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F I S C A L I M P A C T R E P O R T

SPONSOR Robinson

DATE TYPED 2/21/05

HB

SHORT TITLE Water Efficient Technology Act

SB 444

ANALYST Kehoe

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

NFI

(See Fiscal Im-

pact Narrative)

(Parenthesis ( ) Indicate Expenditure Decreases)

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

See Narrative

Water Efficient Technology

Project Fund

(Parenthesis ( ) Indicate Revenue Decreases

Relates to Senate Bill 54, Senate Bill 123, Senate Bill 132, Senate Bill 139, Senate Bill 140, Sen-

ate Bill 152, Senate Bill 186, Senate Bill 239, House Bill 14, House Bill 95, House Bill 123,

House Bill 195, House Bill 271, House Bill 294, House Bill 304, House Bill 403 and House Bill

462.

SOURCES OF INFORMATION

Responses Received From

Office of the State Engineer (OSE)

New Mexico Environment Department (NMED)

Energy, Minerals & Natural Resources Department (EMNRD)

New Mexico Department of Agriculture (NMDA)

New Mexico Finance Authority (NMFA)

Senate Bill 444 -- Page 2

SUMMARY

Synopsis of Bill

Senate Bill 444, introduced for the New Mexico Finance Authority Oversight Committee, enacts

the Water Efficient Technology Act, amends the New Mexico Finance Authority Act, amends

the Tax Administration Act, authorizes NMFA to issue bonds, imposes a water efficiency fee for

certain public waters, and creates a fund.

Significant Issues

Senate Bill 444 enacts the Water Efficiency Technology Act for the purpose of imposing a water

efficiency fee on those persons wishing to exercise the right to divert or withdraw the public wa-

ters of the state. The bill contains a provision making it clear that payment of the proposed fee

does not confirm or provide evidence of any right to appropriate the public waters of the state.

The proposed efficiency fee would be imposed on the following persons:

1)

persons operating a public water supply system, $25.00 per acre-foot per year paid annu-

ally;

2)

persons supplying water for a commercial, industrial, mining or power production con-

cern and for which the fees imposed by this subsection have not otherwise been imposed

or paid, $25.00 per acre-foot per year paid annually; and

3)

persons owning a domestic well, a fix annual fee of $12.50 per well paid annually.

Senate Bill 444 requires that owners of domestic wells be assessed a fixed annual fee. In all

other cases, water efficiency fees would be based on the actual diversion or withdrawal of water

if measured by a metering system approved by the State Engineer; otherwise, fees would be

based on the amount of the permitted, licensed, declared or adjudicated water rights.

The bill requires the Taxation and Revenue Department (TRD) to provide by regulation for re-

porting requirements and the manner and form of collecting the water efficiency fees and to pro-

vide the State Engineer and the New Mexico Finance Authority with an annual report indicating

the amount of fees collected by river basin for each type of fee specified within the Act. The

State Engineer, Interstate Stream Commission, Department of Environment and Public Regula-

tion Commission are required to provide TRD with the necessary information and records

needed to assess the fees imposed by the Act that will be collected by TRD. The bill further pro-

vides that persons who are required to pay the fees and who measures the diversion or with-

drawal of public waters with a metering system approved by the state engineer must submit a

record of the amount of diversion to the State Engineer annually.

Senate Bill 444 creates the water efficient technology project fund within the New Mexico Fi-

nance Authority to consist of the net receipts attributable to the fees imposed by the Act, pay-

ments of principal of and interest on loans for approved water projects and net proceeds from the

sale of bonds, and other money appropriated, donated, or allocated for the purpose of supporting

water projects pursuant to the Act. The proceeds of the fund are appropriated to NMFA for the

purpose of making grants or loans to qualified entities for water projects that benefit persons that

have paid water efficiency fees and to pay the administrative costs of the water efficiency tech-

nology program. Qualifying water projects include:

Senate Bill 444 -- Page 3

•

restoration and management of watersheds;

•

state acquisition or lease of water rights from willing sellers or lessors; or

•

water conservation projects.

The bill requires NMFA to administer the program and fund and to develop the application pro-

cedures for loans and grants, adopt rules and procedures for administering the fund and to evalu-

ate and prioritize qualifying water projects and make funding recommendations to the legisla-

ture. NMFA is authorized to issue revenue bonds payable from the proceeds of loan repayments

made into the water efficient technology fund when NMFA determines issuance is necessary to

replenish the principal balance of the fund.

FISCAL IMPLICATIONS

The fees imposed by this bill are considered a tax for purposes of the Tax Administration Act.

According to EMNRD, the bill creates a significant source of revenue for water projects in New

Mexico. It is estimated that approximately 500,000 domestic wells of New Mexico homeowners

would be affected; therefore, the fee would generate substantial revenues in the amount of $9.3

million from the residential sector. In addition, the use-based fee of $25/acre-foot would be im-

posed on commercial, industrial, mining and power companies. This fee structure will impact

extensive water use operations such as the Intel computer chip facility in Rio Rancho. For com-

panies with sizable water consumption, the fee would increase operating costs substantially.

This could have an adverse effect on economic development efforts but would have to be evalu-

ated against the positive environmental consequences of water conservation. It is estimated that

New Mexico has $2 billion in water project needs and water is the number one resource and pub-

lic policy issue in the state.

The following two tables from the Water Efficiency Technology Act Report by W.J. Miller En-

gineers, Inc. provide revenue projections by Water Sector and by Water Basin. As indicated in

the first table, it is estimated that the Water Efficiency Technology Act will generate approxi-

mately $14.5 million annually with 57.0% of the revenue ($8,297,550) paid by Public Water

Supply providers.

TABLE I

Water Efficient Technology Act

Projected Estimates of Revenue by Water Sector and by Basin:

Preliminary research indicates that the Water Efficient Technology Act would raise approxi-

mately $14.5 million dollars annually assuming 100% collection. Revenue estimates are based

on estimates of water rights and measured diversions based on data from the year 2000. (2004,

W. J. Miller Engineers, Inc., Water Efficiency Technology Act Technical Report, WWF Chihua-

huan Desert Program, Las Cruces, NM)

Senate Bill 444 -- Page 4

Revenue Summary by Water Sector

Use

Withdrawal

(acre-feet)

% of Total

Withdrawal Estimated revenue

% of Total

Revenue

Rate per

ac-ft

Flat Fee

per well

Public Water Supply 331,902

57.8%

$8,297,550 57.0% $25.00

Commercial

25,166

4.4%

$629,150 4.3% $25.00

Industrial

11,707

2.0%

$292,675 2.0% $25.00

Power

63,157

11.0%

$1,578,925 10.9% $25.00

Mining

67,869

11.8%

$1,696,725 11.7% $25.00

Domestic Wells

(164,400 wells

@ 0.45 af per well)

73,980

12.9%

$2,055,000 14.1% $25.00 $12.50

Total =

573,781

$14,550,025

The second table indicates that the Rio Grande Basin will provide approximately $7,171,000 or

57% of the estimated annual revenue.

TABLE II

Revenue Summary by Basin

(Does not include domestic wells)

River Basin

Public Wa-

ter Supply Commercial Industrial Power Mining Total % of Total

Rio Grande $5,697,650 $433,750 $108,375 $189,950 $741,275 $7,171,000 57%

Upper

Colorado $496,100 $5,400 $47,850 $1,261,250 $1,975 $1,812,575 15%

Lower

Colorado $161,050 $21,025 $25,500

$0 $71,925 $279,500 2%

Pecos $1,145,725 $113,275 $91,075

$0 $452,300 $1,802,375 14%

Arkansas $164,925 $10,800

$0

$0 $14,250 $189,975 2%

Texas-Gulf $632,100 $44,900 $19,875 $127,725 $415,000 $1,239,600 10%

Totals: $8,297,550 $629,150 $292,675 $1,578,925 $1,696,725 $12,495,025 100%

ADMINISTRATIVE IMPLICATIONS

The cost of implementation of Senate Bill 444 would be paid through administrative fees and

charges authorized by the bill. The bill amends the Tax Administration Act to allow TRD to

withhold an administrative fee equal to the cost of collection or of five percent of the receipts

Senate Bill 444 -- Page 5

collected from the water efficiency technology fees.

According to the OSE, Senate Bill 444 is likely to result in significant benefits to the water using

public, but its effectiveness requires that it be implemented as smoothly as achievable. To this

end, the sponsor might consider that an effective date that coincides with the OSE’s 5-year water

use report as well as consider whether doing so might provide the ancillary benefit of allowing

TRD, OSE, and the Public Regulation Commission the opportunity to produce the necessary

data, processes, and regulations necessary to promote this Act’s effectiveness upon implementa-

tion. The realities of imposing a new “fee” are such that the state engineer believes that moving

forward on this act might mean making it effective in 2011. The year 2011 is suggested as an

effective date based on the date of promulgation of the state engineer’s 5-year water use report.

In preparing the report, the state engineer can assure that the data generated will be as complete

and responsive as required to effectively implement this act, as well as allow him and his coun-

terparts at TRD and PRC to develop the processes to implement this act. Such an amendment is

suggested below.

Unless the effective date is timed to coincide with the state engineer’s five year water use report,

this bill will negatively impact upon the OSE’s ability to meet its performance measures because

the state engineer would be required to commit significant OSE staff to generate the data that is

required by this bill at this time. This bill does not provide any recurring monies to the OSE, so

these efforts would performed by existing staff.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

The statutory provisions and requirements for administration of the fund proposed by Senate Bill

444 are duplicative of the eligible projects of the public project revolving fund and the water pro-

ject fund. The projects authorized for funding in this bill include two of the five categories of

projects already authorized for funding within the Water Project Finance Act currently adminis-

tered by NMFA—restoration and management of watersheds and water conservation. Other

categories eligible for funding from the Public Project Revolving fund include storage, convey-

ance or delivery of water to end-users; flood control and implementation of the federal Endan-

gered Species Act.

SB444 originally duplicated HB462, however, the House Energy and Natural Resources Com-

mittee has since amended HB462.

SB444 relates to SB54 and HB294 which appropriate $25 million and authorizes the NMFA to

make grants from the Water & Wastewater Grant Fund to qualified entities for 156 eligible pro-

jects.

SB444 relates to SB123 and HB195 establishing a Strategic Water Reserve and authorizes the

Interstate Stream Commission to purchase or lease water, water rights and water storage rights.

SB444 relates to SB132 which amends the duties and approval process of the Water Trust Board.

SB444 relates to SB139 and HB403 which appropriate $100 million to the Water Trust Fund for

expenditures in FY05 and FY06 for projects funded under the Water Project Finance Act.

SB444 relates to SB140 and HB123 which appropriate $4 million from the General Fund to the

Senate Bill 444 -- Page 6

Drinking Water State Revolving Loan Fund administered by the NMFA to provide a state match

for federal capitalization grants which fund low cost loans to qualified entities for water quality

projects.

SB444 relates to SB152 and HB95 which authorize NMFA to provide loans from the Public Pro-

ject Revolving Fund to state and local qualified entities for 108 eligible projects.

SB444 relates to SB186 and HB271 which authorize NMFA to make loans and grants from the

Water Project Fund to 16 qualified entities for eligible water projects.

SB444 relates to SB239 which makes technical changes to the membership of the WTB and pro-

vides that: “Twenty-five percent of all water project funds shall be dedicated to forest and wa-

tershed restoration projects.”

SB444 relates to HB14 appropriates $8.4 million from the general fund to the Interstate Stream

Commission for FY06 to initiate the Gallup-Navajo Pipeline Project.

SB444 relates to HB304 which makes changes to the Water and Wastewater Planning Fund

which is administered by the NMFA.

OTHER SUBSTANTIVE ISSUES

EMNRD indicates Senate Bill 444 will likely impact the energy industries that EMNRD regu-

lates. The larger coal and hard rock mines in New Mexico utilize anywhere from 400 to over

5,000 acre-feet of water per year for mining purposes. That would represent a $1.0 to $125.0 im-

pact per operation annually.

The Department of Agriculture questions whether enactment of this bill, in the absence of meter-

ing and measuring devices in place, further discourage water conservation as do the “use it or

lose it” aspects to state water law. If a water user is charged based upon adjudicated water rights

or declared water rights rather than on-site metering devices, they would have to pay the fee re-

gardless of whether they actually diverted or withdrew the water or not.

If agricultural producers are not exempted from this act, they do not have the ability to raise their

prices to recover fees placed upon them in the same way that businesses and municipal, private,

and industrial water suppliers do. Agriculture is still an important part of the socioeconomic

welfare of the state of New Mexico, and many rural counties and communities depend on this

economic activity for existence.

According to the Department of Agriculture, dairy producers are considered commercial water

users in New Mexico, and thus would be subject to this tax.

TECHNICAL ISSUES

EMNRD indicates the language in Section 3, paragraph A(2), imposing a fee on "persons sup-

plying water for a commercial, industrial, mining or power production concern," is vague as ap-

plied to the use of water in the oil and gas industry and may have unintended consequences. Oil

and gas operations often produce water that is typically high in salts or other minerals. Produced

water is usually considered a waste product, and its proper use or disposal is essential to protect

Senate Bill 444 -- Page 7

the environment. Produced water may be used in drilling operations, or in water flood projects

designed to increase oil and gas production. The state has made efforts to encourage the benefi-

cial use of produced water. (Currently, Senate 111 and House Bill 197 propose a corporate in-

come tax credit of $1000 per acre foot for taxpayers who gather, transport or treat produced wa-

ter disposed of in the process of generating electricity. Ironically, while the corporate entities

that are gathering, transporting and treating the produced water for use in the generation of elec-

tricity will get a tax break, the operator producing the water will be charged a fee under HB 462.)

EMNRD indicates as written, Senate Bill 444 would apply to produced water, because it contains

no definition limiting "water" to fresh water. Imposing a fee on "supplying" water for a com-

mercial concern is vague as applied to the oil and gas industry. The fee would clearly apply to

persons who sell water, including produced water, to others for use in drilling operations or wa-

ter flood projects. It could also be interpreted to apply to oil and gas producers who use the wa-

ter they produce in their own drilling operations or water flood projects. Conceivably the fee

could apply to an operator who properly disposes of his produced water in his own disposal well

or who disposes of it at a commercial disposal facility. To comply with Senate Bill 444, opera-

tors will have to measure the water withdrawn and, if not all of that water will be "supplied" to a

commercial concern, will have to measure the amount of water "supplied." Unless the language

is clarified, Senate Bill 444 may be taxing, and thus discouraging, the proper use and disposal of

a waste product.

LMK/lg