Rising Cost of Imported Water Transcript

Beaumont-Cherry Valley Water District August 3, 2017, Workshop Transcript

3:00 Presentation by Jeff Davis, Manager San Gorgonio Pass Water Agency: “The Rising Cost of Imported Water”

Davis: I’m going to talk about things that I spoke to the Water Alliance about yesterday, Wednesday Night. I told them at the time that I didn’t like their title for the talk. They picked it, I didn’t pick it; The Rising Cost of Imported Water”. I want to talk about the cost of Imported Water whether it’s rising, whether it’s going down, or staying steady; I don’t know if we have enough data points at this point in time to know for sure. Certainly we know what the costs are based on some things that we’ve done recently. I do not have a powerpoint, I just want this to be an informal discussion with you. A couple reasons for that. One reason is, to be honest with you, I’ve spent the great majority of my time in the last several weeks trying to close yet another Water Deal that you’ve not heard about and I’ve just been so busy with that deal that I haven’t had a chance to put these thoughts into a powerpoint.

4:00 Davis: But secondly, even if it weren’t for that, I’m going to talk about some things that other people that might be in competition with us for water supplies, might be interested to know. And I know that anything I say here is obviously public records, but if you start putting power points together and things get forwarded to other people and other people find out and it makes it a little bit harder for us to do that because other people may be going after the same water supplies that we are. I want to talk about several different types of water; you might want to take some notes. When I spoke to the Alliance we had a big white board and i put this on a white board. First I want to talk about our ‘Table A Water’, which is water that we get from the State Water Project. We call it Table A because it’s a number that comes from Table A that’s attached to our State Water Contract. That’s the water we have Water Rights to, but we don’t get all that water every year, in fact we almost never get all that water. This was the wettest year in history and we’re only getting 85% of it.

5:00 Davis: Table A Water is a water right. I want to talk about the cost of that water. The Fixed Costs of the water is to take the fixed cost we send to Sacramento in any given year and divide that by 60% of that Table A amount, which is the average amount. So this year, 2017, we’re sending about $19 Million to Sacramento to pay for our Table A Amount. It has nothing to do with getting the water here, it’s just the fixed costs, service, operation, and maintenance by the State Water Board for the Project. Our Table A amount of water is 17,300 acre/feet. You multiply that by 60%, you come up somewhere in the neighborhood of $10,300, $10,400 acre/feet, and I can round all the numbers off. You divide those numbers out; $19 Million divided by $10,300 and you come up with about $1,800 per acre foot fixed costs.

6:00 Davis: That’s the number I want you to keep in mind; $1,800 per acre/foot for Fixed Costs of Table A Water. The actual amount that we’re going to pay is going to change every year. This year it’s going to be a little bit less than that because we’re getting 85% not 60% [of the water allocation]. We know that $1,800 is going to go up between 3% to 3 1/2% every year going forward. It will start coming down after 2029. We have some big balloon payments that we have to make in 2026, 2027, 2028, and 2029. After that, in 2030, it will come down considerably. In 2032 it will come down a little more, in 2035 it will come down considerably because we’ll pay off a lot of Bonds. But between now and 2030, what’s that - 13 years? It’s going to go up 3% to 3 1/2% per year. There are some advantages and disadvantages. In talking to general managers of water agencies around here; they like our Table A Water.

7:00 Davis: You can write a Will-Serve Letter on Table A Water because that’s actual ‘water rights’. Well, that is true to an extent; it is a water right. However; it’s not a 100% water right. In 2014 we only got 5% of that water. Yea, we have the ‘right’, but depending on the hydrology; you might not get a large part of it. I think the Table A Water is important, but I think we need to get other sources of water besides that Table A because that water that comes through the Delta is just not that reliable and it’s going to become less reliable as the climate changes and as regulatory agencies get more aggressive about this, it’s just going to happen. In 2014 when we got 5% of our water we paid on a per acre foot basis about $13,000 for every acre foot of water for fixed costs.

Board: Can you Certify a WSA with Table A Water?

8:00 Davis: It has been done throughout the State, all over the State for decades. So the answer to that question is ‘Yes’. But you have to watch it in the dry years. If you read our Urban Water Management Plan we say that we have trouble in dry years. We, as an Agency, has to go out and find additional water supplies for dry years, which is what we just did and we’re going to do some more. So $1,800 an acre/foot before it going up 3% to 3 1/2%, Not 100% reliable. 60% reliable, some years it’s going to be less, some years it’s going to be more. I think the reliability in the future is probably going to stick around 60%, I don’t think it’s going to go up. We’re going to do the Twin Tunnels Project, you might have heard. Also known as ‘Cal Water Fix’. That’s basically going to keep the water reliability at 60%. If we didn’t build that Project, we think the reliability would go down to under 50%.

9:00 Davis: Table A Water without the Cal Water Fix would actually decrease in reliability over the years. So clearly; water agencies that depend on Table A water have to find additional supplies. We know that, you know that. We’ve been trying to do that for a number of years. Let’s go on to the next type of water that I want to talk about and that’s the water deal that we recently closed. I think that may be the main reason why Dan invited me here today. That’s for water that I’ll refer to as the Nickel Water because it came from the Nickel Farms. James Nickel, who’s the head of Nickel Farms, is the great-grandson of Henry Miller. Essentially what Nickel Farms did was monetize some of their water rights, their Kern River Water Rights.

10:00 Davis: What we call ‘Pre-1914 Water Rights’. You can’t take them away. By law, they’re good. So the Nickel Family has pre-1914 water rights and they went to the Kern County Water Agency and they wanted to basically turn water into money. They went to the Kern County Water Agency and said: “We will give you all of our Water Rights in exchange for 10,000 acre feet of Kern County Agency Water in perpetuity. And Kern County jumped at that because they wanted the pre-1914 water rights. It’s better than Table A, you don’t have to go through the Delta, you don’t have to worry about a fish problems. You still have wet years and dry years in the Kern River, but these water rights are really good.

11:00 Davis: The Nickel Family took those 10,00 acre feet from Kern County Water Agency, which is 100% reliable, and they started selling it off to various entities. And they sold it off to one entity, which sold it off to another entity, which sold it off to another entity. And we just bought, or should I say long-term lease, 1,700 acre/feet of that water. We got 1,700 acre feet of water per year for the next 20 years starting this year. [January 1st] We leased this from another Water District, the Antelope Valley, East Kern Water Agency (AVEK) had the rights to them. They own the rights to 1,700 acre feet. They still own it, we leased it for 20 years. When we started talking to AVEK they offered us the water for five (5) years.

12:00 Davis: I said absolutely not. I said my customers, including you my biggest customer, can’t do anything with five years of water, we can’t issue Will-Serve Letters, we can’t do anything. So with that I said that we can’t do anything for less than 20 years. And they swallowed hard and they came back and said ‘okay, we’ll offer you a lease of 20 years’. And I said; you know what? I’d like more than that. I would like the opportunity to renew that in 20 years for another 20. And they said ‘okay’ to that. So we have 1,700 acre feet per year for 20 years, from 2017 to 2036 with an option to extend it for another 20 years. I should say that it’s not an ‘option’, it’s a right of first refusal. So after 20 years AVEK could decide to take the water back. I don’t think that they will because they have 144,000 acre feet of Table A Water. They literally have more Table A water than they need.

13:00 Davis: We have the right to renegotiate in 20 years for what the cost will be for the next 20 years. We have the right of first refusal, so I’m pretty certain we have the water for 40 years. The cost of that water, it’s a fixed cost, so there are certain fixed costs associated with that water. Some of those fixed costs go to the Nickel Family, or I should say the Kern County Water Agency, and some of it goes to AVEK. I won’t go through the complicated math, but it’s $1,021 per acre foot for fixed costs of that this year, $1,021.

Board: Is that through the 20 years?

Davis: No. That does have an escalator cost that will go up every year at least 3%. So what the Agreement says is 3% OR the Consumer Price Index for L.A., Orange, and Riverside Counties, whichever is greater. I suspect that 3% is going to be greater than the CPI for the next several years.

14:00 Davis: So again, the Table A water’s going up 3 - 3 1/2% per year, so the Nickel Water goes up 3 1/2%, so in 20 years you’ll still have the same differential. Table A water is going to be more expensive than the Nickel Water. The Nickel Water is 100% reliable. Dry year, wet year, it doesn’t matter. The only thing that would keep us from getting that water would be literally if there was an earthquake or terrorist act and the Aquaduct went down, so in that case we’re not getting any water. But the water supply is 100% reliable for 20 years starting this year.

Board: Do we have capacity in EBX2 to move that water?

Davis: No issue with that.

15:00 Board: After the first 20 years, you’re saying there’s an option we have, but just because we exercise it that they may not accept it. Is that what you're saying?

Davis: No, it’s not an option, I backed off on the option. It’s a ‘Right of First Refusal’. After 20 years Antelope Valley’s Water Agency decides ‘do we want to lease this out again, or do we want to bring that back?’. If they bring it back, but they have to give us a years’ notice. But if they do want to continue to lease it out we get first choice.

Board: We’ve got 20 years and we ‘could’ have another 20 if they decide they want to exercise the lease again we have first right to match anybody’s offer?

Davis: We absolutely get first right and the only reason we would not take that right - I can’t image we wouldn’t unless we had 1,700 acre feet from some other cheaper source.

16:00 Board: You said that we have more Table A Water than they can deal with, right? So why didn’t you try to get some more?

Davis: The answer to that question is we did.

Board: Yea.

Davis: So with the Cal Water Fix some of the water agencies may, in order to pay for the Cal Water Fix may decide to sell their Table A to other State water contractors. In fact I know that some are interested in doing that and Antelope Valley might be one of them that would be willing to do that. They’re not going to do that now, they’re going to wait and see how the Cal Water Fix impacts them. The 1,700 acre/feet of water, my Board; we’ve signed that deal. We have the water. This year all I need to do is schedule when we’re going to deliver that water. So my Board still hasn’t figured out how we’re going to finance that water. We made the deal without knowing how we’re going to finance it.

17:00 Davis: We can finance it in two ways. A: This water makes our Table A supplies more reliable for the people that live here today because we have that dry year yield, we have another 5% year, we have a good amount of water to make up for that. So we would take this fixed costs, this additional $1,000 acre/foot and roll that into our water rate and ‘just' raise our water rate to pay for it. The other thing we could do because it’s a 20 year supply; we could say; does someone want to purchase 20 years of water so they could get a Will-Serve Letter for a certain amount of houses. So that way the deal would be a little more complicated, but essentially we would accept money from ‘somebody’, could be a retailer. It wouldn’t be a developer directly, it would be through a retail agency, such as yourself, and some amount of water each year would be reserved for that particular development.

18:00 Davis: So that’s another way we can sell that water so we can get some money upfront for, let’s say a developer wanted 500 acre feet of that water for the 20 years and there would be a certain dollar amount for 500 acre feet and give us a check so you have those 500 acre feet of water for 20 years. The Board has not yet decided how they want to do that, either one of those can be accepted, or you can have some combination of both. So the Board has asked me to discuss this issue with all the retail water agencies in our service area. As long as the money is green I don’t care if we roll it into our rates or sell it to development or whatever.

Board: Is the 1,700 acre feet still on the table, all of it?

19:00 Davis: Yes. Nobody’s claimed any of it yet. I think you guys go about 1/2 acre per house? Okay, but in round numbers in your service area, 1,700 acre feet would be enough for, round numbers, 3,400 houses. [talking off microphone] Okay, alright, I’ll leave that to Dan. Anyway, the Board’s open to doing that either way. We need to make a decision soon because we’re going to get a bill for $1.7 Million pretty soon. Anyway, I think the bottom line for you to understand it that’s a great deal for my Agency and for you and for everybody in this Region.

20:00 Davis: $1,000 per acre foot for 100% reliable water. I don’t care if it goes up 3% a year, State water is going up 3% a year too. It’s a great deal. I’m getting emails, people in Sacramento are shaking my hand “Jeff, how did you make that great deal?” “What a screaming deal for you guys, how did you - and you didn’t have to pay the water tax they have to pay in Kern County and you got around ..??” I’m not saying that because it’s ‘kudos’ to me, I’m saying that because it’s a great deal. Everybody understand that it’s a great deal. The only difference in the Table A water and the Nickel water is that the Table A Water is $1,800 per acre/foot, that’s being paid for in property tax, it’s not in our water rate. What’s in our water rate is basically the cost of moving it. So we’re basically subsidizing the Table A Water with our tax rate. You can’t do that with Nickel water because it’s not part of the State water project. You’ll have to pay for it some other way.

21:00 Board: I have a comment on how you would put this in the fee structure or manage it. I would say that probably the less complicated or most transparent, easiest way, is probably always the best way. It’s more convenient for you guys to do it all in-house and maybe you should consider that. If it’s easier for you guy to - I don’t even know how it works really. But it seems to me that would be the best course to take. Most transparent, less harsh, the easiest way.

Davis: Yea, we’re open to doing it whatever way. We certainly want to hear from our customers, what our customers want.

Board Covington: Is that a take or pay contract?

22:00 Davis: That is a take or pay contract. If somehow we didn’t take the water, we’d have to pay for it anyway. The way the contact is written; for whatever reason we couldn’t take the water we’d still have to pay for it because AVEK has to pay for it. But what we would do if we couldn’t take it we would put it in AVEK’s groundwater bank and we would take it the next year. We wouldn’t have to pay the full freight for the water if we leave it in the groundwater bank.

Board: So for 2017 it’s possible that it might get banked up.

Davis: That’s one, it could get banked up there it could get banked down here. Next I want to talk about; managers really like - they say ‘Jeff, go out and get more Table A, that’s what we really want because we can legitimately issue Will-Serve Letters on that’. Again, they’ve been done all over the State.

23:00 Davis: We’re certainly in the market for additional Table A water for contractors as well. As the Cal Water Fix moves forward in the next year or two I think there’s going to be more Table A water for sale from other contractors. We would tend to be buyers in that market. We are negotiating a deal right now for additional Table A water, I’m not in a position to say how much or what the cost is per acre foot. Table A Water Rights are averaging about $6,000 per acre foot. You can’t compare the $6,000 per acre foot to the $1,800 or $1,000 per acre foot because it’s a one-time cost, it’s not every year. You buy the right say at $6,000 per acre foot and you’ve got that right forever. However that’s not the total costs because when you buy Table A water from another contractor there’s a one-time fee.

24:00 Davis: You have to go back and pay transportation costs going back to the 1960’s, so that adds a few hundred dollars per acre foot. And then since we’ll own a larger percentage of the State contact; our taxes will go up every year as well. So there’s an additional annual costs that we’ll pay in our taxes, but the one-time costs is in the neighborhood of $6,000 per acre foot, so we’re looking at doing that as well. I think that over the long term, let’s say between now and 2025 - 2030. Right now our Table A amount is 17,300 acre feet. I think I’d like that to be up in the neighborhood of 23-25,000 acre feet.

Board: I’ve been reading the past few years that Indian Reservations have their water rights and in the future may sell some of their water rights. How does that work for all of us here? Is that something that’s been a concept?

Davis: I don’t that issue, that’s a really heavily legal issue. I know that the biggest part of the State where that’s an issue is down in the Coachella Valley where there’s litigation going on right now between the Aqua Calientes and the Desert Water Agency and the Coachella Valley Water District over the groundwater in that Basin. I don’t think it’s much of an issue here in our area because you don’t have Native Tribes that have lots of water rights here.

Board: Could we in the future purchase water rights from other Tribes?

26:00 Davis: We would certainly be in the market to buy water from whoever is selling it. I’m more concerned with getting ‘wet water’ than getting cheap water.

27:00 Davis: Sometimes if you get cheap water, there’s no water. Cheap prices, you have to look at the prices out there. $1,000 acre foot is a ‘screaming deal’ compared to the $1,800 you’re paying. I’ll talk to Dan, but the prevailing opinion of managers is that they want us to find more Table A water. It’s easy to say they have this water right for the Region and we can issue Will-Serve Letters. Again, it’s not a cure all because there’s going to be years when you get 5 or 10% of that. In the years where you get 5 or 10 or 15% or 20% - what are you going to do? Obviously you have to pull water out of storage or somewhere else to keep those houses that you Issued Will-Serve Letters to in water.

28:00 Davis: Our Board wants to be fair to Ratepayers such as the BCVWD that buys our water and they also want to be fair to the Taxpayers that are heavily subsidizing that water rate. So if we were to go out and procure additional Table A water and that’s used so the new houses can be built; the thing about buying more Table A water, because it’s part of the State Water Project, we could buy that with our tax rate. Not the Nickel Water, but Table A water. If we do that then it’s everybody’s taxes. Everybody that pays in, which is every property owner in our Area is paying into that, to buy new houses for some subset of people. Is that fair to everybody else, the other taxpayers who have been paying this since 1960 to use their tax dollars to buy this new water that’s going to be used for growth here.

29:00 Davis: The issues my Board is going to be struggling with as we move forward at looking at more deals to buy Table A water is that we might not want to fund it with property taxes. We may want to look to fund it with Developers Fees or something like that to make it more fair to the taxpayer.

Board: you stated that the water was there. We just went through a very long drought situation. How can you state that you will have 1,726 acre feet a year if everybody is and all the groundwater is in such a drought?

30:00 Davis: Right. So the 17,300 Table A water, yea - you don’t get that every year. In 2014 we got 5%. The plus is that it’s a water ‘right’. The negative is that you don’t always get a fraction of that water right. If we were to calculate how much Table A water you need for one house, use for example .6 acre feet per house. If the water’s only 60% reliable you might not want to use .6 acre feet per house, you might want to use 1 acre feet per house or 1.2 acre feet per house to account for some years when you have a drought. So that would be up to you at the retail water level as to how many acre feet you think is required for each individual house recognizing that most years you’re going to get a lot less than your 17,300.

Board: Is this supposed to be paid in advance? Do you pay as you get your 5%?

Davis: The fixed costs are the same every year whether we get 5% or 85%, we cut the same checks to Sacramento. That’s a fixed cost no matter how much you get.

31:00 Davis: Every year we get a statement of charges telling us in 2018 we’re going to pay x number of millions of dollars to Sacramento and we’re going to pay exactly the same amount whether it’s a 100% year or an 80% year or a 10% year or a 0% year.

Board: That’s the $19 Million ?

Davis: This year it’s $19 Million, that’s right.

32:00 Davis: We don’t want just Table A water. That’s not good water planning, that’s not good for you, our customer. What happened in 2014 when we had a 5% that year; we could barely supply you with any water at all. So we need to have other supplies besides Table A water. We need more Table A too, but we need other supplies and this Nickel water is our first foray, actually our second foray into other water supplies. We also get what we call ‘Yuba Water’, but that’s only about 300 acre feet per year. There’s other types of water purchase you can make. There are some pre-1914 water rights out there that I think are going to be for sale in the next six months. I’ve had a conversation with one of the managers of an agency that has that water for sale about three months ago or so now and we promised that we’d keep in touch.

33:00 Davis: We’re looking at all different types of water. In addition to the Nickel water deal that we just completed, I am in various stages of negotiations on six (6) separate deals for all different kinds of water. Some Table A, some excess surplus water, some groundwater that’s from various places, some pre-1914 water.

34:00 Davis: The last thing I want to talk about is Sites’ Water.

Board: Can you tell us about the cost of those other waters?

Davis: We haven’t gotten to cost. The only thing I can say is that the way it looks to me; the price that we paid for that Nickel Water looks to be pretty close similar to other types of water.

Board: And would that be similar quality?

35:00 Davis: It would be the same quality as the State water, the only way we can get it here is to put it in the Aqueduct. And we can not put any water in the Aqueduct that’s a lower quality than the State Water Project.

37:00 Davis: I want to talk about the price of Sites Water. You are in the process of investing and we don’t have a cost sharing agreement signed by both parties yet, but I think we will very shortly. So you will have 4,000 acre feet of an investment at Sites’ Reservoir. We will have a 10,000 acre/foot investment. Whether that ends up being 4,000 or 10,000 or something less, we don’t know that right now. Sites Reservoir is looking more and more like it will get constructed. It’s not a guarantee. Both you and we are investing in something that may or may not get built. Every month that goes by I’m a little bit more sure that it will be built. There’s enough investors that basically that if the State didn’t participate at all through Prop 1 we’d still have enough investors to build the project.

38:00 Davis: The numbers that they’re talking about for Sites Reservoir is in the neighborhood of $600 per acre foot. I think it’s going to be more than that, but those numbers have been published. And this is in 2030, so it wouldn’t be available until 2030. Assuming it gets built, that will be a ‘sweet deal’ for you and our Agency. It will turn out to be a very sound investment on your part. That’s part of our portfolio.

40:00 Davis: The Project itself, the Sites Reservoir will be owned by a Joint Powers Authority, but the ownership of the water will be split among the investors. We will be one and you will be sort of under our wing. Our investment would be partly ours and partly yours, but it would just be in our name. Sites is great, but it doesn’t get here until 2030.

41:00 Davis: Other State water contractors might be willing to sell a portion of their Table A water is because when the Cal Water Fix gets built it’s going to raise everybody’s cost, right? Because you’ve got to build this new facility, that’s going to go into your debt service, your fixed costs for the State Water Project. A lot of these guys, agricultural contractors who pay for everything through the cost of the water, they don’t pay with property taxes, are going to struggle - it’s going to double their prices. They may not be able to make a living.

42:00 Davis: They may want to sell their Table A rights to lower their additional costs.

Board: Is it possible to get some of this in writing?

43:00 Davis: The folks that are would-be sellers of that are very reluctant to admit that they’re going to be sellers. They don’t want to say that, but everybody knows they will be. [Davis snickers]

44:00 Davis: The deck is stacked against water agencies in the State. Environmental laws, climate change, SIGMA, regulatory and issues related to fish; the deck is completely stacked against us and yet we still have to go out and find water for our customers. We have no other choice. We have to find it wherever we can find it, and most of that is going to be south of the Delta.

54:00 Davis: What Prop 1 says is that any environmental for these projects have to be approved by 2030, the Reservoir has to be online by 2030. It takes a long time to build these projects so if in June of 2018 the California Water Commission comes out with Sites Reservoir is going to get x number of dollars; that leaves it up to all the investors and the JPA to say; okay, are we going to move forward? Are we not? Here’s how much money we’ve got. And we need to start moving forward with the Final Design and all the Permits, there’s about a dozen different Permits that you need to get.

55:00 Davis I and a number of other State water contractors are moving forward and taken a lot of the responsibility of really moving these environmental documents forward. How exactly they’re going to fund it? They’ll sell bonds. When they get to the construction; obviously they’ll sell bonds,, but there may be a number of different ways to fund it. Water sold out of the Reservoir would pay for some part of that, but in dry years there may not be quite as much, so you need to make the bond payments. So they may have some ‘Storage Fee’ to pay so much an acre foot to store it, or if you carry it over from one year to another - another fee. How it gets funded, exactly, it’s a little bit down the line. We’re not talking about the $600 per acre/foot - that would be all those ‘Fees’ together; buying the water and storage fees or whatever. Together the thinking is that the estimate is about $600 per acre foot.

56:00 Davis In 2018 we’ll find out for sure. We’ll make a final decision on moving forward, but I think that enough people have come to the table and said ‘we want to invest’ that if we got zero money I believe there’s about an 80% chance the Project could get built anyway because there’s enough different folks that want to invest that are willing to pay the money.

Board: How much are we currently paying per acre foot?

Davis: How much are you paying us? Currently you’re paying $317 per acre foot, which is basically the cost to pump the water here. That’s just the Water Rate. Your Taxpayers are paying Property Taxes [to pay the $19 Million/year Fee]. The water that we sell you we send you a bill for $317 per acre foot.

Board: So the 1,700 acre feet from Antelope would be $1,021?

57:00 Davis: Yea. Roughly. So we have to find a way to roll that in. We wouldn’t add $1,000 per acre foot to our water rate because that’s a small portion of the overall water that we sell. But the water rate might go up - I don’t even want to say. I would go up. It wouldn’t go up $1,000, it would go up some amount. We would have to hire a consultant to do a rate study. Everything would be completely transparent, we’d hold public hearings, we’d invite you and your staff to come to provide input on the rate and the Board would adopt some kind of a fee structure.

Board: Since you guys are getting this water anyway; are you going to be raising the current $317, or is it going to be mixed in to that with the water coming in?

Davis: I think it’s likely that we’re going to have to do that. The alternative would be that some group of Developers needed 1,700 acre/feet of water per year and it could end up being paid for totally with Developer Impact Fees so it wouldn’t raise the water rate.

58:00 Davis: But then the water wouldn’t be going to help the people that live here today, the water would be going to the new houses. We don’t want to raise the rate for new water, but you don’t want to get increased reliability either because all that water would end up going for growth. It’s a philosophical issue; what do you do with the water? Do you use it to make the existing water supply for the people that live here today more reliable? Do you use it so you can build more houses? Or some of each? There’s no right or wrong, it’s philosophical. How do you want to do it.

Board: Hypothetically; the other option is that we pause on the Will-Serve Letters until we figure out a solution.

Davis: Yea, that’s obviously at your discretion. We’re not going to get involved in that.

59:00 Davis: But we need to make that decision really soon. We’re going to get this bill for $1.7 Million, so the Board doesn’t want - we have the Reserves to pay that, but we don't want to wait months and months to make a decision. We need to move forward on this.

Board: Can you remind me who else is your customer?

Davis: Right now there’s seven (7) Retail Water Agencies in our service area, but only three (3) are currently purchasing water. You are one, the City of Banning is one, and the Yucaipa Valley Water District.

Board: And the other four, where are they getting their water from?

Davis: They’re just pumping groundwater right now. They’re pretty small, so they don’t pump a whole lot of groundwater.

Davis: That’s all I wanted to say about Sites. You haven’t cut us a check yet, but you will shortly I think because we’re going to have a cost-sharing agreement. I think it’s important that you understand.

1:00:00 Board: Because we’re the largest purchaser, would our increase be the bigger chunk for the water you just purchased [Nickel]?

Davis: We have an Ordinance that defines the priorities of who gets the water. Based on that list of priorities; you end up getting most of the water because you need it more. The rate would be consistent with that. I don’t see the Board going to a point where we’re charging different rates for different customers.

1:01:00 Davis: You’re taking by far the largest quantity.

Board: So that 1,700 acre feet you’re taking, if not now, there’s other deals in the making that likely will still play out to be about the same costs?

Davis: I am ‘virtually' sure of that. Virtually 100% certain.

Board: My concern is that when we’re looking at purchasing water; right now on an average I believe since 2007 we have traditionally pulled about 4,000 acre feet a year out of our Storage Account, so we are in a decline [Overdraft] with regards to our storage account even though we stored over 9,000 acre feet last year. Historically we’ve only stored about 3,000 acre feet, and I’m going off the Watermaster report.

1:02:00 Board: My concern is for sure to protect the people that live here now, the ones that have been here and have paid the Debt Service and have paid this Agency for all of its endeavors and all the Capital that they’ve invested in here. We need to concentrate on backfilling our water debt most especially in our storage account, that’s not your issue, that’s our issue, before we even go down the road ..

Davis: [interrupts] Yea, a 5-year drought, there’s a hole.

Board: There’s a big hole. For some reason there’s a big hole to fill and I’m more geared towards protecting the people that are here now as opposed to bringing in new development while we still have this gaping hole to fill.

Davis: Yea. I haven’t talked to everybody, but that seems to be a strong feeling among people that I’ve talked to.

1:03:00 Davis: It wasn’t a big issue until the drought years ha ha ha. We had dry years and we had restrictions in the pipe, but those restrictions are gone.

Board: At the end of the day; our Storage Account is in a Deficit and it’s my vision to bring that out of a Deficit and start going back the other way.

1:07:00 Dan Jaggers: The Sites Reservoir is ongoing. We’ve got a draft agreement that’s sort of been in a holding pattern until we understand where we’re going to execute it. It might be you, Daniel, as President of the Board. We’re going through that right now to make sure we’re satisfied with it. We’ve already gone through it once and changed the language a little bit because the previous version pinned down acre/feet to the Class I and Class II Water and that’s changing. It’s more Class I water, more secure water. People are leaving the program and more Class I is becoming available, so it’s changing the percentages. We put that in a ‘not to exceed 4,000 acre feet’ column.

1:20:00 Jaggers: Well Head Treatment for Chromium 6 (CH6). That cost will go down substantially I think. The State Water Project purchase for the San Gorgonio Pass Water Agency for the Capacity Fees; as you could hear, things are somewhat in flux over there about how the charges are going to be levied. We need to get that figured out before we can really move forward, although the Sites Reservoir portion we have programmed in there also. I think the feeling at the time we programmed it was $1,000 an acre/foot, that was the original number we were talking about.