Delta water tunnel project needs $1.2 billion more for planning

12/07/2013 12:00 AM

10/06/2014 8:47 PM

The giant Delta water-diversion tunnels proposed by Gov. Jerry Brown need $1.2 billion more spent on planning and design before construction starts or is even assured.

The additional planning costs, which come on top of $240 million already spent, first came to light at a board meeting of the Westlands Water District late last month. The Sacramento Bee confirmed this additional planning cost in recent interviews with the California Department of Water Resources, which is leading the project, and several of the water agencies that are responsible for the bills.

“It’s a lot of money on a project of this size before you get to construction,” said Roger Patterson, assistant general manager of the Metropolitan Water District of Southern California, which has been paying about 25 percent of the bills for preliminary planning. “Sometime in the spring, we’ll need to make the decision so at least the next piece of funding is available, because you don’t want to stop if you’re going to have a project.”

The state expects to release the draft environmental impact study – seven years in the making – for the project on Monday. Known as the Bay Delta Conservation Plan, the proposal calls for two huge tunnels, 40 feet in diameter and 35 miles long, that would divert freshwater out of the Sacramento-San Joaquin Delta and deliver it directly to existing state and federal water export pumps near Tracy.

Existing canals would disperse the water to agencies that deliver Delta water to 25 million Californians and 3 million acres of farmland from San Jose to San Diego.

Three pumping plants are proposed on the Sacramento River between Freeport and Courtland, together capable of diverting water at 9,000 cubic feet per second. The plan also includes about 100,000 acres of habitat restoration and other environmental projects.

Tunnel proponents say the project is key to resolving decades of conflict over California’s water supply and repairing the health of the Delta’s fragile ecosystem. Water agencies that depend on the Delta are looking for more stability in that water supply, which in dry years might be 25 percent or less of what they are allowed by contract.

The tunnels also would be designed to alleviate the continuous slaughter of fish at the existing pumps near Tracy, which are operated by DWR and the U.S. Bureau of Reclamation. The pumps reverse natural water flows in the estuary, trapping fish and making modern fish screens ineffective.

By moving diversions upstream on the Sacramento River, the theory goes, reverse flows would be avoided and fish screens would prevent much of the carnage.

Urban and farm water agencies have spent $240 million planning the project over the past seven years. State officials hope to approve the project by the end of 2014. But actual design and planning is only about 10 percent complete, and construction is not expected to begin until 2017, at the earliest.

The remaining planning work is estimated to cost $1.2 billion, water officials told The Bee, or an estimated $300 million annually for four years until construction begins. Among the planning work yet to be done are construction-ready designs and extensive soil testing, which is essential to refine the tunnel route and prepare the gigantic drilling machines that will bore the tunnels.

There’s no formal funding agreement yet for the tunnel project – DWR says that will happen if the project gets approval from state and federal wildlife agencies. So far, water agencies that stand to benefit have paid the planning costs out of their own budgets.

DWR intends to pay for construction of the tunnels by selling bonds under its existing legal authority to finance the State Water Project, and those bonds would be repaid by water contractors via higher water rates. DWR has asserted that it needs no approval from the Legislature or state voters.

Water contractors will have to come up with funding for the remaining planning costs if they want to keep the project going – and do so even though construction of the tunnels is far from assured.

That is because additional regulatory permits must be secured in the interim, notably a complicated Clean Water Act permit from the U.S. Army Corps of Engineers. The project also is likely to be challenged in the courts during the next four years of planning.

In addition, DWR will have to start acquiring land for the project about one year after approval. The interim financing is intended partly to purchase land, a costly process also likely to result in litigation.

Water agencies will have to decide early next year how to ensure a steady flow of cash for the planning process, said DWR director Mark Cowin. Some water agencies may have to sell bonds to raise their portion.

“It’s a tough decision,” Cowin acknowledged. “But we expect them to ultimately decide the investment is worthwhile.”

Jeffrey Michael, an economist at University of the Pacific in Stockton, called $1.2 billion a “staggering” sum that could prompt some water agencies to pull out of the project. Michael has been a persistent critic of the tunnel project and its financial assumptions.

“I think it would be crazy for them to go forward with this,” said Michael, director of UOP’s Business Forecasting Center. “The interim financing is incredibly risky. You don’t know whether you’re going to get a project at the end of this.”

Patterson said Metropolitan Water District likely can cover its share of the future planning costs – about $300 million – without affecting ratepayers. He said he did not know yet whether the money would come from existing revenue or new bond sales.

Westlands Water District in the San Joaquin Valley depends almost entirely on water diversions from the Delta, which it buys from the U.S. Bureau of Reclamation. Among the agencies that contract for water with the bureau, Westlands has provided the majority of funding for planning so far, and it has done so by selling bonds. If it contributes to the additional $1.2 billion in planning costs, it likely would sell more bonds, agency officials said. Ultimately, these would be repaid by charging its ratepayers – farmers in Fresno and Kings counties – more for water.

Westlands farmers use Delta water to grow cotton, tomatoes, almonds, grapes, peaches, corn and other crops on more than 600,000 acres.

“Certainly the money’s got to come from the revenue sources, which is sales of water,” said Jason Peltier, chief deputy general manager at Westlands.

The Westlands district held a workshop on the financing issues with board members on Nov. 20. During that meeting, a financial consultant explained that building the tunnels will end up costing more than initially projected because of inflation. Until now, officials have put the construction cost at $15 billion, with the rest of the $25 billion cost attributed mostly to habitat restoration. The consultant said construction costs will escalate to $18 billion when adjusted for inflation at the project’s estimated completion date in 2027.

Despite the costs, Peltier hopes the tunnels will be a better option than the alternative, which is a future in which Westlands must rely on Delta water allocations that are 20 percent to 40 percent of its contract amount.

“When you’re deciding whether to make an investment, you’ve got to consider what’s the downside if we don’t invest,” Peltier said. “The downside ... is continued water shortages and economic dislocation. That’s something we’re trying to find a path away from.”

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