Fitch Monitors California Water Ratings in Light of State Water Project Pump Station Shutdown
Fitch Ratings is monitoring closely the shutdown of one of the State Water Project (SWP) pumping facilities – the Harvey O. Banks Pumping Plant (Banks) – which delivers water from the San Francisco/Sacramento-San Joaquin Bay-Delta (Bay-Delta) to California residents. At this time Fitch anticipates no immediate credit impact on those utilities that receive SWP water and are rated by Fitch, based on the short amount of time Banks is expected to be offline, the ability of the SWP to continue normal deliveries to contracting parties from SWP reservoirs and other SWP facilities, and contingency plans by water utilities that rely on SWP water. However, a shortage in SWP water resulting from an extended outage of Banks or an unfavorable resolution to the larger issue concerning operation of the SWP that is currently in the courts could have negative rating implications for some California utilities rated by Fitch that rely on the SWP for a material portion of their water supply.
On May 31, the California Department of Water Resources (DWR), the operator of the SWP, voluntarily decided to stop pumping at Banks as a preventative measure in response to concerns about an endangered fish species, the Delta smelt. Water pumped at Banks is diverted to Alameda and Santa Clara Counties and the San Joaquin Valley as well as southern California, home to around two-thirds of California’s 37 million residents.
The Delta smelt have been observed in record low numbers this year and last week were clustered near the Banks facilities. Although a number of variables may be affecting the health of the species, given the proximity of the Delta smelt to the pumps, DWR wanted to reduce the potential impact its facilities may be having on the population levels. Banks pumps are initially expected to be down only a short time (7-10 days) until the migrating Delta smelt move away from the facilities. This is the first time that the pumps have been shut off completely. Generally, some minimum level of pumping at between 5% and 10% of capacity is kept on-line at all times.
DWR’s decision to shut off pumping from Banks stems in part from two separate lawsuits in recent months – one federal and one state – that have challenged operations of the SWP as it relates to endangered species of Bay-Delta fish, including the Delta smelt. The federal lawsuit alleged that biological opinions issued by federal agencies relating to the impact of the SWP on Bay-Delta fish species protected under the federal Endangered Species Act (federal ESA) and the ability to harm or kill some of these fish (incidental taking) through operation of the SWP failed to conform to requirements of the federal ESA. On May 25, 2007, the U.S. District Court for the Eastern District of California issued a summary judgment ruling invalidating the biological opinion and incidental taking of Delta smelt under the federal ESA. A hearing is set for Aug. 21, 2007, to consider appropriate remedies, and it is likely the hearing will focus on potential modification of SWP operations until a new Delta smelt biological opinion can be approved.
On the state side, the Alameda County Superior Court rendered a decision on April 18, 2007, that DWR was illegally taking protected fish under the California Endangered Species Act (California ESA) through operation of the SWP and issued a cease and desist order from further operation of SWP facilities within 60 days unless DWR obtained incidental taking authorization from the state Department of Fish and Game (DFG). DWR subsequently appealed the Superior Court’s decision on May 7, 2007, and this appeal automatically stays the order while the appeal is pending.
DWR has entered into a memorandum of understanding with DFG to assist in consultations with federal agencies in order to acquire new biological opinions, with both DWR and DFG agreeing that the resulting biological opinions under the federal ESA be developed to incorporate consistency requirements under the California ESA. The goal is to complete the new biological opinions by April 2008.
Until the new biological opinions are rendered, there is a possibility that interim modifications of SWP operations resulting from the federal case could entail reduced SWP pumping at Banks and other facilities, although it is unclear if this will occur or whether or not utilities rated by Fitch would be affected, or if so, to what extent. Fitch will continue to monitor developments affecting both Banks and the SWP in general and will provide updates as warranted.
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