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California: A Run on the Water Bank?

Via California Lawyer, an interesting article on one determined investigator’s efforts to pursues a Los Angeles billionaire for allegedly seizing control of the state’s water supply.  As the report notes:

Illustration by Jake Flaherty

Who is Adam Keats, and why is he so focused on Los Angeles billionaire Stewart Resnick? Attorneys representing Resnick’s vast agricultural holdings in the Central Valley wish the troublesome plaintiffs lawyer would just go away.

Keats, 40, is senior counsel at the Tucson-based Center for Biological Diversity (CBD), one of the nation’s most aggressive and uncompromising environmental rights organizations. A graduate of UC Davis’s law school, the Massachusetts native has a passion for hiking and backpacking, a fascination with the wilderness philosophies of Henry David Thoreau and John Muir, and a regimen of riding a bicycle four miles to and from his San Francisco office each day – rain or shine.

Resnick, 74, is a silver-haired entrepreneur with a UCLA law degree and a personal fortune estimated at $2 billion. His Los Angeles-based holding company, Roll Global, manages a portfolio of companies that includes Teleflora, Pom Wonderful, Fiji Water, and Paramount Farming Co. – the world’s largest producer of pistachios and almonds. He and his wife, Lynda, are a quintessential power couple with a reputation for political savvy and philanthropy. They live in a spectacular Beaux-Arts mansion in Beverly Hills and have endowed an exhibition hall of the Los Angeles County Museum of Art and a neuropsychiatric hospital.

What Keats and Resnick share is an interest in water – and the legal disputes that inevitably accompany its scarcity. As the director of the CBD’s urban wildlands program, Keats is the lead attorney behind a pair of lawsuits pending in Sacramento County that have the potential to upend California water law and strike a substantial blow to Resnick’s  empire.

Known as Central Delta I (a companion case has been stayed), the litigation aims to overturn the legal framework and entitlement contracts that control the massive State Water Project, a labyrinthine system of dams, pumping stations, reservoirs, aqueducts, and canals that transports water from the Sacramento-San Joaquin River Delta to Southern California – irrigating about 120,000 acres of Paramount Farming’s nut and fruit trees in Kern County along the way. (Cent. Delta Water Agency v. California Dep’t of Water Res., No. 34-2010-80000561 (Sac. Super. Ct. filed June 3, 2010), Cent. Delta Water Agency v. Kern Cnty. Water Agency, No. S-1500-CV-270965 (Kern Super. Ct. filed July 2, 2010) (transferred to Sacramento County and stayed).)

Legally, Central Delta I raises myriad complexities, both procedural and substantive, under the state constitution, water and government codes, the California Environmental Quality Act (CEQA) (Cal. Pub. Res. Code §§ 2100021177), and related regulations (see Cal. Code Regs., tit. 14, §§ 15000-15387). Broadly, it seeks to invalidate major project modifications executed in 1995 after secret meetings between the state Department of Water Resources (DWR) and a handful of water contractors. Among other changes, the so-called Monterey Agreement transferred state ownership of the Kern Water Bank – an immense underground aquifer occupying 32 square miles in Kern County – to a local joint powers authority controlled in part by Resnick’s companies. The water bank is capable of storing about 1.5 million acre-feet of water, making it the largest such facility in the world.

The transfer was immediately challenged by a coalition of environmental groups under both CEQA and a rarely used “reverse validation” proceeding (see Cal. Code Civ. Proc. § 863). But that case finally settled in 2003 (Planning and Conservation League v. Dept. Water Res., No. 95CS03216 (Sac. Super. Ct. filed Dec. 27, 1995)).

Now, Keats insists, CBD’s Central Delta I reopens questions about the backroom deal that enabled what he calls a “cabal” of agricultural barons – including Resnick – to gain control of a significant portion of California’s water supply. Since the Monterey Agreement was implemented, Keats contends, it has produced an environmental nightmare, depleting fresh water in the Bay-Delta region; contributing to overirrigation, groundwater depletion, and the buildup of selenium in the soils of the San Joaquin Valley; and threatening the habitats of endangered fish and wildlife.

Nonsense, say defense lawyers in Central Delta I. Clifford W. Schulz, a senior attorney in the Sacramento office of Kronick Moskovitz Tiedemann & Girard who represents the Kern County Water Agency, maintains that CBD’s complaint has no merit. Not only are the disputed transactions legal, he says, but “they’ve furthered the public interest – helping to bring California into the 21st century, promoting business, employment, and economic growth, and actually advanc[ing] conservation values.”

Resnick’s counsel at his in-house Roll Law Group declined interview requests for this article. But in November 2010 Resnick told Bloomberg Businessweek that he regarded Central Delta I as “a nuisance,” commenting, “If I think I’m right, I don’t care what people say. It’s their problem.”

The grand sweep of Central Delta I is evident from the list of defendants. In addition to the DWR and Resnick’s Roll Global (formerly Roll International), the real parties in interest include the Tejon Ranch Co. (which owns the state’s largest contiguous expanse of land) and all 29 of the State Water Project’s contractors – the regional public agencies that connect the project canals to local delivery systems. The defense counsel roster spans the state – including, according to Keats, “virtually every big firm that’s ever handled an important water case.”

By contrast, the plaintiffs are a ragtag collection of two Bay-Delta water districts and a handful of sport-fishing and environmental groups. CBD, the lead plaintiff, grew out of the direct-action philosophy of the Earth First movement. It has since evolved into a formidable litigation force with offices in about a half dozen states, an annual budget of about $7 million, and 22 lawyers on staff, mostly in San Francisco. “We’re not just trying to get a seat at the table to negotiate with the powers that be,” Keats explains. “The planet is under attack by polluters and developers, and we’re prepared to take all necessary legal steps to stop them.”

Keats says his interest in the Kern Water Bank grew from CBD’s 2009 challenge to the environmental impact report for Tejon Ranch’s Mountain Village – a planned gated resort of 3,450 luxury homes, hotels, shopping centers, and golf courses located in Kern County nesting ground for the endangered California condor [see "Showdown at Tejon Ranch," California Lawyer, June 2007]. In reviewing the EIR, Keats noticed that the project was slated to get its water from three sources: the State Water Project, recycled water, and the Kern Water Bank.

At first, Keats says, he didn’t understand the implications of what he’d found. “I had never heard of the Kern Water Bank before.” So he started to look around, first at the DWR and then at the earlier case that had settled. “We followed the bread crumbs and clues,” he says, “and decided we had to challenge the bank transfer.”

CBD was a relative latecomer to California water litigation. Peter Galvin, the center’s cofounder and Keats’s boss, says the Tejon Ranch case was an eye-opener. “We realized that water had to be a central focus for us,” he says. “Most bad things that happen to the environment can’t happen without water.”

CBD’s decision to file the Central Delta suits started Keats on a journey of discovery about the state’s water delivery system. Authorized by the Legislature and approved by ballot initiative in November 1960, the State Water Project was designed to promote the public interest and help end California’s perennial water wars. An elaborate system of dams and conveyances would be built to carry an annual total of 4.23 million acre-feet of water down the western spine of the San Joaquin Valley. The DWR was created to build the project and sign agreements with local water-district contractors – the 29 designated regional carriers who would receive specified amounts of water, called entitlements, for delivery to end users.

But for a variety of political and economic reasons, many of the dams and canals were never built. As a result, actual deliveries through the water project from 1980 to 1993 averaged only about 2 million acre-feet – less than half the volume promised to the contractors. The difference is called “paper water” – entitlements the regional contractors paid for but rarely received – which produced “an aura of unreality surrounding the debate,” according to the appellate court in the first challenge to the Monterey Agreement.

Among the facilities that the DWR failed to develop was a depleted underground aquifer called the Kern Fan Element. The department had planned to ring the aquifer with recharge basins, extraction wells, and conduits to turn it into a subsurface reservoir that could be refilled in wet years and drawn down by surrounding districts during droughts. But after spending $74 million on the project, the state couldn’t muster the funds to finish the job.

In the early 1990s a seven-year drought set urban and rural water contractors at odds over their entitlements. The scarcity of supplies was worsened by recent federal court rulings that protected threatened fish species in the Bay-Delta region. Amid increasing tensions, several urban contractors held secret strategy meetings. All sides threatened litigation.

So in late 1994 representatives from the DWR met in Monterey with five water contractors to determine the most equitable way to allocate supplies during times of shortage. The confidential meetings culminated in the Monterey Agreement, a statement of 14 principles signed by the participants on December 1, 1994.

Under the agreement, agricultural contractors gave up an annual entitlement of 130,000 acre-feet of water in return for an end to the “urban preference” during droughts. The deal also eased restrictions on the use of “surplus water” for economic development, and authorized permanent sales of water by and between State Water Project contractors – creating a new private water market.

“The original State Water Project,” says Keats, “was a masterpiece of balance, taking into account the needs of agriculture, cities, and the environment. The new agreement subverted that balance.”

In a final provision, the DWR agreed to transfer ownership of the partially developed Kern Water Bank to the Kern County Water Agency, which had participated in the Monterey meetings. As consideration, the agency and another Kern County contractor – the Dudley Ridge Water District – agreed to retire their rights to a further annual 45,000 acre-feet of water. The water bank owners estimate the entitlement today would be worth approximately $5,800 per acre-foot, or more than $260 million. But according to Keats, that consideration was illusory – a promise of paper water that would be delivered only in wet years or if additional facilities were built.

The Monterey Agreement was executed on December 13, 1995. The very next day, ownership of the water bank was retransferred to the newly created Kern Water Bank Authority, a joint powers agency established under the Joint Exercise of Powers Act (Cal. Gov. Code §§ 6500-6599.3). The KWBA’s “base shares” – defined as its members’ allocation of costs and benefits in the bank – are split six ways, between five water districts and the Westside Mutual Water Co., a private entity wholly owned by Resnick’s Paramount Farming.

According to KWBA documents, Westside Mutual holds 48.06 percent of the base shares. Another 9.62 percent are held by the Dudley Ridge district – which is overseen by a Paramount Farming executive – and another 24.03 percent belong to a water district that Tejon Ranch controls. In effect, Resnick, along with Tejon Ranch, was in position to control millions of acre-feet of water through KWBA transactions.

Roughly three weeks after the double transfer of ownership, the Sacramento-based Planning and Conservation League filed a CEQA and reverse validation challenge to the Monterey Agreement. But after the trial court dismissed all claims, the Third Appellate District found that, under CEQA, the Water Department had improperly relinquished its responsibility for preparing an Environmental Impact Report (EIR) and ordered a new report. It also reinstated the reverse validation cause of action (Planning and Conservation League v. Dept. Water Res., 83 Cal. App. 4th 892 (2000)).

As news of the appeals court ruling spread, national environmental and consumer groups began referring to the Monterey Agreement as “a bloodless coup.” In 2003, Public Citizen in Washington, D.C., published a 38-page exposé entitled, “Water Heist: How Corporations Are Cashing In On California’s Water.”

Later that year, however, the plaintiffs agreed to settle the case for $5.5 million plus costs and attorneys fees if a new EIR were produced (Planning and Conservation League v. Dept. Water Res., No. 95CS03216 (Sac. Super. Ct. order regarding Monterey Agreement filed Jun. 6, 2003)). Years of intense negotiations followed. Finally, in May 2010 the DWR certified the new EIR and the “Monterey Plus Amendments” it embodied. The following month, the plaintiffs agreed to discharge their writ petition.

“This is one of the most carefully crafted EIRs I have ever seen,” says Schulz of Kronick Moskovitz. “It embodies unprecedented input from the environmental community. I just don’t understand what the [current] plaintiffs want.”

What CBD wants is an order directing the Department of Water Resources to vacate its approval of the revised EIR. The center also has initiated a reverse validation proceeding to declare the original 1995 Kern Water Bank transfer invalid (Cent. Delta Water Agency v. Dept. Water Res., No. 35-2010-80000561 (Sacramento Super. Ct. filed June 4, 2010)). Even 16 years after the Monterey Agreement, Keats contends the complaint is timely because the state Water Department’s authorization wasn’t complete until May 2010.

Whether Resnick or any of his companies had a direct hand in the original negotiations or in the water bank transfer remains a matter of speculation. Katherine Spanos, senior staff counsel at the DWR, stated by email that to her knowledge, Resnick’s Westside Mutual company was not involved in the Monterey Agreement meetings. Frederic A. Fudacz, a Nossaman partner in the Los Angeles office who represents Paramount Farming, says his client wasn’t involved in the 1994 meetings, although he acknowledged his role in setting up the Kern Water Bank Authority on its behalf a year later.

However, a 2001 report on Central Valley water banking prepared by the Natural Heritage Institute, a San Francisco-based nonprofit group, states that the Kern Water Bank project was “initiated” in August 1994 when staff from the DWR, the Kern County Water Agency, and Westside Mutual “met to discuss the potential for transferring the [water bank] from DWR to Kern County interests” in exchange for annual water entitlements.

Gregory Thomas, the institute’s president, says he did not prepare that section of the report and could not recall its contents. But he touted the professionalism of his staff and expressed confidence in its accuracy.

Evidence that Westside Mutual was involved in the Monterey Agreement, Keats says, would support a claim that the participants illegally transferred a public asset. He acknowledges that the National Heritage Institute report isn’t a smoking gun, but says it unquestionably moves the center’s case forward. “It shows that DWR knew at the outset that  the water bank would be privatized,” he argues. “It shows that we’re dealing with powerful interests and particularly bad actors who don’t want their secrets revealed.”

Since the transfer of ownership, members of the Kern Water Bank Authority have invested about $35 million in infrastructure and improvements, including wells, canals, pump stations, and pipelines. But Keats asserts that the authority is reaping huge profits at the public’s expense by selling California’s water in the secondary market. From 1995 to 2005, for instance, DWR records show that the water bank’s members withdrew about 138,000 acre-feet of water from the aquifer for their own use, while selling more than 423,000 acre-feet either back to the state or to other interests. Keats estimates that resales to the state have run into the millions of dollars.

“All this,” Keats says, sounding a lot like Jake Gittes in the 1974 movie Chinatown, “to serve the god of profit rather than the public good.”

The defendants in Central Delta I react to such charges with puzzlement. Spanos scoffs at Keats’s implication that the DWR is captive to corporate interests. “We’re independent,” she says. “We follow the law.”

Kronick Moskovitz’s Schulz, who represents the Kern County Water Agency, expresses a mix of shock and disbelief. “We were very surprised there was such an uproar” from the Central Delta I plaintiffs, he says. “You have to go back to the crisis facing the State Water Project in the early ’90s. We had gone through a historic drought that the unfinished project could not adequately handle. The Monterey Agreement was good water policy.”

As Spanos and Schulz see it, the water bank transfer contract and the new KWBA’s ownership structure are perfectly legal under Government Code section 6525, which provides that a private mutual water company may enter into a joint powers agreement with a public agency. Indeed, even before that section was enacted, state courts had recognized the right of mutual water companies to form joint power authorities with public agencies for any purpose deemed proper under the Public Utilities Code. (See City of Oakland v. Williams, 15 Cal. 2d 542 (1940).)

Spanos concedes that by today’s open meetings standards it may seem strange that the Monterey Agreement was negotiated privately. But she says, “There was never any question back then that meetings of this type would take place in public. You got together a core group of agencies to discuss a critical issue, and as soon as an agreement was finalized it was made available to the public.”

Stephen N. Roberts, a Nossaman partner who represents Roll Global, Westside Mutual, Paramount Farming, and Tejon Ranch, says, “There was nothing sinister behind the amendment.” Emphasizing the water bank’s importance to California’s economy, he points out that Roll Global employs more than 4,000 people through its various subsidiaries.

“[Westside Mutual has] invested millions to create a working water bank that DWR had failed to complete,” Roberts says. “We took a big risk and should not be penalized for it. And contrary to the claims of some environmentalists, the land atop the water bank is filled with birds and wildlife that would be far more threatened by other forms of development.”

In November 2010 Sacramento Superior Court Judge Timothy M. Frawley overruled an extensive set of demurrers in Central Delta I that had asserted the complaint should be dismissed as time-barred because all the relevant Kern Water Bank contracts were formed no later than 1996.

Last August defense lawyers responded to the demurrers’ defeat with a motion for judgment on the pleadings as to the CEQA cause of action based on court approval in 2010 of the Planning and Conservation League settlement. “The Plaintiffs in this case stood by and watched for many years, never claiming any separate interest in the outcome of the PCL litigation, never attempting to secure a separate ‘place at the table’ during the EIR negotiations, and waiting until the parties to the PCL litigation had completed many, many years of negotiation and work on the 2010 EIR,” Roberts wrote in court pleadings. “The case is barred by res judicata.”

Keats countered that the Planning and Conservation League, by settling, had abandoned its position as representative of the public interest and also that the current complaint challenged a new EIR and had to be examined on its own merits.

In October, Frawley handed CBD a victory, ruling that its complaint indeed constituted a new and separate cause of action and that the Planning and Conservation League plaintiffs had “expressly disavowed and abandoned their role as public agent.” A determination of privity, he wrote, “depends upon the fairness of binding one party with the result obtained in an earlier proceeding in which it did not participate.” At least at the pleading stage, Frawley concluded, fairness required the case to proceed.

Since jury trials are unavailable in both CEQA and validation actions, Keats now looks forward to a bench trial. “Once we get past the preliminaries and reach the merits, there’s no way we can’t win because the new EIR contains all the defects of the original.”

Environmental law experts say Central Delta I has blockbuster potential. “There are still valid and unanswered questions with the State Water Project over the concept of paper water and the allocations between agricultural and urban users,” says Paul Kibel, a professor at Golden Gate University School of Law in San Francisco.

The allocation of privatized water is also at issue. Ali Amin of Primex Farms, one of Resnick’s rival agricultural processors in Kern County, has sued Westside Mutual Water Co. for allegedly selling water supplies to nonmembers in violation of the Public Utilities Code. In addition, a water district adjacent to the Kern Water Bank Authority has challenged the final EIR, alleging that water bank operations have lowered the local groundwater table, made wells go dry, and caused land subsidence (Rosedale-Rio Bravo Water Storage District v. California Dept. of Water Res., No. S-1500-CV-270635 (Kern Super. Ct. filed June 9, 2010; transferred to Sacramento Super. Ct., No. 34-2010-80000703). And Sandridge Partners – which produces cotton, wheat, and peanuts in Kern County and also participates in private water sales – has filed a public comment on the final EIR, calling for a return to pubic agency control of the water bank.

But could a single superior court judge – or even the state Supreme Court on subsequent review – really reverse 16 years of state water policy that’s been the basis for millions of dollars in KWBA investments, infrastructure, and contracts? Like it or not, Tejon Ranch and Paramount Farming have made the Kern Water Bank into a profitable operation where the state Department of Water Resources had failed.

“Judges are indeed cognizant of the real-world consequences of their decisions,” says Daniel Selmi, a professor at Loyola Law School in Los Angeles who specializes in land use and environmental law. “But if the requirements of CEQA have been violated, courts have discretion to kill the project – no matter how big – and order another EIR, or do something else.”

Exactly what that something else might be is a mystery. Some water experts advocate yet another legislative fix. In February, for instance, the San Francisco-based Public Policy Institute of California released a study that called for reorganizing the DWR and treating water as a public commodity, much like electricity. Toward that end, the institute recommended relaxing legal standards to permit even more water market transfers and water banking – and it cited the Kern Water Bank Authority as a positive illustration of both processes.

Meanwhile, the parties in Central Delta I are locked in a war of words. Nossaman’s Roberts acknowledges that Keats and other activists “have done a good job sending out press releases and personalizing the case” against his clients, reacting to news stories that he says have falsely depicted Tejon Ranch as an enemy of the environment and Stewart and Lynda Resnick as billionaires behaving badly.

Resnick is adamant that he won’t return the Kern Water Bank to public control. “We paid for it, we built the infrastructure,” he told Bloomberg Businessweek last year. “I don’t know how we could lose it. We bought it. We own it.”

Keats replies that Central Delta I isn’t about personalities. “I’m sure these people are basically decent folks,” he says of the Resnicks. “This case is about a legal and economic paradigm that allows a few well-placed individuals to take advantage of the rest of us. The paradigm needs to change.”

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