Title
Intergovernmental Agreements with Pinal County Irrigation Districts; with Arizona Water Banking Authority; and Between Various Entities and Central Arizona Water Conservation District (Ordinance S-45412)
Description
Request the City Manager, or his designee, to enter into one or more Intergovernmental Agreements with Pinal County irrigation districts to store Colorado River water; an Intergovernmental Agreement with the Arizona Water Banking Authority to exchange long-term water storage credits; and between various entities and the Central Water Conservation District for water deliveries. There is no cost to the City for these agreements. Further request authorization for the City Treasurer to accept all funds related to these items.
Report
Summary
On Jan. 31, 2019, Governor Ducey signed a concurrent resolution of the Legislature giving authorization to the Director of the Arizona Department of Water Resources to enter into the Lower Basin Drought Contingency Plan (DCP) negotiated among Arizona, California, and Nevada. An explanation of the DCP and its potential impacts to Phoenix is included (Attachment A). The State is the required party in Arizona for the DCP agreement, so Phoenix’s approval of the interstate agreement is not necessary. However, staff recommends that Phoenix enter into three agreements that are part of DCP implementation in Arizona.
The concurrent resolution gives the Director of the Arizona Department of Water Resources the authority to forbear ordering a portion of Arizona’s entitlement to Colorado River water, so by entering into the DCP, the State agrees to divert less water from the Colorado River. Because most of the Colorado River water delivered through the Central Arizona Project (CAP) canal is lower in priority than water used on the main-stem of the Colorado River, this will result in significant reductions to CAP water deliveries.
Operation of the CAP Priority System
In addition to the existing priority system on the main-stem of the Colorado River, a separate priority system for Colorado River water exists for users of the CAP. Various cities, Indian communities, mining companies, and private water companies in Maricopa, Pima, and Pinal County, including Phoenix, hold federal contracts in perpetuity for the three highest priority classes of water. In priority from highest to lowest, these are Wellton-Mohawk water, Municipal & Industrial and Indian water as co-equal priority, and Non-Indian Agricultural water. These federal contracts guarantee that delivery of water in the CAP occurs in accordance with the established priority system. All other water delivered through the CAP is in a category called Excess water. Excess water is the water not used by long-term federal contract holders in any given year. Long-term contracts for Excess water are not available, but rather are entered into with the Central Arizona Water Conservation District (CAWCD) on a year-by-year basis. Because the volume and availability of Excess water is based on the orders of higher priority water users in Central Arizona, there is no guarantee that Excess water will be available in any given year. Moreover, this water is subject to the first reductions in deliveries under shortage conditions on the Colorado River. In any given year, Excess water is only available after the water orders of those holding contracts for Wellton-Mohawk, Municipal & Industrial, Indian, and Non-Indian Agricultural water are fulfilled.
For users in Central Arizona, the cost of Colorado River water consists of: (a) a capital charge to repay the federal government for the canal infrastructure; (b) operation, maintenance and replacement (OM&R) costs for the canal works; and (c) the energy costs associated with pumping the Colorado River water uphill from the Colorado River into Central Arizona. At the time of the 2004 Arizona Water Settlement Act, agricultural districts in Maricopa, Pima, and Pinal counties were struggling to maintain their long-term contracts to Non-Indian Agricultural water because they could not afford the full cost of Colorado River water. To solve this problem, the agricultural districts relinquished their higher priority Non-Indian Agricultural contracts to cities and tribes (including Phoenix) in exchange for a right-of-first-refusal to Excess water at a substantially subsidized cost. Agricultural districts do not have a right to Excess water, but rather only a right-of-first-refusal whenever Excess water is available. CAP agricultural districts do not pay capital charges or OM&R, but only pay the energy costs for Excess water when it is available. According to the agreement between the agricultural districts and the CAWCD, this right of first-refusal for Excess water expires in 2030. As a result of this agreement, to date, the agricultural districts have received subsidies through reduced-cost deliveries of Excess water and other concessions valued at nearly $400,000,000. The CAWCD has taxing authority on real property in Maricopa, Pima, and Pinal Counties and uses the taxes raised to pay for the subsidies provided to the agricultural districts.
Impact of DCP Water Reductions in Central Arizona
Under the terms of the DCP, less Colorado River water will be available in Central Arizona and the likely impact is that Excess water will not be available at all because it is lowest in priority and first to be cut. Because the agricultural districts in Central Arizona depend on Excess water, one impact of DCP is the likely elimination of any deliveries of Colorado River water to the agricultural districts. This was an unacceptable result to the Governor's office and the Board of Directors of CAWCD, so they determined that the loss of water to agricultural districts must be mitigated as a prerequisite to passage of the DCP in the Arizona Legislature. Because no water can flow to Excess water users such as agricultural districts unless the higher-priority water orders are filled, and under DCP there wouldn’t be enough water to meet these water orders and have water left over for Excess water users, the CAWCD Board voted to withdraw a large volume of water that CAWCD had previously stored in Lake Mead known as Intentionally Created Surplus (ICS) water out of Lake Mead and into Central Arizona for delivery to agricultural districts in Pinal County. ICS water must also be delivered in accordance with the priority system when it is brought down out of Lake Mead. However, even with the ICS water, there would have been insufficient water to meet the deliveries of the higher priority users and provide the agricultural districts with an acceptable volume of water. To bridge this gap, the Gila River Indian Community offered to accept payment in lieu of its higher priority water deliveries to help make water available to fill higher priority orders. In addition, several cities (including Phoenix) agreed to deliver some of their CAP water for storage in Pinal County agricultural districts. Taken together, these actions will meet the demands of higher priority contracts and permit an agreed-upon amount of water to reach the lower priority agricultural districts during shortage conditions.
With the addition of ICS water to mitigate the agricultural districts, essentially, the CAWCD voted to take water out of Lake Mead for the benefit of agricultural districts in Pinal County to help ensure passage of the DCP, which is focused on keeping water in Lake Mead to stave off catastrophic shortages in Lake Mead. Other stakeholders, including the cities and the Gila River Indian Community, did not feel it appropriate to drain water out of Lake Mead to the benefit of agricultural districts in Pinal County, and therefore insisted on “offset” provisions that will ensure more water ends up in Lake Mead rather than less. To accomplish this, the Gila River Indian Community and the Colorado River Indian Tribes will be compensated for leaving additional water in Lake Mead, some in the form of ICS and some in the form of system conservation. These provisions ensure that the in the spirit of the DCP, keeping more water in Lake Mead to mitigate the chance of catastrophic shortage is upheld in the Arizona implementation of the agreement, and sets a valuable precedent for the on-going success of system conservation programs. Funding for the various components of DCP implementation in Arizona will come from the State General Fund, CAWCD tax levy, and increased CAP water rates. Phoenix is not providing direct funding to any entity, but will pay increased CAP OM&R charges as a result of DCP implementation. Revenue generated from CAP OM&R charges can only be used for project purposes on expenditures that fit within the definition of OM&R expenses as stipulated between the CAWCD and the Bureau of Reclamation.
Three Phoenix DCP Implementation Agreements
1. NIA Mitigation Agreement - In order to effectuate the mitigation referenced above, it is proposed that Phoenix enter into an agreement among holders of Non-Indian Agricultural (NIA) water contracts and the CAWCD. This agreement will run concurrent with the interstate DCP through 2026. The terms of the agreement will ensure that the CAWCD does not deliver more water to agricultural districts in Pinal County than has been agreed, and that the CAWCD delivers some ICS water to the benefit of NIA water contract holders over the term of the DCP. In addition, the agreement will ensure that the CAWCD does not make certain types of water available as Excess water during the course of the DCP agreement, and will allow some NIA water users, such as the Gila River Indian Community, to accept in lieu payments to forbear its water order so there is sufficient water to mitigate other NIA water contract holders. The agreement is structured to uphold the existing priority system for water deliveries and to ensure that the cities’ existing contracts for Colorado River water control in the event of any conflict.
2. Storage Agreements with one or more Pinal County irrigation districts - Understanding that passage of the DCP authorizing legislation in Arizona depended on mitigating impacts to agriculture in Pinal County, cities, including the City of Phoenix, also pledged to participate in mitigation for Pinal County agricultural districts. Specifically, the City of Phoenix will enter into one or more intergovernmental agreements providing that if a Tier 1 or Tier 2(a) shortage occurs during 2020, 2021, or 2022, the City will deliver up to 15,000 acre-feet of Colorado River water per year to Pinal County irrigation districts. In return, the irrigation districts will reimburse Phoenix the energy component of its CAP water rate for the water delivered. The Colorado River water delivered to the district displaces the district's use of groundwater, and a long-term storage credit for Colorado River water is created in the Pinal Active Management Area (AMA) in Phoenix’s name. The water Phoenix will use for this storage agreement is water Phoenix would have otherwise stored in an underground storage facility in the Phoenix metropolitan area.
3. Exchange Agreement with Arizona Water Banking Authority - While Phoenix will earn credits from the water it sends to the Pinal County irrigation districts in the Pinal Active Management Area, Phoenix would be unable to use the water associated with those credits within the City. In order to preserve the value of the credits, Phoenix will then exchange the long-term storage credits created in the Pinal County Active Management Area for a like amount of long-term storage credits in the Phoenix Active Management Area, where those credits can eventually be pumped out of Phoenix’s wells. This exchange will take place with the Arizona Water Banking Authority, which holds millions of acre-feet of long-term storage credits in Maricopa, Pima, and Pinal counties. To effectuate the exchange, Phoenix must enter into an intergovernmental agreement with the Arizona Water Banking Authority for the exchange of long-term storage credits on a one-for-one basis.
The intergovernmental agreements with the Pinal County irrigation districts binds Phoenix to deliver water to the district only to the extent that Phoenix receives a long-term storage credit for the delivery. That is, if state law is amended such that Phoenix would no longer receive a long-term storage credit for deliveries to the district that can subsequently be exchanged with the Arizona Water Banking Authority for a credit in the Phoenix Active Management Area, Phoenix’s obligation to deliver water ceases. The exchange agreement with the Arizona Water Banking Authority includes no conditions on the exchange. That is, Phoenix will receive a long-term storage credit in the Phoenix Active Management Area for every long-term storage credit Phoenix creates through delivery of Colorado River water to the Pinal County irrigation districts. In terms of the legal availability of long-term storage credits, Phoenix is in the same position through this exchange than if Phoenix had stored the water in local aquifers. However, from a physical availability perspective, less Colorado River water will be stored in Phoenix-area aquifers.
The proposed DCP implementation in Arizona is a compromise reached after years of difficult discussions among many different entities that depend on Colorado River water in Central Arizona. If DCP is implemented, Arizona will enter into shortages on the Colorado River sooner, and in larger amounts than under the status quo. Over the course of the agreement, Phoenix can reasonably expect to receive less of its NIA water than it would under the status quo, although actual outcomes will depend greatly on weather and snowpack in the Rocky Mountains. Importantly for Phoenix, the existing priority system for Colorado River deliveries in Central Arizona is upheld, the terms of its federal contracts for Colorado River water are not altered, more water ends up in Lake Mead, and system conservation is deployed in a meaningful way. This last point is worth emphasizing because the long-term ability for Phoenix to receive is Colorado River allocation consistently and in reasonable amounts hinges on the success of system conservation.
Staff recommends approval of these three agreements. The agreements do not require the expenditure of additional City funds over the amount the City would normally spend to purchase and store Colorado River water.
Contract Term
The Intergovernmental Agreements (IGA) with the Pinal County irrigation districts will be effective upon execution and through Dec. 31, 2022. The IGA with the Arizona Water Banking Authority will be effective upon execution and through Dec. 31, 2026. The IGA between various entities and the Central Arizona Water Conservation District will be effective upon execution and through Dec. 31, 2026.
Financial Impact
There is no cost to the City for these agreements.
Department
Responsible Department
This item is submitted by Deputy City Manager Karen Peters and the Water Services Department.