BOARD AGENDA MEMORANDUM
Government Code § 84308 Applies: Yes ☐ No ☒
(If “YES” Complete Attachment A - Gov. Code § 84308)
SUBJECT: Title
Receive an Update on the Pacheco Reservoir Expansion Project, Project No. 91954002 (Santa Clara County, District 1; Merced County).
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RECOMMENDATION: Recommendation
A. Receive an update on the Pacheco Reservoir Expansion Project, and
B. Provide direction to staff and authorize the Interim Chief Executive Officer to take all actions necessary to implement the Board’s direction.
Body
SUMMARY:
The purpose of this memorandum is to provide the Board an update on progress made in the planning, permitting, and design efforts of the proposed Pacheco Reservoir Expansion Project (“PREP” or “Pacheco Project”) and other issues that may impact the PREP. This memorandum is organized in sections to also address the following concerns raised by the California Water Commission (the "Commission") during its May 21, 2025 meeting:
I. The Commission commented that Valley Water's environmental review and decision-making timeline for the Pacheco Project appears protracted and lengthy.
II. The Commission raised concerns that the likely cost of PREP might be cost-prohibitive for Valley Water.
III. The Commission pointed out that Valley Water has not yet secured the necessary approvals from the Bureau of Reclamation (Bureau) to advance the project.
IV. The Commission observed that PREP does not seem to be a high-priority project for Valley Water compared to other ongoing projects. It also asked when Valley Water’s Board would be able to make a decision on the project.
Valley Water continues to make progress in the planning and design phases of the Pacheco Project and has initiated efforts to ensure the timely review and processing of regulatory permits. However, Valley Water continues to face significant challenges with PREP, particularly concerning an anticipated increase in PREP’s estimated costs and Valley Water’s ability to secure several key approvals from the Bureau. Nonetheless, during the project planning process, staff continues to evaluate significant developments regarding the viability and benefits of PREP, and to identify other feasible and cost-effective alternatives consistent with Valley Water’s adaptive management water supply planning approach.
I. Planning, Permitting, and Design Update
The Commission has expressed concerns about the PREP timeline. While PREP is complex, significant progress is being made. Below is a brief summary of staff’s current planning, permitting, and design efforts.
A. Planning: California Environmental Quality Act (CEQA) Review
Valley Water released a draft Environmental Impact Report (DEIR) for PREP in November 2021 and received a large number of public comments on the proposed project and the DEIR. Subsequent to the release of the DEIR, Valley Water has made further progress in the project design. Staff is revising the DEIR, which will incorporate those project changes and update other information and analysis in the DEIR. Valley Water plans to recirculate the revised draft (Recirculated Draft EIR or RDEIR) for public comments before finalizing the EIR.
Due to the number and extent of project changes and analysis required to evaluate the PREP, recirculation of the revised DEIR was determined to be necessary to allow additional public input pursuant to the CEQA Guidelines. Examples of major project changes and additional analysis include:
• Following extensive discussions with Pacific Gas & Electric (PG&E) over the course of the last several years, in October 2024 Valley Water finally received concurrence from PG&E on the selected alignment of the transmission lines for supplying electric power to the PREP. The realignment extends the transmission line by an additional two miles to meet PG&E design standard requirements and requires infrastructure for a large-scale electrical breaker system. These changes to the PREP require additional environmental analysis in the RDEIR.
• Numerous models were used to assess project impacts in the DEIR. Some of these models depend on output generated by CalSim, a benchmark model designed for simulating operations of Central Valley Project (CVP) and State Water Project (SWP) reservoir and water delivery systems. The CalSim model has since been updated (from CalSim 2 to CalSim 3) after release of the DEIR. Based on feedback from regulatory agencies, Valley Water is conducting additional numerical modeling based on output from CalSim 3 to refine the DEIR’s analysis of several project impacts (e.g., water quality, hydrology, and aquatic resources).
• The DEIR has identified a hard-fill dam that would create a 140,000-acre-foot reservoir as the proposed project. Per a recommendation by the Division of Safety of Dams (DSOD), the RDEIR will identify an earth-fill dam alternative as the proposed project. While both hard-fill and earth-fill dam designs were analyzed in the DEIR at the same level of detail, revising the DEIR to clearly identify the new preferred alternative (earth-fill dam at the same location as previously proposed for the hard-fill dam, with a 140,000 acre-foot reservoir) as the proposed project would improve clarity and transparency for the public.
Valley Water is working diligently to meet its schedule to release the RDEIR for public comment by December 2026, with the Final EIR anticipated for Board consideration of certification by December 2027. Although the timeline for environmental review of this project may appear to be lengthy, Valley Water has taken proactive steps to complete the RDEIR expeditiously while also ensuring CEQA requirements are met. For example, staff has regularly met with regulatory agencies with jurisdiction or approval authority over the project to discuss the project design and seek input on avoidance, minimization, and mitigation measures to address project impacts. Doing so would enable Valley Water to more efficiently complete the Final EIR and facilitate regulatory agencies’ review of our permit applications.
B. Permitting: State and Federal Regulatory Permits
Implementation of PREP requires permits and authorizations from numerous federal and state regulatory agencies. To ensure a more timely review and processing of these future approvals, staff has hosted 26 interagency project workshops to discuss the PREP design and to develop strategies for avoiding, minimizing, and mitigating project impacts. Staff’s meetings with the regulatory agencies in advance of permit application submittals will be crucial for minimizing any surprises during the permitting and approval process. Permit applications and supporting documents will be developed as Valley Water continues to work on finishing the RDEIR.
Once the Final EIR is certified, the state regulatory agencies with approval authority over PREP (including California Department of Fish and Wildlife, State Water Resources Control Board, California Department of Transportation, and California State Parks) would be able to rely on the Final EIR to issue their permits.
In addition to state permits, implementation of PREP would require a Clean Water Act Section 404 permit (404 permit) from the U.S. Army Corps of Engineers (USACE), which will act as the lead agency to comply with the National Environmental Policy Act (NEPA) before issuing the 404 permit for the project. Valley Water’s RDEIR will likely support USACE’s preparation of its NEPA document. Specifically, staff anticipates that much of the information from the RDEIR can be incorporated by reference into USACE’s NEPA document or as detailed appendices to comply with legally mandated NEPA document page limits.
USACE will also comply with Section 7(a)(2) of the federal Endangered Species Act (ESA) which requires federal agencies to consult with the U.S. Fish and Wildlife Service (USFWS) and/or the National Marine Fisheries Service (NMFS) to ensure that actions they fund, authorize, permit, or otherwise carry out will not jeopardize the continued existence of any federally-listed species or adversely modify designated critical habitats. To support USACE’s Section 7 consultations, Valley Water plans to prepare two parallel Biological Assessments (BAs), one for NMFS and one for USFWS.
Finally, staff is also working with consultants to prepare cultural resource reports that would support USACE’s compliance with Section 106 of the National Historic Preservation Act (NHPA), which requires federal agencies to take into account the effects of their approval of projects on historic properties.
C. Design
The preliminary PREP design has been at 60% completion since August 2022. To finalize the 60% design, Valley Water needs to conduct further geotechnical investigation activities which are being evaluated in the Design Level Geotechnical Investigations project (DLGI Project). These investigations are currently on hold until the DLGI Project EIR is completed. Staff is planning to present the DLGI Project EIR to the Board for certification and project approval in September 2025. If the geotechnical investigation activities can resume in 2025, staff expects to be able to confirm the 60% design in late 2026.
Staff anticipates reaching 100% design and obtaining approval of the 100% design package from DSOD in late 2028. Staff has shared Valley Water’s schedule with DSOD and is in ongoing discussions with DSOD to identify ways to expedite the state agency’s review process once Valley Water submits the design for its review.
II. Affordability of the Pacheco Project
The current estimated total cost for the Pacheco Project is $2.732 billion (with inflation) as reflected in the Board adopted Capital Improvement Program (CIP) Fiscal Year (FY) 2026-2030 Five-Year Plan. This total cost estimate incorporates a construction start date of mid-2029, which is the best case scenario, assuming that Valley Water can complete its environmental review and project design and successfully obtain all necessary permits for the project. A revised PREP cost estimate is currently being prepared by consultants and will be presented to the Board at the August 26 meeting. Since other projects of similar scale have seen increases due to tariffs, materials and labor increases, staff expects this will be the case for PREP as well.
Staff acknowledges the Commission's concerns about PREP’s affordability. The following summarizes Valley Water’s multi-pronged approach to reduce the financial impact on the community:
• Grant Funding: In 2018, the Commission conditionally awarded Valley Water a grant of $485 million as part of the Water Storage Investment Program (WSIP). The conditional grant award has been increased to $504 million since then and includes $24.2 million in early funding, which Valley Water has already received, to support planning and environmental permitting efforts.
• Water Infrastructure Finance and Innovation Act (WIFIA) Loan: In October 2023, Valley Water executed a $1.4 billion WIFIA Master Agreement, under which an initial loan agreement of $91.6 million with an interest rate of 5.08% was executed to provide up to 49% funding for the planning and design costs. To date, no amount has been drawn on this initial WIFIA loan. The WIFIA loan is administered by the United States Environmental Protection Agency (EPA) and provides a low-interest federal loan program specifically designed for water infrastructure projects. In general, issuing debt to fund capital projects helps keep water charges low and stable over the long term and ensures inter-generational equity by matching the benefits received from the project with the repayment term. Furthermore, debt financing may be necessary for large capital projects, as it may be impractical and infeasible to raise sufficient cash to fund the capital projects within the desired construction time frame. A key additional benefit provided by the WIFIA loan is a customizable loan repayment schedule. The currently assumed WIFIA loan debt service schedule reflects “backloaded” principal payments, which start in FY 2054-55 with payoff by FY 2066-67. Pushing principal repayments toward the end of the amortization period helps relieve near-term water rate pressure. Interest expense over the long term can be mitigated by the ability to pay off the loan sooner with no prepayment penalty if financial conditions warrant.
• Partnerships: The PREP team is actively evaluating different approaches to project financing, including exploring the potential for partnerships with other agencies or entities that could benefit from the expanded reservoir capacity. This could involve cost-sharing agreements or other collaborative funding mechanisms. The PREP team has engaged in discussions with various water agencies to assess their interest and potential contributions. The current Valley Water financial projection assumes partner participation of 35% per Board direction. This means that in return for 35% of the project benefits, partners would pay for 35% of the $2.732 billion total project cost (less the WSIP grant, and plus financing costs). However, as staff indicated in their update on Valley Water’s efforts in pursuing project partners to the Water Supply and Demand Management (WSDM) Committee on May 5, 2025, staff is evaluating whether/how a rental or merchant model could work for PREP. Staff is also considering a hybrid model consisting of some upfront capital to reserve storage capacity, competitive with groundwater banking programs. A copy of the May 5, 2025 WSDM Committee agenda memo for the PREP update is included as Attachment 1.
• Groundwater Charges: The current financial projection assumes that the remaining portion of PREP costs (net of the WSIP grant and partnership payments) would be paid for by groundwater charges, distributed in proportion to the benefit that PREP provides to groundwater benefit zones within Valley Water's service area.
Based on the current estimated total cost for the project at $2.732 billion, staff estimates that once PREP becomes operational, the incremental cost impact to the average household via water rates would range from $9 to $15 per month with 35% partner payments, or from $15 to $25 per month without 35% partner payments. These projected rate impacts are expected to increase once updated cost estimates are prepared.
III. Bureau of Reclamation's Approvals
Implementation of PREP as proposed would require several key approvals from the Bureau to allow Valley Water to modify the Bureau’s Pacheco Conduit and construct a turnout, store CVP water in the expanded Pacheco Reservoir, convey SWP and/or local water using Bureau’s facilities to the expanded reservoir, and construct electrical transmission facilities on Bureau lands.
During its meeting in May of this year, the Commission asked about the status of the Bureau’s approval. Valley Water reported to the Commission that our discussion with the Bureau was ongoing. After hearing the Commission’s concern, Valley Water's executive staff met with the Bureau's Interim Regional Director in early July to discuss approvals Valley Water would need from the Bureau to move forward with the PREP in its current form. The Interim Regional Director stated that the Bureau would not support storage of CVP water in an expanded Pacheco Reservoir, nor would it support serving as a lead on federal permitting processes, primarily because of its view that PREP’s main benefits were environmental (i.e., not water supply only), with Valley Water as the sole beneficiary. He noted that the Bureau's headquarters would not provide funding for PREP, support alterations of the Bureau’s water rights, nor authorize the Bureau to act as a Section 7 lead for consultation with the wildlife agencies under the federal ESA. Furthermore, he clarified that storing CVP water is not an option because the Bureau believes it would trigger Section 7 obligations for the Bureau.
In the July meeting, the Interim Regional Director was open to providing Bureau support to secure approvals needed for Valley Water to potentially store SWP water in an expanded Pacheco Reservoir. He noted, however, that the Bureau has undergone significant downsizing in the past few months, the current reduced staffing level would likely remain in effect for at least two years, and that the Bureau will prioritize its work on ongoing operations over new projects and projects that are not CVP-authorized. In addition, he mentioned that storing SWP water in an expanded Pacheco Reservoir would require a “Warren Act contract” to allow the use of federal facilities to convey non-CVP water to the reservoir.
Valley Water requested another meeting to follow up with Bureau staff to further discuss issues relating to storing SWP water in the expanded reservoir. This second meeting took place in late July. Bureau staff confirmed that storing SWP water in the reservoir would require negotiation and execution of a long-term Warren Act contract between Valley Water and the Bureau, which would require a more involved and formal negotiation process, including approval by the Commissioner or delegation for approval by the Regional Director. Bureau staff further added that the federal agency would have to comply with NEPA, and staff anticipates that it could take more than two years to complete NEPA review and negotiation for the long-term Warren Act contract. While the Bureau has expressed willingness to work with Valley Water on the necessary approvals for a project to store SWP water, including exploring other processes to expedite the approvals, pursuing such approvals comes with its own challenges, and it is expected to be a lengthy process given the limited staffing resources at the Bureau.
IV. Priority of Pacheco Project in Valley Water’s Water Supply Planning Efforts
Staff is actively evaluating a range of projects to meet our service area’s long-term water supply needs as part of Valley Water’s development of its Water Supply Master Plan 2050 (WSMP). The WSMP analysis has found that developing drought-resilient supplies coupled with storage will best prepare Valley Water for future droughts. PREP is one of the storage projects evaluated in the WSMP and was included in several portfolios that address future shortage.
Included in the WSMP is an adaptive management strategy that focuses on the Lower Cost Portfolio, which includes BF Sisk Dam raise, groundwater banking, Delta Conveyance Project, Pure Water Silicon Valley, and South County Recharge, while continuing to plan for other projects including PREP, Sites, and others. PREP is not included in the WSMP Lower Cost Portfolio due to its significant cost. Staff recommends the Lower Cost strategy while continuing to plan for other projects as a way to balance affordability and reliability. However, since some of the projects in the Lower Cost Portfolio are still in their development stages and may not ultimately emerge as planned, and given that large water supply projects and partnerships can have uncertain outcomes, continued planning for additional projects is recommended. Thus, PREP remains a valuable alternative to some of the projects identified in the Lower Cost Portfolio.
PREP provides a new local surface storage opportunity that could capture surplus local and imported water supplies during wet periods and allow Valley Water to use existing pipelines to move stored water from the reservoir to Valley Water’s service area during critical droughts, in addition to providing environmental and incidental flood protection benefits. For example, PREP could provide 1.4 million residents with water supply for one year in an emergency.
Staff developed various alternative portfolios as part of the WSMP, both with and without PREP, in each of the strategies presented (lower cost, local control, and diversified). Given the Bureau’s position that CVP water cannot be stored in an expanded Pacheco Reservoir, staff is evaluating if the benefits of storing non-CVP water only are sufficient to justify continued investment. Staff is also conducting additional analysis to identify if other potential water supply or water storage options could provide similar water supply benefits as the existing Pacheco Project. Options to be evaluated may include, but are not limited to, expanding one or more of Valley Water’s local reservoirs, increasing Valley Water’s existing participation in other projects such as the Sites Reservoir Project or the Delta Conveyance Project, or pursuing a smaller size Pacheco Project.
Conclusion
In summary, Valley Water is making steady progress on its planning, design, and permitting efforts for PREP. However, this project continues to face significant challenges, particularly securing several key approvals from the Bureau and the anticipated significant increase in its estimated costs. The Bureau’s Interim Regional Director has clearly stated that the Bureau will not support the PREP in its current form, largely because the Bureau perceives the PREP as primarily focused on non-water supply benefits and that Valley Water is its sole beneficiary. Although the Bureau is open to supporting a Pacheco Reservoir expansion project that stores non-CVP water, that route would require negotiating a long-term "Warren Act Contract" and the Bureau’s compliance with NEPA, which staff estimates could take more than two years. Additionally, a forthcoming revised PREP cost estimate is anticipated to be more than the current cost estimate of $2.732 billion (with inflation), which is cause for concern to the CWC about PREP’s affordability.
While the WSMP analysis shows that the Lower Cost Portfolio could effectively address future shortage, staff recognizes the importance of continuing to plan for other projects such as PREP as part of the adaptive management approach to ensure water supply reliability. As noted earlier, staff will continue to evaluate whether other lower-cost potential water supply or water storage options can provide similar water supply benefits as PREP.
ENVIRONMENTAL JUSTICE IMPACT:
There is no environmental justice impact associated with this item.
FINANCIAL IMPACT:
The Pacheco Reservoir Expansion Project, Project No. 91954002 is included in the Board adopted Capital Improvement Program (CIP) Fiscal Years FY 2026-30 Five-Year Plan and in the FY 2025-26 Board adopted Budget. Staff is anticipating a cost increase relative to the current $2.732 billion capital cost estimate in the adopted CIP, which would mean upward pressure on the near-term water rate projection, all else being equal. Alternatively, if the Board were to direct staff to stop work on the PREP, it would provide relief to the near-term water rate projection, all else being equal.
CEQA:
The recommended actions do not constitute a project under CEQA because they do not have a potential for resulting in direct or reasonably foreseeable indirect physical change in the environment.
Valley Water continues to proceed with CEQA review of the Pacheco Project, and the Final EIR will be presented to the Board for consideration before project approval.
ATTACHMENTS:
Attachment 1: May 5, 2025 WSDM Committee Agenda Memo
Attachment 2: PowerPoint
UNCLASSIFIED MANAGER: Manager
Ryan McCarter, 408-630-2983