L.A. Bets on the Farm
Faced with unprecedented drought, the West's most powerful water agency is mixing Wall Street tactics and rice farm supplies to hedge against Southern California's risk of going dry.
LOS ANGELES, CALIFORNIA -- On the south edge of the Union Station plaza, in the heart of Los Angeles, a 12-story office tower stands swarmed by the constant stream of police helicopters that troop in and out of the L.A.P.D. air base a couple of blocks away. This is the headquarters of the Metropolitan Water District of Southern California, the most powerful water agency in the West.
On the first floor, in an expansive boardroom that evokes the ambience of the U.N. Security Council chambers, a ring of leather chairs waits for Metropolitan's directors, representatives of the 27 agencies in the Los Angeles and San Diego area that buy water from Met. Eighteen million people - half of California's population and one of every 16 people in the United States - get their water from Metropolitan. That water powers a $927 billion regional economy that accounts for 35 percent of the gross domestic product of the entire Western U.S. If its service area were a separate nation, Met would fuel the eleventh-biggest economy on the planet.
Metropolitan is the apparatus that has enabled Southern California to grow beyond the limits of its local water supply, and the agency's name has become synonymous with limitless power. Metropolitan pumps its water hundreds of miles, from the Colorado River to the east, and the Sacramento and San Joaquin River Delta, located far to the north. The agency has always been determined to control its future: In more ambitious times, Met's stealthy hand seemed to guide grand plans to pump water from even farther north, in the Pacific Northwest and Canada, to its dry corner of the West.
Yet Metropolitan now faces a gathering crisis, and beyond a tightly guarded front desk and a bank of elevators, the view from general manager Jeff Kightlinger's top-floor office is terrifying. This has been the driest year on record in Southern California. The Colorado River has been gripped by drought for eight years running. Snowpack in the Sierra Nevada, which feeds the Sacramento-San Joaquin Delta, was just 29 percent of average this year. And, in an effort to preserve the Delta's disintegrating ecosystem, a new federal court ruling dramatically cut pumping levels there. Next year, Metropolitan will have to ration water to its member agencies, raising the specter of a watery version of the California electricity crisis.
"It's amazing how fast things have moved. It's like being run over by a freight train," says Kightlinger. "We're being outstripped by the events and we can't keep up with them."
That crisis is, in broader form, one that the entire West will soon confront. Bedeviled by climate variability and change, water managers are struggling to provide a rapidly growing population with reliable sources of water. Surprisingly, Metropolitan may, in its moment of crisis, offer promising lessons for the rest of the region. Two decades ago, the agency embarked on a quiet endeavor to break out of the hidebound traditions of Western water, partnering with farmers spread throughout the length and breadth of the state and experimenting with increasingly sophisticated ways of managing risk. That effort - despite some mistakes along the way - is now helping Metropolitan counterbalance the rising uncertainties it faces.
Two hundred miles east of Los Angeles, in the Colorado River town of Blythe, Ed Smith runs the Palo Verde Irrigation District. He works out of a low-slung office whose interior is painted avocado green and has the grim '60s feel of a Civil Defense shelter. The creepy ambience is further heightened by a high-definition aerial image of the irrigation district - taken by a Soviet spy satellite in the waning years of the Cold War - that's tacked to the wall of the building's bunker-like boardroom.
"The scary thing," Smith says, "is that you can see - this supposedly came from Russian stuff, OK? - and look: You can see friggin' cars and trucks on the freeway."
Looking at the satellite photo, it is hard not to get the sense of the irrigation district in the crosshairs of an evil empire - even more so because several such images made their way into Smith's hands via Metropolitan, which has used the now widely available photos to assess the irrigation district's potential water yield.
Outside, the fields that appear in the satellite photo lie flat and lush, hemmed in by desert mountain ranges, jagged heaps of dusky slag that call to mind Luke Skywalker's home planet of Tatooine. After a five-mile trip over roads whose painted striping has warped beneath the ferocious sun, Smith stops his pickup at a dry field full of gigantic dirt clods. Earlier this year, the field was taken out of production. To keep the dust down from the fallowed field, "they wet it," Smith says, "and then go in there and disc it, it so it makes these big ol' nasty clods."
The cloddy field makes up a couple of the roughly 15,000 acres of ground that farmers scattered throughout the valley have fallowed to provide water to Metropolitan this year. It also represents the latest round in an ongoing and occasionally uneasy alliance between Met and farmers throughout the state.
In 1986, Metropolitan dispatched an emissary, a sometimes-pugnacious Ph.D. economist named Tim Quinn, to the Palo Verde Valley to cut a fallowing deal. The farmers' initial reaction was cold. One person close to the negotiations related that Quinn "set down with these guys like a schoolteacher, and got his little chalkboard out, and explained to them why they weren't making any money in farming, and why they should be just tickled to death to have Met come and save them and take their water."
Finally, however, after years of negotiations, the Palo Verde farmers agreed to test-drive the fallowing concept from 1992 to 1994. Farmers laid out about a fifth of their land - land they otherwise would have planted in alfalfa, cotton and melons - in exchange for $1,240 per acre, an amount calculated to cover what they would have earned had they used the water to grow crops, plus a little extra.
For Western water bosses, the standard denomination for water is an acre-foot: about 326,000 gallons, enough water for two families in the Los Angeles area for a year. Metropolitan got 185,000 acre-feet of water out of the deal - but not for long.
The agency stored the saved water in Lake Mead, upstream on the Colorado River near Las Vegas. But the winter of 1997 was so wet that it seemed likely the river would flood. To make room in Lake Mead for the coming floodwaters, the federal government emptied all $25 million worth of Metropolitan's water out the bottom end of the reservoir, from whence it flowed onward into the Gulf of California and floated away to sea.
For Met, the deal had not been an auspicious adventure, but it was hardly the end of the agency's pursuit of farm water.
In 1984, Carl Boronkay became Met's general manager, and he inherited a pledge the agency had made, 30 years earlier, to provide whatever water was necessary to supply the growing needs of Southern California. For decades, Met kept its pledge by importing water from the Colorado River and the Delta. But two years before Boronkay took charge, California voters defeated the Peripheral Canal, which would have been capable of siphoning the entire flow of the Sacramento River around the Delta and south to Los Angeles.
Boronkay set out to transform Met's thinking, and he soon hired Quinn, who had been working at the RAND Corporation, a Santa Monica-based public policy think tank. One of the first things Quinn did was analyze the reliability of Metropolitan's water supply. He delivered his findings to the board from behind an overhead projector - the first of many times that the Nebraska native would induce a little heartburn among those he dealt with.
"I compared our reliability to other sectors like electricity and telephones and natural gas, and all those places were virtually 100 percent reliable all the time," he says. "And it turned out that we were about 50 percent reliable.
"It caught the board's attention." But more important, Quinn notes, "it really energized where Boronkay wanted to go."
Spurred by a serious drought in the late '80s, Boronkay set Metropolitan on a path toward diversifying its water-supply portfolio. No longer would the agency rely solely on massive engineering projects, such as dams, for its water. Met began giving its member agencies incentives to increase water conservation. Those agencies also began to increasingly "recycle" water by treating their wastewater for reuse. And they added a long-neglected asset back to the portfolio by working to clean Southern California's notoriously contaminated groundwater so that it could be made usable again.
But increasingly, the state's farms came to occupy a prominent place in Metropolitan's vision for the future. In one sense, the Peripheral Canal defeat marked a break between Met and agriculture. For decades, Metropolitan had joined the state's farm lobby in calling for new dams and water infrastructure. But as the prospects for more projects dimmed, Boronkay realized that agriculture represented a tremendous reservoir from which Met could potentially draw: Eighty percent of the water in California goes to the state's farmers.
"I thought, just 5 percent of that agricultural water would make a hell of a difference to us," Boronkay says. "We could use just a little of the massive amount of water that's devoted to agriculture to save ourselves."
Boronkay, who is now 77, has perfected the habit of delivering radical observations with a disarming grin, but the idea of transferring farm water to the city put him on perilous ground. The notional conflict between cities and farms stands at the center of the West's rip-roaring saga of water wars - thanks largely to William Mulholland and the Los Angeles Department of Water and Power's infamous raid on the Owens Valley early in the 20th century.
Boronkay knew in his bones that simply buying farms to take their water was a political nonstarter. But he saw promise in experimenting with fallowing programs as a way to free up water. "Farmers can pull back: They fallow land if markets aren't good," he says. "So it's nothing strange." He and Quinn set to work puzzling out whether farming communities and urban areas might be able to forge a symbiotic, rather than a parasitic, relationship.
In the late 1990s, California came under increasing fire from the six other states that share the waters of the Colorado River for taking more than its 4.4-million acre-foot allocation of the river. The river dispute made the ag card an even more important piece of Met's portfolio. Palo Verde's farmers watched as several agencies negotiated a complex set of deals to get water from the nearby Imperial Irrigation District, and they sensed that it wouldn't be long before they heard from Met once more themselves. "Met kept going to all these meetings and giving these PowerPoint presentations, and it always included 100,000 acre-feet from Palo Verde," says Smith. "They never bothered to tell us that, but we knew they were gonna come after it." Palo Verde was particularly attractive to Met because it had the oldest recognized rights on the entire Colorado River - which, in the first-in-time, first-in-right hierarchy of water law, also makes them the most dependable.
By that point, Palo Verde's farmers had resigned themselves to the inevitability of Met's presence in their lives. "We know there's 18 million people over there, and 2,700 of us here. They're gonna come get some water," Smith says. "And we want to make a deal that's best for us."
In late 2000, one of the irrigation district's board members called Smith and instructed him to drive out to the Blythe airport to pick up a couple of representatives from Metropolitan. The two sides began negotiating an agreement that would take water transfers to a higher order of sophistication. As in the earlier deal, farmers in the irrigation district would generate water for Met by fallowing their lands. Unlike the previous arrangement, however, this one would stand in place for 35 years.
"Both sides spent a lot of time trying to look for bogeymen," Smith says. "If you're going to be in this 35 years, you have to think about a lot of things."
Simply taking land out of production for that length of time would have been tantamount to drying it up permanently. But by crafting a "rotating" fallowing program, in which any given field would be idled for no more than five years in a row, the new deal makes the impacts temporary and distributes them throughout the district.
The negotiations were not without their rough spots. Met, for instance, initially insisted on approving the yearly plan that each participating farmer submits to his bank for loans. "That was an absolute deal-killer," Smith says. "We will guarantee that if you tell us to fallow some ground, we will fallow some ground. The rest of that ground, you have nothing to do with it. It's none of your damn business."
Finally, after nearly three years of negotiations and a set of meticulously written contractual protections, the Palo Verde Irrigation District agreed to be drawn within Met's orbit. Farmers idle between 7 to 29 percent of the land in the district each year. In exchange, they received a sign-up bonus of $3,170 per acre, plus about $630 for each acre they fallow in any given year. (In each subsequent year of the deal, that amount will increase to cover inflation.)
The fallowing program allows Metropolitan to draw a steady "base load" of at least 25,000 acre-feet from the district each year. During dry years, Met can call for a maxed-out "peak load" of 111,000 acre-feet. For the valley's farmers, the deal allows them to continue farming the majority of their acreage during normal years and compensates them for income lost from any fallowed acreage.
When Metropolitan's managers talk about the agency's diversified water-supply portfolio, they tend to emphasize the interplay between Met's water-conservation programs and its massive expansion of storage projects. Per capita water consumption in Metropolitan's service area has been decreasing since 1990, while Met has expanded its water storage capacity by a factor of 10 over the same period. The agency can stash whatever water its efficiency efforts save during wet years.
But wet years are increasingly rare, and farm-water transfers play a critical role in the total mix; during droughts, they're the one reliable way Met can "backfill" shortfalls and make good on its pledge of 100 percent reliability. To ensure access to that water, Quinn - who was rising through Met's ranks on his way to becoming deputy general manager - began working to establish relationships with irrigation districts in other parts of the state.
"It wasn't like there was a long line of people wanting to talk to us," he concedes. "My nose got broken 86 times with agricultural district doors slamming shut on it, saying, 'What part of "no" don't you understand?' "
But Quinn learned. Eventually, he began touting the ways that Met could use its considerable financial resources to help farmers hedge their own risk, by providing them a supplemental source of income that was more dependable than variable crop prices.
Quinn also got better at sniffing out people like Van Tenney, who ran the Glenn-Colusa Irrigation District, more than 400 miles north of Los Angeles. The district supplies water to rice farmers near Sutter Buttes, the eerily beautiful carcass of an extinct volcano that sits smack-dab in the center of the Sacramento Valley. In spring and fall, the sky is alive with ducks and geese winging their way in and out of several wildlife refuges in the area.
In 2001, Glenn-Colusa banded with other local irrigation districts to sell water to the Westlands Water District, an agricultural powerhouse in the San Joaquin Valley, south of the Delta. "That was a pretty major deal," says Tenney, "and I think Metropolitan was watching."
Still, in the years after Boronkay left Metropolitan in 1993, Met's top brass did little to help Quinn's cause. In the late '90s, Boronkay's successor, John "Woody" Wodraska - who, not long afterward, would go on to work for Enron's water subsidiary - delivered an incendiary speech to the area's rice farmers. "He basically came up and told the audience, 'If you guys don't cooperate with Metropolitan, we're gonna take your water,' " says Tenney. "It was the most in-your-face thing I've ever seen."
Wodraska's departure from Met, and a series of conversations with Quinn, finally convinced Tenney that the agency was, as he puts it, "going through a fairly significant attitudinal change." He agreed to talk.
Quinn, meanwhile, had been thinking about how to move beyond the simple first-order strategy of portfolio diversification as a way to manage risk. He set out to hedge two of Metropolitan's biggest risks - running short of water, and spending heavily on backup supplies that it might not need.
"The really bad years don't happen that often," Quinn says. "We had enough water most of the time." Metropolitan might only need to backfill its supplies one year in five. "I wanted to find some sort of mechanism that would solve that one-in-five-year problem," Quinn says - a way that Met could ensure itself access to backup water, but only in the worst drought years.
As a graduate student at UCLA, Quinn was interested in stock-options trading. Electrical utilities had adapted that tool to put together portfolios that supplemented their "firm" supplies - such as power plants that they themselves owned and operated - with options to buy power from other producers on an as-needed basis. Quinn borrowed that idea and tailored it to the rusticated world of Western water.
In the winter of 2002, Quinn arranged a series of meetings with farmers in Glenn-Colusa and 10 other Sacramento Valley irrigation districts and began negotiating one-year options contracts for part of the farmers' water. Initially, says Tenney, "Probably half my farmers would've strung me up. (Shipping) that water south for money was just viewed as a terrible moral thing to do." But for the farmers, the options deals opened up a wider array of - what better way to put it? - options than just growing a crop with their water.
Under the terms of the contract, Met paid the irrigation districts $10 an acre-foot for the option to buy sometime before the following March. If Met called the option, it would pay an additional $90 per acre-foot to buy the water. The irrigation districts would then "float" it down the Sacramento River and into the Delta; State Water Project pumps at the Delta's southern edge would transfer the water into the California Aqueduct, which would then carry it to Southern California.
If Metropolitan didn't need the water, it wouldn't exercise the option. Farmers would pocket the option fee and then use the water on their farms. For Met, the arrangement was attractive because the agency could keep extra water on-call, but pay just a fraction of what it would have cost to buy the water outright and run the risk of not actually needing it.
It was an elegant idea - on paper. All told, Met signed options for more than 146,000 acre-feet of water. The winter was dry, and that spring, Met called the options. Almost immediately afterward, the heavens opened, and it rained like hell. "April was off the charts," says Quinn. "April and May combined were one of the biggest flows in history."
Because so much water had fallen on Northern California, the State Water Project pumps were running day and night, sucking water into the California Aqueduct. "The pumps were so busy that they didn't have any room for option water," Quinn says. And, in a sort of dejavu, $8.3 million worth of water floated down the Sacramento River and out to sea. "We watched tens of thousands of acre-feet of water go out to the Golden Gate Bridge," says Quinn, "because we had to call it too early."
Undaunted, Quinn tried again the next year. He began negotiating another round of options contracts, with a call date on April 1. But he added a new provision. "I learned in 2003 to put your call date really late," Quinn says, so he sweetened the new round of contracts: If farmers would hold on until May before Metropolitan decided whether to exercise its options, the agency would pay an additional $20 per acre-foot premium. "We offered them more money if they kept the call going longer," Quinn says. "That's valuable to you as the buyer, because it reduces the probability of your making a mistake."
With such adjustments, Quinn slowly stacked the odds in Met's favor. At the beginning of every "water year," which starts on Oct. 1, there is a 50-50 chance that Metropolitan will have enough water to meet its demands. The potential spread at the start of the year is huge: Met may need to store as much as a million acre-feet of excess water each year, or it may need to scare up a million acre-feet to cover shortfalls. It all depends on how much precipitation falls over the course of the winter. Only as summer approaches do water managers finally have a solid idea of how much water will really be available.
In early 2005, Met signed options for 125,000 acre-feet of water. But by February, after a relatively wet winter, there was only about a 10 percent chance Met would need it. "And then when April hit" - in a repeat of what had happened in 2003 - "the (supply) curve shifted up," Quinn says. "All of a sudden we had no (water) problem."
This time, Met let the options expire without exercising them. Although the agency lost the $1.25 million it paid for the options, that was just a fraction of the nearly $16 million it would have lost had it bought the water but not ultimately needed it.
"Some people say, 'Well, you wasted money - you paid the 10 bucks (per acre-foot),' " Quinn says, shrugging. "But it's like paying health insurance: Even if you don't get sick, you don't feel like you wasted the premiums you paid."
This summer, Quinn left Metropolitan for a new job just as the biggest crisis in years hit the agency. In June, the state shut down its Delta pumps for nine days to protect endangered Delta smelt, whose populations have plummeted in recent years. Then, in September, U.S. District Judge Oliver Wanger ordered the state to protect the smelt by throttling down the pumps from late December until June, when the fish spawn in the Delta. The restriction could reduce by up to a quarter the amount of water pumped out of the Delta.
Metropolitan kicked into crisis mode. The agency maintains an office on the ninth floor of The Senator Hotel, across the street from the state Capitol in Sacramento, and high-level Met managers have been on rotating deployments there throughout the fall. In October, the agency joined the list of supporters for a proposed ballot initiative that would approve a multibillion dollar project to route Sacramento River water around the Delta.
Exactly what form that project will take is, for the moment, unclear. But it could turn out to be a scaled-down version of the Peripheral Canal, which would protect Met's water supply - and, the project's supporters say, be paired with a substantial program to restore the smelt's habitat. (Despite that apparent reversal of its Boronkay-era decision not to seek new infrastructure, Met did, quite prominently, decline to support a competing measure that enjoys the spirited support of the farm lobby; it would authorize both a canal and two new dams.) Even if voters approve either of the measures - something that many capital veterans say is unlikely - it will be at least 15 years before an around-the-Delta canal is completed.
That has left Met scrambling to assess how vulnerable its water supplies will be next year. Metropolitan has significant quantities of water stashed around the state in its various storage projects. But as that water is drawn down, farm-water transfers will become critical. Deep within the agency's L.A. headquarters, its Water Surplus and Drought Management group - known in Metspeak by the pronunciation of its acronym, WSDM, as "the Wisdom group" - has been assessing whether Met needs to begin doing drought-rationing triage and lining up options contracts.
When the state shut down its Delta pumps in May, the WSDM group began calling in Met's chits. The agency immediately asked the Palo Verde farmers to fallow the maximum amount of land allowed under their contract. "We put them on notice," says Kightlinger, Met's general manager, "and we'll be going full-bore next year."
Meanwhile, in an office just past the reception area in the ninth-floor Sacramento office, Steve Hirsch has maps pinned on every available patch of wall. Hirsch is Met's program manager for water transfers and exchanges, and he has an order from WSDM to find and buy 200,000 to 250,000 acre-feet of water next year - 9 to 11 percent of Met's annual average deliveries.
Judge Wanger's ruling is forcing Hirsch into unexplored territory. In the past, when Metropolitan negotiated dry-year options with farmers, Hirsch says, "it's always been smarter to go north of Delta," in the Sacramento Valley, where water is cheaper. But Wanger's decision considerably complicates efforts to move water from the Sacramento River through the Delta and into the pumps.
Because of the pumping limits, Hirsch will have to thread his water transfers through needle's-eye windows of opportunity that may open at the pumps from next July through September. Only if next year is extremely dry will Met have any chance of getting water transfers across the Delta, through the State Water Project pumps and into the California Aqueduct.
That has left Hirsch pursuing a two-pronged strategy. In addition to buying options north of the Delta, he is making contacts with an entirely new set of irrigation districts, south of the Delta in the San Joaquin Valley. There, it's more likely that Met can actually take delivery of whatever water it buys - but the prices are higher, too.
Met is not the only agency seeking emergency water. Several San Francisco Bay Area urban water agencies will also see their supplies cut by Judge Wanger's ruling and are scouting out their own water-transfer deals. They will likely work cooperatively to find water. But at the end of September, the directors of the San Diego County Water Authority - a member of Met that has been increasingly insistent on lining up its own dedicated supplies - voted to seek a deal for 30,000 acre-feet from the Butte Water District in the Sacramento Valley.
The increased competition for water could drive prices up significantly. "If the prices get too high, we have the ability to say we'll sit out a year," Hirsch says. Metropolitan has enough water in storage that it could draw that down further to make up any shortfalls. "That's what we'll do if things get too crazy," Hirsch says, although he points out that such a tactic would result in less water in storage to cover shortfalls in future years.
In addition to the logistical challenges Met faces in the coming year, it will have to overcome some substantial lingering perceptual issues. "They've done a very good job of changing their approach and seeking cooperation," says Van Tenney, who retired from the Glenn-Colusa Irrigation District last year. But, he says, to many irrigation districts, "they're still suspect, even today. A lot of people in the north wouldn't give them the time of day."
In October, Hirsch did not seem particularly overwhelmed by the complex juggling act he'll be facing this winter. Still, he allowed, "this year's tough, because we're entering into a lot of new scenarios."
As evidence continues to mount that climate change will further reduce water supplies in California and throughout much of the West, Hirsch's tough new scenarios will likely become the norm for the entire region. It may not be long before Met's quiet, two-decade-long experiment in risk management proves useful to far more than the 18 million people whose faucets the agency will try to keep full next year.
Back in L.A., in his office on the 12th floor of Metropolitan's headquarters, Kightlinger says that the state's farms are as important to the agency now as they were in Carl Boronkay's day. "In those critical years, we need everything we can get hold of," he says. Then he circles back to the abiding question, "How do we make it work so we can both survive?"
The author is a contributing editor of High Country News.
This article was made possible with support from the William C. Kenney Watershed Protection Foundation and the Jay Kenney Foundation.