United States Department of the Interior

~,~JMENTOFTNE~

APR16 W98 LOE3~2~

U.S. Fish and Wildlife Service U.S. Bureau ofReclamation

Region 1 Mid-Pacific Region

911 N.E. 11th Avenue 2800 Cottage Way

Portland OR 97232-4181 Sacramento CA 95825-1898

Subject: Final CVPIA Administrative Proposal on Contracting Policies

Dear Interested Party:

In September 1995, the Department ofthe Interior(Interior) invited the public to identify their

concerns regarding implementation ofthe Central Valley ProjectImprovement Act (CVPIA). To

facilitate public input and discussion, Interior representatives held a series ofpublic meetings

between September 1995 and April 1996. During these meetings, 12 major areas ofconcern were

identified, and individuals volunteered to form work teams and discuss the specific issues pertaining

to those areas. In April 1996, Interior committed to the preparation ofan Administrative Proposal to

address the principal issues raised by stakeholders during the public forum and work team meetings.

To that end, Interiorcirculated two draft proposalsregarding contracting issues on July 1, 1998:

CVPIA Administrative Proposal, ContractingPolicies--Part A Discretionary v. Mandatory CVPIA

Contract Renewals and CVPIA Administrative Proposal, Contracting Policies--Part B, Contracting

Issues. Written comments were received from nine parties. The enclosed final Administrative

Proposal on Contracting Policies combines Parts A and B ofthe draft proposals and reflects key

comments received as well as previously raised concerns.

Copies ofthis final proposal can be accessed on the Mid-Pacific Region’s home page at

http:/wwiv.mp.usbr.gov or can be obtained by calling Ms. Alisha Sterud at 916/978-5195 or

TDD 916/978-5608.

Sincerely,

Roger K. Patterson

Director Regional Director

U.S. Fish and Wildlife Service U.S. Bureau ofReclamation

Region 1 Mid-Pacific Region

Enclosure
t

CVPIA ADMINISTRATIVE CONTRACTING

PROPOSAL POLICIES

INTRODUCTION

In September 1995, the Department ofthe Interior (Interior) invited the State ofCalifornia and

the public to identif~’ anyconcerns they had regarding implementation ofthe Central Valley

Project Improvement Act (Title XXXIV ofPublic Law 102-575) (“CVPIiA”). To facilitate public

input and discussion, representatives ofInteriorheld a series ofpublic meetings between

September 1995 and April 1996. During these meetings, 12 major areas ofconcern were

identified’ and individuals volunteered to form work teams and discuss the specific issues

pertaining to those areas.

In April 1996, Interiorcommitted to prepare “Administrative Proposals” to address the principal

issues raised by stakeholders during the public forum and work team meetings. To that end, on

lily 1, 1996, Interior circulated two draft proposalsregarding contracting issues arising from

Section 3404: CVPIA Administrative ProposaL Contracting Policies—Part A Discretionary v.

Mandatory CVPIA Contract Renewals and CVPIA Administrative Proposal, Contracting

Policies--Part B, CVPIA Contracting Issues. Written comments on the draft proposals were

received from 9 parties. This Administrative Proposal on the ContractingPolicies combines

Part A and Part B ofthe draft proposals and has been revised to reflect the key comments

received on the draft proposals as well as previously raised concerns. Responses to specific

comments are provided in Appendix A.

BACKGROUND

The Central Valley Project Improvement Act (CVPIA), Section 3404, “Limitation on Contracting

and Contract Reform,” addresses a range ofissues related to the contracting policies ofthe

Bureau ofReclamation (Reclamation) for watersupplies from the Central Valley Project (CYP).

Sections 3404(a) and (b) addressthe issuance ofnew contracts; Section 3404© addressesthe

renewal ofexisting long-term contracts.

SUMMARY OF ISSUES

This Administrative Proposal focuses on five distinct issues related to new and interim contracts

described in Sections 3404(a), (b), and Cc):

The 12 areas ofconcern are the following: conservation, contracting policies,

Anadromous Fish RestorationPlan (AFRP), management ofSection 3406(b)(2) water,

Restoration Fund, urban reliability, water transfers, refuge supply, San Joaquin River, Trinity

River, Stanislaus River, and the stakeholderprocess.

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• Restrictions on New Contracts—which refersto the specific statutory requirements in

the CVPIA (Section 3406(b)-Cd)) which must be satisfied before the Secretary can enter

into any newcontract other than contracts for fish and wildlife purposes.

• Interim Renewal Contracts—which addressesthe status ofcontracts up forrenewal

pending completionofthe CVPIA Programmatic Environmental Impact Statement

(PEIS).

• “Article Fourteen” Contract Amendments—which addresses the fourteen long-term

Friant Division contracts that were renewed between January 1, 1988, and passage of

the CVPIA in 1992 that have notyet been modified to reflect the statutory language of

the CVPIA.

• Implementation ofthe “Hammer Clause”—whichaddresses the surcharge imposed

by Section 3404(c)(3) to encourage early renewal ofcontracts.

• Mandatory Renewal—which addressesthe level of certainty ofrenewal ofthe

successive long-term renewal contracts for 25 years.

Restrictions on New Contracts

CVPIA Requirements. Section 3404(a) prohibits the Secretary ofthe Interior (Secretary) from

entering into any new short-term, temporary, or long-term contracts or agreements for water

supply from the CVP for any purpose otherthan fish and wildlife before a series of actions takes

place. One ofthese actions isthat the provisions ofsections 3406(b)-Cd) be met.

Slakeholders’ Views. Waterusers desiring new contracts have expressed concern that the

requirement ofSection 3404(a)(1) to meet the provisions ofSection 3406(b)-(d) is vague and

uncertain and will prevent the Secretary from ever offering anynew contracts for CVP water.

These water users believe that so long as new contracts are written and administered in

accordance with the CYPIA, there should be no policy reasons against offering new contracts.

Existing CVP contractors are concerned that new contracts could result in less water being

available for delivery to existing CVP contractors.

Others have suggested that new contracts necessary to meet “Area ofOrigin” needs shouldnot be

subject to CVPIA restrictions on the issuance ofnew contracts. These interests have further

suggested that if an exemption is not granted, then at a minimum, newcontracts to Area of

Origin waterusers should be given preferential status.

During workteam sessions, stakeholders apparently agreed to a partial approach under which

Interiorwould be asked to develop a set ofcriteria defining when actions required under

Section 3406(b)-Cd) would be considered as “met” for purposes ofsatisfying Section 3404(a)(l),

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thereby allowing the offering ofnew contracts. There was no agreementin the stakeholderwork

team, however, on the suggested Area ofOrigin exemption fromthisrequirement.

Interior’s Response. Interior agrees that there is a need to define the meaning of

Section 3404(a)(l). Although Interior does not presently intend to initiate any new water

marketing programs, Interiorrecognizesthat theremay be limited situations in the future in

which new contracts might be appropriate ifcompliance with Section 3404(a)(l) could be

demonstrated.

Interiorproposes to define what is meant by Section 3404(a)(l)’s requirementthat “the

provisions ofsubsections 3406(b)-(d) are met”. Interior hopes that draft criteria defining this

requirement will be available for public review prior to April 1, 1999. The stakeholder

community and the interested public will have an opportunity for meaningful input before such

criteriaare finalized.

Interior does not agree with the proposal for an Area of Origin exemption from section 3404(a).

Such an exemption does not appear, explicitly or implicitly, in the statutory language.

Interim Renewal Contracts

CVPIA Requirements. Section 3404(c)(l) prohibits the Secretary from renewing existing longterm repayment or waterservice contracts” ... until appropriate environmental review, including

the preparation ofthe [CVPIAPrograiYimatic Environmental Impact Statement (PEIS)], has been

completed.” Pending the completion ofthe CVPIA PEIS, the Secretary is authorized to execute

interim renewal contracts for an initial period ofup to 3 years, followed by successive renewal

periods ofup to 2 years as necessary. The interim renewal contracts are to be modified to

comply with existing law, including the provisions ofthe CVPrA.

Stakeiwiders’ Views. CVP Contractors have raised two broad concerns. First, there are

concerns about the scope ofsubstantive contract modificationsthat could be proposed for the

interim renewal contracts, andthe possibility that subsequent interim renewals could result in

reopening contract issues resolved previously. Contractors interpret Section 3404(c)(1)

narrowly, arguing that contract modifications should be limitedto provisions ofthe CVPIA

explicitly made applicable to the interim renewal contracts.

Certain Delta interests believe that the scope ofinterim contractactions should be broadened to

include a consideration ofrestrictions on use that would address drainage problems and Area of

Origin laws. Environmental groups believe that the CVPIA provides a broad opportunity to

review interim renewal contracts, including terms forthe quantity ofwatersupplied and the

mechanisms used for pricing water.

The second broad concern raised by CVP contractors is the potential expense and delay ofa

major interim contracts renegotiation processfor subsequent interim renewals. Environmental

3 April 16,1998
CYPIAADMINISTRATIVE CONTRACTING

PROPOSAL POLICIES

groups and Delta interests believe the contractors’ concerns are unfounded because, as a practical

matter, theparties to the interim renewal contracts are unlikelyto revisit or reopen major issues

every 2 years.

The workteam did not reach substantial agreement on these issues. Stakeholders did, however,

explore the possibility ofdeveloping a short list oftopics which would be reviewed during the

preparation ofinterimrenewal contracts. However, there was no agreement on what topics

properly belonged on the short list; the concept went no further.

Interior’sResponse. Interior notes that thesetwo concerns were addressed during the

negotiation ofthe first interim renewal contracts. A provision was included in those 3-year

interim renewal contracts to allow the contracting parties to agree in writing to simply renew the

interim renewal contracts for the subsequent period ofup to 2 years upon completion of

environmental documentation and associated public review and comment. Alternatively, either

party can find that specificprovisions need to be revisited before execution ofthe subsequent

interim renewal contracts.

Interior believesthat such a renewal provision adequately addressesthe issues ofrenewing

interim renewal contracts. Interior notes that 54 interim renewal contracts expired on

February 28, 1998. In preparation for those renewals, Interior determined that the “Water

Shortage andApportionment” article needed to be clarified. Contract negotiations with

representatives from the 54 contractors, on May20, 1997, led to agreement on the modification

ofthe “Water Shortage and Apportionment” article along with corresponding changes to the

“Opinions and Determinations” article. With those modifications and modest administrative

changes, such as dates and actions completed, the terms and conditions ofthe existing interim

renewal contracts will remain the same.

“Article Fourteen” Contract Amendments

CVPIA Requirements andBackground. Fourteen long-term Friant Division contracts

(hereinafter referred to asthe Friant-14) were renewed during the period between

January 1, 1988, and the passage ofthe CVPIA in October 1992. These contracts are the subject

ofcontinuing litigation and contain a contract provision which makes them subject to

modification under certain conditions. Section 3404(c)(l) specifically requiresthe Secretary to

amend these fourteen contracts to include a provision requiring “payment ofthe charge mandated

in subsection 3406(c) and subsection 3407(b) ofthistitle and all other modifications needed to

comply with existing law, including the provisions ofthis title. This title shall be deemed

‘applicable law’ as thatterm is used in Article 14(c) ofcontracts renewed by the Secretary since

January 1, 1988.” WhileInterior has not yet amended these 14 contracts, it has been collecting

the charges required by Sections 3406(c) and 3407(b).

Stakekolders’ View. Environmental interests contend that Interior needs to expeditiously amend

these 14 contracts. They contend that collecting fees does not constitute compliance with the

4 April 16,1998
CVPL4ADMINISTRATIVE CONTRACTING

PROPOSAL POLICIES

requirement to amendthe Friant-14 contracts andthat failure to amend the contracts makes it

difficult to implement certain environmentally beneficial provisions ofthe CVPIA (such as

tiered-pricing) in atimely fashion. They contend, therefore, that Interior’s actions are

inconsistentwith the goals and objectives ofthe CVPIA.

CVP contractors believe that amending these contracts at thispoint would require needless

expense without generating any significantenvironmental benefits. These contractors are paying

the applicable feesrequired by CVPIA, but believe that new amendment negotiations should

await the resolution of judicial and administrative issues on these contracts and on the CVPIA in

general, including the completion ofappropriate NEPA review. The stakeholders did not reach a

consensus resolution ofthisissue.

Interior’sResponse. Interior believesthat itmust amend the contractsin question as outlined in

Section 3404(c)(l) upon completion ofappropriateNEPA review. This will ensure that results

ofthe PEIS and appropriate divisional-level environmental review are considered prior to

amendment ofthe Friant-14 Contracts. Interior believes, however, that its approach ofcollecting

the applicable fees as described above is a legitimate interim measure. A timeline will be

established forrenegotiation which provides opportunitiesfor public involvement in the contract

amendment process.

As previously noted, the Friant-14 contracts are currentlythe subject oflitigation, Natural

Resources Defense Council et aL, v. Roger Patterson et aL, No. C’IVS-88-16S8 LKK. The

United States District Court entered its final order andjudgment on January 15, 1997, as

amended by a subsequentorder issued on April 16, 1997. The final order andjudgment declared,

among other issues, that the Friant-14 contracts were invalid as ofMarch 7, 1998. The affected

Contractors and plaintiffenvironmental organizations in the litigation have appealed the final

order andjudgment to the United States Court ofAppeals forthe Ninth Circuit.

Implementation ofthe CVPIA “Hammer Clause”

CVPIA Requirements. Section 3404(c)(3) imposes a surcharge on existing CVP contractors

who do not commit to earlyrenewal oftheir contracts. The surcharge, which is an additional

mitigation and restoration payment ofone and one-halftimes the payment calculated pursuant to

Section 3407(d) ofthe CVPIA, will be imposed beginning October 1, 1997. If the CVPIA PEIS

is not completed by October 1, 1997, however, the surcharge will not be imposed on any CVP

contractor who executes a binding agreement to renew immediately upon the completion ofthe

CVPIA PEIS.

Stakeholders’ Views. Contractorsfind it difficult to assess whether they should executethe

“binding agreement” to renewtheir existing contracts because the environmental goals and

objectives ofsuchrenewal contracts are not known at thistime. CVP contractors are concerned

that critical information, such as the applicable rules and regulations, may not be available for

S April 16,1998
CYPIA ADMINISTRATIVE CONTRACTING

PROPOSAL POLICIES

reviewat the time they enterthe binding agreement. The stakeholders did not arrive at a

consensus approachto this issue.

Interior’s Response. Interior acknowledges that delays in completing the PEIS have resulted in

CVP contractors having to make a decision on executing a binding agreement without having

complete information as to the results ofthe NEPA analysis and the contracting approach ofthe

United States. However, Reclamation’s proposed draft binding agreement allows CVP

contractorsto reconsidertheir “renewearly” decision once appropriate information becomes

known,subject to the statutory requirement to paythe additional mitigation and restoration fees.

On December 12, 1996, Reclamation released its draft binding agreement for public review and

comment. Substantial public comments were received and evaluated. The draft binding

agreement was revised in light ofthe comments and was mailed to CVP contractorsin late

August 1997 fortheir execution. All but one ofthe CVP contractors who were required to sign a

binding agreement have signed an agreement.

Discretionary v. Mandatory Long-Term Contract Renewals

CVPIA Requirements. CVPIA Section 3404(c) states, in relevantpart, that “the Secretary shall,

upon request, renew any existing long-term repayment or waterservice contractfor the delivery

ofwater from the Central Valley Project for a Period of25 years and may renew such contracts

for successive periods ofup to 25 year~ each.”

Stakeholders’ Views. CVP contractors are concerned about the language in Section 3404(c)

which provides that the Secretary “may” renew long-term repayment or waterservice contracts

for successive 25-year periods afterthe initial 25-year contract. The contractors believe that the

use ofthe word ~ creates uncertainty ofrenewal which is an unwarranted threat to their

future watersupplies and will cause them difficulty in arranging long-term financing orin

making long-term plans. The contractors raise the argument that renewal should be mandatory

because the CVP was formed and operates under the “trust” theory in which Reclamationholds

water rights in trust for and appurtenant to the lands held by landholders served by the

contractors and as a result the landholders are the “real” owners. Under this theory, Reclamation

should be required to renew contracts and any “reallocation” should be the result ofregulatory

requirements orarrangements made between willing buyers and willing sellers.

Environmental interests generally oppose apermanent right ofrenewal because that right would

“lock up” a substantial portion ofthe State’s water, making it unavailable for changing societal

needs. They believe that locking up this water in agricultural contracts also might encourage

inefficient use ofthe water, with potentially adverse environmental effects. Environmental

interests (as well as others, including some fishing and urban interests) also are concerned that

granting a permanentright ofrenewal to CVP contractors could grant both a permanent

6 April 16,1998
CVPIAADMINISTRATIVE CONTRACTING

PROPOSAL POLICIES

“subsidy” and apermanent “windfall” to these particular water users.2 Environmental interests

are opposed to these subsidies because they believe that charging less than full cost for water

encourages wasteful use. Further, environmental interests oppose granting apermanent windfall

to contractors because that windfall represents the “return” on a substantial public investment in

the CVP, whichthey believe rightfully belongs to the public, not individual contractors.

Some environmentalists acknowledge the need to have well-defined contract rights in order to

facilitate the emerging water transfer market and to maintain a stable farm economy.

Urban interests generally support guaranteed renewals.3 Urban CVP contractors believe that

guaranteed renewals for the agricultural contractors will lead to guaranteed renewals oftheir own

CVP municipal and industrial (M&I) contracts. Additionally, urban interests that are not CYP

contractorssupport guaranteed renewals for agricultural contractors because they are interested in

purchasing water from those contractorsfor long-term water transfers.

These concerns have led to a general urban consensus that any solution should facilitate water

transfers. This consensus has taken two forms. First, urban interests have expressed a desire to

have the “groundrules” well known,so they can negotiate with potential transferors with full

knowledge about what will happen at the end ofthe original 25-year renewal contract. Second,

some urban interests have expressed a more fundamental concern that restructuring the term of

renewal contacts to 25 years is not conducive to major water facilities planning efforts. That is,

urban water districts trying to plan facilities for future growth usually have at least a 30- to 50-

yeartime horizon (for financing and/cfr project management reasons). Relying on water transfers

to increase urban supplies is difficult ifthe water transfer contract is based on a contract for only

25 years.

It would be reasonable to conclude that there has been little progress on resolving this issue in the

stakeholder process. A draft discussion paper was initially prepared by a Reclamation participant

in the stakeholder work team, and was subject to at leastthree revisions. That discussion paper,

however, did not result in a proposed resolution. Substantial additional discussions have taken

place within Interior and more informally with the stakeholder interests, and these discussions

have led to the preliminary alternative proposal outlined below.

2 For purposes ofthis outline, the “subsidy” is the difference between the agricultural

contractprice and the full cost ofservice price (the difference being primarily that agricultural

contractors do not pay interest on the associated outstanding capital costs). The “windfall” is the

difference between the full cost ofservice and the fair market value ofthe water.

‘ Different urban interests attach different conditions to the guaranteed renewal. For

example, draft proposals submitted to Congress by one urban coalition supported guaranteed

renewals so long as price and quantity were negotiable.

7 April 16,1998
CYPIA ADMINISTRATIVE CONTRACTING

PROPOSAL POLICIES

InteriorResponse. Interior believes that this issue is one ofthe most important policy issues

facing the broaderCaliforniawater community. The need to develop a framework for water

contracting that addresses countervailing policy considerations — that is, one that provides

contractual arrangements allowing productive agricultural operations and concurrently avoids

improper limitations on future flexibility to respond to the changing California watersituation --

goesto the heart ofhow water management will be done in California overthe next century.

Interiorbelieves that the scope ofthis issue, which goeswell beyond the implementation ofthe

CVPIA, calls for a substantial public outreacheffort to assure that resolution is based on the best

analysis, not only by the interested stakeholders, but also by the broader business, financial, and

academic communities in California.

Public Outreach Effort -Advance Notice ofProposedRulemaking. Interior developed the

concepts in Section V, “Possible Solutions,” ofthe draft Administrative Proposal - Part A as a

public outreach effort. The public outreach effort included Interiorproposing to issue an -

“advance notice ofproposed rulemaking” describing the contracting issues and providing

alternative approaches for resolution. Interior focused on two particularareas ofconcern: the

shortage provisions and the development ofa contract renewal provision to be included in the

contracts. Interior’s draftAdministrative Proposal - Part A under Section VI “Next Steps”

emphasized that the proposals described in the “Possible Solutions” section are extremely

preliminary and offered for discussion purposes only. Interior further acknowledgesthat the

concepts presented are not the product ofthe Contract Policies workteam asthe work team was

unable to produce mutually agreeable potential concepts. The Administrative Proposal explains

that the concepts will be scrutinized in a rulemaking process, so asto enable the broadest

possible public participation and debate. The range ofcomments on thissection was very broad

and there was no consensus, except that commenters generally advocate that Interior withdraw

the “Possible Solutions” sectioit Based on the comments received, Interioris hereby

withdrawing the “Possible Solutions” section. Interior has decided these concepts should not be

addressed in this Administrative Proposal. Therefore, the issue ofsupplemental renewal of

contracts will be left to the discretion ofthe Secretary at the time ofcontract renex~’als for

“successive periods ofup to 25 years each.”

8 April 16,1998