The Colorado River’s low flows and Lake Mead’s photogenic bathtub rings are again making headlines — but the most vulnerable component of Arizona’s water supply system today is its power supply.
The latest projections for spring–summer runoff into Lake Powell (a good measure of hydrologic conditions in the Colorado River Basin), indicate that 2013 flows will be among the lowest on record. Reclamation projects that storage for the entire Colorado River system will be less than 50 percent of capacity at the end of the year. Low water conditions of this magnitude would normally eclipse other factors that affect the availability of this water supply. However, energy is required to move water to users — and the main source of power for the CAP now faces unprecedented uncertainties.
The Navajo Generating Station, a 2250 MW coal-fired plant, provides nearly all the power required to operate the CAP. The plant’s future depends on the willingness of its partners / owners to invest in its continued operation. However, two partners recently announced their intent to terminate their NGS contracts. One is the Los Angeles Department of Water & Power. Earlier this year, the LADWP decided to terminate contracts on all coal-based power supplies and struck a preliminary deal to sell its NGS share to SRP by 2015. Then, last month, another partner, Nevada Energy, publicized that it too plans to divest its ownership in coal-fired plants. This leaves four remaining Arizona partners: Reclamation (on behalf of CAP), SRP, APS, and TEP.
The defections are, in part, a response to new regulations for coal-fired power plants. Earlier this year, the EPA published its proposed rule for NOx controls at NGS. This long-awaited rule will cost an estimated minimum of $600M to implement — a cost that presumably must be shouldered by NGS owners, who may be reluctant to increase investments in coal given the current (and likely future) regulatory environment.
Other uncertainties threaten NGS. The plant’s operator, SRP, must execute a new land / infrastructure lease with the Navajo Nation. The current lease, enacted in 1969, is set to expire in 2019. Water contracts between SRP and Reclamation must also be renegotiated; the current contract that supplies water to the power plant expires in 2014. Furthermore, coal supply contracts involving Peabody, the Hopi Tribe, and the Navajo Nation need to be renewed. And finally, the Navajo Nation and Hopi Tribe both have unsettled claims to Arizona’s 50,000 AF of water from the Upper Colorado River Basin, some of which is currently used to operate the plant.
Despite these uncertainties, Arizona’s NGS partners may be willing to invest in this critical facility for the future because of its importance to the state; indeed, leaders at CAP, SRP, and the Navajo Nation have publicly expressed their support for the plant. In any case, regardless of whether NGS shuts down or continues to operate, it will have a major impact on the price and availability of Colorado River water supplies in Arizona in the near future.
Juliet M. McKenna, MS, PG | Michele Robertson, PG
New federal regulatory standards are looming for hexavalent chromium. What will this mean for Arizona?
The EPA’s evolving efforts to set a standard for hexavalent chromium (chromium-6) may have profound implications for Arizona groundwater suppliers. Currently, public water systems are only required to meet the standard for total chromium (100 parts per billion [ppb], set in 1991), which includes both chromium-6 and its more benign counterpart, trivalent chromium (chromium-3). The California EPA adopted a drinking water goal of 0.02 ppb in July 2011 after determining that chromium-6 is likely a carcinogen.
The EPA began a rigorous review of the health effects of chromium-6 after the Department of Health & Human Services published toxicity studies in 2008. In September 2010, the agency released a draft of the human health assessment for public comment and external peer review. Once this draft is finalized, the EPA will use it, along with other relevant information, to determine if a new chromium-6 standard is warranted; this process is anticipated to take another year. In the interim, the EPA has required most public water systems to monitor for chromium-6 to gather more data on its distribution and concentrations.
So, why, after 5 years of investigation, are additional studies needed? One reason is that chromium has a Jekyll-and-Hyde personality in water: It may occur in either its trivalent (benign) or hexavalent (toxic) state depending principally on pH and oxidation conditions. Since EPA standards are risk-based, it’s important to understand which form of chromium is present in water supplies to evaluate how it will ultimately affect receptors.
Unfortunately, the conditions in Arizona’s deep aquifers — which tend to be alkaline and highly oxidized — favor the formation of chromium-6 over chromium-3. A 1975 USGS study found that chromium-6 concentrations in 436 samples in Paradise Valley ranged from 0 to 220 ppb. A more recent study by the Environmental Working Group looked at chromium-6 levels in tap water from 35 cities and found that it ranged from 0 to 12.9 ppb; chromium-6 levels were 0.19 and 0.05 ppb, respectively, in Phoenix and Scottsdale. In addition, chromium can partially or completely oxidize to chromium-6 when it occurs in water supplies that are subjected to chlorination or certain other disinfection processes.
If the EPA follows California’s lead in setting a low value for the new chromium-6 standard, it’s likely that many Arizona water providers will be required to treat their sources or develop new ones. The costs related to compliance and treatment may be similar to those for arsenic, which is now regulated under a standard established in 2006. In the short term, at least, this new standard has the power to impact both the availability and cost of municipal water supplies in Arizona — perhaps as much as any other market factor we have seen in a long time.
A proposal to terminate a landmark interstate water banking agreement demonstrates a nimble response to new economic and hydrologic realities.
In 2001, a landmark agreement between the Arizona Water Banking Authority and the Southern Nevada Water Authority established interstate water banking. At the time, water banking offered important benefits for both states. Arizona, with rights to 2.8 MAF/yr of Colorado River water, lacked the demand to take its full allotment. Nevada, on the other hand, faced unprecedented population growth in Las Vegas but held rights to a meager 300,000 AF/yr of Colorado River water; consequently, it was willing and able to pay for additional supplies to buffer future shortages on the river. The agreement was a win-win: It provided additional water supplies for Las Vegas while preserving Arizona’s future ability to use its Colorado River allocation.
The original agreement and subsequent amendments called for Arizona to “bank” 1.25 MAF of Colorado River water in underground storage facilities. In exchange, Nevada would pay the full cost of water delivery and storage, plus an additional $100M that Arizona could use to develop new in-state supplies. To date, Arizona has stored almost 50 percent of the contracted 1.25 MAF, receiving $123M from Nevada.
Twelve years later in 2013, however, water banking is no longer advantageous for either party. In recent years, as Arizona’s demand for CAP water has increased, less water has become available for Nevada (Arizona customers have first priority for these supplies); in fact, since 2010, Arizona has had no surplus CAP water at all for Nevada, as shown in Table 1.
Hydrologic and economic conditions have created additional challenges. In 2011, water levels in Lake Mead approached the 1,075-foot trigger level for declaring a shortage. In addition, the SNWA faced financial difficulties related to the economic downturn, which hit Las Vegas particularly hard, affecting its need to stockpile water supplies in Arizona. Las Vegas is now focusing on obtaining groundwater supplies from northern Nevada.
Based on these developments, the parties are now looking to terminate future water banking obligations. Lessons from the past are not forgotten, however; the new draft agreement provides the flexibility to adapt to changing conditions. In fact, the parties can agree to resume storage at any point in the future. This adaptive approach will be important to managing the Colorado River as both states grapple with the potential impacts of climate change and future population growth.
The AWBA Commission is expected to vote on the final agreement at its next meeting on March 20, 2013.
Table 1: AZ–NV Interstate Storage Account
Juliet M. McKenna, MS, PG | Michele Robertson, PG
An accelerating cash crunch means the CAP Board will have to make some very tough decisions about water rates this year.
Last month, we noted that increasing costs and lower demand for coal-fired power might unleash an acceleration in rates for CAP water after 2013. Not only does the CAP’s late-January budget briefing to its Board of Directors confirm this speculation, but it also proposes immediate action to address the growing deficit.
The latest CAP projections show that financial reserves are currently 25 percent lower than the Board-established target, with little hope of recovery in the next few years. Furthermore, these projections do not appear to consider costs for implementing EPA regulations at Navajo Generating Station, the coal-fired plant that provides nearly all of the CAP’s power. On January 18, the EPA proposed new emissions-reducing requirements for the NGS that are estimated to cost a minimum of $500M. During this year’s rate-setting process, which continues until June, the Board will find it difficult to avoid the conclusion that the current revenue-water rate structure is unsustainable.
The January brief recommended adjusting water rates starting this year to begin to compensate for the shortfall. The proposed approach includes increasing energy rates for all customer classes, which will require increasing the subsidy for agricultural customers.
If the Board leaves rates alone this year, some customers may be temporarily satisfied. However, financial problems will persist and grow, adding to uncertainty for the future. The next few months will reveal whether the Board plans to endorse a wait-and-see approach or pursue a more aggressive course to address its long-term structural revenue deficit.
The Board brief from the January 24 Finance Committee meeting is worthy of review by anyone involved in budgeting for future CAP water use.
Increasing costs and lower demand for coal-fired power are unleashing a possible acceleration in CAP rates after 2013.
Data for this analysis came from a recent financial review prepared for the CAP’s Finance, Audit, & Power Committee.
Recent financial reports from the CAP reveal that some unexpected developments in the power market — specifically, developments related to Navajo Generating Station power — portend future increases in water rates. NGS, which supplies over 90 percent of the CAP’s power, is costing more in response to rising prices for coal, increasing emission-control requirements, and more demand for water deliveries (mostly to federal customers). On top of this, soft market conditions have resulted in lower-than-expected revenues from sales of NGS “surplus” power. Unpredicted even a couple of years ago, several factors — the low cost and increased availability of natural gas and the increased regulatory pressure on coal — have mostly erased the net revenue that was expected from the sale of NGS surplus power.
The CAP is in a unique position as the only federal Reclamation project that includes (and depends on) a coal-fired power plant, and this operation figures prominently in CAP’s debt repayment strategy. Because of reduced revenues from surplus NGS power sales in 2012, the fund that contributes to repaying the federal government for building the CAP currently has $10.7M less than anticipated. With continued reductions in NGS revenue, the debt repayment burden will need to be shifted back to the capital charge paid by the CAP’s M&I customers.
Additionally, for 2012, the CAP projected that $12.7M will be needed from SO2 credits and strategic reserves to maintain its adopted rates. This is a stop-gap solution, however; in future years, if the combined trend of a soft energy market and increasing power costs continues, the rate increases for all CAP customer classes — federal, M&I, and agriculture — will likely be higher than projected. The table below shows current projected rates.
CAP Water Rates (Firm & Projected), adopted June 2012, in $/AF
|Total delivery cost
Note that M&I subcontractors pay capital charges regardless of whether water is delivered; on the other hand, delivery charges only apply if water is actually delivered. Delivery charges include energy and fixed operations, maintenance, and replacement/reserve (OM&R) costs. In 2012, long-term subcontractors in the sector paid $122/AF for water delivery. Agricultural users pay only energy costs ($49/AF, which could be reduced to $43/AF with various subsidies).
So what does the future hold for CAP customers? Per Board policy, the 2013 rates cannot be changed. However, in 2014 and beyond, the Board may need to increase both capital and energy charges more rapidly than indicated by current projections, which would affect all customer classes. In addition, as energy costs rise, ag subsidies may need to be increased to keep CAP water affordable to these customers. Alternatively, there may be interest in waiving the requirement for irrigation districts to use all 400,000 AF in the “ag pool” before they can accept water as groundwater savings facilities. Because removing some portion of this requirement would free up supplies for other excess water users, interesting alliances could emerge.
Another water supply is shaking loose in Arizona, offering new and interesting opportunities.
In our last editorial, we presented news of the Gila River Indian Community’s plans to begin selling long-term storage credits and to lease 30,000 AF of its CAP water for 100 years — a development that opens doors to the future use of CAP water anywhere in the state. Another emerging water supply is CAP “Non-Indian Agriculture” water. ADWR, in cooperation with the CAP and Reclamation, has begun the process to permanently allocate 75,782 AF of this NIA water to interested parties in accordance with the terms of the Arizona Water Settlement Act and other legal agreements. Of the initial pool, 12,000 AF are reserved for industrial users and about 12,000 AF are reserved for water providers in certain Pinal County irrigation districts that have right of first refusal; the remaining 52,000 AF are available to other water providers, including the CAGRD.
According to the agencies’ proposal, applicants must demonstrate their ability to pay for and use the NIA water by 2020 to be eligible for this supply, establishing a hierarchy that may not please all parties. The proposal also calls for all eligible applicants to receive a share. CAP’s preliminary price estimate for the water is $2,288/AF. This is a one-time acquisition cost; as with all CAP contracts, annual cost-of-delivery charges will also apply. Additionally, all proposed contracts must comply with NEPA and be authorized by the Secretary of Interior. ADWR is currently reviewing public comments and expects to release the final policy by year-end.
Unlike the GRIC supplies, NIA water has a lower priority on the CAP system than the M&I and Indian contracts. In fact, ADWR estimates that the annual NIA allocation could be reduced by anywhere from 6,000 to 60,000 AF — and it’s possible this supply may not even be available in some years, depending on basin hydrology and usage by on-river contractors. However, despite its lower reliability, there is still a great deal of interest in this water supply. Because of the robust system of recharge and recovery that has been developed in Arizona over the past two decades, NIA water can be used directly or stored underground to round out a municipality’s water portfolio.
Like GRIC water, this new NIA supply is actually a reallocation that is already being sold as excess water by CAP via year-to-year contracts. By moving more CAP water into permanent contracts or long-term leases, competition may begin to increase for other water supplies in Arizona.
Juliet M. McKenna, MS, PG | Michele Robertson, PG
A recent landmark deal will have lasting effects on the price and availability of water in Arizona.
Last month, SRP and the Gila River Indian Community announced a partnership that will enable the tribe to use more of its CAP entitlement. In exchange for guaranteeing SRP access to a portion of its water supplies, GRIC will receive assistance in developing recharge projects along the Gila River — projects that will not only be critical to restoring riparian habitat but will also generate long-term storage credits for use or sale.
Much of GRIC’s CAP allocation — 311,800 AF/yr, as granted under the 2004 Arizona Water Settlements Act — is currently unused, and it will take the tribe decades to build the infrastructure necessary to take full delivery and use the water for agricultural purposes. As a result, “excess water” is available; each year, CAP sells this water to other municipal, agricultural, and industrial users. Under terms of the recent deal, SRP was given the right to buy up to 100,000 AF of water during times of shortage over the next 20 years. Also, GRIC will make available for lease up to 30,000 AF of water for a term of 100 years.
This unprecedented agreement will impact water supplies in Arizona in many ways. First, Indian contract water has the highest priority among CAP supplies (this priority is shared only with M&I contracts); no other sources at this priority level are known to be currently available for long-term lease. Because the 100-year term satisfies the requirements for an assured water supply, lessees may include municipal providers who will pay a premium for this supply. Second, the agreement allows the GRIC CAP water to be leased inany of Arizona’s nine counties, opening up this supply to potential buyers across the state. Third, the new leases will help define a market price for water and may kick-start additional transactions in Arizona’s underdeveloped market. (All long-term Indian CAP leases executed so far used a pricing structure that was determined during water-rights settlement negotiations.) Finally, GRIC’s increasing use of its allocation will diminish the CAP’s “excess water” pool; therefore, demands may accelerate for other types of water supplies as the economy recovers in Arizona.
SRP should be commended for forging this relationship between entities that, in the words of GRIC Tribal Chairman Gregory Mendoza, “…used to be on the opposite sides of the table when it came to water.” Because of this access to additional water supplies during drought, SRP is now in a more secure position.
As the details emerge of how this water will be marketed and priced, those interested in securing additional supplies should be paying close attention.
Juliet M. McKenna, MS, PG | Michele Robertson, PG
Southern California’s main water wholesaler demonstrates that even large reductions in available supply can be resolved using active, comprehensive, creative management strategies.
“Shortage” is a word that tends to invoke anxiety, particularly when used in association with an important resource like water. However, as our recent editorials have shown, Arizona’s water shortages won’t necessarily be dire; not only will we have ample time for planning, but we also have a flexible legal and operational system for managing the cascading impacts of supply shortages. Furthermore, the Lower Basin already has experience dealing with these kinds of impacts.
Southern California’s experience provides an interesting example of how a long-term reduction in water supply can be mitigated. Over the past 20 years, a sequence of events has resulted in drastic reductions of Metropolitan Water District’s supplies. In the wake of the 1963 Arizona vs. California Supreme Court decision, MWD needed to relinquish “squatter’s rights” to an excess 800,000 AF/yr of Colorado River water that Arizona was planning to deliver to its customers through the CAP canal. This forced MWD to permanently reduce its importation of Colorado River supplies by about 50 percent. In the past decade, endangered species litigation in the Sacramento-San Joaquin Delta presented a second major supply constraint for MWD by reducing deliveries from the State Water Project.
In the two decades between 1985 and 2005, MWD responded with multiple initiatives that were designed to increase water supplies, as well as decrease demand. These initiatives included developing local sources, importing additional supplies, improving the efficiency of its infrastructure, constructing new water storage facilities, and increasing its use of reclaimed and treated water. MWD also increased its rates to reflect the cost of developing new, more expensive supplies. In addition, because traditional sources of inexpensive fresh water were unavailable, MWD and its member agencies acquired supplies through various innovative mechanisms: interstate storage credits, lining the All America Canal, and planning for future seawater desalination, for example. Agricultural water from the Imperial and Palo Verde Irrigation Districts, which together hold rights to about three-quarters of California’s allocation of Colorado River water, was acquired through long-term fallowing agreements.
MWD’s response demonstrates that supply-demand imbalances can be resolved through active management. In practice, active water management generally means acquiring more expensive supplies. Basic economic theory tells us that as more expensive supplies are added to a utility’s portfolio, overall cost of water to the consumer rises. In response to these rising costs, customers will reduce their water use. One result is that water demand in the aggregate falls, thus providing another element of the overall solution.
In light of this dynamic process, the question is not whether water will be available — because it will — but rather, how much will it cost, and how will the additional cost be distributed among water users?
Although often misunderstood or ignored in favor of “gloom and doom” scenarios, the allocation system for Colorado River water is robust and underpins the water security of our state.
Embodied in the complex body of legal and policy documents known as the “Law of the River,” shortages on the Colorado River have been anticipated since flows were originally allocated 90 years ago. As a result of this evolving body of governance, the impact to Arizona during a shortage is not only well defined but also limited — a reality that contradicts the notion that our water-dependent communities are on the verge of collapse.
At the risk of oversimplifying a complex, integrated body of law, court decisions, treaties, and regulations, the Law of the River basically gives the Lower Basin priority over the Upper Basin states for the first 75 MAF over a 10-year period; this operationally translates to 7.5 MAF/yr. Additionally, Mexico is entitled to 1.5 MAF/yr (half from the Upper Basin, half from the Lower Basin). Thus, the Lower Basin plus Mexico have priority over the Upper Basin for 8.25 MAF/yr, while the Lower Basin has obligations to its states and Mexico of 9 MAF/yr.
Consequently, during a shortage year, the Lower Basin states must absorb the difference between what the Upper Basin is required to deliver and the total obligations to Lower Basin states and Mexico — a maximum of up to 0.75 MAF/yr. Beyond that, the burden to make up shortages shifts to the Upper Basin states. Arizona’s share of this shortage, still unquantified, will likely top out at around 0.65 MAF/yr, with the remaining going to Nevada and Mexico. To put this amount in perspective, Arizona’s shortage cut of 0.65 MAF is…
- About 40 percent of CAP’s allocation (plus on-river Arizona Priority 4 allocations)
- Less than 25 percent of Arizona’s total 2.8 MAF allocation
- Twice as much as the 0.32 MAF reduction in deliveries to Arizona (primarily CAP) that are triggered at the first shortage level, when Lake Mead falls to 1,075 feet msl
- About 75 percent of the 0.48 MAF reduction in deliveries to Arizona (primarily CAP) when the third shortage level (1,025 feet msl) is reached in Lake Mead
As we discussed in last month’s editorial, CAP will be cut first; however, the priority system for CAP water is a farsighted program that protects certain categories of users for the foreseeable future. Thanks to the groundwork laid by the Law of the River, there is indeed a limit on how deep those cuts will be, giving Arizona the certainty it needs to plan its water future.
Next month, we will continue this thread and discuss how the basin states are preparing for shortage.
An overview: Evolution of shortage-management on the Colorado River
- 1922: The Colorado River Compact gives the Lower Basin states (Nevada, California, and Arizona) priority over the Upper Basin states for the first 75 MAF over a 10-year period. It also specifies the Upper Basin’s obligation to deliver up to half of any future Mexican treaty obligation every year in normal (nonsurplus) years.
- 1944: The Mexican Water Treaty quantifies the U.S. obligation as 1.5 MAF/yr in a normal flow year.
- 1968: The Colorado Basin Project Act stipulates that during a shortage, California’s entire 4.4 MAF annual allocation takes priority over all of Arizona’s remaining river water supply not yet under federal contract (about 1.6 MAF/yr of Priority 4 water contracted to CAP and on-river users).
- 2007: The Interim Shortage Sharing Guidelines define the levels in Lake Mead that trigger shortage and the amount deliveries will be reduced to each state.
Juliet M. McKenna, MS, PG | Michele Robertson, PG
In last month’s editorial, we noted that a shortage on the Colorado River is inevitable. This month, we consider how a shortage might affect Arizona water users.
It is common knowledge that agriculture accounts for the biggest share of Arizona’s water demand and that, consequently, some ag users are likely to be subject to reductions during shortages on the Colorado River. Less well understood is that Arizona’s complex water-management structure incorporates hardwired protections for municipal uses for the foreseeable future. CAP has released a new recovery plan, which incorporates the results of hydrologic modeling and provides an updated look at what M&I subcontractors can expect when the shortage hits. The plan provides reassurance that M&I subcontractors are in a relatively secure position for the next 25 years, while agricultural and other users of “excess” CAP water should continue to prepare for frequent, and perhaps sustained, reductions.
The formula for allocating shortages as prescribed by the Law of the River sets reduced water deliveries in motion. As Lake Mead drops below the successive threshold levels of 1,075, 1,050, and 1,025 feet, Arizona will be expected to reduce its 2.8 MAF share of Colorado River water by first 320,000, then 400,000, and finally 480,000 AF per year. CAP will absorb most of Arizona’s shortage because of its lower priority.
There is also a priority hierarchy for CAP subcontractors. Reductions will start with excess water users. This lowest-priority group includes interstate banking and the ag settlement pool. After that, long-term contract holders will be shorted — again, according to priority, starting with non-Indian ag (NIA) and lastly M&I and Indian contracts.
The low priority of CAP agricultural contracts, combined with future uncertainties in energy availability and water costs, prompted a study on loan risks by Farm Credit Services Southwest. A borrower-owned cooperative, FCSSW holds the note on nearly half of all Arizona farm and ranch loans. According to Thomas Schorr of FCSSW, speaking at a recent conference in Tempe, “a loan on property within a CAP district could have a shorter repayment period and/or lower loan-to-value limits based on the availability and costs of water.”
Unlike lower-priority contractors, CAP’s M&I and Indian users are uniquely buffered from shortages because of “deposits” made to the Arizona Water Bank that can be recovered during shortage. CAP’s plan incorporates prescribed shortage formulas for existing contracts based on the updated hydrologic modeling results. The results are summarized below for different shortage and population-growth scenarios.
Table 1: First onset of shortage to M&I contracts (recovery trigger)
||Moderate Scenario *
||Severe Scenario **
|Rapid (Full use of CAP by 2025)
||No impact to M&I
||First M&I impact
|Moderate (Full use of CAP by 2035)
||No impact to M&I
||First M&I impact
* Assumes two shortages: 2017–2019 and 2024–2034
**Assumes a sustained shortage from 2016–2035
Based on these projections, M&I contracts are reduced and recovery is triggered only under the severe shortage model. Through 2035, a maximum of only 3 percent of all subcontracts would be shorted in any given year — about 17,000 AF/yr, out of almost 1 MAF. As such, the recovery needs of M&I customers will be very manageable through 2035. Nonetheless, model projections should continue to be updated so M&I contractors can prepare for 2035 and beyond.
Juliet M. McKenna, MS, PG | Taylor D. Shipman, MS | Michele Robertson, PG