BOARD AGENDA MEMORANDUM
Government Code § 84308 Applies: Yes ☐ No ☒
(If “YES” Complete Attachment A - Gov. Code § 84308)
SUBJECT:
Title
Receive Information on Water Supply Strategy, Water Supply Master Plan Update, and Work Study Session on the Pacheco Reservoir Expansion Milestone Review, Project No. 91954002 (District 1, Merced County). (PREVIOUSLY LISTED AS ITEM 2.4)
End
RECOMMENDATION:
Recommendation
A. Receive information on Board Adopted water supply strategy, Water Supply Master Plan update, and decision framework for future water supply projects;
B. Receive information on the Work Study Session on the Pacheco Reservoir Expansion Milestone Review, Project No. 91954002 (Santa Clara County - District 1, Merced County);
C. Schedule a future Work Study Session on Water Supply Master Plan Portfolio when Pacheco Reservoir Expansion Project reaches 60% level design; and
D. Provide direction to staff.
Body
SUMMARY:
The presentation on this item is comprised of four sections: 1) Water Supply Master Plan; 2) Pacheco Reservoir Expansion Project Background and Benefits; 3) Pacheco Reservoir Expansion Project Cost and Financing; and 4) Pacheco Reservoir Expansion Project Milestones. After each section, there will be an opportunity to ask questions.
Santa Clara Valley Water District’s (Valley Water) long-range water supply planning is to evaluate its future needs and develop investment strategies to ensure water supply reliability for Santa Clara County (County). The Water Supply Master Plan 2040 (WSMP), adopted by the Valley Water Board of Directors (Board) in 2019, is the most recent plan from the planning process. As part of the WSMP, the Board established Valley Water’s Level of Service (LOS) goal “to develop water supplies to meet 100 percent of annual water demand during non-drought years and at least 80 percent demand in drought years.” This goal was established based on a community survey and cost/benefit analysis and balances the need to provide sufficient water for the County, while minimizing overall costs.
To ensure Valley Water achieves its level of service goal, the WSMP recommends a three-pronged strategy and a portfolio of projects to be invested through 2040 to meet future County-wide demand:
1) Secure existing supplies and infrastructure. This includes securing local water rights, pipeline maintenance, dam retrofits, treatment plant improvements and other projects to maintain the existing water utility system, as well as actions to secure existing imported water supplies.
2) Expand water conservation and reuse. This involves expanding the use of drought-resilient supplies and conservation because they are going to be most reliable in the future under a changed climate. These generally are local supplies, not dependent on rain, and are reliable during droughts.
3) Optimize the use of the existing water utility system to increase operational flexibility. In some years, supplies exceed demands. Additional facilities would increase our flexibility to use or store these excess supplies and therefore Valley Water’s ability to respond to outages or operate the system during challenges like droughts or water quality problems.
These three elements together provide a framework for a sustainable and reliable future water supply in our County and strike a balance between protecting what we have, investing for the future, and making the most of the existing water supply system.
The Pacheco Reservoir Expansion Project (PREP) is one of the recommended projects that addresses strategy 3; to optimize the operation of the existing system and diversify storage. The main goal of this strategy is to maintain our storage capacity while improving when and how much water we can take or put into the various storage projects. If approved, the PREP will expand the storage capacity of the existing Pacheco Reservoir from 5,500 acre-feet (AF) to up to 140,000 AF to provide increased emergency water supplies, improved water quality, and ecosystem benefits. Project components include installation of a new dam on the North Fork of Pacheco Creek and associated appurtenances, including outlet works and spillway; installation of a new pipeline between the existing Pacheco Conduit and the new dam; decommissioning of the existing dam with creek restoration; a new pumping plant; new power supply and other appurtenances; and improved site access.
In addition to the PREP, Valley Water is also pursuing a number of other partnerships related to storage including the Los Vaqueros Reservoir Expansion Project, groundwater banking, Sites Reservoir, and the Sisk Dam Raise project. Given the uncertainties and varied benefits and costs of these projects, evaluating them using consistent criteria as part of the WSMP will assist the Board in making investment decisions to ensure a sustainable supply of clean safe water for the community in the face of climate change.
Valley Water follows a roughly 5-year cycle for its WSMP update and is currently embarking on a 2-year process to complete the next WSMP update by the end of 2024. The update will involve a comprehensive assessment of future demand and supply for the next 30 years and development of water supply portfolios for continued planning and/or investment. The water supply projects, including PREP and other storage projects, will be evaluated as part of this process. The WSMP update provides an opportunity to evaluate and compare the water supply benefits, costs, and other benefits of these projects to help inform the Board on investment decisions. It is anticipated that WSMP framework development will occur in calendar year 2023.
The remainder of this report provides the requested background and project status update of the PREP.
Project Background - Water Storage Investment Program
Proposition 1, passed by voters in 2014, dedicated $2.7 billion for investments in California water storage projects. The California Water Commission is administering the Water Storage Investment Program (WSIP) to fund the public benefits associated with these projects.
On July 25, 2017, the Valley Water Board adopted Resolution 17-51 authorizing actions related to the Proposition 1 Funding Application to the California Water Commission (CWC) for Water Storage Investment Program (WSIP) funding for the Project.
On August 14, 2017, Valley Water staff submitted a Proposition 1 Funding Application for the PREP to the California Water Commission (CWC) for a WSIP grant.
On July 24, 2018, the CWC approved the PREP for a Maximum Conditional Eligibility Determination (MCED) for funding up to $484.55 million, which included an early funding award of $24.2 million to support planning and environmental permitting efforts. The Early Funding Agreement was executed in December 2018 and the CWC has contributed $20.3 million to date through cost sharing with Valley Water. The Early Funding Agreement has been amended to extend the term to complete the scope of work by December 31, 2023. Valley Water is responsible to perform the planning and environmental permitting work described in the Early Funding Agreement, and if found to be in default, could be required to repay the funding.
Each WSIP project that the CWC approved for conditional funding was required to meet statutory requirements to remain eligible for the MCED prior to a January 1, 2022 deadline. The statutory requirements and the PREP actions to fulfill them are as follows:
1. All feasibility studies are complete - The PREP State Feasibility Report was submitted to CWC staff and received a recommendation for the CWC to determine the PREP as feasible.
2. Draft environmental documentation is available for public review - The Draft PREP Environmental Impact Report was released on November 17, 2021, with a 90-day public review period.
3. The Director of the Department of Water Resources (DWR) receives commitments for not less than 75 percent of the non-public benefit cost share of the project - On November 9, 2021, the Board adopted the RESOLUTION for WATER STORAGE INVESTMENT PROGRAM FUNDING COMMITMENT FOR THE PACHECO RESERVOIR EXPANSION PROJECT This Resolution (No. 21-91) was transmitted to the Director of DWR on November 10, 2021. The non-public sources of the funding may be from eligible Valley Water funding as well as any partnership contributions as applicable.
On December 15, 2021, the CWC determined that the PREP is feasible and “can be technically and physically constructed and operated.” As such, the CWC determined the PREP continues to be eligible for the MCED which will require all federal, state, and local approvals, certifications, and agreements prior to executing a Final Funding Agreement.
In March 2022, the CWC increased the MCED to $504.14 million for the PREP. Each of the other WSIP projects also received relative increases to redistribute available funds to account for inflation and increased project costs.
Staff is working with all the other WSIP funding recipients in negotiating terms and conditions of the Final Funding Agreement with the CWC and Contracts for Administration of Public Benefits. The PREP specific public benefits will be developed and negotiated with California Department of Fish and Wildlife (ecosystem benefits) as well as Department of Water Resources (emergency storage benefits) between 2023 and 2026. The Final Funding Agreement is anticipated to be brought to the CWC in 2027 when all conditions are met.
Project Benefits in the Face of Climate Extremes
The WSIP required applicants for public funding to analyze their proposed projects using climate and sea level conditions for California projected at years 2030 and 2070.
The period from 2000 to 2021 was the driest 22-year span since the late 1500s in the American Southwest. Scientists predict a more extreme trend toward megadrought as global warming continues. As the state continues to get hotter and drier, it will see, on average, less snowfall, increased evaporation, and greater consumption of water by vegetation, soil, and the atmosphere itself. Over the next 20 years, California could lose 10 percent of its water supplies to aridification.
During the 2021-2022 water year, California experienced torrential rain; a record-breaking, prolonged spring dry spell; a record-breaking fall heat wave; and its third year of drought. The multi-purpose, multi-objective PREP is envisioned to respond to these types of climate extremes. To best prepare for future climate changes, Valley Water has been pursuing a diversified water portfolio. Water supply projects like desalinization and water re-use provide for increased and consistent new water supply. Storage projects are also needed to ensure water can be captured during wet years for use during dry years. The PREP, with over 140 thousand acre-feet of storage will provide for emergency water during droughts as well as catastrophic system failures.
An expanded Pacheco Reservoir will also allow Valley Water to better utilize its State Water Project and Central Valley Project supplies, as well as provide for local storage when excess imported water is available for Valley Water to divert and store for later use. If Valley Water invests in the Delta Conveyance Project, the PREP would allow for local storage of the additional water supply the Delta Conveyance Project will provide for Valley Water.
Climate extremes also impact terrestrial and aquatic resources as prolonged droughts impact fish passage and habitat. The PREP will provide for regulated, consistent, and cool water to improve the habitat for the federally threatened South Central Coast Steelhead in Pacheco Creek as well as other species. This will be accomplished by storing runoff water during high-rainfall periods and releasing it in a regulated fashion year-round when the creek would otherwise be dry.
The ability to store more water in the expanded reservoir during high-rainfall periods will also incidentally reduce peak flows and reduce flood damage along Pacheco Creek, in the San Felipe Lake (aka Soap Lake) area, a disadvantaged community, and for the U.S. Army Corps of Engineers’ Pajaro River Project for the communities of Pajaro and Watsonville which are also both disadvantaged communities.
Project Status
In late 2021, the planning phase and 30% design were near completion and the PREP Draft Environmental Impact Report (DEIR) was released for public review. The DEIR included five alternatives and identified the preferred project alternative as a hardfill dam type located approximately one mile upstream of the existing North Fork Dam. Upon release of the DEIR, the Department of Water Resources Division of Safety of Dams (DSOD) rejected the hardfill dam type concept, due to limited performance history, and stated the earthfill dam type alternative included in the DEIR, remained a feasible option.
After receiving DSOD’s request, staff and consultants completed a 30% design update in June 2022. Additionally, the revised alternatives analysis and staff-recommend project technical memoranda were completed in September and November 2022, respectively.
On January 10, 2023, staff presented the PREP Planning Study Report (PSR) to the Board, which marked the completion of the planning phase. The PSR identified the recommended project as the upstream, earthfill dam type, with a 140,000 AF capacity, located approximately one mile upstream of the existing dam.
The PREP’s geotechnical investigations, environmental investigations, and analysis necessary to support the 60% design and environmental documents, are scheduled to be completed in late 2023. These investigations are necessary to advance the design of the dam and related improvements, which include the electrical transmission line and construction access improvements. The investigations will also aid in further assessing the environmental impacts and developing mitigation options, including the cultural resources.
After reviewing the DEIR comments and gathering additional project information, there is a need to further develop the impact analyses and mitigation on the electrical transmission line, construction access improvements, as well as complete tribal consultation. Staff proposes re-circulating the Draft PREP EIR to address these needs while combining it with the PREP Draft Environmental Impact Statement (EIS) that is needed to fulfill the National Environmental Policy Act (NEPA) requirements. This draft joint document has an anticipated release for public comment in mid-2025, followed by a final joint document to be certified by the Board in mid-2026.
PREP Cost
The latest PREP construction cost estimate was performed in April 2022 to include the latest project features and economic conditions at the time. This updated cost estimate was incorporated into the Final Planning Study Report (PSR) and the planning cycle for Valley Water’s Capital Improvement Program (CIP) Fiscal Year (FY) 2024-28 Five-Year Plan. The PSR does not include all PREP costs such as complete project mitigation, design work, and pre-construction permitting efforts as noted in the PSR. However, the CIP includes all estimated PREP costs including inflation through the latest forecasted construction schedule.
The current preliminary cost for mitigation is estimated at $50 million. Mitigation land will need to be acquired and managed to compensate for the PREP’s environmental impacts. At this time, it is premature to provide a range of mitigation costs due to the extent and variety of environmental impacts associated with a project of this size and complexity, until negotiation terms are somewhat established with the regulators. As interagency meetings and discussions with the regulators progress, a more refined estimate of the mitigation costs will be developed along with the 60% level project cost estimate.
The current total capital cost, which is included in the CIP’s FY 2024-28 Draft Five-Year Plan, is $2.78 billion. Financing costs, including a Water Infrastructure Finance and Innovation Act (WIFIA) loan and revenue bonds, are estimated at $3.23 billion for a total cost including financing of $6.01 billion. When netted against the WSIP grant and the assumed partnership reimbursements at 35%, the net cost that would be paid by water charges over time is $3.27 billion.
In general, issuing debt to fund capital projects helps keep water charges low and stable, helps larger projects get done faster than without the use of debt, and helps facilitate intergenerational equity - the concept that those who benefit from an asset over time, pay for the asset over time.
The current assumed WIFIA loan debt service structure reflects principal payments starting in FY 2054-55. This backloaded WIFIA debt service structure when combined with a strategy of shortening the amortization periods associated with future Water Utility revenue bond debt, would create a level overall debt service profile for the Water Utility in the decades to come and save the community money by facilitating the payoff of more expensive revenue bond debt sooner and the less expensive WIFIA debt later. Valley Water would not draw on the WIFIA loan for construction, unless the Board has approved a construction contract for the PREP.
The PREP has a minimal impact on the North County (Zone W-2) groundwater charge projection until FY 2031 since major expenditures aren’t projected to start until FY 2028, which would be mostly offset by WSIP grant reimbursements, WIFIA loan proceeds and revenue bond proceeds. As shown in Attachment 1, for the 5-year period between FY 2029 and FY 2033, the net cash flow (or cost outlay) for the project totals $428 million ($300 million of which would occur from FY 2031 to FY 2033). The average net cash flow over the 5-year period is $86 million per year and would translate to roughly $387 per acre-foot (AF) for the North County Zone W-2 groundwater charge, or roughly $13.35 per month to the average household. Between FY 2034 and FY 2053, the net cash flow for the PREP would average $60 million per year and would translate to roughly $255/AF, or roughly $8.80 per month to the average household. From FY 2054 to FY 2067, the net cash flow for the project would average $111 million per year and would translate to roughly $430/AF, or roughly $14.75 per month to the average household.
Project Schedule
The current PREP schedule has both the design and environmental phases scheduled to be completed in mid-2026 with the construction contract and permits being completed mid-2027. This will be followed by a 7.5-year construction duration and a 6-month close-out phase scheduled to be completed in mid-2035. The schedule will continue to be updated at various milestones as the technical, environmental, and financial aspects of the PREP develops.
Upcoming Milestones
Over the next several years there will be several PREP milestones that will allow for, or in some cases, require Board consideration or action. These milestones will provide points when the feasibility of the PREP can be assessed based on updated technical, environmental, and financial project information.
As mentioned above, Valley Water is currently embarking on a 2-year process to complete the next WSMP update by the end of 2024. The WSMP update provides an opportunity to evaluate the benefits of the PREP in comparison with other storage projects and within Valley Water’s overall water supply portfolios.
The 60% design package is scheduled to be completed in mid-2024 which will incorporate the results of the completed Phase 2 Geotechnical Evaluations and Environmental Surveys. It will include updates to the earthfill dam design and additional improvements such as the PG&E transmission line design and construction access improvements. Additionally, the 60% design package will include an updated PREP Cost Estimate. It is anticipated that there will be meaningful progress on potential partnerships and other funding options by this point. Therefore, this milestone will be the next opportunity to evaluate all three feasibility categories (technical, environmental & financial) at the same time.
The information developed through the 60% design will help inform the WSMP update and portfolio evaluation described above.
Public review for the recirculated draft EIR and draft EIS is anticipated in mid-2025, between the completion of the 60% and 90% design phases. While the review process may generate comments that could ultimately impact all three feasibility categories, the milestone itself is expected to provide an update predominantly on the environmental feasibility of the PREP.
The 90% and final design milestones are scheduled for late 2025 and mid 2026 respectfully. It is anticipated that these designs milestones will primarily include refinements of the design presented at 60% and address comments from the recirculated Draft EIR/EIS. A Final Engineer’s Estimate on construction costs, as well as a potential third-party estimate, will be completed as part of the final design. The partnerships, funding and financing plan is expected to be completed by late 2026 after the completion of the final design. These milestones will provide additional opportunities to review the Technical, Environmental and Financial Feasibilities of the PREP.
Certification of the final EIR/EIS is anticipated in Mid-2026. This milestone requires Board approval.
Finally, staff estimates that the Board will consider for adoption the plans and specifications and decide whether to authorize the bidding and awarding of the PREP in Mid-2027. This would be the final opportunity to evaluate the Technical, Environmental and Financial Feasibility of the PREP.
While there are several identified milestones that would allow for the Board to evaluate the feasibility of the PREP in several categories, it is recommended that the next milestone for evaluation of the PREP be at completion of 60% design. With a scheduled completion date of Mid-2024, this is the closest milestone that will provide necessary detailed information for all three major feasibility categories, technical, environmental, and financial. This timeline is also consistent with the WSMP update which will evaluate projects and recommend a water supply project investment strategy through 2050. At the completion of this milestone, most of the technical and environmental issues would have been investigated and analyzed, the PREP’s total cost would be at a stage where the estimated value will be evaluated against future economic trends, the mitigation plan would be more developed with cost estimates, and additional information on potential partnerships, funding, and financing would be known.
ENVIRONMENTAL JUSTICE IMPACT:
There are no Environmental Justice impacts associated with this item. However, the Environmental Justice Impacts of the PREP will be assessed and addressed in future board actions related to the continued development of the PREP. Some of the anticipated Environmental Justice Impacts include the reduction of flood damages to several disadvantaged communities.
FINANCIAL IMPACT:
There is no financial impact associated with the recommendation in this item. The PREP is currently included in the CIP’s FY 2024-28 Draft Five-Year Plan. Any future decisions on the course of the PREP may have financial impacts.
CEQA:
The recommended actions in this item does 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. CEQA will be addressed for the PREP through an Environmental Impact Report that will be presented to the Board when it considers whether to approve the PREP.
ATTACHMENTS:
Attachment 1: PowerPoint
Handout 2.4-A: Huenemann
Handout 2.4-B: Perricelli
Handout 2.4-C: Whitfield
Handout 2.4-D: Sletteland
Handout 2.4-E: Rogers
Handout 2.4-F: Freedom
*Handout 2.4-G: Smith
*Handout 2.4-H: Sierra Club
*Handout 2.4-I: Stop Pacheco
*Handout 2.4-J: Stepanova
*Handout 2.4-K: Trades Council
*Handout 2.4-L: Kishler
*Handout 2.4-M: Giberson
UNCLASSIFIED MANAGER:
Manager
Christopher Hakes, 408-630-3796