Rebuilding California’s Infrastructure – Water Storage (Part 3 of 6)

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This is Part Three of “Rebuilding California’s Infrastructure,” to access the other five sections, click on the links below. To access the entire six-part study in a single, printable PDF document, DOWNLOAD HERE.

Part One: Introduction
Part Two: Water Reuse
Part Three: Water Storage
Part Four: Desalination
Part Five: Energy and Transportation
Part Six: Financing Models and Policy Recommendations

WATER STORAGE

The cumulative impact of water-related regulatory actions in California has reduced water distribution to consumers thus calling into question the reliability of the state’s water supply. This has precipitated a sustained call for increased storage capacity for water developed for urban, agricultural, environmental, and management uses. This shift in the state’s perspective on water storage—from a mechanism to facilitate conservation objectives to a critical component of water supply and distribution—introduces potential investment opportunity for institutional investors.

State water authorities and legislators alike have called for private-sector capital to play a role in financing water storage projects. The Department of Water Resources, for example, cited public-private partnerships as potential financing options in the 2013 Water Plan Update, as did the 2016 State Treasurer’s Biennial Report. California’s long-standing use of joint powers authority offers institutional investors, and especially public pension funds as state agencies, even broader financing partnership opportunities.

Available funding further enhances policymakers’ appeals to institutional investors. California voters approved $2.7 billion in funding support for water storage projects in Proposition 1, the Water Quality, Supply and Infrastructure Improvement Act of 2014. Federal grants and funding provided by Title XVI for water projects seeks to attract capital from the private sector in hopes of leveraging public dollars. This confluence of funding from all levels of government decreases risk for institutional investors and commensurately increases value for taxpayers.

In this section, we examine the utility of water storage in improving water managers’ ability to deliver water services to customers for the purpose of discovering potential investment opportunities for private-sector investors. Although water storage technology does not increase the amount of water, it makes the supply of water for human use more reliable.

California stores water from two sources. Surface water, the water that runs into rivers, lakes, and reservoirs, and groundwater, which flows below ground in the permeable rock, gravel, sand, and silt of aquifers. Availability from stored water supplies can be thought of as a bank account. Surface water is like a checking account, offering short-term, seasonal water storage capabilities, and groundwater is more like a savings account for longer-term storage capacity.[1]

Academics, policymakers, and water managers agree that coordinating the management of surface and groundwater supplies optimizes overall yield and nets cost efficiencies.

The table below shows the state’s sources of water, storage repositories, and a summary of the key dynamics impacting market activity.

Water Sources, Types of Water Storage, and Market Dynamics
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We believe there is potential investment opportunity for private-sector investors in market-driven surface water and groundwater water storage strategies, particularly in water banks. Opportunities for private-sector investors will expand as water districts increase their ability to form partnerships and aggregate projects.

CURRENT CAPACITY

Estimates of California’s total water storage capacity vary widely due to incomplete information about the state’s 515 groundwater basins. California’s Department of Water Resources approximates groundwater storage capacity to be somewhere between 850 million and 1.3 billion acre-feet but then further qualifies this statistic by assessing the volume of usable storage capacity—defined as groundwater that can be economically withdrawn, recharged, and meets potable or non-potable quality standards—at 143 to 450 million acre-feet.[2] Still, California has at least ten times more storage capacity below ground than above which the department estimates approaches some 41 million acre-feet contained in the state’s 1,400 reservoirs.[3]

California Surface and Ground Water Storage Capacity (million acre-feet)
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Combined, these estimates indicate total water storage capacity statewide to be between 184 and 491 million acre-feet.

For context, in the most recent normal weather year, 2010, California used more than 40 million acre-feet of water, drawing roughly 22 million acre-feet (59%) from surface water and 17 million acre-feet (40%) from groundwater.[4] In drought years, groundwater can supply as much as 46 percent.[5] This illustrates how critical both surface water and groundwater storage capacity are to meeting California’s water needs.

PROPOSED PROJECTS TO EXPAND WATER STORAGE CAPACITY

Over the next two years, decisions will be made on four major projects to expand California’s surface water storage capacity by 10 percent.[6]  Irrespective of whether or not construction on these expanded or new reservoirs begins, the call to increase surface water storage capacity in the state will continue to intensify as long as the reliability of California’s water supply remains in question.

The four reservoir projects under consideration are detailed in the table below along with their corresponding potential increased capacity and current status:

Representative California Surface Water Projects
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There are several additional projects proposed or in progress to increase water storage capacity. These include the Lake Del Valle Reservoir Water Supply Storage Expansion Project, the Blagen Mill Pond Restoration Project, and the Wilson Lake Rehabilitation and Meadow Restoration Plan.

While there is pitched interest in expanding surface water storage capacity, it is important to note that Proposition 1 funding cannot exceed more than half of a project’s total capital costs, nor can it be used for operation and maintenance costs. This requires water authorities to secure financing from other sources, including the private sector, in order to take advantage of available state funding.

DEVELOPING GROUNDWATER STORAGE CAPACITY

In contrast to the state’s well-documented efforts to expand surface water storage capacity, California policymakers encouraged 1 million acre-feet of groundwater storage expansion but they have not proposed, nor identified, any specific projects electing instead to have groundwater storage managed at the local level.

Local water managers are very interested in pursuing projects to expand groundwater storage capacity, particularly capacity that would increase supply reliability by facilitating conjunctive management with surface water storage. They are motivated by available funding and by the enactment of the Sustainable Groundwater Management Act. This legislation introduces the state’s first groundwater regulation and requires water districts to develop sustainable groundwater master plans.

A comprehensive study of groundwater management plans found that many water agencies are actively evaluating groundwater storage expansion options, including water banking. These include the Semitropic Water Storage District, Sacramento and San Joaquin counties, Orange County Water District, and Eastern Municipal Water District. The study’s researchers estimate these projects would lead to approximately 22 million acre-feet in expanded groundwater storage capacity. They cite potential advantages as drivers of these efforts, specifically local control, support, and use, which translate into lower conveyance costs due to the proximity of water consumers.[7]

A portion of the total groundwater storage capacity includes space created by the depletion of some of the state’s aquifers. To make use of the most strategically-located spaces, water managers have created water banks. Like financial banking institutions, water bank customers make deposits and withdrawals to their accounts although in a different currency: water. Experts calculate that water banks have been developed in less than one percent of Californian water basins.[8]

Major California Water Bank Expansion Projects
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California has a significant amount of untapped groundwater storage capacity.

Experts calculate that approximately 250 million acre-feet is available for additional groundwater storage and banking.[9] Partnerships between water districts, storage engineers, and long-term institutional investors could accelerate the development of the state’s groundwater storage capacity.

COSTS TO ACQUIRE WATER STORAGE CAPACITY

Location is the key factor in the cost to develop water storage capacity, varying significantly according to site characteristics, water recharge supply, conveyance infrastructure, and the ability to integrate the management of surface, groundwater, and conveyance facilities.

The table below provides findings from studies which examined the comparative costs to develop water storage capacity.

Comparative Costs to Develop Water Storage (Average Costs $/AF)
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Our survey agrees with these studies finding that groundwater storage offers far greater water storage capacity at a lower cost than surface water projects. What’s more, groundwater storage projects have generally been developed and put into operation over shorter timeframes than those involving dams and reservoirs.

In testimony to the Hoover Commission in 2010 on water banking, a Kern Water Bank Authority representative illustrated the initial capital cost differential. He compared the $1.9 billion capital cost of the Diamond Valley Reservoir which stores 800,000 acre-feet to the Kern Water Bank which cost $75 million to construct and holds over 1,000,000 acre-feet.[10]

It is important to note, however, that water managers and industry experts agree that the advantages of groundwater storage are best realized when used in conjunction with surface water storage resources.

REVENUE POTENTIAL

While recent legislation and government funding have improved conditions for securing initial capital to expand water storage capacity, long-standing regulations remain that inhibit widespread development. As long as local water authorities are compelled to focus on cost recovery instead of revenue generation, capital-intensive projects like water storage will continue to take decades to conceive, evaluate, and finance.

Without revenue sources to repay investments made either by taxpayers or private-sector investors, progress in expanding California’s water storage capacity will be made only at the margin.

Water experts have advised that “the water sector has to fundamentally change the way it values water as a resource by adjusting the water rate structure and pricing policies in a way that captures the full cost of delivery, decouples revenue from the quantity of water sold, and reflects the marginal cost of consumption and scarcity.”[11] Moreover, they assert that, “having a functional water market, in which people with excess water can sell it to those who need it, is an important incentive for getting people to store water because they can profit from their conservation. From the state’s perspective, the market is an important tool to reallocate water to those who most need it now without harming anyone’s long- term water rights.”[12]

As a result, market pricing data on water storage revenue is not readily available and therefore has not been widely studied to date. Both surface and groundwater storage managers have three primary sources of revenue: fees for conveyance, pumping and storage; water sales from actual supplies and potential trading and exchange activities; and pumping rights. The lack of pricing data is a significant deterrent to private-sector investment.

Energy generated in the course of operation by surface water storage assets introduces potential revenue streams to capitalize on in the open markets.

Hydroelectric power, for example, is produced as gravity directs water flow from higher elevation to lower elevation, turning turbines to generate electricity that can be sold. In addition to using the basic downstream flow of rivers, a surface water supply system can generate additional hydroelectric power through pumped storage.

RETURN ON INVESTMENT

We find that the most compelling potential investment opportunity in water storage for the private sector is in groundwater, particularly in water banks. The Rio Bravo Water Storage District in Kern County, for example, is offering long-term equity ownership in its water bank in addition to the more traditional debt financing and contract or lease arrangements. Researchers foresee water banks serving as brokers, clearinghouses, and facilitators of trade. [13]

Water banks build on the sector’s experience in using partnership structures to achieve economies of scale, diversify risk, and increase influence. Examples of these partnership structures include informal consortiums, joint powers authorities, and public-private partnerships. This partnering capability is another key to securing private-sector investment.

Alliances between water districts to seek government grants and funding seeds a potential progression towards water storage project aggregation that would facilitate private-sector financing. This is attractive to investors because it diversifies project risk and improves return on investment.

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FOOTNOTES

[1] This concept was suggested by Robert Merrill (March 31, 2016), Groundwater Storage Isn’t Sexy, But It Beats Temperance Flat, The Fresno Bee. http://www.fresnobee.com/opinion/readers-opinion/article69096302.html.

[2] California Department of Water Resources (2003). California Groundwater Update, Bulletin 118, Chapter 6, Basic Groundwater Concepts, p. 95. http://www.water.ca.gov/pubs/groundwater/bulletin_118/california’s_groundwater__bulletin_118_-_update_2003_/bulletin118-chapter6.pdf.

[3] California Department of Water Resources (2013). California Water Plan Update 2013, Vol. 1, Chapter 3, California Water Today, p. 38. http://www.water.ca.gov/waterplan/docs/cwpu2013/Final/04_Vol1_Ch03_Ca_Water_Today.pdf.

[4] California Department of Water Resources (2013). California Water Plan Update 2013, Vol. 3, Chapter 9, Conjunctive Management and Groundwater Storage, p.9.

[5] California Department of Water Resources (2013). Compilation of Enhanced Content for California Water Plan Update 2013, p. 1.

[6] The Public Policy Institute of California calculates an additional 4 million acre-feet, increasing California’s total water storage capacity from 42 million acre-feet to 46 million acre-feet. See Storing Water, April 2015.

[7] Jay Lund, et. al. (November 2014). Integrating Storage in California’s Changing Water System, Center for Watershed Sciences, University of California Davis. https://watershed.ucdavis.edu/files/biblio/Storage_White_Paper_20Nov2014.pdf. .

[8] Erica Gies (May 7, 2015). Water in The Bank, Yale Environment 360. http://e360.yale.edu/feature/water_in_the_bank_one_solution_for_drought-stricken_california/2872/. Gies estimates “around 22 basins in California — mostly urban — are already storing and banking groundwater.” Of these only four are banking water, representing less than 1% of the state’s total water basins.

[9] Jay Lund, et. al. (November 2014). Integrating Storage in California’s Changing Water System, Center for Watershed Sciences, University of California Davis.

[10] This testimony is available at http://www.lhc.ca.gov/studies/201/watergovernance/ParkerJan10.pdf.

[11] Newsha Ajami and Barton Thompson (June 1, 2015). Investing in the Future of the Water Sector, Water Online. http://www.wateronline.com/doc/investing-in-the-future-of-california-s-water-sector-0001.

[12] Erica Gies (May 7, 2015). Water in The Bank, Yale Environment 360.

[13] Peter W. Culp, Robert Glennon and Gary Libecap (October 2014). Shopping for Water: How the Market Can Mitigate Water Shortages in the American West, The Hamilton Project-Brookings. http://www.hamiltonproject.org/assets/files/how_the_market_can_mitigate_water_shortage_in_west.pdf.

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ABOUT THE AUTHORS

Marc Joffe is the Director of Policy Research at the California Policy Center. In 2011, Joffe founded Public Sector Credit Solutions to educate policymakers, investors and citizens about government credit risk. His research has been published by the California State Treasurer’s Office, the Mercatus Center at George Mason University, the Reason Foundation, the Haas Institute for a Fair and Inclusive Society at UC Berkeley and the Macdonald-Laurier Institute among others. He is also a regular contributor to The Fiscal Times. Prior to starting PSCS, Marc was a Senior Director at Moody’s Analytics. He has an MBA from New York University and an MPA from San Francisco State University.

Jill Eicher Jill Eicher is a researcher focusing on innovative financing models for public-sector agencies. Most recently, she was a Visiting Scholar at Stanford University’s Global Projects Center, working on the development of a cooperative investment model for public pension funds to deploy capital into U.S. infrastructure. She co-founded the Fiduciary Infrastructure Initiative, a research-driven venture focused on the applicability of international pension cooperatives making direct infrastructure investments as models for the U.S. A graduate of Wellesley College, Eicher did post-graduate work in mathematics and was issued a patent for her method for assessing investment risk.

Ed Ring is the Vice President of Policy Research at the California Policy Center. His work has been cited in the Los Angeles Times, Sacramento Bee, Wall Street Journal, Forbes, and other national and regional publications. Previously, as a CFO primarily for start-up companies in the Silicon Valley, he has done financial accounting for over 20 years, and brings this experience to his analysis and commentary on issues of public sector finance. From 1995 to 2009 he was the editor of EcoWorld, a website covering environmental issues from a free-market perspective. Between 2007 and 2010 he launched in partnership with AlwaysOn Media the highly successful “GoingGreen” clean technology investor conferences, held annually in San Francisco and Boston. He has an MBA in Finance from the University of Southern California, and a BA in Political Science from UC Davis.

Kevin Dayton is a policy analyst for the California Policy Center, a prolific writer, and the author of frequent postings about generally unreported California state and local policy issues on the California Policy Center’s Prosperity Forum and Union Watch. Major policy reports written by Kevin Dayton include For the Kids: California Voters Must Become Wary of Borrowing Billions More from Wealthy Investors for Educational Construction. Dayton spent more than 17 years in various federal, state, and local policy positions for Associated Builders and Contractors (ABC), including ABC of California State Government Affairs Director from 2005 to 2012. He was also a legislative assistant in the U.S. House of Representatives for Congressman Gary A. Franks (R-Connecticut) from 1992 through 1994. Dayton is a 1992 graduate of Yale University, where he majored in History.

ABOUT THE CALIFORNIA POLICY CENTER

The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

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