April 6, 2018 Randy Record, Chairman Board of Directors, Metropolitan District of Southern California 700 N. Alameda, Street Los Angeles, CA 90012 RE: Oppose Additional Funding for California WaterFix (Agenda Item 8-7) On behalf of the Natural Resources Defense Council, which has more than 3 million members and activists, 400,000 of whom live in California, I am writing to request that the Board of Directors of the Metropolitan Water District of Southern California to delay the vote on agenda item 8-7, regarding additional funding for the California WaterFix project. We recommend that Metropolitan delay this vote because the Board of Directors lacks adequate information on which to make a decision regarding this agenda item because:

1) The Board of Directors have not been provided a staff report regarding this agenda item, and have not been provided the necessary details of the likely costs of debt service for Metropolitan’s share of total costs;

2) The Board of Directors lacks adequate information regarding potential water supply from WaterFix;

3) The proposed financing appears to violate Proposition 13, Proposition 26, and Proposition 218; and,

4) The Board of Directors have not complied with the California Environmental Quality Act.

NRDC’s October 3, 2017 letter urged the Board of Directors to vote against funding for WaterFix because the proposal would worsen ecological conditions in the Bay-Delta estuary as compared to the status quo, threatens funding for cost-effective investments in local and regional water supply projects, and lacks a viable financing plan after the withdrawal of Westlands Water District and other CVP contractors. See Exhibit A. It is abundantly clear today that WaterFix lacks an adequate financing plan. However, given the lack of adequate information for the Board of Directors to exercise their fiduciary duty in a lawful manner, as discussed in detail below, we request that Metropolitan delay this vote.

1) The Board of Directors have not been provided a staff report regarding this agenda item, and have not been provided the necessary details of the likely costs of debt service for Metropolitan’s share of total costs.

The WaterFix project is likely the largest capital investment project in Metropolitan’s history, yet as of Friday, April 6, staff had not presented the Board of Directors with a staff report for the

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vote on Tuesday, let alone detailed financial information regarding the potential debt service costs. Without that detailed cost information, the Board of Directors simply lacks adequate information on which to make a decision. According to the attached presentation by Brian Thomas of Metropolitan, the total cost of debt service for the 9,000 cfs twin tunnels WaterFix project was estimated to be $47.242 billion over 50 years, assuming an interest rate over 5% and no capitalized interest. See Exhibit B at page 11. The annual debt service payments for this proposal would peak at just under $1 billion per year. Id. If Metropolitan paid two thirds of the total cost of WaterFix as proposed, Metropolitan’s potential liabilities would be more than $32 billion over the next half century. According to the attached email from Brandon Goshi of Metropolitan, the estimated annual cost (including debt service) for a single tunnel, 6,000 cfs State Water Project only WaterFix project would be more than $671 million per year, assuming a 6% rate of interest. See Exhibit C. If Metropolitan paid 47.13% of the total project cost, the annual payment over the coming decades would be approximately $316.5 million per year. However, Metropolitan staff have acknowledged that they are also negotiating water transfer agreements with other State Water Project contractors, where Metropolitan would pay 85% of the WaterFix costs of the transferees, which would significantly increase Metropolitan’s annual costs for WaterFix. Yet detailed information about these additional costs have not been disclosed to the Board of Directors. Without detailed cost and debt service information, the Board of Directors lacks adequate information on which to exercise their fiduciary duty to the ratepayers in Southern California. The Board of Directors should therefore delay the vote.

2) The Board of Directors lacks adequate information regarding potential water supply from WaterFix.

The Board of Directors lacks the needed information on water supply on which to base its decision. First, until the State Water Resources Control Board issues a decision on the petition to change the point of diversion for the WaterFix project, the Board of Directors lacks needed information on the potential water supply from the project. In its decision on the petition, as well as in setting updated water quality standards for the Bay-Delta, the State Water Resources Control Board is likely to impose additional Delta outflow restrictions that reduce water supply from the Delta. In Appendix 5E of the final EIS/EIR for WaterFix, the Department of Water Resources modeled additional restrictions on exports and Delta outflow requested by the State Water Resources Control Board. As the attached document shows, the total water supply under these proposed terms and conditions for WaterFix would decline to 3.36 million acre feet per year. See Exhibit D. The biological science is clear that reduced water diversions from the Delta are necessary to protect and restore the estuary’s health, with or without WaterFix. Until such time that the State Water Resources Control Board issues its final decision on the change in point of diversion petition, the Metropolitan Board of Directors lacks adequate information on the water supply to expect from WaterFix.

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Second, Metropolitan staff have provided the Board of Directors with misleading and inaccurate information on which to base their decision. Instead of comparing the water supply with WaterFix to the no action alternative, Metropolitan has used a fake baseline for water supply analysis, comparing the proposed WaterFix project with an alternative that does not include new conveyance but includes the operating rules for WaterFix. Exhibit D demonstrates that WaterFix does not necessarily result in any incremental water supply benefit. Third, Metropolitan’s prior water supply analyses have indicated that Central Valley Project contractors like the Westlands Water District would lose water supply under a single tunnel alternative. However, the attached letter from the Bureau of Reclamation specifically states that Central Valley Project contractors that do not participate in WaterFix will not lose water supply. See Exhibit E. In order to grant the change in point of diversion petition, the State Water Resources Control Board must find that the change would not injure the water rights of the Central Valley Project. Thus, it appears likely that the modeling that Metropolitan has presented overstates the potential State Water Project contractors’ water supply from WaterFix.

3) The proposed financing appears to violate Proposition 13, Proposition 26, and Proposition 218.

The proposed financing schemes for both the full tunnel project and the single tunnel project appear to violate state Constitutional protections for ratepayers and taxpayers. Metropolitan’s third White Paper from 2017 asserted that the 55/45 split between the State Water Project and Central Valley Project followed the “beneficiary pays” principle, assigning costs in proportion to the benefits received. However, it is unclear how Metropolitan could meet its burden of proof to demonstrate that the benefits of WaterFix would be proportional to the burdens on ratepayers and taxpayers (as required by Proposition 218 and Proposition 26) if the State Water Project paid for 100% of the full 9,000 cfs project, but water supply for the Central Valley Project was not impacted. Moreover, absent a public vote, use of property taxes to pay for or secure the new debt associated with WaterFix would violate Proposition 13, as it would constitute “bonded indebtedness for the acquisition or improvement of real property.” Cal. Const., Art. XIIIA, §1.1

4) TheBoardofDirectorshavenotcompliedwiththeCaliforniaEnvironmentalQualityAct.

Finally, we note that the Department of Water Resources has indicated that supplemental environmental review under the California Environmental Quality Act (CEQA) is required to analyze the potential impacts of a single tunnel WaterFix project. In its October 2017 staff report, Metropolitan acknowledged its duty to comply with CEQA as a responsible agency, and concluded that the Board had reviewed and relied on the Department of Water Resources’ final EIR, and was adopting those final findings under CEQA. However, no such environmental

1InlitigationoverthevalidationofstatebondstopayforWaterFix,theSuperiorCourtdeniedthedemurrerfiledbytheDepartmentofWaterResourceschallengingtheaffirmativedefensesrelatedtotheseConstitutionalprotectionsforratepayersandtaxpayers.Thatlitigationisongoing.

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analysis exists for the Board of Directors to rely on in determining the environmental impacts of a decision to finance a single tunnel project, and it appears that Metropolitan would violate CEQA by adopting a decision to finance a single tunnel WaterFix project. In conclusion, we urge the Board of Directors to delay the vote on agenda item 8-7. Sincerely,

Doug Obegi Enclosures: Exhibits A-E

EXHIBIT A

October 3, 2017

Randy Record, Chairman

Board of Directors, Metropolitan District of Southern California

700 N. Alameda, Street

Los Angeles, CA 90012

RE: Oppose California WaterFix (Agenda Item 8-4)

On behalf of the Natural Resources Defense Council, which has more than 3 million members

and activists, 400,000 of whom live in California, I am writing to urge the Board of Directors of

the Metropolitan Water District of Southern California to reject the California WaterFix project

and vote NO on agenda item 8-4. NRDC opposes the WaterFix project, and recommends that

the Board reject the project because it:

1) Worsens ecological conditions in the Bay-Delta estuary;

2) Does not substantially improve water supply reliability, and is likely to divert billions of

dollars away from cost-effective investments in local and regional water supply projects;

3) Lacks a feasible financing plan, particularly given the recent vote by the Board of

Directors of the Westlands Water District not to fund WaterFix.

Metropolitan’s mission is to “provide its service area with adequate and reliable supplies of high-

quality water to meet present and future needs in an environmentally and economically

responsible way.” WaterFix is neither an environmentally responsible nor economically

responsible way to meet the region’s water needs. The Board should reject WaterFix as

inconsistent with Metropolitan’s mission.

1) WaterFix worsens ecological conditions in the Bay-Delta Estuary

Everyone recognizes that the status quo in the Delta is unsustainable for fish and wildlife that

depend on a healthy estuary. After several years of drought and waiving environmental

protections in the Delta to increase water supply, fish populations are now on the very brink of

extinction. Federal agencies have reinitiated consultation under the Endangered Species Act,

recognizing that current operations of the State Water Project and Central Valley Project are

jeopardizing the continued existence of salmon and other endangered species.1

1 See Letter from NMFS to USBR regarding Reinitiation of OCAP Consultation dated August 17, 2016, available online at: https://www.usbr.gov/mp/BayDeltaOffice/docs/nmfs-reponserto-reinitiation-request-08172016.pdf; Letter from USFWS to USBR regarding Response to Request for Reinitiation of Section 7 Consultation Addressing Coordinated Long Term Operation of the Central Valley Project (CVP) and State Water Project (SWP) dated August 3, 2016, available online at: https://www.usbr.gov/mp/BayDeltaOffice/docs/fws-response-to-reinitiation-request-08032016.pdf.

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The Bay Delta Conservation Plan began with the premise of improving conditions for fish and

wildlife in the Bay-Delta estuary. However, the final proposed WaterFix project is likely to

worsen water quality in the estuary and reduce the survival and abundance of endangered fish

and wildlife. WaterFix is worse than the status quo for our native species.

The National Marine Fisheries Service (“NMFS”) biological opinion concludes that survival of

juvenile winter run Chinook salmon through the Delta will be significantly lower with WaterFix

than today because the new intakes will reduce flows in the lower Sacramento River, thereby

reducing survival2 (and NMFS does not adequately account for WaterFix’s other adverse effects

on salmon survival as a result of increased predation, impingement on the massive fish screens,

and reduced turbidity and worsened water quality in the Delta). The State’s incidental take

statement under the California Endangered Species Act admits that abundance of threatened

Longfin smelt will be lower than today because of reductions in Delta outflow,3 even though

populations of this historically abundant fish are nearly zero today. The U.S. Fish and Wildlife

Service could not issue a biological opinion for operations of the project that would not

jeopardize the continued existence of Delta Smelt,4 which is not surprising since the project will

worsen water quality, reduce turbidity, increase salinity, and reduce Delta outflow. And none of

those conclusions even consider that the permits include a footnote allowing for WaterFix to

operate with the same South Delta pumping levels and reverse flows as today in most months.5

We recognize that the health of the Bay-Delta estuary and its native fish species, or protecting

the thousands of fishing jobs that depend on healthy salmon runs, may not be at the forefront of

your minds as you consider this item. But Metropolitan’s mission is to “provide its service area

with adequate and reliable supplies of high-quality water to meet present and future needs in an

environmentally and economically responsible way.” WaterFix fails this test.

2) WaterFix fails to substantially improve water supply reliability, and is likely to

divert billions of dollars away from cost-effective investments in local and regional

water supply projects

Equally important, because WaterFix is worse than the status quo in the Bay-Delta, the project

does not substantially improve, and is likely to worsen, water supply reliability.

With the so-called pivot from the Bay-Delta Conservation Plan to the California WaterFix

project, there are no regulatory assurances under the state or federal Endangered Species Acts

that would prevent state or federal agencies in the future from requiring more stringent

environmental protections for fish and wildlife that result in reduced water exports from the

2 See National Marine Fisheries Service, Endangered Species Act Section 7(a)(2) Biological Opinion, Magnuson-Stevens Fishery Conservation and Management Act Essential Fish Habitat Response, and Fish and Wildlife Coordination Act Recommendations for the California WaterFix Project in Central Valley, California, June 16, 2017, at 913. 3 See, e.g., Findings of Fact of the California Department of Fish and Wildlife Under the California Endangered Species Act (Fish & G. Code § 2050 et seq.) for the project proposed by California Department of Water Resources in reliance on and regarding the Construction and Operation of Dual Conveyance Facilities of the State Water Project (California WaterFix) and the Bay Delta Conservation Plan/California WaterFix Final Environmental Impact Report/Environmental Impact Statement, Incidental Take Permit No. 2081-2016-055-03, July 2017, at 313. 4 See U.S. Fish and Wildlife Service, Biological Opinion for the California WaterFix, June 23, 2017, at 2. 5 See supra note 3 at 179, fn. 32.

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Delta.6 The federal biological opinions for WaterFix either do not authorize operations of the

tunnels (U.S. Fish and Wildlife Service7) or only authorize operations through the year 2030

(National Marine Fisheries Service8). Because there are no regulatory assurances, subsequent

biological opinions could and likely will significantly reduce water exports. The State Water

Resources Control Board is likely to impose additional environmental protections that reduce

water supply for WaterFix in its permitting processes, as the Kern County Water Agency

recently acknowledged to their Board of Directors.9 More than 20 cases have been filed in state

and federal court challenging environmental permits for WaterFix. With or without WaterFix,

the best available science demonstrates that California needs to significantly reduce water

diversions and increase the amount of water that flows through the Delta and into San Francisco

Bay.

In addition, WaterFix does not change the fact that California has highly variable precipitation

and water supply will still be highly variable from year to year. But with WaterFix, water

contractors will pay Wall Street every year for the billions of dollars that are borrowed to pay for

the tunnels, including drought years where farmers and cities get little or no water supply from

the Delta.10 Nor does WaterFix address physical reliability along the 400-plus-mile California

Aqueduct or throughout the water distribution system in Southern California. That is why Los

Angeles’ Resilience by Design plan, developed by scientists with the U.S. Geological Survey and

City staff, emphasizes that, “Increased use of local water reduces the risk posed by reliance on

water imported via fault-crossing aqueducts. Initiatives to improve local water supplies through

storm water capture, water conservation, water recycling, and San Fernando Valley Groundwater

Basin contamination remediation provide the best possible protection and should be supported as

fundamental earthquake resilience measures.”11

The Board is currently considering whether to take on more than $4 billion in debt to fund a

portion of the costs of the construction and operation of WaterFix. That is money that could

instead be used on local and regional water supply projects that are more cost-effective and

environmental sustainable, and which create jobs in Southern California. As NRDC’s recent

Mismatched report demonstrates, the 2015 Urban Water Management Plans of Metropolitan’s

member agencies already plan for reduced exports from the Delta, increased investments in local

and regional water supply projects.12 But these projects will require financial investments, and

paying for WaterFix will divert billions of dollars away from these projects. Even in water

6 See, e.g., State of California, Frequently Asked Questions, July 17, 2015, at 3, available online at: http://cms.capitoltechsolutions.com/ClientData/CaliforniaWaterFix/uploads/r1acu_pivot_QA_FINAL_revised.pdf. 7 See supra note 4. 8 See supra note 2 at 1206. 9 See Kern County Water Agency, California WaterFix Overview, Materials for Discussion and Decision, September 15, 2017, at 57 (“Many participants in the process report there are likely to be increased regulatory requirements that will impact water supply from existing SWP and CVP facilities and from California WaterFix once it is constructed and becomes operational.”) 10 See Blue Sky Consulting, The Bay Delta Conveyance Facility: Affordability and Financing Considerations, California Debt and Investment Advisory Commission, November 2014, at 35-37. 11 Mayoral Seismic Safety Task Force, City of Los Angeles, Resilience by Design, at 10, available online at: https://www.lamayor.org/sites/g/files/wph446/f/article/files/Resilience%20by%20Design%20(1).pdf. 12 NRDC, Mismatched: A Comparison of Future Water Supply and Demand for the Metropolitan Water District of Southern California and Its Member Agencies, September 2017, available online at: https://www.nrdc.org/resources/comparison-2015-urban-water-management-plans-metropolitan-water-district-southern.

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districts that reduced or eliminated water use from the Delta, their residents would still be paying

millions of dollars in property taxes for WaterFix.

Some tunnel proponents want you to believe that WaterFix is part of an “all of the above”

strategy for water. However, “all of the above” is not a sound financial strategy. As a colleague

emphasized a few years ago with respect to energy policy, “An ‘all of the above’ energy policy

that includes our most expensive and environmentally risky resources is a guarantee of costly

disappointment.” Water districts must make choices about how to spend limited money.

Metropolitan’s mission is to “provide its service area with adequate and reliable supplies of high-

quality water to meet present and future needs in an environmentally and economically

responsible way.” Because WaterFix fails to significantly improve water supply reliability and

diverts funding from local and regional water supply projects, it fails this test.

3) WaterFix lacks a viable financing plan

Finally, as the Board considers whether to borrow more than $4 billion for WaterFix, it is clear

that Central Valley Project (“CVP”) contractors will not contribute 45% of the total costs as staff

have assumed. As you know, the Board of Directors of the Westlands Water District recently

voted not to fund WaterFix. According to Metropolitan staff, Westlands was expected to

contribute around 12% of the total cost of the project.13 That would mean other CVP

contractors, primarily CVP agricultural contractors, would be expected to cover 33% of the total

cost. Yet no CVP agricultural contractors have agreed to pay for WaterFix, and no one has

identified who would pay the nearly $4 billion share of costs that David Sunding’s cost-benefit

analysis prepare for the State assumed would be subsidized by taxpayers.14 Dr. Sunding’s report

concluded that the project was not cost-effective for agricultural water users, and that without

billions of dollars in taxpayer subsidies it would be even less cost-effective for agricultural

users.15 Nor should the Board expect that other CVP agricultural contractors will agree to pay for

WaterFix; as Chairman Record admitted last week with respect to the Westlands vote, “it’d be

hard for me as a farmer not to make the same decision.”16

Metropolitan staff have continued to rely on unrealistic assumptions about cost allocations, and

the project currently lacks adequate funding to be constructed. Stakeholders and the public were

repeatedly promised that the Board and public would review an actual financing plan, laying out

how costs would be allocated, yet there is still no public plan for how to allocate costs.

Similarly, it is unclear how Metropolitan plans to bill its member agencies for this project.

According to Metropolitan’s Ten-Year Financial Forecast (February 2016), “SWC costs account

for 35 percent of Metropolitan’s expenditures in FY 2016/17, growing to 47 percent in FY

2025/26, primarily due to the California Water Fix costs.”17 By the year 2026, the Ten-Year

Financial Forecast estimates that nearly all the ad valorem property revenue would be dedicated

13 Statement of Jeffrey Kightlinger, September 26, 2017, special board meeting of the Metropolitan Water Districts of Southern California. 14 See David Sunding, Draft CalWater Fix Economic Analysis, Prepared for California Natural Resources Agency, November 15, 2015, at 2. 15 Id. 16 Statement of Randy Record, September 26, 2017, special board meeting of the Metropolitan Water Districts of Southern California. 17 Metropolitan Water District of Southern California, Ten-Year Financial Forecast, 2016/17 and 2017/2018 Biennial Budget, Attachment 2, February 9, 2016 Board Meeting, at 8, available online at: http://edmsidm.mwdh2o.com/idmweb/cache/MWD%20EDMS/003736442-1.pdf.

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to State Water Project costs, including Metropolitan’s share of costs for construction of

WaterFix.18 Board members cannot fulfill their fiduciary duty without sufficient detail as to how

the project will be fully funded, how Metropolitan will allocate costs between member agencies,

and how total costs will be allocated between SWP and CVP contractors.

Finally, the proposed financing JPA asks Metropolitan to take on additional financial risks that

the State of California has declined to take. Rather than waiting for the court’s judgment in the

case filed by DWR to validate revenue bonds for WaterFix, the financing JPA seeks to issue

bonds in advance of the judgment. An adverse judgment could result in significant financial

liabilities for Metropolitan, as staff of the Santa Clara Valley Water District has warned its

board.19

For all of these reasons, we urge the Board of Directors to vote NO on agenda item 8-4 and

reject borrowing $4 billion for the ecologically devastating and economically infeasible

California WaterFix project.

Sincerely,

Doug Obegi

18 Id. at 5. 19 See Santa Clara Valley Water District, September 12, 2017, Agenda Item 2-1, Supplemental Attachment 5: WaterFix Financial Risks.

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