LAO 2003 Budget Analysis: Resources

Legislative Analyst's Office

Analysis of the 2003-04 Budget Bill

Department of Water Resources (3860)

The Department of Water Resources (DWR) protects and manages California's water resources. In this capacity, the department maintains the State Water Resources Development System, including the State Water Project (SWP). The department also maintains public safety and prevents damage through flood control operations, supervision of dams, and safe drinking water projects. The department is also a major implementing agency for the CALFED Bay-Delta Program, which is implementing a long-term solution to water supply reliability, water quality, flood control, and fish and wildlife problems in the San Francisco Bay/Sacramento-San Joaquin Delta Estuary (the "Bay-Delta"). (Please see the discussion on the "CALFED Bay-Delta Program" in the "Crosscutting Issues" section of this chapter.)

Additionally, the department's California Energy Resources Scheduling (CERS) division manages billions of dollars of long-term electricity contracts. The CERS division was created in 2001 during the state's "energy crisis" to procure electricity on behalf of the state's three largest investor owned utilities (IOUs). However, on January 1, 2003, the IOUs resumed their electricity purchasing responsibilities. Nevertheless, CERS continues to manage the long-term contracts entered into by the department during the last two years.

The budget proposes total expenditures of about $6.6 billion in 2003-04, an increase of about $261 million, or 4 percent, above estimated expenditures in the current year. This increase is partly a result of an increase in Proposition 50 bond expenditures, mainly for activities related to the CALFED program. It also reflects an increase in expenditures ($340 million) related to the energy purchases made on behalf of the IOUs, largely for debt servicing costs. Of the proposed total expenditures, about $5.3 billion is for energy purchases on behalf of IOUs and about $750 million is for planning, construction, and operation of SWP, financed with SWP funds (revenues from water contractors).

Major budget proposals include: (1) the transfer of around 75 personnel-years and $77.8 million to the newly established California Bay-Delta Authority; (2) expenditure of approximately $300 million from Proposition 50 for CALFED, desalination projects, water security, and water management grants; and (3) a $4.4 million reduction in General Fund expenditures for various water management and flood management activities.

Fee-Based Cost Recovery for Dam Safety Program

We recommend the enactment of legislation to revise the existing dam safety fee structure in order that fees fully replace the department's budgeted General Fund expenditures for the dam safety program. We also recommend the enactment of legislation to require that dam safety fees be deposited in a special fund. (Reduce Item 3860-001-0001 by $7.8 million and increase new special fund item by a like amount.)

Dam Safety Program Overview. The DWR's dam safety program regulates approximately 1,250 dams in the state that are not under federal jurisdiction. The program is responsible for supervising the maintenance and operation of all non-federal dams that are of a specified minimum size (dams within the department's jurisdiction are either over 25 feet tall or have storage capacity that exceeds 50 acre-feet).

In exercising its responsibility, the program reviews plans and supervises the construction of new dams, and the enlargement, alteration, repair, or removal of existing dams. The program currently oversees the construction of approximately 3 to 5 new dams and supervises around 10 to 15 major alterations or repairs annually. The program is also charged with evaluating the seismic stability of dams with close proximity to fault lines and has been involved in overseeing security at dams. Finally, the dam safety program also performs annual inspections of dams under its jurisdiction.

Fee Structure. The current fee structure in the dam safety program was established by statute and was last revised in 1991. It consists of two fees. The first fee is an annual maintenance fee of $200 per dam plus $24 times the dam's height in feet. The second is a filing fee for a new dam or enlargement, alteration, or repair of an existing dam. This filing fee is calculated as a fixed percentage of estimated costs of the project (tiered depending on project size), and the minimum filing fee is $300. Statute has limited the amount of fees for dams located on farms or ranch properties and for small "privately owned" dams (small privately owned dams refers to dams with less than 100 acre-feet of storage capacity owned by individuals and businesses). These fees are set at $150 per dam plus $16 times the dam's height in feet.

The department collects around $1.9 million annually in maintenance fees. These fees have remained virtually constant over the last five years. The division also collects an average of $475,000 annually in filing fees for new dams or changes to existing dams. However, revenues from the filing fees have varied significantly—ranging from $300,000 to $5 million annually—depending on workload.

Budget-Year Proposal. The Governor's budget proposes about $8.8 million for the dam safety program in 2003-04. Of this amount, $7.8 million is from the General Fund, and $1 million is from the Proposition 50 bond fund for dam security activities. The General Fund amount reflects fee revenues that are deposited directly in the General Fund rather than into a special fund. We estimate that such fee revenues will total about $2.4 million in the budget year. Accordingly, the budget proposes that fees cover less than 30 percent of the program's expenditures.

Fees Should Fully Replace General Fund Expenditures. As discussed below, we think that fees on dam owners should fully cover the dam safety program costs currently covered by the General Fund. This is because the program directly benefits a clearly defined population—dam owners—that should pay for the services provided to it.

Program Services Benefit a Clearly Defined Population. The dams under jurisdiction of the program are used for a variety of purposes, including storage, irrigation, flood control, and power production. These purposes result in economic gains and benefits for the owners. The services performed by the program directly benefit dam owners because they ensure that dams can be operated safely to serve the various purposes listed above. Specific benefits to the dam owners include (1) avoided costs due to prevention of safety problems and (2) lower insurance costs (some insurance companies provide beneficial rates to dam owners based on DWR's safety review).

In addition, since the program has the authority to enforce compliance with dam safety standards, and can potentially shut down or restrict the use of a dam that is out of compliance, the program in effect gives dam owners a permit to operate the dam. Such a "permit" may allow the dam owner to operate a business and make economic gains.

Many Dam Owners Have Cost Recovery Mechanisms. Our review finds that a majority of dam owners under the jurisdiction of the dam safety program have access to cost recovery mechanisms to recoup the costs of increased fees. As shown in Figure 1 (see next page), of the 1,250 dams under the jurisdiction of the program, over one-half of the dams are owned by public entities such as water districts and other local agencies. Most of these entities recover the costs of providing services through a user fee charged to customers. Investor owned utilities own another 9 percent of dams. These owners also have access to cost recovery mechanisms through the rate-setting proceedings at the California Public Utilities Commission. The bulk of the remaining dams (36 percent) are owned by private individuals and businesses. Of those dams, the majority are located on farm and ranch properties. The remaining 4 percent are owned by various other state government agencies.

Comparable Safety Programs Recover 100 Percent of Program Costs Through Fees. We have identified several comparable safety programs administered by state agencies where fees cover at least a majority of program costs. Like the dam safety program, these programs involve field inspections, review of new construction and alterations, and enforcement of regulations. Examples of such programs are: 

Recommend Legislation to Increase Fees. We recommend that the Legislature enact legislation to increase the existing filing and annual maintenance fees on dam owners so that fees cover 100 percent of program costs. This is because we think that dam owners under the program's jurisdiction directly benefit from the services provided by the program. Although many dam owners have access to cost-recovery mechanisms, it is possible that this level of fee increase could impose a hardship on owners of some small dams, since these owners may be unable to recover the increased cost. Therefore, we recommend that the legislation direct DWR to structure the revised fees in a manner that limits the amount of the fee increases for privately owned dams that have less than 100 acre-feet of storage capacity. Such a structure is consistent with current law.

Recommend Legislation to Create Fee-Based Special Fund. Finally, we think that the Legislature's oversight of, and accountability for, the use of dam safety fees would be increased if the fees were deposited into a special fund that requires legislative appropriation for expenditure. (Under current practice, dam safety fees are deposited into the General Fund.) Therefore, we recommend the enactment of legislation to create this special fund.

General Fund Savings Result. The implementation of this recommendation would result in General Fund savings of $5.4 million in the budget year, as this is the amount of General Fund that would be replaced by additional fee revenues. We recommend that the department's budget be reduced by $7.8 million from the General Fund and increased by a like amount from the new special fund that we recommend be established. (The budgeted General Fund amount of $7.8 million incorporates about $2.4 million of fee revenues that the budget proposes be deposited directly into the General Fund.)

Funding for Desalination Projects Is Premature

We think that the budget proposal to spend Proposition 50 bond funds on desalination projects is premature, pending legislative receipt and review of a statutorily required report on the state's role in furthering desalination technologies. Therefore, we recommend deleting the funding for desalination grants in the budget year. We also recommend the enactment of legislation directing the department to develop a plan for expenditure of these funds as part of the report to be submitted to the Legislature for its review. (Reduce Item 3860-101-6031 by $15 million.)

Budget Proposal. The Proposition 50 bond measure allocates $100 million to DWR for grants relating to contaminant and salt removal technologies, specifying that no less than $50 million be appropriated for desalination projects. The budget proposes to expend $15 million of these funds in the budget year to implement a grant program to assist in the construction of projects for desalination of ocean or brackish waters and for feasibility studies for such projects. (Budget documents expressed intent to spend the balance of the $50 million in the subsequent two years.) In addition, the budget proposes $245,000 from the bond funds for state staff to develop grant selection criteria and to administer the program in 2003-04.

Funding for Desalination Projects Is Premature. Chapter 957, Statutes of 2002 (AB 2717, Hertzberg), directs the department to convene a water desalination task force that is comprised of representatives from various state departments and stakeholder groups. The task force is to report to the Legislature by July 1, 2004 on its recommendations regarding the role of the state in furthering desalination technologies. This includes making findings on potential opportunities and impediments for using desalination in the state.

We think that plans to allocate bond-funded grants for desalination projects should be included in the report mentioned above, and the Legislature should have an opportunity to review this report and its findings before allocating these funds. We think this would ensure that any allocation of funds for desalination projects is effective in furthering the development of desalination technology in the state.

Given the above, we recommend enactment of legislation to require that, as part of the AB 2717 reporting requirement, the department develop a plan for using the Proposition 50 bond funds allocated for desalination. Pending legislative receipt and review of the AB 2717 report, we recommend deleting the funding proposed for desalination grants in the budget year. We recommend, however, approving the one-time augmentation of $245,000 for state staff to help support the department's activities in preparing its recommendations to the Legislature, including a plan for expending the bond funds allocated for this purpose. This would provide a reasonable funding level for the desalination task force.

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