Agenda Number 8. CAGRD WATER SUPPLY ACQUISITION PROGRAM

Transcription

1 Agenda Number 8. CAGRD WATER SUPPLY ACQUISITION PROGRAM May 29, 2012

2 1. Executive Summary The CAP General Manager and Senior Management Team instructed Central Arizona Groundwater Replenishment District (CAGRD) staff to prepare a business plan as a prerequisite to developing a Water Supply Acquisition Program at CAP. The objective of this business plan is to present the business case for program implementation with emphasis on financial and staffing requirements. CAGRD is obligated by state law to acquire sufficient water resources to meet the replenishment obligations of its members. CAGRD has a fiduciary responsibility to acquire the required supplies in a timely and cost effective manner. In recognition of these responsibilities, the CAP Board has clearly emphasized the need for a more aggressive water supply acquisition strategy in its 2010 Strategic Plan, through rate-setting to increase revenue generation, by securing revenue bonding authority and by authorizing a CAGRD Water Supply Acquisition Study. The water supply study, completed in March 2012, provides the foundation for a strategic, programmatic approach to accomplish CAGRD's water supply acquisition objectives. The CAGRD's water supply portfolio is inadequate to meet current and projected obligations, consisting of only 10,350 AF of long-term supply to meet 35,000 AF of annual obligations projected by 2015 and 136,500 AF projected by Therefore, approximately 125,000 AF of new water supplies is needed by CAGRD over the next 20 years to meet its obligations. Considering CAGRD's significant shortfall of supplies, the perpetual nature of water acquisition activities and the high level of impact to CAP and its customers, an adequately staffed and well funded water supply acquisition program is essential for success. The number of full-time equivalent employees (FTEs) currently dedicated to water supply acquisition efforts is insufficient to support the level of effort necessary for a successful acquisition program. CAGRD currently has one FTE dedicated to water acquisition, with one additional FTE budgeted to begin in the third quarter of Water supply acquisition is inherently complex and labor intensive, requiring extensive negotiations, contract development, regulatory approvals and due diligence to support each transaction. Work load complexity, coupled with the need to pursue multiple assets simultaneously from a pool of several hundred potential sellers, will require additional manpower over and above current staffing levels if CAGRD hopes to acquire 125,000 AF of new water supply by This Page 2

3 business plan recommends: (1) hiring up to three additional FTEs dedicated exclusively to water acquisition, only one of which is in the current approved budget; (2) creating an interdepartmental team to provide program support; and (3) retaining outside professional consulting services to provide technical support in specialized areas where CAP lacks inhouse expertise. Implementation of a water supply acquisition program has no direct financial impact on CAP and is revenue-neutral to CAGRD. CAGRD revenues are generated exclusively from its members and, by statute, must be maintained separately from other CAP funds. As a result, water acquisition expenditures will have no direct impact on the CAP budget. The CAGRD Infrastructure and Water Rights account holds funds available for water right acquisition, infrastructure, staff wages and consulting costs. The current fund balance of $23.5 million is projected to increase to $63.5 million by the end of The approved budget assumes the entire fund will be spent to cover the costs of water supplies, consulting services and staffing costs. Under the proposed water supply acquisition program, any additional staffing and consulting costs associated with water acquisition activities will be paid from the Infrastructure and Water Rights account. This will slightly decrease the funds available for purchasing new water supplies, but in itself will not result in any increase in CAGRD rates. 2. Requirement to Acquire Water Supplies 2.1. Statutory Requirement In 1993 the Legislature created a groundwater replenishment authority to be operated by the Central Arizona Water Conservation District throughout its three-county service area. ARS et seq. Membership in the CAGRD is voluntary. Any city, town, water company, subdivision or homeowners association located in Maricopa, Pinal or Pima County may join the CAGRD simply by demonstrating that it meets the statutory requirements for membership. By law, CAGRD is required to replenish groundwater in an amount equal to the replenishment obligations of its members CAGRD Plan of Operation Pursuant to ARS C, the CAGRD is required to prepare and submit a Plan of Operation every ten years for approval by the Arizona Department of Water Resources. Among other things, the Plan of Operation must include: (1) an estimate of CAGRD's Page 3

4 projected groundwater replenishment obligations for the next 100 years for current members and members that are projected to enroll in the next 10 years; and (2) a description of the water supplies that CAGRD plans to use to meet its replenishment obligations for the next 20 years and the water resources potentially available to CAGRD during the subsequent 80 years. CAGRD must submit its next Plan of Operation no later than January 1, CAP Board of Directors Guidance In 2010 the CAP Board of Directors adopted a Strategic Plan that included the following strategic objectives regarding CAGRD water supply acquisition: 1) Reevaluate the water supply acquisition program in the Plan of Operation (e.g., timing, types of supply and projected costs). 2) Aggressively acquire water supplies as outlined in the Plan of Operation. 3) Develop and implement revenue generation mechanisms (e.g., bonding, rates, fees) that are sufficient to carry out the water supply acquisition plan. 3. Water Supply Acquisition Plan 3.1. Water Supply Acquisition Study In March 2011, the Board authorized staff to conduct a Water Supply Acquisition Study to support the reevaluation of the water supply acquisition program in the Plan of Operation. A consulting contract was awarded to Montgomery and Associates to provide technical assistance to CAGRD staff to complete the study expeditiously. The results of the Water Supply Acquisition Study were presented to the Board in April The study involved four main tasks: (1) inventory and characterize the type and quantity of water supplies available for acquisition; (2) estimate the economic value of supplies; (3) recommend an acquisition strategy; and (4) recommend an acquisition implementation plan. The primary objective of the study was to address the Board's strategic objective to "reevaluate the water supply acquisition program in the Plan of Operation" to provide current, fact-based information to inform decision making for future water supply acquisition activities for the CAGRD. The results of the study give CAGRD the best available information regarding water supply availability, market valuations, and a recommended strategy to acquire 25,000 AF of supplies by In short, the study provides CAP with the technical tools and a "roadmap" for a well-informed, strategic water acquisition program to meet Page 4

5 CAGRD's statutory responsibility to acquire water supplies in a timely and cost-effective manner. The study did not address CAGRD's revenue stream and staffing requirements to implement the acquisition strategy Water Supply Needs CAGRD's replenishment obligations define the volume of supplies that need to be acquired under a water supply acquisition program. In its October 2011 "Mid-Plan Review," staff refined the obligation projections used in the 2004 Plan of Operation, which resulted in an overall reduction in obligations of about 30% as compared to previous projections. The actual CAGRD replenishment obligation for 2011 was 32,572 AF. The mid-plan review estimated that the replenishment obligation for current and future members projected to enroll under the current Plan of Operation would be approximately 35,250 AF by 2015, increasing to 136,500 AF by CAGRD's replenishment obligations may continue to increase due to future member enrollment under subsequent Plans of Operation; therefore, 136,500 AF likely represents the minimum volume of water supplies the CAGRD will need to acquire over the next 20 years to meet its statutory replenishment obligation. Today, CAGRD holds an entitlement to 7,996 AF of CAP M&I priority water and approximately 60,000 AF of long-term storage credits. CAGRD also has a 100-year lease for 2,500 AF of Non-Indian Ag (NIA) priority CAP water that will become available when the White Mountain Apache Tribe settlement is effective. This portfolio provides CAGRD the equivalent to about 10,350 AF of "permanent" (100-year) water supplies. Much of the water that CAGRD currently uses to meet its annual replenishment obligation is Excess CAP Water, the availability of which is determined annually. A CAP Board policy adopted in 2009 established a pool of up to 35,000 AF of Excess Water to be used for CAGRD annual replenishment purposes through Given the uncertainty regarding the availability of Excess Water after 2014, it is imperative that CAGRD's next Plan of Operation not rely on this source of supply. The Arizona Department of Water Resources is initiating a process to reallocate additional CAP NIA water over the next several years. CAGRD will attempt to obtain the maximum NIA allocation possible; however, because this is a regulatory process and not a market-based transaction, it is difficult to predict the amount of water that CAGRD might receive and whether the reallocation will occur by Page 5

6 3.3. Acquisition Strategy CAGRD's "target acquisition volume" of long-term water supplies is the difference between the volume of water supplies currently held by CAGRD and its projected replenishment obligation. The target acquisition volume to be acquired before 2015 (the near-term target acquisition volume) is 25,000 AF. Acquisition of that amount of water would effectively eliminate the current shortfall by the time the next CAGRD Plan of Operation is submitted. An additional 100,000 AF must be acquired between 2015 and 2035 (the long-term target acquisition volume) to keep up with projected growth in obligations. This equates to an average annual acquisition volume of about 8,300 AF per year over the next 3 years and 5,000 AF per year for the following 20 years, although it is unlikely that acquisitions will follow such a linear trajectory. Period WATER SUPPLY ACQUISITION VOLUME AND TIMING Annual Supply at Start of Period (AF/yr) Projected Annual Obligation at End of Period (AF/yr) Target Acquisition Volume During Period (AF/yr) ,350 35,250 25, , ,500* 100,000 * Based on projected enrollment for current members and members projected to enroll through CAGRD will follow these principles in acquiring water supplies: 1) Pursue a diversified portfolio of supplies composed of different water supply classes, including Colorado River entitlements, CAP water (NIA, Indian, M&I), effluent, long-term storage credits and imported groundwater. Supply diversity reduces the risk of over-reliance on any single source. 2) The volume and timing of acquisitions should seek to eliminate the shortfall in supplies by 2015, then align future acquisitions with the buildup in CAGRD's projected obligations. 3) Acquisitions will only be considered from willing sellers. Efforts will be made to identify and avoid or mitigate third party impacts, including environmental impacts. Page 6

7 4) Multiple acquisitions from different classes will be pursued concurrently. Rapid decision making will be necessary to compete in the market. The CAP Board will need to be engaged in and approve transactions. 5) Acquisition efforts will initially focus on the Tier 1 supplies that have been identified as being most promising and with the highest probability for a successful transaction. A combination of Tier 1 and Tier 2 supplies will be pursued for acquisition for the long-term target acquisition volume of 100,000 AF by ) CAGRD has a fiduciary responsibility to its members to acquire supplies at the lowest possible cost. 4. Program Organizational Structure 4.1. Description of Work The CAGRD water supply acquisition program will most likely require completing a large number of small transactions rather than a few large-volume acquisitions. Acquisitions will be complicated by multi-layered state and federal regulations and may also require development of new infrastructure. The specific tasks that must be performed will vary from one transaction to another, but in general the work will involve: Page 7 1) Researching and prioritizing acquisition targets. 2) Contacting prospective sellers and establishing relationships. 3) Negotiating price and other material terms. 4) Conducting due diligence analysis of the water asset under consideration to determine whether a successful transfer is feasible, to include evaluation of the validity of the water right, quantification of the transferable volume, owner/title verification, historic use, regulatory impediments and potential third-party impacts. 5) Analyzing or appraising the fair market value of the potential acquisition. 6) Determining the total costs associated with the potential acquisition, including purchase, development and delivery costs. 7) Negotiating and drafting appropriate legal instruments to document the transaction, such as a purchase agreement, option agreement, short- or longterm lease, fallowing agreement, etc. 8) Obtaining Board approval of the agreements.

8 9) Addressing public and third-party concerns such as environmental mitigation and socio-economic impacts. 10) Securing necessary regulatory approvals, including permits, transfer documents and NEPA compliance. 11) Completing financial closing. 12) Maintaining the CAGRD Water Asset Database Organizational Structure Staffing Water supply acquisition will be a full-time CAP activity for at least the next 20 years and quite possibly forever, ultimately resulting in the expenditure of $500 million to $1 billion or more. This work will be labor-intensive, complex, time-consuming and probably controversial in many respects. To ensure the ultimate success of this critical and nondiscretionary endeavor, it is essential that the program have adequate staffing and focused leadership. The Water Supply Acquisition Study identified 460 individual assets of which more than 100 were considered higher priority Tier 1 and Tier 2 assets. The transaction time needed to develop each asset is estimated to be one to five years, with longer timeframes required for effluent and Colorado River supplies. Because it is impossible to know in advance whether any particular acquisition attempt will be successful, staff will necessarily need to pursue multiple acquisitions of various types of supplies simultaneously. Overseeing this effort will require strong leadership and good project management skills. The next CAGRD Manager will need to give his or her primary attention to supporting the CAGRD Committee of the Board, implementing the strategic objectives and guiding principles established by the Board, developing the next Plan of Operation, and managing the day-to-day operation of the CAGRD. These activities will require extensive and time-consuming public outreach and stakeholder discussion and, quite likely, new state legislation. As a result, the next CAGRD Manager will not be able to devote sufficient time to the water acquisition program to insure its success. Accordingly, CAP should create a Water Supply Program Manager position to lead and direct CAGRD's water supply acquisition effort. The Water Supply Program Manager Page 8

9 would have overall responsibility for program development and oversight and would report to the CAGRD Manager. The FTE for this manager position would come from the existing CAGRD Senior Analyst position. The Water Supply Program Manager would be supported initially by a Senior Analyst, the FTE for which is already included in the CAGRD budget as of July Additional supporting FTEs would be added as needed over time. At present, it is contemplated that two additional analysts might be hired over the first twelve months, bringing the total Water Supply Program staffing to four FTEs by the end of These last two FTEs are not included in the current approved budget, but would be managed within the overall CAP FTE total during the current budget cycle Personnel Qualifications Due to the complexity of the work involved in negotiating and completing successful water transactions, staff should consist of experienced, self-motivated individuals with a wide range of education, skills and experience in such fields as economics, water policy, water resource and environmental regulations, hydrology, project management, Page 9

10 contracting, technical writing, negotiation and database administration. Ideally, these would be experienced individuals who do not require extensive training Program Support Interdepartmental Team The water acquisition program will require support from across the organization. It is recommended that an interdepartmental team be created to provide guidance, decision support and technical assistance to the water supply acquisition program. This group would be modeled on the interdepartmental steering team that advised the Water Supply Acquisition Study and would include representatives from Legal, Colorado River Programs, Finance, Engineering/Lands, Business Planning, IT/GIS, Communications, Resource Planning and perhaps other departments as well. A strong commitment from CAP's Legal Department to support negotiations, contract development and advise on state and federal regulatory issues will be particularly critical Outside Professional Services Qualified consulting firms would be employed as needed to provide support, especially during initial development of the water supply acquisition program. In the early phase of the program, consultants will provide the additional labor force needed to meet aggressive acquisition goals while CAP is assembling staff and developing the program. In general, consultants will be retained to provide technical support in specialized areas where CAP may lack in-house expertise, such as water right valuation (appraisals), NEPA compliance, hydrologic and environmental support for effluent recharge, environmental and legal due diligence assessments for land and water rights, Arizona Corporation Commission issues and groundwater modeling. 5. Financial Plan 5.1. CAGRD Financial Structure CAGRD revenues are derived from fees, water rates and membership dues paid by CAGRD members. CAGRD revenues are accounted for separately from other CAP funds and are used exclusively for CAGRD purposes, including water supply acquisition. CAGRD funds are maintained in four general "buckets" or accounts: Page 10

11 1) Administrative used to pay basic CAGRD administrative costs (salaries, benefits, overhead, conservation program). 2) Water and Replenishment used to pay the annual costs of delivering and storing water to meet CAGRD's ongoing replenishment obligations. 3) Infrastructure and Water Rights used to pay the capital costs of acquiring water supplies and developing infrastructure necessary to meet CAGRD's replenishment obligations, including associated administrative costs. 4) Replenishment Reserve used to pay the cost of establishing and maintaining a replenishment reserve of long-term storage credits. The Infrastructure and Water Rights (IWR) account is the funding mechanism for acquiring water supplies, including costs associated with these activities such as outside professional services and labor costs for CAGRD staff engaged in water supply acquisition activity. As of January 1, 2012, the IWR account held approximately $23.5 million. Based on current and advisory rates, an additional $40 million in revenues is expected to accrue to that account by the end of Spending Projections Estimated acquisition costs vary widely depending on assumptions regarding the volume and types of supplies to be acquired. Initial implementation of the water supply acquisition program will require coordination between CAGRD and Finance to forecast revenues and spending and characterize potential funding mechanisms that might be necessary to achieve acquisition targets Budget Impact The approved 2012/2013 CAGRD budget included the following assumptions: 1) Outside professional consulting services to support water acquisition would be $970,000 in 2012 and $695,000 in ) Staffing to support water acquisition would include 1.5 FTE in 2012, 2.0 FTE in ) All funds in the IWR account would be expended during the budget cycle for water acquisitions, wages and consulting costs. Page 11

12 The addition of two new FTEs, as proposed in this Business Plan, will have no impact on the CAGRD Administrative account but will result in a slight cost increase to the IWR account. 6. Action Plan Upon approval of this Business Plan, staff would take the following actions: 1) Brief Board of Directors on formation of program. 2) Develop staffing position descriptions, submit to Human Resources, advertise and hire staff. 3) Establish interdepartmental team. 4) Develop scope of work and prepare consulting services contract. 5) Prepare program work plan. 6) Coordinate with Finance to prepare cash-flow analysis. 7) Engage potential sellers, initiate negotiations, conduct due diligence on potential assets. 8) Continue ongoing water acquisition negotiations. Page 12