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Private water sales are paving way for growth 9/22/02
To satisfy a legal settlement nearly a decade ago, Coleman had to buy the water supply for a suburb of 30,000 planned for the Dougherty Valley area of Contra Costa County. A project manager for Dougherty Valley, he spent months visiting farmers and rural water agencies -- the groups likely to have water for sale. He found what he needed 220 miles away, in a remote rural corner of Kern County, for $7 million. When the water started flowing, construction began. Coleman pioneered a new job description: the developer as water prospector. Since he made his purchase, others have scoured the state, buying water to serve their housing projects. They've had little choice. From El Dorado Hills to greater Los Angeles, the link between real estate and water has tightened. A growing body of lawsuits and legislation has forced developers to line up water before they break ground -- and has turned water into a chess piece in the debate over growth. With water unavailable in many of the choice locations for new housing, environmentalists say it's time to turn back the bulldozers. Developers counter that there is ample water; it's just in the wrong places. In a state that's mostly an irrigated desert, moving more water around to create housing isn't unreasonable, they say. "I don't subscribe to the myth that there's a shortage of water," said developer Steve Krueger, who's made a tentative deal with Chico-area farmers to supply a $1.5 billion Fresno suburb planned by real estate giant Castle & Cooke Inc. Developers are becoming key players in the state's emerging and controversial private water market. Indeed, they might well unlock the water capitalism movement in California, overcoming the legal, logistical and bureaucratic hurdles that have hindered the market so far. But environmentalists and no-growth advocates are challenging water sales. They're suing to keep water out of the hands of developers, arguing that suburbs are being built on flimsy, unreliable water supplies. What'll happen to these homes, they say, when a drought hits? "There's not enough water to go around," said environmental lawyer Rose Zoia, who's been fighting a massive golf course community west of Modesto called Diablo Grande. Environmentalists are using water to fight development: Stop the flow, they reason, and the houses won't grow. In 1996, Zoia's clients, an environmental group, won a ruling halting Diablo Grande until water was found. The case prompted a triumphant headline in a Sierra Club newsletter: "Legal Tools for Stopping Sprawl." But developers have tools of their own -- namely, dollars. Diablo Grande, backed by a pharmaceutical tycoon named Donald Panoz, spent $8 million on permanent water rights to import water from Kern County. Although environmentalists are fighting the deal in court, Panoz's lawyer, Russell Newman, said home building should begin next spring. "Ultimately, money will talk," said Debra Coy, a water industry investment analyst at Schwab Capital Markets. A similar tug of war is taking place in El Dorado County, where water is tight, growth is controversial and the two are completely intertwined. Shortages almost led to water-use restrictions in El Dorado Hills last summer. At the same time, environmentalists are fighting attempts by local officials and developers to find new water. For instance, last year a state agency awarded the county the right to tap three Sierra Nevada lakes. Environmentalists sued, and the case is pending. "Are they making it tough? Oh, yes," said prominent Sacramento-area developer Angelo Tsakopoulos, who owns land in El Dorado. "El Dorado should learn to live within its means," countered the environmentalists' lawyer, Stephan Volker. Water has been a key issue in growth fights since the early 1990s. Starting with Dougherty Valley, environmentalists have won several rulings halting projects for lack of water. Then, at environmentalists' urging, the Legislature last year put water front and center. It passed two laws forcing developers and cities to face up to their water needs. In particular, SB 221, by Sen. Sheila Kuehl, D-Santa Monica, requires "substantial evidence" of a 20-year water supply on all new housing projects of 500 units or more. Yet development hasn't screeched to a halt. Instead, developers have been galvanized into action, said Edward Casey, a Los Angeles real estate lawyer who specializes in water issues. With the state's population booming and billion-dollar housing projects hanging in the balance, developers are actively hunting for water, he said. He recently started working on water deals for two big Southern California housing projects. Casey and others believe the pressures of population growth will lead to a wave of water-for-cash transactions in the years to come. Developers will find the water themselves or prod their local governments to find it. "The large developers, they'll lead the way," said Syrus Devers, an aide to Kuehl. Still, environmentalists have had some success. They have stalled development of Newhall Ranch, a $1 billion suburb proposed by Newhall Land and Farming Co. near Los Angeles. First, they won a court order blocking the project because the area lacked water. After the local water agency bought $48 million in permanent water rights from farmers in Kern, to feed Newhall and other projects, the environmentalists sued again. An appellate court said there were flaws in the environmental study required for the water transfer. Newhall was put on hold by county supervisors. The water issue "is turning out to be something that could limit the sprawl," said environmentalist Ron Bottorff, who's leading the charge against Newhall. But in the crazy-quilt world of California water, developers can reach across the state if need be. Take the strange case of Gateway Village, a $1.5 billion suburb planned by Castle & Cooke in Madera County outside Fresno. There's groundwater beneath the site, there's water in the adjacent San Joaquin River and there's a whole lot of water behind the nearby Friant Dam, one of the state's major dams. But the groundwater was deemed insufficient, and the other supplies already were serving users throughout the San Joaquin Valley. When county supervisors rejected the development last year, a statewide search got under way. "Here I am, that close to that water, and why am I scurrying around? Because every drop of water in that dam has somebody's name on it," Krueger said. With farmers suffering from low crop prices, he quickly got six water offers. He cut a 25-year deal with the peach and alfalfa farmers of the Butte Water District, some 240 miles away. He'll pay them up to $1.5 million a year, plus millions more to ship it through a series of canals. That is, if the deal flies. State officials said they might block the transfer because they think the Butte farmers are offering water that's actually been allotted to others downstream. Krueger said he's confident the deal will be completed. If not, "there's other sources out there," he said. Developers first waded into the water business because of Dougherty Valley. In the early 1990s, Shapell Industries and Windemere Ranch Partners mapped out the 11,000-home project. Contra Costa County officials asked the East Bay Municipal Utility District to supply the water. EBMUD refused. There was a drought on. "We said, 'We can't in good conscience take on 11,000 homes,' " said district lobbyist Randy Kanouse. The denial sparked a political fight that touched Sacramento. The agency had been trying to take water out of the American River, a move long opposed by area officials. After the agency refused to hook up Dougherty Valley, developers said it had given up on the American River and was engineering a water shortage to squelch growth. Sacramento and EBMUD eventually agreed on a water-sharing plan involving the Sacramento River but not in time to affect the Dougherty project. Back then, agency officials say, they were grappling with a genuine shortage. Still, Contra Costa went ahead with approvals for Dougherty Valley. EBMUD sued -- and won. Coleman hit the road. "It was a strange trip," Coleman said. "You find yourself going from district to district. Somebody would refer you: 'Why don't you call so and so?' You wind up in Stockton, then you'd go to Oakdale, and then over to Pinecrest ... finally finding out how the thing works." The trek was filled with odd insights. He found water everywhere; the trick was getting it. Driving past an irrigated cotton farm on Interstate 5 once, he calculated how much cotton he'd have to pass in order to view the amount of water he needed. "Two miles would get you the whole enchilada," he said. Coleman had experience dealing with water and utilities, but this was something else. One night, at a board meeting of the Oakdale Irrigation District east of Modesto, the topic was an increase in water rates. A landowner stood up and threatened to shoot board members if the rates went up. Coleman "slinked out" of the room. An Oakdale source confirmed the incident. As it happened, the water Coleman needed found him. The Berrenda Mesa Water District in Kern County had gobs of surplus water, acquired when some farmers lost their land. Berrenda officials heard about Dougherty Valley and called. Thus began negotiations on one of the first big private water sales in California. "They were inexperienced in doing this; of course, so were we," said Ron Lampson, Berrenda's then-manager. "We were pioneering something." A deal was struck in 1994. Dougherty Valley, acting through its local water district, bought permanent rights to 7,000 acre-feet -- enough to supply up to 14,000 houses. The water wouldn't be shipped all the way from Kern. It would be plucked out of the California Aqueduct near Tracy and routed the few miles to Dougherty Valley. Even so, the cost of shipping the water will run into the millions over the life of the project, said Tom Koch, a Dougherty Valley manager. Plus, there was the $5 million the developers paid for a backup supply to be stored near Bakersfield. Environmentalists and the city of Livermore sued, saying Dougherty Valley would hog the area's entire supply. The deal was changed so the project could use only the imported water. With that, the water flowed. "It was fascinating," Coleman said. "It was kind of fun to learn about. I don't think I want to make a career out of it."
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