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Presentation on Water PricingSeptember 11, 2012

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Annual expenditures (200 9 $ , m illions) Annual em ploym ent

Operating Investm ent Total Local agencies 17,568 12,730 30,298 44,130

W ater supply (public) 10,430 5,859 16,289 34,261

W ater supply (private) 798 2,606 3,404 1,598

W astewater (public) 5,511 3,941 9,452 5,098

Flood m anag em ent (public) 829 324 1,153 3,173

State agencies 1,985 1,084 3,069 5,669

D epartm ent of W ater Resources – Sta te W ater Pro ject 952 379 1,331 1,517

– O ther water supply 97 – 97 871

– Flood management 165 174 339 449

Sta te W ater R esources C ontro l Board (water quality and rights) 435 – 435 1,465

D epartm ent of Fish and G am e (ecosystems) 173 1 174 1,093

D epartm ent of Public H ealth (d rinking water quality) 80 – 80 206

C alifo rn ia Public U tilities Co m m iss ion (private w ater utilities) 83 – 83 68

W ater-re lated general obligation debt repayment – 530 530 –

Federal agencies (California programs) 374 136 510 3,012

U.S . Bureau of Rec lam ation (w ate r supply) 207 – 207 937

U.S . A rm y Corps of Engineers (flood management) 47 136 183 1,246

U.S . Environm enta l Pro tection Agency (w ater quality) 8 – 8 56

U.S . Fish and W ildlife Serv ice (ecosystems) 58 – 58 400

N ationa l M arine Fishe rie s Service (ecosystems) 54 – 54 373

Total local, state, and federal 19,927 13,950 33,877 52,811

Economic size of California’s water management system, late 2000s

Public Policy Institute of California, Water and The California Economy, May 2012

To avoid double counting, the table does not include $720 million in state grants to local agencies and $481 million in federal grantsunder state and federal expenditures, since these grant revenues help fund local expenditures included elsewhere in the table.

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Methods of Water Management Financing

State Water Project

SWP Project facilities have been constructed with several general types of financing: general obligation bonds and tideland oil revenues (under the Burns-Porter Act, which was approved by the Legislature in 1959, and the bond issue approved by voters in 1960); revenue bonds; and capital resources revenues.Repayment of these funds, and the operations, maintenance, power, and replacement costs associated with water supply, are paid by the 29 agencies and districts that have long-term contracts with DWR for the delivery of SWP water. Costs are repaid as debt service on the bonds comes due.

DWR Bulletin 132-08, Management of the California State Water Project, June 2012

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Methods of Water Management Financing

Federal Central Valley Project

The Reclamation Project Act of 1939 (RPA) provides the basic authority for recovering thefederal investment in constructing, operating, and maintaining authorized water projects. TheAct establishes two primary contract methods for repayment: repayment contracts and waterservice contracts. Reimbursable CVP project costs are recovered through rates set for eachcontractor and separate contractor capital payments. Repayment contracts are used whenspecific cost obligations can be clearly assigned to beneficiaries, e.g. when a specific facilityis constructed for the sole benefit of a single contractor. These types of contracts are usuallyprovided for a fixed annual payment, over a 40 year period, for a fixed total amount. Waterservice contracts are used for projects that provide multiple individual, multipurpose,facilities benefiting different functions and many different contractors (such as the CVP).Costs are allocated to, and recovered from, appropriate beneficiaries based on the amount ofwater received.

Overview on Central Valley Project Financing, Cost Allocation, and Repayment Issues, Entrix Inc. , September, 18, 2008 (Delta Vision Consultant Reports)

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Methods of Financing

Investor-Owned (Private) Utilities• O&M Costs

– Water Rates• Capital Project Costs

– Issuance of Private Activity Tax Exempt Bonds– Issuance of Corporate Bonds– Sales of Stock

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Methods of Financing

Water Supply and Flood Control Special Districts, County and City Governments

• O&M Costs– General Property Taxes (percent share of 1% tax collected by county)– Special Property Taxes (2/3 vote of residents for approval)– Benefits Assessments (2/3 vote of residents or majority property owner vote for

approval)– Water Rates

• Capital Project Costs– General Obligation Bonds (2/3 vote of residents for approval)– Revenue Bonds (financed by user fees)– Benefits Assessment Bonds (2/3 vote of residents or majority property owner vote for

approval)– Grants and Loans from State (Propositions 84 & 1E) and Federal (Title XVI and

WaterSMART) Governments

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Department of Water Resources Remaining Bond BalancesJanuary 2012

($ in thousands) Bond Law

Am ount Authorized for

DW R

Set- Asides

Encum brances/ Expenditures through 6/30/11 1

FY 11-12 Budget

Opening Balance July 1, 2012

FY 12-13 Proposed Budget

Rem aining Balance July 1, 2013 1

Department of Water Resources Prop 81 Safe Drinking Water 1988

$425,000 $412,944 $2,315 $9,741 $2,315 $7,426 Prop 25 Water Conservation Bond Law 1984

$10,000 $9,632 $0 $368 $0 $368 Prop 44 Water Conservation 1986

$75,000 $55,717 $1,600 $17,683 $1,600 $16,083 Prop 82 Water Conservation 1988

$60,000 $50,883 $0 $9,117 $8,974 $143 Prop 204 (DWR Authorization) Safe, Clean, Reliable Water S upply 1996

$217,200 $1,915 $188,916 $742 $25,627 $735 $24,892

Prop 13 (DWR Authorization) Safe Drinking Water, Clean W ater, Watershed Protection, and Flood Protection Act 2000

$1,105,243 $42,655 $855,504 $56,675 $150,409 $7,887 $142,522

Prop 50 (DWR Authorization) Water Security, Clean Drinking W ater, Coastal & Beach Protection Act 2002

$857,624 $739,687 $42,218 $75,719 $14,774 $60,945

Prop 84 (DWR Authorization) Safe Drinking Water, Water Quality and Supply, Flood Control, River and Coastal Protection Bond Act 2006

$2,103,000 $73,605 $783,609 $586,368 $659,418 $27,746 $631,672

Prop 1E Disaster Preparedness & Flood Prevention Bond Act 2006

$4,090,000 $143,150 $1,239,467 $309,422 $2,397,961 $62,135 $2,335,826

Total, DW R $8,943,067 $261,325 $4,336,358 $999,340 $3,346,044 $126,166 $3,219,878

1 Remaining balances include unappropriated amounts, plus reversions (including pending future natural reversions) of unused prior appropriations.

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Financial Relations Between Government and Investor-Owned (Private) Utilities

• Financial Oversight– State Public Utilities Commission (Rate Setting)– State Controller’s Office (Financial Reporting)

• Financial Assistance– Private Activity Tax Exempt Bonds

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Principles for an Astringent Budgeting Environment

The beneficiary pays principle offers the best basis for establishing reliable funding for essential water-related investments. Many precedents exist that demonstrate the success of financing water infrastructure by direct beneficiaries, and ample potential exists to apply this method to more complex multi-beneficiary projects. CUWA defines the beneficiary pays principle as requiring those receiving a benefit from a given project or program to pay a proportional share of the cost.

CALIFORNIA URBAN WATER AGENCIES, CUWA Policy Principles,Reliable Water Financing, May 23, 2012

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Principles for an Astringent Budgeting Environment

A functional beneficiary pays system should:• Identify all beneficiaries (including the public) and limit "free riders“• Establish a clear nexus between charges and benefits received• Provide specificity, such that charges are based on defined projects with

defined costs• Provide for a joint powers forum in which beneficiaries collaborate on the

integrated design of given water projects.• Be transparent in cost allocation and investment decisions• Dedicate funds strictly to water-related projects and programs, with no

redirection of funds to other purposes• Reasonably assure that benefits will be proportional to charges assessed• Allow for special situations, e.g., disadvantaged communities, in which a

beneficiary might not pay in proportion to benefits receivedCALIFORNIA URBAN WATER AGENCIES, CUWA Policy Principles,Reliable Water Financing, May 23, 2012

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Principles for an Astringent Budgeting Environment

• Improve the use of grants and loans as investment incentives, including the development of a statewide hydrologic-economic analysis framework to quantitatively analyze and identify trade-offs associated with adopting alternative State and regional water management packages in order to inform State investment decisions (Water Plan Finance Caucus)

• Establishment of a bond fund for financing public benefits purposes of multi-purpose water projects: ecosystem improvements, water quality improvements, flood control, emergency response, and recreation (SBX7-2)

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Methods for Monetizing Benefits

Avoided Cost or Avoided DamageAlternative CostMarket PricesHedonic Pricing and Land Value MethodsOther Revealed PreferenceSurvey-Based MethodsBenefits Transfers

Guidance: Federal Principles and Guidelines, DWR Economic Analysis Guidebook

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Monetizing Benefits – Existing Models• Ecosystem improvement:

– USACE cost-effectiveness analysis– California Ocean Fish Harvest Economic Model (COFHE)– Ecological Flows Tool (EFT)

• Water quality– Lower Colorado River Basin Water Quality Model (LCRBWQM)– Bay Area Water Quality Model (BAWQM)

• Flood damage reduction– HEC-FDA and HEC-FIA– FEMA Hazus-MH– FEMA Benefit Cost Analysis (BCA) toolkit– F-RAM

• Recreation– USACE Unit Day value models

• Water Supply Reliability – Least Cost Planning Simulation Model (LCPSIM)– California Value Integrated Network (CALVIN)– Other Municipal Water Economic Model (OMWEM)– Metropolitan Water District of Southern California’s IRPSIM and other agency-specific water cost

models– Statewide Agricultural Production (SWAP) model.

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CALFED Common Model Package

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Contact Information

ray@water.ca.gov