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February 2, 2024  |  Written by Kelly M. Doyle

Delta Conveyance Project Faces Stronger Headwinds with Court Ruling Rejecting Financing Scheme and New Environmental Litigation

Though the Delta Conveyance Project (“DCP” or the “Project”) was only recently approved by the Department of Water Resources’ (“DWR” or the “Department”) after completing the lengthy California Environmental Quality Act (CEQA) process, the DCP faces new obstacles to implementation. Nine lawsuits challenging DWR’s December 21, 2023 approval of the Project were recently filed in Sacramento County Superior Court by a total of thirty-three plaintiffs representing all the Delta counties, the City of Stockton, environmental and other nongovernmental organizations, and tribe[s]. Resolution of that litigation could take several years.

In the meantime, DWR will have to revisit its plans for financing the Project, most recently estimated to cost $16 billion. In an action known as Sierra Club, et al. v. California Department of Water Resources, the Sacramento County Superior Court rejected the Department’s attempt to validate revenue bond resolutions that would provide necessary funding to the Project. This article provides a brief analysis of the background and legal outcome of the case.

Background

The DCP is a possible future component of the State Water Project and is the progeny of the abandoned “twin tunnel” project and, before that, the Peripheral Canal, which was rejected by the voters in a statewide initiative in 1982. Last month, DWR certified the Final Environmental Impact Report (FEIR) for the DCP, completing the environmental review process required by CEQA and clearing the way for construction of a tunnel that would divert water from the Sacramento-San Joaquin Delta for export to Silicon Valley, central and southern California.

On August 6, 2020, DWR adopted three bond resolutions (Bond Resolutions) which would have authorized revenue bond financing as the mechanism to fund the DCP. The Bond Resolutions were intended to fund a combination of expenses DWR labeled as the “Delta Program” which the Department defined as:

    • [T]he environmental review, planning, engineering, design, and, if and when [DWR] determines to be appropriate, acquisition, construction, operation, and maintenance of facilities for the conveyance of water in, about and through the Sacramento-San Joaquin Delta, subject to such further specification thereof as [DWR] in its discretion may adopt. Delta Program facilities may include, but are not limited to, water diversion intake structures located on the Sacramento River and a tunnel to convey water to Banks Pumping Plant.

DWR concurrently filed a validation action (Validation Action). The Validation Action sought a judicial determination that DWR’s issuance of bonds, are valid, legal, and binding. Following the Department’s filing, the Sierra Club, and numerous other parties, including Sacramento County, Sacramento County Water Agency, and the City of Yuba, filed answers raising numerous affirmative defenses challenging the legality of DWR’s adoption of the Bond Resolutions.

Analysis

The court’s ruling in the Validation Action addressed just one of the challengers’ affirmative defenses – i.e., arguments that the Delta Program, as DWR defined it in the Bond Resolutions – was not within the scope of DWR’s statutorily delegated authority under the Central Valley Project Act (CVPA) to construct and operate as a unit of the State Water Project. Specifically, the court considered whether the Delta Program amounts to a mere modification of the Feather River Project (FRP) unit described in the CVPA in three historical reports, as DWR asserted, or whether the Delta Program was defined so broadly that it constitutes more than a mere modification, and therefore falls outside of the scope of DWR’s delegated authority.

DWR contended that the planning and construction of the Delta Program is within the authority granted to the Department by section 11260 of the Water Code (last amended in 1959) to modify the FRP, which at one time included a Delta Cross Channel to move water from the Sacramento River to pumping facilities in the south Delta. The Department argued that the Delta Program facilities would serve the same function as the facilities described in section 11260, as the facilities would be transporting water from the Feather River and Sacramento River to the south Delta for export.

Defendants argued that the DCP could not in any sense be considered a further modification of the historic “Delta Cross Channel” mentioned in the historic reports because these reports do not describe any facilities peripheral to or under the Delta. Additionally, Defendants argued that the DCP could not be a further modification of the FRP because DWR had formally dispensed with the Delta Cross Channel and DWR did not show that the DCP is a further modification of any other Delta facility associated with the CVPA. DWR did not offer an interpretation of “further modification thereof” that relied on rules governing statutory interpretation or case law and instead argued for a “discretionary standard” – i.e., whether the “function and purpose” of the FRP and Delta Program are the same.

The court found the Department’s arguments unpersuasive. Judge Mennemeier stated that, “[a]lthough the Legislature plainly delegated broad authority to (the Department), it did not delegate infinite authority.” The court held that DWR’s definition of the Delta Program ignores the scope of the FRP’s objectives and could theoretically provide for DWR to approve facilities that would serve purposes other than those set forth in the reports. Judge Mennemeier stated, “[i]n plain words, the problem with (the Department’s) definition of the ‘delta program’ is that its definition is untethered to the objectives, purposes, and effects of the Feather River Project.” The court also rejected DWR’s reliance on the second sentence of the definition of the Delta Program to support its claim that the definition is consistent with the purposes of the FRP. Specifically, the court stated that the second sentence is merely illustrative, not restrictive. In sum, Judge Mennemeier found that DWR did not show that its definition of the Delta Program would amount to a mere modification of the FRP.

Therefore, the court found that section 11260 does not delegate to DWR the authority to adopt the Bond Resolutions and as such, DWR’s actions exceeded the scope of its authority. Because DWR lacks the authority to adopt the “Delta Program” as a “modification” of the FRP unit, the court found that “it necessarily follows that DWR lacks the authority to issue revenue bonds to finance the Delta Program.” In accordance with this holding, the court denied and dismissed the Department’s Validation Action.

Although the court characterized the ruling as “narrow,” the practical implications of the ruling are consequential. Without a judgment from a court validating DWR’s authority to issue bonds, DWR’s ability to finance the environmental review, planning, design, and construction of the Delta tunnel project is compromised because potential bond buyers lack assurance of DWR’s authority to issue bonds and impose charges that will generate a revenue stream necessary to repay the bonds.

Any effort to confirm DWR’s authority to fund the DCP with revenue bonds faces additional legal uncertainty, whether DWR appeals the superior court decision or adopts new bond resolutions and attempts to successfully prosecute a new validation action. The January 16 decision did not address numerous other legal issues raised by validation defendants that may be raised in any future validation proceeding related to Delta tunnel revenue bond financing.

A link to the court’s decision can be found here.

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