an interruption of SWP/CVP exports from one to three years which would have significant impact on the California economy. Economic stimulus and job creation. Building public works projects is a long-standing policy of the federal government and a testament to the legacy of Californian investments in water infrastructure.

“Another huge issue we must tackle is water. Last week, Secretary of the Interior, Ken Salazar - met here in Sacramento with those in my administration who are working to complete the Bay Delta Conservation Plan. Together we agreed that by this summer we should have the basic elements of the project we need to build. This is something my father worked on and then I worked on-decades ago. We know more now and are committed to the dual goals of restoring the Delta ecosystem and ensuring a reliable water supply. This is an enormous project. It will ensure water for 25 million Californians and for millions of acres of farmland as well a hundred thousand acres of new habitat for spawning fish and other wildlife. To get it done will require time, political will and countless permits from state and federal agencies. I invite your collaboration and constructive engagement.”62 —Governor Edmund G. Brown Jr.

Funding for the preparation of this paper provided by: Castaic Lake Water Agency, Coachella Valley Water District, Mojave Water Agency, The Metropolitan Water District of Southern California, and San Bernardino Valley Municipal Water District.

2012 State of the State Address January 18, 2012

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Appendix 1-BDCP Water Delivery Assumptions
Table A Quantities Metropolitan WDSC Kern County WA Antelope Valley-East Kern WA Coachella Valley WD Santa Clara Valley WD Tulare Lake Basin WSD San Bernardino Valley MWD Castaic Lake Water Agency Alameda County WD Zone 7 Palmdale Water District Desert Water Agency Mojave Water Agency Central Coast Water Authority 1,911,500 982,730 141,400 138,350 100,000 88,922 102,600 95,200 42,000 80,619 21,300 55,750 82,800 45,486 Total Share of State Contractor Cost 45.82% 23.55% 3.39% 3.32% 2.40% 2.13% 2.46% 2.28% 1.01% 1.93% 0.51% 1.34% 1.98% 1.09% 20% Exceedance (Acre-Feet) 1,696,977 872,440 125,531 122,823 88,777 78,942 91,085 84,503 37,281 71,560 18,907 49,485 73,496 40,375 50% Exceedance 80% Exceedance (Acre-Feet) (Acre-Feet) 1,621,885 833,835 119,976 117,388 84,849 75,449 87,055 80,763 35,631 68,393 18,070 47,296 70,244 38,588 1,052,556 541,134 77,861 76,182 55,064 48,964 56,496 52,413 23,123 44,385 11,727 30,694 45,586 25,043

SWP exceedance allocations provide a range of probabilities based on historic hydrology (1922 to current) of the amount of SWP deliveries with the new BDCP facilities and assumptions on permit conditions.

MWD Per Capita Debt Service Cost
 $35  $30  $25  $20  $15  $10  $5  $‐ Baseline BDCP Project Share 50% Project Cost
In the event that MWD is hypothetically responsible for half the total project cost, MWD’s per capita debt service burden would be $29.07. In this scenario, MWD would be responsible for Page 31 | SCWC / PFM

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Appendix 2-BDCP Financial Sensitivity Analysis
To evaluate the sensitivity of this model, we looked at how a 200 basis point increase, a three year construction delay and omitting capitalized interest would impact our model. A 200 basis point (i.e., 2%) increase would raise level debt service to $1.44 billion, an increase of 31% over the baseline scenario. The unit cost would increase to $245/AF.

200 BP Increase raises baseline $/Acre‐ Foot costs to $245
$300 $250 $/Acre‐Foot $200 $150 $100 $50 $0 2016 2021 2026 2031 2036 2041 2046 2051

$ in Millions

Total Debt Service (200 bp increase) 
Level Debt: $1.44 Billion
$1,500 $1,000 $500 $0 2016 2021 2026 2031 2036 2041 2018 Series 2046 2051 2056 2015 Series 2017 Series 2020 Series

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Debt Service falls to $167/AF without  Capitalized Interest
$180 $160 $140 $120 $100 $80 $60 $40 $20 $0 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052


Omitting capitalized interest from this paper’s financing model would lower debt service payments by roughly 12 percent. The unit cost decreases to $167 per AF. A three year construction delay would increase the level debt service to $1.27 billion, an increase of 15 percent. Note this increase is driven by construction cost inflation. Cash flows for this scenario are detailed on the next page:

$ in Millions

Scenario: 3 Year Delay 
Level Debt: $1.27 Billion
$1,400 $1,200 $1,000 $800 $600 $400 $200 $0 2016 2021 2026 2031 2036 2041 2019 Series 2046 2051 2056 2061 2015 Series 2017 Series 2022 Series

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Phase II 2017 2018 2019 10% $ 1,016 $ 1,270 $ 1,651 $ 1,190 $ 1,488 $ 1,934 $ 1,214 $ 1,518 $ 1,973 $ 1,016 $ 1,270 $ 1,651 $ 1,016 $ 1,270 $ 1,651 $ 1,239 $ 1,548 $ 2,013 10% 10% 2021 2022 10% $ 1,016 $ 1,270 $ 1,651 $ 1,263 $ 1,579 $ 2,053 $ $ $ 15% $ 1,524 $ 1,905 $ 2,477 $ 1,716 $ 2,145 $ 2,789 $ 1,751 $ 2,188 $ 2,845 $ 1,524 $ 1,905 $ 2,477 15%

Phase I 2015 2016 15% $ 1,524 $ 1,905 $ 2,477 $ 1,683 $ 2,103 $ 2,734

Three Year Delay Cashflows (2011 $)
Phase III 2020

Phase IV 2023 5% 508 635 826 $ 644 $ 805 $ 1,047 $ $ $

2024 5% 508 635 826 $ 657 $ 821 $ 1,068

Total 100% $ 10,668 $ 13,335 $ 17,336 $ 12,457 $ 15,571 $ 20,243

BDCP Economic Benefits and Financing Strategies



Low (-20%) Midpoint High (+30%)

$ 1,016 $ 1,270 $ 1,651

Low Inflated Mid Inflated High Inflated

$ 1,100 $ 1,375 $ 1,787

BDCP Economic Benefits and Financing Strategies

Appendix 3-Revenue Bond Interest Rate Scale

Interest Rate: 1.96 standard deviations above historical average since 1997 (95% confidence interval)

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Appendix 4-Historical Comparisons
The Colorado River Aqueduct
On September 29, 1931, the citizens of the MWD service area voted by a 5:1 margin to issue $220 million of bonds for the purpose of financing the construction of the Colorado River Aqueduct (CRA). As a comparison, Hoover Dam, which was built concurrently by the famous “Six Companies” and funded by the federal government, cost roughly $80 million. The federal government played an interesting role in both the CRA and Hoover Dam projects. California Senator Hiram Johnson and Representative Phil Swing repeatedly introduced legislation to authorize what would become Hoover Dam, but other legislators argued the huge expense was not justified considering most of the benefit would flow to California. After the 1927 Mississippi flood, Southern and Midwestern representatives were more sympathetic and on December 21, 1928, President Calvin Coolidge signed legislation authorizing the dam. These projects were built during the Great Depression just two years after Black Friday in 1929 when the stock market crashed. At the time of the election, it was understood that the bonds would need to be financed through the federal government. The municipal bond market had totally collapsed by early 1932, and MWD could not issue bonds in the public market. The State of California also wanted to build the Central Valley Project (CVP) planned by State Engineer Edward Hyatt and endorsed by the California Legislature in 1933 at a cost of $170 million. Water revenues were supposed to pay for the CVP bonds, but with the Great Depression getting progressively worse in 1933, California leaders did not even attempt to issue municipal bonds and instead sought federal assistance. Ultimately, Congress authorized the Bureau of Reclamation and the Army Corps of Engineers to build the original California Central Valley Project planned facilities. The actual costs of completing these initial phases of the Central Valley Project exceeded $500 million (early 1950s). The Hoover Administration agreed to have the Reconstruction Finance Administration purchase MWD bonds initially at an interest rate of 5% and then lowered it to 4.16% in 1938. Later, following the Congressional termination of the Reconstruction Finance Administration, a new federal agency called the Public Works Administration funded the MWD bonds. Key Statistics • Los Angeles + Orange Counties = ~2 million people • MWD: 13 cities were the original member agencies • CRA construction financed by a $220 million bond by the federal government • Assessed value of service area in 1931: $1.827 billion • CRA Project = ~12 percent of total property assessed value of service area (13 cities) References: 1939 MWD Annual Report and The Great Thirst by Norris Hundley, 1992 Page 36 | SCWC / PFM

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State Water Project
After the Second World War, the California economy experienced a second “Gold Rush” and millions flocked to the Golden State, lured by the promise of a better climate and plentiful jobs. In 1945, the state authorized an investigation into statewide water resources to ascertain how to best meet this increased demand. After intense negotiations in the late 1950’s, the Burns-Porter Act passed in 1960 by the slim margin of 173,944 votes out of 5.9 million cast. This authorized the state to issue bonds to finance the construction of the SWP. About 78 percent of the costs of constructing the SWP have been financed by the sale of general obligation and revenue bonds. These bonds are repaid in full by SWP beneficiaries, rather than the general taxpayer. The State Water Project contractors are responsible for all water supply related costs, including operating and maintaining SWP facilities. Each of the 29 contractors pays the same per acre-foot rate for the cost of constructing and operating facilities that store and convey the SWP water supply. Supplementary to that amount, each contractor pays a transportation charge to cover the cost of facilities needed to convey water to its service area. Contractors more distant from the Delta pay more than those close to the Delta because of the capital cost of the Aqueduct and increased pumping costs. Key Statistics • Population Served: 25,000,000 (1960) • Scope: 34 storage facilities, reservoirs and lakes; 20 pumping plants; 4 pumping-generating plants; 5 hydroelectric power plants; and about 701 miles of open canals and pipelines. • Assessed value of service area in 1960: $6 billion • $1.75 billion bond, which was one of the largest (worldwide) water revenue supported bond financings in the early 1960’s • MWD share (approximately half) = $875 million • SWP share = ~15 percent of the assessed value of MWD service area in 1960

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Appendix 5-A Comparison of Contemporary Water Infrastructure Investment Costs
San Diego County Water Authority Emergency Storage Project
Background The Emergency Storage Project is being built to enhance water supply reliability for the San Diego region from potential seismic disruptions to the imported water delivery system by increasing the amount of water stored locally within San Diego County Water Authority’s service area. Historically, 80 to 90 percent of San Diego County Water Authority’s water supplies are imported deliveries from Northern California or the Colorado River. Once fully completed, the Emergency Storage Project will add 90,100 acre-feet of water storage for emergency use. The last phase, scheduled to be completed in 2014, is the raising of San Vicente Dam to increase local surface storage and connect Lake Hodges to the SDCWA imported water delivery system. The project consists of four main facilities: the Olivenhain Dam/Reservoir, Lake Hodges Pipeline and Pump Station, San Vicente Pipeline and Pump Station and the San Vicente Dam Raise. In addition, SDCWA is addressing the environmental impacts of constructing the Emergency Storage Project by creating new wetlands, restoring habitat at project sites and preserving sensitive habitat at other locations. The project capital costs are approximately $1.5 billion. Key Statistics • • 318-foot-tall dam adding 18,100 acre-feet of emergency water storage at the Olivenhain Reservoir (completed 2003) and an additional 117 feet added to San Vicente Dam providing 52,000 acre-feet of water stored for emergency use Various pipelines and pump stations connecting Olivenhain Reservoir, Lake Hodges and San Vicente Reservoir to the Authority’s imported distribution system

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BDCP Economic Benefits and Financing Strategies

State Water Project (SWP) Coastal Aqueduct and Central Coast Water Authority (CCWA) Project
Background The Coastal Aqueduct extension conveys the SWP water to San Luis Obispo and Santa Barbara Counties, which have a combined 47,816 AF of project capacity (although their combined SWP contracts amounts are 70,486 AF). The CCWA facilities consist of a pipeline extension through Santa Barbara County and a regional water treatment plant. When the CCWA Board of Directors approved construction of the 42-mile CCWA pipeline, it included a number of conditions. One condition was to require each of the CCWA project participants in Santa Barbara County to commit that its SWP contract amount allotment will be used first to offset its proportionate share of groundwater overdraft, and then to improve water quality for its consumers, before utilizing the supplies for new development. Key Statistics • • • Phase I, an above ground aqueduct totaling 15 miles from where it branches from the California Aqueduct, was completed in 1968 Constructed from 1994 to 1997, Phase II consists of 101 miles of a 42–57 inch diameter buried pipeline extending from the Devils Den Pump Plant to Tank 5 on Vandenberg Air Force Base in Santa Barbara County The Central Coast Water Authority (CCWA) extension, completed in 1997, is a 30–39 inch diameter pipeline that travels 42 miles from Vandenberg Air Force Base to Lake Cachuma in the Los Padres National Forest

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BDCP Economic Benefits and Financing Strategies

East Bay Municipal Utility District (EBMUD) Freeport Regional Water Project
Background EBMUD serves 1.3 million customers in Alameda and Contra Costa Counties. Originally the Bureau of Reclamation had started the Folsom South Canal from Folsom Reservoir on the American River to deliver CVP supplies under its contract with EBMUD. With the Sacramento County/EBMUD agreement, the Freeport Regional Water Project diverts the CVP supplies on the American River just upstream of the confluence with the Sacramento River. Construction was completed in 2010, and the facility began operations in February 2011. EBMUD’s existing Mokelumne River water supply is adequate to meet the needs of its 1.3 million customers during wet and normal years, but during droughts its customers may have cutbacks up to 50 percent. The Freeport Regional Water Project can deliver up to 10 million gallons per day during droughts to avoid theses customer cutbacks. The Freeport Regional Project is projected to provide a supplemental water supply of up to 85 million gallons of water a day for Sacramento, and provide reliability far into the future. By using surface water from the Freeport Project, the Sacramento County Water Agency will protect its fragile groundwater basin from depletion. The Freeport Regional Water Project is projected to ultimately serve more than 300,000 customers in central Sacramento County. The SCWA’s share of the costs are approximately $386 million and EBMUD’s share of the costs are approximately $517 million. Key Statistics • • • • A 185 mgd water intake structure and pumping plant on the Sacramento River north of Freeport A large diameter pipeline to transport water eastward from the intake to a new SCWA water treatment plant and to the existing Folsom South Canal A water treatment plant in central Sacramento County to treat the water for municipal use by SCWA customers Two pumping plants and a large diameter pipeline to transport water from the southern end of the Folsom South Canal to EBMUD’s Mokelumne Aqueducts

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BDCP Economic Benefits and Financing Strategies

San Francisco Public Utilities Commission (SFPUC) Hetch Hetchy Seismic Upgrade Project
Background San Francisco’s Hetch Hetchy water system, completed in 1934, is a 167-mile, gravity-driven network of dams, reservoirs, tunnels, pump stations, aqueducts and pipelines that collects Tuolumne River runoff on federal land near the Yosemite Valley and conveys it to the San Francisco Bay Area. The SFPUC manages and operates the Hetch Hetchy system. The SFPUC on average delivers about 260 million gallons of water per day (mgd) to retail customers in San Francisco, and to 29 wholesale buyers – cities, water districts, a public utility and other institutions – that supply communities in San Mateo, Santa Clara and Alameda Counties. In all, SFPUC delivers water to a customer base of some 2.4 million people in the region. The system also generates about 1.6 billion kilowatt hours of clean, hydroelectric power annually for the City and County of San Francisco’s municipal tenants and retail customers. Hetch Hetchy’s major dam, reservoir, pipeline, tunnel and pump station components are all at least nearly 50 years old, and many are 60 to 80 years old. Key structural assessments, maintenance and upgrades have been deferred for decades. Major components have no bypass capability in the event of failure. Hetch Hetchy crosses at least five active earthquake faults. Facilities located near these points of intersection are at risk of failure in the event of a major earthquake, an event considered likely in the next 30 years. In 2002, San Francisco voters approved a $1.6 billion bond measure to pay for their share of repairs to the aging system. It will be paid back over time with increases in water rates. Proposition A was approved by San Francisco voters 54% to 46%. Key Statistics • • • • Hetch Hetchy Regional Water System serves approximately 2.5 million residents in southern Alameda, Santa Clara, San Mateo and San Francisco Counties. San Francisco owns the Hetch Hetchy facilities but about two-thirds of the supply is delivered annually to the other residents outside of San Francisco. Annual deliveries are approximately 260 million gallons per day through 280 miles of pipelines, over 60 tunnels, 5 pump stations, 11 reservoirs and two water treatment plants. Upgrade of the Hetch Hetchy Regional Water System was to meet current seismic, building and health code requirements.

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BDCP Economic Benefits and Financing Strategies

Metropolitan Water District (MWD) Diamond Valley Lake/Inland Feeder
Background Built to expand storage capacity, Diamond Valley Lake almost doubles Southern California’s surface storage. The facility helps secure six months emergency water supply southwest of the San Andreas fault. In addition, it reduces the threat of water shortages during droughts and periods of peak summer use. The project cost roughly $1.9 billion to construct. The Inland Feeder consists of nearly 44 miles of tunnels and pipeline designed to improve water quality and reliability for Southern Californians. The water project will store large volumes of water when available from Northern California and the Colorado River (indirectly) and local groundwater basins for use during dry periods and emergencies. The project also will improve the quality of the Southland’s drinking water by allowing more uniform blending of better quality water with Colorado River supplies, which have a higher mineral content. The project cost $1.2 billion to construct. Together, the projects have helped minimize the environmental impact of water exports on the Bay Delta by smoothing deliveries. In addition, as part of environmental mitigation for the construction of the Inland Feeder, MWD added more than 875 acres to existing holdings of mitigation habitat in the San Bernardino Mountains. Key Statistics • • • • • • 810,000 acre-feet or nearly 264 billion gallons capacity Area: 4,500 surface acres; 4.5 miles long, more than 2 miles wide; 150 to 250 feet deep Dam construction began September 1995 and was completed December 1999 Don Owen Dam: Earth/rock-fill-construction, 280 feet high, 1.9 miles long East Dam: Earth/rock-fill-construction, 180 feet high, 2.2 miles long Began pumping water into Diamond Valley Lake on November 8, 1999

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BDCP Economic Benefits and Financing Strategies

Contra Costa Water District (CCWD) Los Vaqueros Reservoir
Though Contra Costa County is adjacent to the Sacramento/San Joaquin Delta, the quality of that water has been a concern since the area was first settled in the 1870’s because of the influence of seawater intrusion into the Delta from the San Francisco Bay. Concerns about rising salinity from the San Francisco Bay is one of the reasons the Contra Costa Water District was formed in 1936. Though the District pumped most of its water from Delta locations upstream near Oakley, salinity continued to be a problem. During the drought in 1977 – the driest year on record in California – salinity levels exceeded public health limits and water was rationed by CCWD and other Northern California water districts. CCWD considered a number of alternative solutions, and in 1988 voters approved funding of the $450 million Los Vaqueros Reservoir project. The measure passed with 68 percent of the vote. After years of design, construction began in 1994. In addition to building the $61 million 192 foot tall dam, the District: • Built 12.8 miles of Vasco Road around the watershed at a cost of $27 million • Relocated 20 electrical towers and 12 miles of gas line • Built a new $20 million, 10,000 horsepower pumping plant on Old River near Discovery Bay • Constructed a new $12 million transfer station with 8,000 horsepower pumps • Built 20 miles of six to eight foot diameter buried pipeline connecting all the new facilities with CCWD’s existing canal system in Antioch • Secured nearly 20,000 acres of land for the dam and the watershed CCWD also made a commitment to preserving the environment and respecting Native American and other historical sites in the watershed. In 1997, most of the major construction was completed. The dam is made of 3 million cubic yards of tightly compacted fill. CCVD began to fill the reservoir in February of 1998. Because of the very wet water year and the availability of high quality water, it was filled by January 1999, a year ahead of schedule. CCWD began construction of the expansion of Los Vaqueros in early 2001. The expanded project increases the reservoir capacity from 100,000 acre-feet to 160,000 acre-feet at a cost of approximately $120 million.

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