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July 15, 2005 The Water Report <br />water transactions. They begin to stretch the paradigm of offstream banking, through agreed alteration of <br />Water <br />detail, to more greatly enhance the fungibility (i.e., legal interchangeability) of water supplies. Several <br />Banking <br />aspects of the offstream banking paradigm are worth noting. <br />Security of the Banked Water Resource <br />Because of the Secretary's responsibility under the Article II (B)(6) of the Decree in Arizona v. <br />Secure <br />California, and his or her obligation to ascertain that unused Colorado River apportionment exists in one <br />Agreement <br />state prior to permitting users in another state to use that apportionment, that unused apportionment must <br />be secure. In the first iteration of the Nevada - Arizona agreement, this security was established through <br />the sequential process of first identifying available water and actually placing it underground in the <br />storage year, thereby creating storage credits. The storage credits were then redeemed by securing <br />substitute non - Colorado River water use and certifying the concomitant nonuse of Colorado River water <br />to the Secretary in the recovery year. Recovery could not occur without the security of the water in the <br />ground (bank) first being established. <br />In the second iteration of the Nevada - Arizona agreements, the security is much simpler. Storage <br />Storage for $ <br />credits are created in direct consideration for the payment of money. The recovery of storage credits is <br />pursuant to a contractually established schedule. The bank thus assumes the risk that sufficient <br />alternative nonuse of Colorado River water will be available so as to meet the established recovery <br />schedule, and its obligation to the Secretary to certify that the ICUA has been created in the recovery <br />year; the consideration paid under the amended Arizona - Nevada agreement therefore contains a risk <br />premium. However, because the banking entity is not constrained under this type of agreement by the <br />Flexibility <br />actual date by which the water must be stored in order to meet its obligations, it may realize more <br />economic opportunities to obtain the water it needs to meet those obligations, including those <br />opportunities which exist when surplus water exists in the Colorado River system. The "bank" therefore <br />now may operate more like a commercial bank, garnering opportunity based on its transactional position <br />between its depositing and borrowing customers. <br />Constructive Storage / Fungible Water Resources <br />Where the storing entity possesses water already in storage at the time of the banking transaction, <br />the operational question arises whether to place the new water into storage while taking the previously <br />Repayment <br />banked water out of storage for delivery to consumers, or alternatively to deliver the new water directly to <br />Liability <br />consumers, leaving the previously stored water in place. If the two water supplies are fungible, then the <br />latter may be accomplished. Under the 2004 Nevada - California agreement, the latter management <br />alternative is possible. However, by so managing the "stored" water, the storing entity has necessarily <br />600,000 <br />600,000 <br />400,000 <br />W <br />y 300,000 <br />200,000 <br />100,000 <br />Central Arizona Project <br />Water Deliveries for Underground Storage —1997 -2004 <br />(Grand Total = 3,361,474 acre -Feet) <br />■ USF Other a GSF Other ® USF AWBA ❑ GSF AWBA <br />1997 1998 1999 2000 2001 2002 2003 2004 <br />AWBA Cumulative Total <br />2,224,984 acre -feet <br />AWBA M &1 Firming <br />Target <br />3,400,000 acre -feet <br />AWBA Interstate Target <br />1,200,000 acre -feet <br />imposed a future repayment <br />liability on its otherwise - <br />stored water supply. As with <br />the 2004 Nevada - Arizona <br />agreement, the bank has now <br />assumed a risk that its stored <br />water supply will be <br />adequate to meet its future <br />obligations. In the Nevada - <br />California instance, <br />consideration for the <br />assumption of this risk is in <br />the value of the water quality <br />components of the new <br />water, as compared with the <br />stored water, for purposes of <br />blending with water from <br />other sources. Fungibility <br />has its value. <br />"Authorized Entity" <br />43 C.F.R. 414.2 <br />The Secretary's <br />Offstream Storage <br />Regulations limit the field of <br />parties who may be engaged <br />in interstate transactions <br />Copyright© 2005 Envirotech Publications; Reproduction without permission strictly prohibited. 13 <br />