Agenda Number 5.

CONTACT: Ted Cooke Tom McCann Suzanne Ticknor (623) 869-2167 (623) 869-2343 (623) 869-2410 tcooke@cap-az.com tmccann@cap-az.com sticknor@cap-az.com MEETING DATE: February 7, 2013 AGENDA ITEM: Discussion and Consideration of Action Regarding NIA Priority Water Reallocation RECOMMENDATION: Staff recommends that the Board approve Non-Indian Agricultural Priority Water acquisition price components for 9d Debt, Back Capital Charges and Back Property Tax Equivalency, a five-year payment plan and appropriate credits for facility use charges.

FINANCIAL IMPLICATIONS: The reallocation of NIA water will result in certain proceeds to CAP. The first phase will generate proceeds in 2014-2019. Proceeds related to 9d Debt will be deposited into a stand-alone sinking fund to service the 9d Debt obligation that has been assumed by CAP. Proceeds related to the Back Property Tax Equivalency will only occur if an allocation is approved outside the CAP service area, which is not anticipated until 2021. Proceeds related to Back Capital Charges will be deposited in the CAP General Fund Strategic Reserves. These proceeds have been incorporated into CAP's Strategic Reserve forecast. Due to the recent decision by the Arizona Department of Water Resources to defer 17,333 acre-feet from the first phase of the NIA allocation (2013) to the subsequent phase (2021), CAP's reserve forecast for 2014-2019 will be reduced by approximately $16 million.

LINKAGE TO STRATEGIC PLAN, POLICY, STATUTE OR GUIDING PRINCIPLE: 2010 CAWCD Strategic Plan

• Water Supply: Prepare for CAP NIA Reallocation

PREVIOUS BOARD ACTION/ACTIVITY: February 2012 – Work/Study – Revenues, Reserves and Rates April 2012 – Customer Rate Workshop and Finance, Audit and Power Committee May 2012 – Regular Board Meeting December 2012 – Regular Board Meeting January 2013 – CAGRD Committee Meeting ISSUE SUMMARY/DESCRIPTION: HISTORY – The Arizona Water Settlements Act of 2004 ("Settlements Act") was enacted on December 10, 2004. The Settlements Act ratified the Arizona Water Settlement Agreement ("Agreement") between CAWCD, the United States and the Arizona Department of Water Resources ("ADWR"), which made available CAP Non-Indian agricultural priority water ("NIA Priority Water") for reallocation by the Secretary of the Interior. Among other things, the Settlements Act and the Agreement required the Secretary of the Interior to reallocate 96,295 acre-feet ("AF") of NIA Priority Water to ADWR to be held in trust for further reallocation to non-Indian municipal and industrial users in Arizona.1 The Settlements Act and the Agreement required ADWR to submit to the Secretary of the Interior ("Secretary") a recommendation for reallocation of the 96,295 AF of NIA Priority Water. The Agreement also required ADWR to develop eligibility criteria and make such NIA Priority Water available for reallocation to non-Indian M&I users in Arizona "at periodic intervals, starting in 2010".2 On August 25, 2006, the Secretary issued a Record of Decision reallocating 96,295 AF of NIA Priority Water to ADWR, which provided that "before the water may be further allocated, the Director of ADWR shall submit to the Secretary of the Interior a recommendation for reallocation."3 Last October, ADWR released its draft Proposed Process and Evaluation Criteria for the reallocation of this NIA Priority Water. At the same time, CAWCD developed proposed pricing methodology and components for the acquisition of this NIA Priority Water and Reclamation drafted a process for reviewing ADWR's recommendation for reallocation. A public meeting was held on October 2, 2012 to present the background of ADWR's proposed process for reallocation, CAWCD's pricing methodology and Reclamation's review process. Public comments were accepted by ADWR through November 9, 2012. All written comments are compiled and available on ADWR's website, www.azwater.gov/. CAWCD submitted written comments to ADWR on its proposed reallocation process.

1 Settlements Act § 104(a)(2)(A) and Paragraph 9.3 of the Agreement. 2 Paragraph 9.3.4 of the Agreement. 3 Notice of Modification to the Secretary of the Interior's Record of Decision, Publication of a Final Decision of CAP Water Reallocation, 71 Fed. Reg. 50449, 50451 (August 25, 2006).

ADWR'S PROPOSED STRUCTURE OF REALLOCATION – ADWR proposes to reallocate the NIA Priority Water in phases, with the first phase in 2013, the second phase in 2021 and, if necessary, a third phase in 2030. Further, ADWR proposes to divide the 96,295 AF of NIA Priority Water between potential applicants within CAP's three-county service area and potential applicants outside of CAP's service area as follows: 78,962 AF for users within CAP's service area and 17,333 AF for users outside of CAP's service area. Of the 78,962 AF pool for users within CAP's service area, ADWR initially proposed to divide the pool as follows: 51,962 AF for M&I water providers and the CAGRD (to be reallocated in 2013); 12,000 AF for industrial water users (to be reallocated in 2013); and 15,000 AF for water providers serving the Central Arizona Irrigation and Drainage District ("CAIDD") area and the Maricopa Stanfield Irrigation and Drainage District ("MSIDD") area, as required by Paragraph 9.3 of the Agreement (11,820 AF to be reallocated in 2013, and the balance to be reallocated in subsequent phases.) After considering submitted comments on its proposed reallocation structure, ADWR decided to reduce, by about 1/3, the 51,962 AF pool for M&I water providers and the CAGRD to be reallocated in 2013 and retain 17,333 AF from this pool for later reallocation in 2021. Hence, the pool of NIA Priority Water available for reallocation for M&I water providers and the CAGRD in 2013 has been reduced to 34,629 AF. ADWR'S PROPOSED SELECTION CRITERIA FOR REALLOCATION – ADWR identified three goals for the 2013 reallocation of NIA Priority Water: (1) To reduce groundwater overdraft; (2) To provide an additional source of water to areas with limited physical availability of groundwater; and (3) To meet the near-term demands for existing municipal water providers and industrial users of groundwater or Excess CAP water with permanent demands. ADWR's proposed selection criteria to implement these goals include the following requirements: qualified applicants must demonstrate the ability to pay the costs associated with acquisition and utilization of the water supply; qualified applicants must demonstrate how they plan to utilize this water by 2020 and how they will manage the future shortage impacts associated with this supply; and qualified applicants must demonstrate an imbalance between its projected 2020 water demand and its available renewable water supplies. PUBLIC COMMENTS – A total of 38 entities submitted written comments on ADWR's proposed reallocation process, including cities and towns inside and outside of CAP's service area, municipal water providers, industrial users, developers, and water users' associations. ADWR issued a Response to public comments on January 18, 2013. A copy of ADWR's Response is attached as Attachment 1. Of the entities commenting on ADWR's proposed reallocation, some also submitted comments regarding CAWCD's proposed pricing methodology. CAWCD issued a Response to the public comments regarding pricing methodology on December 20, 2012. A copy of CAWCD's Response is attached as Attachment 2.

ADWR's NEXT STEPS – ADWR will post the Final Process and Evaluation Criteria for the 2013 NIA Priority Water reallocation in late January or early February, 2013. ADWR has stated that soon thereafter, it will schedule a meeting to discuss the application process with prospective applicants. ADWR will propose a three-month process for applicants to prepare their applications for NIA Priority Water. ADWR has stated that it plans to have a recommended allocation to the Secretary by the end of 2013. CAWCD PRICING PROPOSAL – CAP's role in the NIA Water reallocation (other than as an applicant through CAGRD) is to set acquisition prices. During the ongoing discussions over the last year, three price components that are relatively straightforward and provided for by statute, contract or policy have been under consideration. A fourth, a Water Supply Availability Component, which would have been discretionary on the part of CAP to provide a partial source of funding to help ensure the availability of NIA water by CAP in "normal" water supply years, has been dropped due to insufficient clarity as to how such a program would work and lack of support. The three remaining price components are as follows: - 9(d) Debt Component – estimated to be approximately $389/acre-foot, this amount will reimburse CAP for the $88.7 million in 9(d) debt assumed from CAP irrigation districts under the Arizona Water Settlement Agreement. - Back Capital Charge Component – estimated to be approximately $899/acre-foot, this amount will contribute towards the CAP repayment obligation. This charge is consistent with past practices, contracts and the terms of the Repayment Stipulation. - Back Property Tax Equivalency Component – estimated to be approximately $1,500/acre-foot, this charge will only apply to allocations outside the CAP service area. This charge is authorized under A.R.S. §48-3715.B. No allocations outside the CAP service area are anticipated in this initial allocation (2014). These rate components are based in part on estimates and will need to be recalculated at the time the actual allocations are approved by the Secretary. Staff also proposes that CAP offer a five-year payment plan, including interest, as was done for the M&I allocation in 2007. In response to comments received, staff also proposes that recipients of NIA water receive appropriate credit against Back Capital Charges for facility use fees consistent with the CAP Transfer Policy and CAP's responses to public comments on the NIA reallocation program. SUGGESTED MOTION: I move that the Board of Directors approve Non-Indian Agricultural Priority Water acquisition price components of $389/acre-foot for 9d Debt, $899/acre-foot for Back Capital Charges and $1,500/acre-foot for Back Property Tax Equivalency, adjusted

as necessary for refinement of estimates and timing of actual allocations. In addition, I move that CAP offer a five-year payment plan for recipients of NIA Priority Water and provide appropriate credits for facility use charges consistent with the CAP Transfer Policy and CAP's responses to public comments.

Agenda Number 5. Attachment 1.

Non-Indian Agricultural Priority Central Arizona Project Water Reallocation

Response to Public Comments

January 18, 2013

On December 10, 2004, the Arizona Water Settlements Act, Public Law 108-451

(Settlements Act), was enacted. The Settlements Act ratified the Arizona Water

Settlement Agreement (Agreement) between the United States, the Arizona Department

of Water Resources (Department), and the Central Arizona Water Conservation District

(CAWCD) and provided for the reallocation of 96,295 acre-feet of Non-Indian

Agricultural Priority Central Arizona Project Water (NIA Priority water) for municipal and

industrial uses in the state of Arizona.

Both the Settlements Act and the Agreement required the Secretary of the Interior

(Secretary) to reallocate the 96,295 acre-feet of NIA Priority water to the Department “to

be held under contract in trust for further allocation.”1 Both the Settlements Act and the

Agreement also specified that the Director of the Department shall submit a

recommendation for reallocation to the Secretary, and any reallocation shall be based

on the Director’s recommendation or revised recommendation.2 The Agreement further

provided that the Department develop eligibility criteria and make the NIA Priority water

available for reallocation “at periodic intervals, starting in 2010.”3 On August 22, 2006,

the Secretary reallocated the 96,295 acre-feet of NIA Priority water to the Department

1 Settlements Act § 104(a)(2)(A); see also Agreement Paragraphs 3.1 and 9.3.1.

2 Settlements Act § 104(a)(2)(C); see also Agreement Paragraph 9.3.4. The Department has traditionally provided recommendations of allocations of CAP water to the Secretary, consistent with its authority in A.R.S. § 45-107. 3 Agreement Paragraph 9.3.4.

JANICE K. BREWER Governor

SANDRA A. FABRITZ-WHITNEY

Director

ARIZONA DEPARTMENT OF WATER RESOURCES

3550 North Central Avenue, Second Floor

PHOENIX, ARIZONA 85012-2105

(602) 771-8500

Agenda Number 5. Atachment 2.

NIA Reallocation 2 ADWR Response to Comments January 18, 2013

acknowledging that “before the water may be further allocated the Director of ADWR

shall submit to the Secretary of the Interior a recommendation for reallocation.”4

The Department drafted its Proposed Process and Evaluation Criteria to reallocate the NIA Priority CAP water in periodic intervals with the first recommendation set for 2013. CAWCD developed proposed pricing components for this reallocation. The U.S. Bureau of Reclamation (Reclamation) drafted a process for reviewing the Department’s recommendation for the allocation. The Department held a public meeting on October 2, 2012 to present the background of this reallocation and the proposals from the Department, CAWCD, and Reclamation.

The Department accepted questions and comments regarding the proposed reallocation

during the meeting as well as through the initial deadline of October 19, 2012. At the

public’s request, the Department extended the deadline for public comment to

November 9, 2012. All written comments are compiled and available on the

Department’s web site.

The Department’s Proposed Process and Evaluation Criteria identified three goals for

the 2013 reallocation of NIA Priority water:

1. To reduce groundwater overdraft;

2. To provide an additional source of water to areas with limited physical availability

of groundwater; and

3. To meet the near-term demands for existing municipal water providers and

industrial users of groundwater or Excess CAP water with permanent demands.

The goals associated with this reallocation process complement the AMA management

goals and have been selected for this process to achieve good water management

policies. While the Department recognizes that this 96,295 acre-feet of NIA Priority

water will not be sufficient to achieve these goals on its own, the Department crafted the

Proposed Process and Evaluation Criteria with the intent of furthering these goals. The

Department recognizes that the Proposed Process and Evaluation Criteria may not

address every possible scenario but will interpret and apply the selection criteria in a

manner consistent with these objectives.

The Department will make two substantive changes to the Proposed Process and

Evaluation Criteria. First, the Department will remove the proposed requirement for the

relinquishment of groundwater allowance credits.

4 Notice of Modification to the Secretary of the Interior’s Record of Decision, Publication of a Final Decision of CAP Water Reallocation, 71 Fed. Reg. 50449, 50451 (Aug. 25, 2006).

NIA Reallocation 3 ADWR Response to Comments January 18, 2013

Second, the Department will retain part of the Municipal Pool for allocation in 2021.

This retention allows the Department to maintain some flexibility to adapt to changing

water management goals as well as changing economic and hydrologic conditions.

Although meeting near-term demands for existing municipal providers and industrial

users with permanent demands remains one of the three identified goals, the

Department recognizes that this goal must be balanced with economic constraints of

prospective applicants and the possibility that aquifer conditions may change over time.

RESPONSE TO COMMENTS

The Department appreciates the feedback received on its initial proposal. In order to

facilitate a timely and efficient response, the Department has grouped the comments

and the subsequent responses into the following categories:

Demand and Supply Imbalance in 2020

The Department received several comments with respect to the 2020 date and the use

of this date to establish a Demand and Supply Imbalance (DSI) for each applicant.

Comments stated that the intended recipients would not be able to meet all of the

criteria by this date and that the criteria exclude and penalize water providers with

designations through 2025. The Department also received letters of support.

The Arizona Water Settlement Agreement does not mandate the use of the 2020 date

for calculating DSI. The Department selected the year 2020 to identify near-term

demands, which is a reasonable timeframe while recognizing that this date must be

balanced with economic constraints and aquifer conditions that may change over time.

Additionally, NIA Priority water is projected to be available more often in the near future

than in the longer term. Finally, while this timeframe was decided independently from

any Assured Water Supply process, it will coordinate well for those entities with

designations that expire prior to 2025 and therefore have an immediate need for supply.

The Department plans to maintain the 2020 DSI requirement because it will further the

identified goals. First, the DSI is in itself a calculation of groundwater overdraft (or

potential overdraft) because it is a calculation of the anticipated demand compared to

non-groundwater supplies. Second, assessing the DSI based on the year 2020 assists

in determining the near-term demands. Finally, applicants with greater DSIs are likely to

be located in areas with limited physical availability of groundwater.

Central Arizona Groundwater Replenishment District

NIA Reallocation 4 ADWR Response to Comments January 18, 2013

The Department received various comments regarding the Central Arizona

Groundwater Replenishment District’s (CAGRD) participation in the 2013 reallocation

process. Many comments supported the CAGRD’s participation in this reallocation

process. Other comments recommended limitations on the CAGRD’s eligibility for an

allocation.

The CAGRD has a statutory enrollment and membership process that determines its

replenishment obligations. The securing of additional water supplies to meet these

replenishment obligations does not directly affect membership in the CAGRD or its

accrual of replenishment obligations.

The Proposed Process and Evaluation Criteria state that if the Department will

recommend that a member service area or a water provider serving member lands

receive a part of this reallocation, the Department will reduce the CAGRD’s DSI

accordingly to account for the reduced demand to the CAGRD. Member service areas

or water providers serving member lands applying for this NIA Priority water must

demonstrate how an NIA priority reallocation would be used to reduce their demands on

the CAGRD. These provisions address the concerns raised by comments proposing

limitations on the CAGRD’s eligibility.

In the past, the Department has not required any designated provider to modify its

designation to reflect a newly acquired water supply unless the provider’s current,

committed and 2 years of projected demand exceed the water supplies identified in the

existing designation. The Department recognizes that a designated provider may have

other factors to consider (e.g., a pending acquisition of another supply, pending

consideration of new treatment facilities, possible new storage facilities, etc.) with the

timing of an application to modify its designation.

Additionally, a Member Service Area Agreement is an agreement between the water

provider and the CAGRD. While the Department reviews those agreements prior to

issuing a designation, the Department does not have the authority to require the

CAGRD and the designated provider to modify these agreements unless they are not

consistent with the Assured Water Supply determination. Presumably, financial

requirements and hydrologic reality will encourage water providers and the CAGRD to

reduce replenishment obligations whenever possible.

The Department will not require any applicant for NIA Priority water to modify its

designation or Member Service Area Agreement as a result of a recommendation or a

contract for NIA Priority water. The Department will leave those decisions to the water

providers and the CAGRD.

NIA Reallocation 5 ADWR Response to Comments January 18, 2013

Calculations of Pools

The Department received various comments regarding the calculation of some of the

pools for the reallocation of NIA Priority water. The comments concern the pools within

the 2013 reallocation, as well as the pool for those outside the three-county CAWCD

service area (CAP service area) and the non-CAP service area pool.

To calculate the division of the pools between the CAP service area and the area

outside of the CAP service area, the Department considered two separate, statewide

studies that assessed demands for water uses, including industrial, environmental,

agricultural, and municipal demands. These studies were the Water Resources

Development Commission (WRDC)5 and the Colorado River Basin Water Supply and

Demand Study (Basin Study)6. These studies were conducted independently of one

another and yielded different results. Based on water supply and projected demands,

the WRDC indicated that 94% of the state’s overall unmet water demands would occur

inside the CAP service area, leaving 6% of the state’s unmet demands outside of the

CAP service area, based on the Phoenix AMA, Pinal AMA, and the Tucson AMA Basin

data. The Basin Study concluded that 61% of the state’s overall unmet water demands

would occur inside the CAP service area and 39% of the state’s unmet demands would

be outside the CAP service area.

While both of these studies are comprehensive, the wide-ranging results of water

demands for these two areas of interest led Department staff to consider values that fell

between the results of the two studies, as a way of averaging the results. The

numerical average of the two studies provides a division of 78% of the demand being

inside the CAP service area and 22% outside the CAP service area. A division between

the two areas close to this numerical average seemed reasonable and is further

supported by population studies as described below.

The 2010 Census data provides an 80% to 20% division of the population between

inside and outside the CAP service area, respectively. The most current DES

population projections for 2020 provide a division of 82% inside and 18% outside of the

CAP service area. The Department selected the 82%/18% division between the two

areas because: (1) it is reasonably close to the average of the other two water demand

methodologies; (2) it is a population projection for 2020, coincident with the time frame

the Department selected for the DSI determination; and (3) it is consistent with ADWR’s

past reliance on DES projections for other demand forecasting efforts.

5 Water Resources Development Commission Final Report Volumes I and II; October 1, 2011;

http://www.azwater.gov/AzDWR/WaterManagement/WRDC_HB2661/Meetings_Schedule.htm as of 1/18/2013. 6 Colorado River Basin Water Supply and Demand Study; U.S. Department of the Interior Bureau of Reclamation;

December 2012; http://www.usbr.gov/lc/region/programs/crbstudy/finalreport/index.html as of 1/18/2013.

NIA Reallocation 6 ADWR Response to Comments January 18, 2013

The Arizona Water Settlement Agreement specifies that the NIA Priority water shall be

made available for reallocation to non-Indian M&I water users within the State of

Arizona and the division of demands between the CAP Service Area and outside of the

CAP Service Area is a fair representation of the State. The Department identified this

division between the two areas in an unbiased manner in an attempt to balance

opportunities to use the NIA Priority water.

The Industrial Pool was calculated as being 15% of the overall M&I demands for the

CAP service area. The Department evaluated its AMA Assessment Reports7,8,9 for the

AMAs within the CAP service area. The AMA Assessment Reports revealed an

industrial demand that was 12.5% of the overall M&I demand. The WRDC Study

indicated that industrial demands accounted for 20.4% of the overall M&I demands for

the AMA basins within the CAP service area. ADWR selected 15% as a value between

these two studies, and applied that percentage to the amount available for reallocation

within the CAP Service Area, 78,962 af, resulting in an Industrial Pool of 12,000 af. This

Industrial Pool volume will be reallocated inside of the CAP service area only.

Reviewing the Department’s Recommendations

Various comments suggested that the Department should review the allocations to

ensure that the plans for use of the NIA Priority water submitted with the applications

are implemented as described and that the water is fully used. The Department’s role,

as defined in the Settlements Act, the Agreement, and state statute, is to recommend

allocation volumes to the Secretary of the Interior. After the Secretary allocates the

water, the Secretary will offer to enter into subcontracts for permanent service. As with

previous allocations of CAP water, the Department will not seek revocation of an

allocation or subcontract as long as the subcontractor is meeting the contract

requirements. Applicants are required to demonstrate both the economic and

7 DRAFT Demand and Supply Assessment 1985-2025 Phoenix Active Management Area; Arizona Department of

Water Resources; November 3, 2010; http://www.azwater.gov/AzDWR/WaterManagement/Assessments/documents/PhoenixAMAAssessment11-8-2010.pdf as of 1/18/2013. 8 DRAFT Demand and Supply Assessment 1985-2025 Pinal Active Management Area; Arizona Department of Water

Resources; May 13, 2011; http://www.azwater.gov/AzDWR/WaterManagement/Assessments/documents/PinalAssessmentFinal5-23-2011.pdf as of 1/18/2013. 9 DRAFT Demand and Supply Assessment 1985-2025 Tucson Active Management Area; Arizona Department of

Water Resources; May 28, 2010; http://www.azwater.gov/AzDWR/WaterManagement/Assessments/documents/FINALTAMAASSESSMENT.pdf as of 1/18/2013.

NIA Reallocation 7 ADWR Response to Comments January 18, 2013

technological feasibility of using an allocation and the Department will not recommend

an allocation to an applicant whose plan is merely speculative.

If an allocation holder seeks to transfer its allocation to another water user, the transfer

would be subject to the Department’s review. A transfer of an NIA Priority water

allocation will be subject to the Department’s Revised Policy Regarding Transfer of

Central Arizona Project Municipal and Industrial Water Subcontract Entitlements (CR6),

until such time the Department elects to develop an alternative policy to address

transfers of NIA Priority water.

Demonstration of Analysis of Costs and Feasibility Plans

Comments suggested that the required demonstration that the costs associated with

acquiring and utilizing this water supply have been analyzed, and a plan to assess the

feasibility of any infrastructure that might be needed may be conceptual upon submittal

of the applications. The Department recognizes that the planning process is individual

to each applicant and expects a reasonable demonstration of technological and

economic feasibility. While the requirements specified for this reallocation process may

use language similar to that used in other Department programs, the Department

recognizes that this reallocation process is a separate and individual process. The

Department does not intend to apply assured or adequate water supply criteria to

applications for NIA Priority water.

Recommendations for Priorities

Some comments suggested that the Department should give priority to existing CAP

water users that currently take deliveries of their full allocations. Some comments

suggested that the Department prioritize the use of NIA Priority water for firming or

drought mitigation. Some comments recommended establishing priority for entities that

have accrued long-term storage credits because those credits will serve as a back-up

supply when the NIA Priority water is unavailable.

Giving priority to (1) existing CAP water users, (2) those who have accrued long-term

storage credits, or (3) applicants that will use the water for firming or drought mitigation

would not necessarily provide an additional source of water to areas with limited

physical availability of groundwater, or meet the near-term demands for existing

municipal providers and industrial users. Therefore, these recommendations for

priorities do not serve the goals identified by the Department for this process.

NIA Reallocation 8 ADWR Response to Comments January 18, 2013

While the Department will not establish priority for current CAP water users or for those

who have accrued long-term storage credits, each applicant must identify how it will put

the NIA Priority water to use in the near term and identify back-up supplies for use when

the NIA Priority water is unavailable. Presumably, water users currently using CAP

water and/or have accrued long-term storage credits will be able to demonstrate these

requirements.

Recharge and Recovery

Some comments recommend prioritizing water users that will use the NIA Priority water

directly over those that will store and recover the water. Some comments also

recommended placing additional requirements on NIA priority water planned for indirect

delivery (recharged), such as restricting the recharge and recovery to the same sub-

basin of use or recovering the credits within the area of impact of storage.

While the Department acknowledges that concerns about storage and recovery outside

the area of impact are valid water management concerns, the Department views this

issue as a broader water management concern applying to storage and recovery of any

water supplies, and not just NIA Priority water. Storage and recovery of water will be

regulated within the AMAs as identified in statute, and in the 4th Management Plans,

without regard to how the particular water supply was acquired. Applicants for NIA

Priority water must demonstrate that their proposed use will be consistent with the goals

established for this allocation.

Pro-Rata and Market-Based Distribution

Some comments oppose the pro rata distribution because it will result in allocations that

are too small to make infrastructure investment worthwhile. Some comments suggested

market-based distribution.

The Department recognizes that the proposed pro rata distribution would make smaller

quantities of water available to a larger number of water users and that these smaller

quantities may make it difficult to justify the infrastructure development costs. However,

given the broad interest expressed in this reallocation, ADWR does not believe that

selecting only a few recipients for reallocation would be prudent public policy.

Therefore, the Department identified meaningful water management goals for this

reallocation and drafted specific selection criteria to best allocate this water. Each entity

NIA Reallocation 9 ADWR Response to Comments January 18, 2013

will need to assess its own circumstances with regard to its water resources planning

and finances and determine whether to apply for this reallocation.

In addition, there are contractual and statutory requirements for the pricing of this water.

CAWCD will establish a pricing policy for this water, ADWR will establish selection

criteria, and each entity will make its own planning and business decisions regarding

this reallocation.

Relinquishment of Groundwater Allowance Credits

The Department will not be implementing this proposed requirement.

Groundwater Management Goals

Many comments recommended that the NIA Priority water should not be used to foster

growth without sufficient non-groundwater supplies as a back-up for this water. Some

comments expressed concern that the NIA Priority water would be utilized to foster

growth, and when this water is unavailable, groundwater would be used as the alternate

supply.

The Department has identified the DSI for 2020 as the method for calculating each

applicant’s demand for NIA Priority water. This will include the calculation of the

applicant’s projected demand in the year 2020, as well as a consideration of the water

supplies available to meet that demand in 2020. Each applicant is expected to show

how its use of NIA Priority water will meet the goals established by ADWR for this

reallocation process. Any applicant proposing to use groundwater as a back-up supply

must demonstrate how its groundwater use will not contribute to groundwater mining

within the AMA.

Delay the 2013 Reallocation

The Department received recommendations to delay the output of the reallocation until

the completion of the 4th Managements Plans and the CAGRD 2015 Plan of Operation.

While these planning documents will define important water management strategies,

completion of these plans may not benefit the 2013 reallocation process.

NIA Reallocation 10 ADWR Response to Comments January 18, 2013

Industrial Pool

The Department received various requests for clarification about the Industrial Pool. The

Department also received questions regarding industrial users receiving water from

municipal providers. Some comments also recommended requiring General Industrial

Use Permit holders who receive allocations to modify the terms of their permits to

reduce groundwater use.

The Industrial Pool will be 12,000 af and will be made available during the 2013

reallocation. Allocation recommendations will be for specific uses in specified locations

within the CAP service area. As discussed previously, subsequent transfer of the

allocation will be subject to the Department’s Revised Policy Regarding Transfer of

Central Arizona Project Municipal and Industrial Water Subcontract Entitlements (CR6),

until such time as the Department elects to develop an alternative policy to address

transfers of NIA Priority water.

A qualified industrial user will include currently authorized groundwater users that can

demonstrate a DSI for 2020 that is greater than 400 af. Excess CAP water will not be

included as a supply in the calculation of the DSI.

If an industrial user receives water from a municipal provider, the municipal provider

may coordinate with the industrial user to provide projected demands for 2020 in the

municipal provider’s application for the Municipal Pool. An industrial user may apply for

water to serve its industrial uses in the Industrial Pool. The Department will work to

ensure that individual facility industrial demands are not counted in both pools.

The Department does not need to require that applicants modify General Industrial Use

(GIU) permits if an applicant receives an allocation recommendation. GIU permits

include a requirement that if uncommitted municipal and industrial Central Arizona

Project water is available or other surface water or effluent of adequate quality is

available at a cost comparable to groundwater, the Director may require the permittee to

use such water in lieu of groundwater. Additionally, the applications will be evaluated

based on a demonstration of the replacement of an actual groundwater use.

Municipal Pool

The Department received a question regarding the definition of the CAP service area:

whether it refers to the AMAs or the three-county CAWCD service area. The

Department also received comments regarding the demands for water to serve

development on State Lands. Some comments proposed that the Department withhold

NIA Reallocation 11 ADWR Response to Comments January 18, 2013

part of the Municipal Pool volume for a future reallocation process, possibly 2021, to

allow further assessment of aquifer conditions and water management goals.

The applicable Municipal Pool area is the three-county CAWCD service area (CAP

service area). Qualified applicants for the Municipal Pool will include public and private

water providers and the CAGRD. The State Land Department will remain on equal

footing with and must meet the same criteria as other applicants in the reallocation

process. If an applicant’s planning area includes state-owned lands, the applicant can

show projected demands for those areas and include those demands in its DSI for

2020.

After consideration of comments received, the Department has decided to retain part of

the Municipal Pool for allocation in 2021. This retention allows the Department to

maintain some flexibility to adapt to changing economic and hydrologic conditions. The

Department proposes to retain 17,333 af for reallocation to the Municipal Pool inside the

CAP service area in 2021, an amount equal to that being held for outside of the CAP

service area. This leaves 34,629 af to be reallocated to the Municipal Pool in the initial

round. Because the total volume to be allocated in 2013 has been reduced, the volume

of water in each of the CAIDD and MSIDD Pools will also be reduced to 4,313 af each.10

Outside CAP Service Area

The Department received various comments regarding the criteria for allocation outside

the CAP service area in 2021. While most comments were supportive of the

Department’s proposal to make a volume of NIA Priority water available for reallocation

outside the CAP service area in 2021, one comment questioned the proposal. Some

comments requested information about the criteria.

As discussed previously, the Director of the Department is authorized by state statute to

consult, advise, and cooperate with the Secretary regarding new allocations of Colorado

River water or CAP water pursuant to A.R.S. § 45-107. In particular, the Department is

authorized to recommend allocations of this NIA Priority water to the Secretary pursuant

to the terms of the Settlements Act and the Agreement.

While the Settlements Act expressly prohibits most allocations outside the state of

Arizona, the Settlements Act is silent on whether allocations may occur within the state

of Arizona and outside the CAP service area.11 Had Congress intended to limit

reallocations to the CAP service area, it certainly could have done so. The Agreement 10

Agreement, Paragraphs 9.3.4.3 and 9.3.4.4. 11

Settlements Act, § 104(e)(1).

NIA Reallocation 12 ADWR Response to Comments January 18, 2013

itself provides that the Department “shall make [NIA Priority water] available for

reallocation to non-Indian M&I water users within the State of Arizona.”12 The State of

Arizona, Reclamation, and CAWCD could have identified the CAP service area as a

limitation for reallocation, had they intended to do so.13

Additionally, allocating CAP water outside the CAP service area is consistent with state

statute and previous allocations. Section 48-3707(A), A.R.S. provides that “Water users

outside the district may contract for a water supply from the central Arizona project

directly with the secretary or with the district on the basis of paying costs allocated by

the secretary.” In 1983, the Secretary allocated CAP water to 13 entities outside the

CAP service area.14

The Department will not develop the criteria for the 2021 reallocation until closer to the

2021 timeframe. Waiting until closer to 2021 will allow the Department to consider water

management goals and economic issues applicable at that time. The criteria developed

for the 2021 reallocation may be modified to reflect changing economic and hydrologic

conditions, and incorporate lessons learned in this initial round of reallocation. The

Department will develop selection criteria that provide sound water management policy

for the area of interest based on then current conditions. Additionally, if any water

remains unallocated after the 2021 reallocation process, conditions will be assessed

and the disposition of the remaining water will be determined at that time.

NEXT STEPS

In early February 2013, the Department will post the Final Process and Evaluation

Criteria for the 2013 NIA Priority Water Reallocation. Soon thereafter, the Department

will schedule a meeting to discuss the application process with prospective applicants.

12

Agreement, Paragraph 9.3.4.2 (emphasis added). 13

Compare Agreement, Paragraphs 9.3.4.3 and 9.3.4.4, in which the parties agreed to provide a right of first refusal for a volume of water in each of two specified areas. 14

48 Fed. Reg. 12446, Mar. 24, 1983.