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Chinese water resource officials peer down an access tunnel while on a tour Jan. 6, 2009 of the world's largest underground water banking site in California's Central Valley near Bakersfield. The Kern Water Bank is a dusty 32 square-mile parcel, 200 miles south of the Bay Area where Delta water is stored in an aquifer. (Karl Mondon/Times)

Just before Interstate 5 climbs the Grapevine out of the San Joaquin Valley is a massive underground reservoir that its owners say is the largest water banking project of its kind in the world.

Here among the tumbleweeds, sand and scrub, 15 miles west of Bakersfield, the gush of crystal-clear water appears as curiously out of place as the great blue herons cruising along the bank's six-mile canal.

The Kern Water Bank, which was owned by the state Department of Water Resources from 1988 to 1995, is now in the hands of Kern County interests and is 48 percent owned by Westside Mutual Water Company, a private water company controlled by Beverly Hills billionaire Stewart Resnick.

It is 32 square miles of desert where one natural river and two artificial ones pass: the Kern River, which originates in the southern Sierra Nevada; the California Aqueduct, which carries Delta water more than 400 miles to a reservoir in Riverside County; and the Friant-Kern Canal, which takes water to valley farmers from behind a dam on the San Joaquin River.

"We have lots of water conveyance facilities that bring water past the Kern Water Bank," said Jonathan Parker, general manager of the Kern Water Bank Authority. "That makes this location pretty unique."

In wet years, the water bankers deposit water from the rivers into ponds where it percolates into the Kern River's alluvial fan.

In dry years, they make withdrawals, which is why on a tour of the bank earlier this year water was gushing out of the ground from pipes and bubbling up into the canal from underground structures.

Kern County water users, thanks in part to local ownership of the Kern Water Bank, became the biggest source of water for CalFed's "environmental water account" that cost taxpayers nearly $200 million.

The account was in effect during a period when record amounts of water were pumped out of the Delta and fish populations staggered to record lows. One species, Delta smelt, could be near extinction in large part because of Delta water pumping.

Roughly one-fifth of all the money spent to buy water for the program went to companies owned or controlled by Resnick, one of the state's largest farmers.

More than half of Kern County's water sales to the environmental water account — and all of Westside Mutual's sales — came from the Kern Water Bank.

And thanks to the magic of paper water trades, less than half of the water sold from here was actually pumped out of the ground.

Representatives of Resnick's farm and water companies did not respond to repeated requests for interviews over a two-month period.

The state Department of Water Resources also declined to comment.

Deal's 'linchpin'

The deals worked by letting sellers trade the underground water they were selling at market prices for water the state was delivering to them at much lower prices.

Instead of going to Kern County, then, Delta water went to San Luis Reservoir east of Gilroy.

The state got the Delta water at the reservoir, while in Kern County the water was either pumped out of the ground for farmers' use or, more often, simply reclassified as if it were delivered from the Delta. The sellers then pocketed the price difference.

The exchanges made some sense because, by taking delivery of the water upstream, the state could deliver it almost anywhere it would want to without unnecessary pumping.

But it also meant that at a time when the state Department of Water Resources was pumping record amounts of water out of the Delta — in some cases exceeding conditions regulators had approved as safe for Delta fish — it was delivering some of that water to itself for a program that was supposed to protect the same fish populations that were damaged by the high pumping levels.

And it paid Kern County interests with taxpayer money for the ability to do so.

The general manager of the Kern County Water Agency, James Beck, said the program was a way for the state to ensure those buying water in Kern County got the water to which they were entitled.

"The environmental water account was a good example where water was provided to the state at a reasonable price ... to assist the state to meet its contractual obligations to its contractors," Beck said.

For many sellers to the environmental water account, including Resnick's companies, the key was ownership of the Kern Water Bank.

The deal that transferred the Kern Water Bank from state ownership to Kern County interests has its roots in the last big California drought, from 1987 to 1992. As have been the past three dry years, the last drought featured water cutbacks and severe environmental strains in the Delta, where fish were being added to the lists of threatened and endangered species.

In Kern County, the last drought was particularly acute because contract rules at the time required Kern County's farmers to take deeper cuts to their Delta water supply than Southern California cities.

To avoid a court fight, water officials representing the state, Kern County and Southern California reached a deal with ramifications that linger today. Among other things, the deal transferred the Kern Water Bank from the state to local interests.

The "Monterey Agreement," named for the city where the negotiations took place, along with the CalFed plan that followed, laid much of the groundwork for how the state's water supplies would be managed and how the Delta environment would be protected.

The results were mostly good for big water users, and almost entirely bad for taxpayers and the environment.

"The environmental water account was in some respects the linchpin to close the deal for the CalFed plan," said Spreck Rosekrans, a co-author of a 2005 Environmental Defense Fund study that showed how the account lacked the resources it was expected to get while it also was required to do more than planned.

"It involved buying some of the water that had been overpromised. It allowed folks to game the system and gain profits that were unwarranted," Rosekrans said.

State denied

At the time of the last drought, Resnick was expanding his farm holdings near Bakersfield. Kern County property tax records show his companies appear to own more than 115,000 acres — nearly four times the size of San Francisco and more than all the parks in the East Bay Regional Park District combined.

The water supply for those farms and orchards, which his companies boast include the largest pistachio and almond growing and processing operations in the world, was secured in part by the Kern Water Bank.

With a capacity of at least 1 million acre-feet, it is like having a reservoir the size of Folsom Lake, near Sacramento, or 10 reservoirs the size of Los Vaqueros, near Brentwood.

There are other advantages too. Little water is lost to evaporation. Terrestrial habitat is not flooded.

The water is easy to get out of the ground: It only costs $35 to $40 to pump an acre-foot — nearly 326,000 gallons, Parker said.

Though the state invested a total of $74 million in buying and developing the Kern Water Bank, it could never get the groundwater storage operations up and running, partly because of a state law that requires the Department of Water Resources to receive local approval for groundwater projects.

Kern County never granted that approval.

As a result of the negotiations in Monterey, the bank was transferred from the state to the Kern County Water Agency in exchange for Kern County interests giving up a small portion of their claim to water. The agency immediately turned the bank over to a joint powers authority made up of a handful of water districts and Westside Mutual Water Company, which has a 48 percent stake.

Another 10 percent is owned by Dudley Ridge Water District, where Resnick's farming company, which owns more than 40 percent of the district's irrigated acreage, is the largest landowner.

Dudley Ridge's board president, Joseph MacIlvaine, is also president of Resnick's farm company, Paramount Farms.

The agreement made in Monterey also forced Southern California cities to share equally with Kern County farmers in the pain of drought.

And it created a new program that allowed agencies in Kern County, Southern California and elsewhere to buy so-called surplus water for cheap — discount water that flowed so freely that, until the Delta ecosystem hit the skids, it amounted to more than the cut they took in their water contracts to obtain the water bank.

The U.S. Fish and Wildlife Service, in a December analysis, said delivery of "Article 21" water was also much more than what they approved when they issued a permit in 2004 meant to protect Delta smelt from the effects of Delta water pumping.