Water Manager Elaborates on SoCal Regional Water Issues

John, water is clearly the lifeblood of California south of the Tehachapis. Please discuss MWD outgoing CEO Ron Gastelum's assertion: "Today, we find ourselves in far better shape to meet our needs even in the face of a cutback in the Colorado River. Our conclusion today is to continue to diversify the portfolio of resources, make the investments that are needed to meet water quality standards, and plan well in advance of need."

He is right. You know that there are two schools of thought on what regional water agencies do, particularly agencies like ours that are growing. One is that we rely on MWD for anything and everything needed in terms of reliability and adequate supply to meet not only the current customers' needs, but also – in keeping with Senate Bills 221 and 610 -- for new development with a 20-year supply reliability. The other school of thought is that an agency like ours goes out and puts its own transactions together, ensuring that there is a sufficient supply in the event that MWD misses the mark. This, of course, is a back-stop sort of approach. It's been our experience that the builders, at least in this area, prefer to have this approach. When you look at the regional supply situation, whether it's MWD or, in the larger California scheme, the supply between the Delta and the Colorado River, there's been quite a bit of questioning about its reliability and the longer-term outlook, and that of course has been exacerbated by the 500-year drought situation we're currently in.

What are the pressing challenges facing you as the GM of Santa Margarita Water District today? What's the top priority?

Well, we've briefly touched on that. We're in a high-growth area, and we're expecting another 14,000 homes over a 10 to 20-year period in our service area. Supply reliability is at the top of our agenda. We're looking at this in terms of encouraging MWD to do everything it can to make sure there is sufficient water within its service area. But we've also put together some backup supply reliability transactions to ensure, in case there is a shortfall or hiccup in MWD's regional supply picture, so that we don't find ourselves in a position of not being able to accommodate additional growth.

Could you elaborate on some of the transactions supplemental to MWD allocations that you've entered into in Orange County and San Diego to meet your adequate supply mandates?

Well, a transaction that we did for one of the developers in our service area involved the Chino groundwater basin. We identified several supply options in areas north and south of the Delta area, and those closer to our service area, such as the Chino groundwater basin. We then contracted with what is now called the Cucamonga Valley Water District to store up to 50% of the expected demand upon buildout for the developer/landowner service area. So in that case, the amount was 4,250 acre-feet of water. It can be called in every year over the term of our agreement with Cucamonga Valley. That agreement is in effect for 25 years from the time we exercise the option to purchase, with an option to renew that for another 25-year period. That provides essentially a 50% backup margin in the event that there is a shortfall of Tier 2 water from the MWD system. This ensures that we're not put in the position of having to reduce supply reliability because of the new development in our area. In this case, the builder/landowner was willing to underwrite the costs of making the payments. We have a 3-year option period, and we're in Year 2 of that now. The option period ends in February 2006. And once we exercise that option, then it's a take-or-pay situation with regards to the 4,250 acre-feet of water.

That water is priced somewhere around $80 per acre-foot, with a CPI index adjustment from year-to-year for the duration of the agreement. Again, the builder, through an agreement with the Santa Margarita Water District, has agreed to make those payments in addition to the initial option payment during the three-year option period.

John, we asked Mr. Gastelum a year ago to talk about water transfers, and here's what he said: "We certainly would support transfers, but we do not want to be in the position where our surplus water is dependent on whether we're all willing to pay the price, whatever is demanded by entities like the Imperial Irrigation District." What are your thoughts re: the water transfer issues, the IID deal, and what Southern Californians have to look forward to in terms of water supply in the next 5 to 10 years.

Let me see if I can answer that question in the context of how we dealt with the Cucamonga Valley water. Although we may have to wrestle over this issue with MWD at some point, Cucamonga Valley will produce more groundwater – the water that's banked there on behalf of the Santa Margarita Water District – and that will free up more imported water supply for the Municipal Water District of Orange County (MWDOC). We also entered into a memorandum of understanding between MWDOC and Inland Empire Utilities Agency, another agency in the Cucamonga Valley Area. It basically says they have to recognize our transaction in the event there is a water supply or water shortage allocation from MWD. MWD has not balked at that. They said that if they cannot deliver sufficient Tier 2 water to meet the demands of our growing service area, then by definition, they don't have a problem with us using or exchanging through the MWD system. And I think that MWD is really indifferent to that type of transaction.

What they are not indifferent to, which I think is the issue with IID and some of the other larger regional transfers, are situations where they are in a position to provide water when other agencies want to transfer their own water through the MWD system. So you end up with fiscal issues, lost sale problems, and capacity utilization issues. If this were not so, the sale would have been by MWD. So, I think it is important to recognize the difference between those two types of structures and what's likely acceptable to MWD and what isn't.

John, could you address what holds MWD, our incredibly important regional water agency, together. Likewise, what issues cause friction within the family of member agencies?

A situation where agencies within the MWD family (using that term loosely) are out trying to promote long-term supply reliability -- either for reliability and/or for cost-savings purposes -- is antithetical to the concept of a regional water supplier. And there's good reason on both sides as to why agencies should or shouldn't do that. But I think at some point there will have to be a consensus reached among the MWD family members about who has that responsibility, and to what extent MWD becomes more of a joint-powers type of operation, one where agencies use water through the MWD system versus one where MWD has primary responsibility.

It's an issue of whether transfer and supply reliability questions should be dealt with on a regional scale, as opposed to everyone doing it on their own in a Balkanized fashion. I'm not saying that MWD hasn't had that discussion, but I don't think it's reached critical mass yet, although we would have expected that to have occurred when the IID/San Diego transfer issue came up, and more recently, with the QSA resolution.

And could you also elaborate on the always-present tensions between agricultural and urban interests regarding water?

If you're talking about this in the context of the Delta, well, you know, more money has been pumped into that than into the building of the State Water Project by now. And if you talk to some of the folks that were at the table during that process, you may hear some optimism in that there's going to be a resolution that everybody's going to live with. I, of course, am talking about this as between the competing agricultural, urban, and environmental interests. I don't know where all this may end up. If we have a true water crisis, or if the cost of water rises dramatically because we are looking at other sources, or perhaps if something like ocean desalination comes along to augment the water supply from the Delta, then perhaps that conversation between urban and ag interests will ensue.

John, as you know, CEO Ron Gastelum has announced that he'll be leaving MWD at the end of the year. What's the significance of his leaving MWD at this time? What does it portend for MWD's leadership and priorities going forward?

It'll be interesting to see what Ron's leaving means for MWD. With Wes Bannister's ascendancy as chairman, the roles of the board and the CEO's office could be different. It may be that the board is going to be more engaged, that there's going to be a different level of communication between the board and the CEO's office. But, it's too early to tell. Clearly, change depends on what the Board is looking for in a new CEO and the type of person that sits in that office. It also depends on whether MWD will be a consensus-driven organization, or if it's going to be one where we have one faction or another at any given time holding the cards or political power. The latter scenario has probably perpetuated some of the controversies between, for example, L.A., San Diego, and the rest of the MWD family.

MWD's leadership must work more closely with the board, and that's not to denigrate the job that Ron's done. Matters always look easier from the outside, only to become more complex when you get on the hotseat. Frankly, based on what I've heard, I would expect to see more involvement from the board with respect to some issues than what we've seen in the last five years.