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California DWR Approves EIR and Files Validation Action for State Water Project Contract Extension Amendments

On December 11, 2018, the Director of the California Department of Water Resources (DWR), Karla A. Nemeth, certified and approved the Final Environmental Impact Report (FEIR) for the Water Supply Contract Extension Project. This project will amend the 29 water supply contracts DWR has with public agencies throughout California as part of the State Water Project. The amendments will extend the water supply contracts from 2035 to 2085. (EIR, at 1-2.) The same day as the EIR approval, DWR filed a validation action in the Superior Court of Sacramento County, seeking a judgment confirming the validity and legality of the contract extension amendments. (California Department of Water Resources v. All Persons Interested in the Matter, Case No. 34-2018-00246183.)

 

Background

For over half a century, DWR has operated the State Water Project (SWP) to distribute water throughout California. The Burns-Porter Act (BPA), enacted by the State Legislature in 1959 and approved by voters in 1960, authorized the issuance of $1.75 billion in general obligation bonds for the construction of the SWP. (Water Code § 12935.) The BPA further directed DWR to enter into contracts for the sale, delivery, and use of water and power, the proceeds of which would be used to repay the bonds. (Water Code § 12937 (b).) Accordingly, DWR maintains 29 long-term water supply contracts with cities, counties, water districts, and other agencies (Contractors) throughout the state. (DWR, Bulletin 132-16, p. 151.) In turn, the Contractors deliver water to more than 27 million Californians and about 750,000 acres of farmland. The Contractors pay DWR for the cost of capital construction, improvements, and operations and maintenance of SWP facilities.

Each Contractor has its own long-term water supply contract with DWR, but the basic terms and conditions of all the contracts are substantially uniform. These contracts have been amended periodically to incorporate changes agreed upon by DWR and the Contractors. (Bulletin 132-16, p. 153.) Due to amendments in the 1990s, the contracts are in effect for the longest of: the project repayment period (ending December 31, 2035); 75 years from the date of the contract; or the period ending with the latest maturity date of any bond used to finance construction costs of project facilities. (Bulletin 132-16, p. 152.) All 29 of the contracts are set to expire between 2035 and 2042. (California Department of Water Resources v. All Persons Interested in the Matter, Complaint, p. 2.)

Although bonds have historically been sold with 30-year terms, no SWP bonds have been sold with maturity dates beyond 2035. As that date approaches, the financial strain of repayment obligations grows, and it has become increasingly difficult to affordably finance SWP capital expenditures. (EIR, at 2-4.)

 

The Contract Extension Amendment

In advance of the end of the 2035 repayment period, DWR and the Contractors began negotiations to amend the contracts in May 2013. (EIR, at 1-1.) Just over a year later, the negotiators agreed on four project objectives: first, to “ensure DWR can finance SWP expenditures beyond 2035 for a sufficiently extended period to provide for a reliable stream of revenue from the Contractors and to facilitate ongoing financial planning for the SWP”; second, to “maintain an appropriate level of reserves and funds to meet ongoing financial SWP needs and purposes”; third, to “simplify the SWP billing process”; and fourth, to “increase coordination between DWR and the Contractors regarding SWP financial matters.” (EIR, at 1-2; Bulletin 132-16, p. 151.)

The proposed amendments achieve the stated purposes by: 1) extending the term of the 29 contracts to December 31, 2085; 2) providing for increased SWP financial operating reserves; 3) establishing a new “pay-as-you-go” repayment methodology in which costs are recovered within the year they were incurred; 4) providing enhanced funding mechanisms and new accounts to address SWP financial needs; and 5) establishing a Finance Committee and provide other means to increase coordination between DWR and the Contractors. (EIR, at 1-2.)

DWR released a Draft Environmental Review (DER) in August 2016, in which it determined that there are no impacts of the proposed amendments in the resource topics analyzed. In particular, the proposed amendments concern financial provisions of the contracts and would authorize no new construction or water allocations. (DER, at ES-4.) Further, DWR determined that the amendments would have no physical environmental impacts and therefore would not contribute to any cumulative effect. (Id.) A public hearing was held on September 12, 2016 and the public comment period lasted until October 17, 2016.

Numerous parties commented on the DER. One comment from multiple commenters was that the Draft did not discuss the relationship between the contract extension amendments and California WaterFix. (EIR, at 2-8.) DWR explained that the California Environmental Quality Act (CEQA) does not require the contract extension amendments to be analyzed in combination with California WaterFix because the two projects are not reasonably foreseeable consequences of one another, and each has independent benefits, purposes, and objectives. (EIR, at 2-9.) Another comment was that DWR should amend the contracts to decrease SWP exports from the Delta. In response, DWR explained that the contracts are used only to determine the proportionof water each Contractor should get from available SWP, not the amountof supply, which is determined based on hydrology, reservoir storage, facility constraints, and regulatory constraints.(EIR, at 2-12 – 2-13.)

DWR certified the Final EIR on December 11, 2018.

 

The Validation Action

The California Government Code provides that a state agency may bring an action under the Code of Civil Procedure, § 860 (Validation Statute) to determine the validity of its contracts. (Gov. Code § 17700.) On the same day it certified the Final EIR, DWR filed a validation action asking the court to deny all challenges to the validity of the contract extension amendments and to find that the amendments are valid, legal, and binding. DWR also asks for a permanent injunction against any legal action to challenge the adoption or validity of the amendments. If DWR prevails, it would shield the contract extension amendments from future legal attack.

 

Conclusion and Implications

Individual contractors, such as Metropolitan Water District of Southern California and Santa Clara Valley Water District, have approved the contract extension amendments and more are expected in the coming weeks. Interested parties may challenge the contract extensions in court by either answering the validation action or by filing a new lawsuit challenging the adequacy of DWR’s environmental review. It remains to be seen whether the contract extensions as approved by DWR will be found to be binding and conclusive.

(Chelsie Liberty, Meredith Nikkel)