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Executive Summary Failure to provide for a means to fund environmental and recreational enhancements could create additional conflict, increase the cost of water development, delay project implementation, preclude some water users from developing a reliable supply, and prevent the creation of the desired enhancements. Further dialogue to identify potential funding mechanisms and to better define the distinction between mitigation and enhancement comprises one of the key SWSI recommendations. 9. The Ability of Smaller, Rural Water Providers and Agricultural Water Users to Adequately Address Their Existing and Future Water Needs is Significantly Limited by Their Financial Capabilities Agricultural and smaller, rural water providers face a number of challenges in developing new supplies. Agricultural users in many areas have a less than full supply for existing irrigated lands and would benefit from more dependable and predictable supplies. Smaller and rural water providers, including water conservancy districts providing augmentation water, also need to create more reliable supplies for existing uses during dry years as well as developing supplies for future water demands. for all uses now has placed agricultural users in competition with M&I users and environmental and recreational needs for the limited available resources. Agricultural users face the same costly and lengthy permitting process for developing new storage to firm agricultural supplies. In most basins, agricultural users needing to acquire consumptive use water supplies for well augmentation must compete with M&I users who are also seeking these same consumptive use sources. Agriculture cannot compete on an ability to pay basis with M&I users. Agricultural users generally cannot afford to pay more than $40 to $60 per AF/year (<$1,000 per AF one-time capital cost) for water based on market prices for agricultural goods. Water acquisition and water development capital costs, however, range from $2,000 at the minimum to greater than $15,000 per AF of reliable (firm) annual yield. As a result, agriculture cannot, without subsidies, afford the current cost of water acquisition or development. The high market value of water rights also makes it tempting for agricultural users to sell their water rights to municipal and industrial users and dry-up their irrigated lands, since they can receive a much greater return on their investment than if the water rights remain in agricultural use. Development of new water supplies to meet future water needs is an increasingly competitive and expensive process. The construction of storage to regulate existing and future water rights can be a very complex process with lengthy and expensive permitting and mitigation procedures. The purchase or lease of existing agricultural water rights for M&I use has also become increasingly expensive. Storage is required to regulate acquired agricultural rights for M&I use. This storage is needed to carry water over from the irrigation season to the non-irrigation season and to store water for below average runoff years and to make historic return flows owed to the river system during the non-irrigation season. In addition, the water court process for changing acquired agricultural rights or filing for new water rights is complex and expensive. As a result, water supply development costs, whether from developing new storage or acquiring water rights through agricultural transfers, have increased significantly and are anticipated to continue to increase. Agricultural users also face an expensive process for developing new supplies. The increased needs for water ~ $~ole'ri~ice Wo~e' $upplY Initia~ive Smaller and rural water providers, including water conservancy districts providing augmentation supplies, also face these high water development costs as they seek to firm existing supplies or develop new supplies. There are significant economies of scale (i.e., fixed costs such as engineering and construction are a greater percentage of cost for smaller storage projects) in developing water supply that are not available to these smaller and rural water providers and conservancy districts since these users do not need and cannot afford large storage projects. In addition, water quality standards drive up raw water treatment costs. Opportunities to joint venture with other users can result in larger, more cost-efficient projects. Water storage costs per AF of storage for the same reservoir site generally decrease as additional storage is constructed. In addition, every reservoir must have a spillway and outlet works regardless of the reservoir size and these costs decline as the capacity increases. These relative economies of scale also apply to engineering, legal, and administrative costs. Agricultural users and smaller water providers have difficulty paying for the sophisticated ~~ ~ S:\REPORT\WORD PROCESSING\REPORT\EXEC SUMMARY 11-10-04.DOC ES-41