Presentation on Water Pricing September 11, 2012

1. Presentation on Water PricingSeptember 11, 2012

2. Economic size of California’s water management system, late 2000s To avoid double counting, the table does not include $720 million in state grants to local agencies and $481 million in federal grants under state and federal expenditures, since these grant revenues help fund local expenditures included elsewhere in the table. Public Policy Institute of California, Water and The California Economy, May 2012

3. 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

4. Methods of Water Management Financing Federal Central Valley Project The Reclamation Project Act of 1939 (RPA) provides the basic authority for recovering the federal investment in constructing, operating, and maintaining authorized water projects. The Act establishes two primary contract methods for repayment: repayment contracts and water service contracts. Reimbursable CVP project costs are recovered through rates set for each contractor and separate contractor capital payments. Repayment contracts are used when specific cost obligations can be clearly assigned to beneficiaries, e.g. when a specific facility is constructed for the sole benefit of a single contractor. These types of contracts are usually provided for a fixed annual payment, over a 40 year period, for a fixed total amount. Water service 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 of water received. Overview on Central Valley Project Financing, Cost Allocation, and Repayment Issues, Entrix Inc. , September, 18, 2008 (Delta Vision Consultant Reports)

5. 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

6. 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

7. Department of Water Resources Remaining Bond BalancesJanuary 2012($ in thousands) 1 Remaining balances include unappropriated amounts, plus reversions (including pending future natural reversions) of unused prior appropriations.

8. 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

9. 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

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

11. 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)

12. Methods for Monetizing Benefits Avoided Cost or Avoided Damage Alternative Cost Market Prices Hedonic Pricing and Land Value Methods Other Revealed Preference Survey-Based Methods Benefits Transfers Guidance: Federal Principles and Guidelines, DWR Economic Analysis Guidebook

13. 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.

14. CALFED Common Model Package

15. Contact Information ray@water.ca.gov