BOARD02099

• Board Meeting Date: 5/20/2002
• Description: CWCB Director's Report
• Board Meetings - Doc Type: Memo

Today, the wheelers and dealers of the California water world are obscure
agencies such as the Semi tropic Water Storage District and the Yuba County
Water Agency--not Enron Corp. or the Bass Bros.

Not that those big Texas-based companies didn't try. Enron practically invented
trading in natural gas and electricity, and the company hoped that its
subsidiary Azurix would become a player in a future California water market.
Its executives read World Bank and United Nations reports describing a
desperate need for clean, reliable sources of water around the globe. In 1999,
the company invested $30 million in a Madera County ranch capable of storing
large amounts of water underground. It intended to make Madera Ranch the
cornerstone of its North American operations.

"Due diligence suggested that the way the Central Valley was growing, it was a
good investment," said John "Woody" Wodraska, who led the Metropolitan Water
District of Southern California from 1993 to 1998 before going to work for
Azurix. "People in the company went through that and thought this had a chance
for pretty remarkable payoff if they could market the water."

But Azurix hit stiff opposition from local farmers fearful the project would
drain the county's water for sale to Southern California. It didn't take long
before the speculators abandoned the state, having failed to earn riches.
Enron, once a haughty champion of free markets, filed for bankruptcy in
December. Wodraska left Azurix last April.

"Like with most things, the pioneers have the arrows in their backs," Wodraska
said.

FARMERS USE 80% OF STATE'S WATER

When water gets transferred in California, it's almost always by agricultural
districts. Farmers use 80% of the developed water in the state. And water is
typically sold from north to south. That's because, hydrologically speaking,
California is out of whack. Three-quarters of the precipitation in the state
falls in the north, but three-quarters of the demand for water is in the south.

Starting in the 1930s, California and the federal government tried to correct
that imbalance. They dammed northern rivers such as the Sacramento and Feather,
built giant pumps to harness rivers before they could drain to the Pacific
Ocean, then channeled the water hundreds of miles south in concrete canals.

Two massive water projects, one federal and one state, have fueled the
agricultural development of the San Joaquin Valley and allowed southern coastal
cities to sprawl. But by the 1980s, the projects were sometimes over-tapped.
California kept growing. And federal law dictated that increasing amounts of
water be taken from farms and cities to protect several species of salmon and
other native fish.

Pressure on the water projects increased when drought struck in 1987 and
lingered for six years. In 1991, to squeeze more water into the system, the
state Department of Water Resources set up an emergency "drought water bank."
The department paid farmers $68 to $175 per acre-foot to skip growing a crop
for a year and instead sell the water.

That hastily constructed water market, with the state playing broker and
setting prices, disbanded when the rains returned. But it helped foster a Vlew
of water as a commodity. Water districts that had for decades simply taken what
they needed from a river began to consider how they might sell the water they
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