A federal water contract can now last indefinitely while the amount of water delivered under it still changes dramatically from one year to the next. That distinction sits at the center of a Ninth Circuit ruling issued Monday, Center for Biological Diversity v. U.S. Bureau of Reclamation, No. 25-5137, involving the Central Valley Project, the federal network of reservoirs, dams, canals and power plants supplying farms, communities and businesses across California. The court upheld the federal government's conversion of 67 water-service contracts into repayment contracts without individual environmental reviews under the National Environmental Policy Act or consultation under the Endangered Species Act. Those contracts cover almost 3 million acre-feet of water annually, subject to availability, and another 16 contracts have been proposed for conversion. The decision gives contractors considerably more certainty about the durability of their contractual rights. It does not give them certainty about their water, and for agricultural operations, food processors, manufacturers, municipal systems and companies assessing California water exposure, that is the more important distinction.
The Ninth Circuit Separated Contract Risk From Water Risk
The case turns on a change Congress authorized a decade ago. Water-service contracts provide water in return for annual payments and expire at the end of a defined term. Repayment contracts work differently: contractors repay their share of federal project construction costs and, once those costs are satisfied, continue paying only operation and maintenance expenses. A prior federal court decision put the difference succinctly, in a comparison the Ninth Circuit repeated Monday: a repayment contract resembles a mortgage, a water-service contract a lease.
The 2016 WIIN Act allowed eligible contractors to convert water-service agreements into repayment contracts and prepay outstanding construction obligations either immediately or within three years. Converted contracts continue indefinitely as long as contractors make the required payments, and the prepayments accelerate money back to the federal government, which Congress directed toward water-storage infrastructure; the Congressional Budget Office has estimated similar prepayment provisions across Reclamation's contractor base could generate roughly $639 million for the Treasury. Contract conversion therefore accomplished two things at once: it accelerated repayment of federal infrastructure costs and gave water users greater contractual permanence, and the Ninth Circuit has now strengthened the legal foundation beneath that arrangement.
Reclamation Cannot Reopen Water Rights During Conversion
Environmental groups challenged the conversions because Reclamation did not conduct a separate NEPA review or ESA consultation for each one. The Ninth Circuit concluded neither was required, not because the contracts have no environmental consequences, but because Congress left Reclamation no meaningful discretion to address those consequences during conversion. Section 4011 says the Interior Secretary "shall convert" qualifying contracts when requested, and bars Reclamation from modifying other water-service contractual rights in the process, meaning it can negotiate payment terms but cannot use conversion to reconsider how much water a contractor receives or how it is delivered. Because both NEPA and ESA consultation turn on agency discretion, a nondiscretionary action does not trigger a new review. The ruling affirmed the district court, which reached the same conclusion in 2025.
The Contract Can Be Permanent While the Allocation Is 28%
That does not mean a converted contract guarantees delivery of its full contractual quantity, and California's 2026 water year demonstrates the difference. In February, Reclamation gave south-of-Delta agricultural water-service and repayment contractors an initial allocation of just 15% of their contract totals, while north-of-Delta irrigation and municipal and industrial contractors received 100%. Improving hydrological conditions allowed Reclamation to raise the south-of-Delta agricultural allocation to 20% in March, to 25% in May, and most recently to 28% in mid-August, just days before this ruling came down. Westlands Water District, one of the contractors involved in the litigation, has repeatedly said the increases have not kept pace with improving reservoir storage and rainfall, calling the allocations short of what the district's farms need even as conditions improved. The result illustrates a risk that can disappear in a contractual review: a company can sit downstream from a water supplier with an indefinite federal contract and still face a year in which only a fraction of the maximum contractual supply is allocated. The contract protects the relationship. It cannot manufacture hydrology.
Environmental Review Has Not Disappeared
The Ninth Circuit was careful about another distinction: its ruling applies to the conversion of the contracts, not to operation of the Central Valley Project or the water deliveries made through it. The court explicitly said its decision should not be interpreted to mean deliveries secured by the repayment contracts are exempt from environmental review, and they remain subject to environmental impact statements and biological opinions governing operation of the CVP. That matters because the project is an operating system, not simply a collection of contracts. Reclamation manages reservoir storage, pumping, river flows, temperature requirements and endangered-species protections alongside municipal and agricultural demand, and those operational decisions can affect how much contractual supply can actually be delivered. For corporate risk analysis, the practical result is a separation of exposures: the Ninth Circuit has reduced uncertainty around whether these particular contracts can be reopened during conversion, but it has not removed hydrological, environmental or operational uncertainty surrounding the water itself.
Nearly 3 Million Acre-Feet Makes This More Than a Legal Technicality
The scale makes that distinction commercially important. The Central Valley Project extends hundreds of miles through California and serves more than 270 contracts supplying roughly 3 million acres of farmland, along with communities, wildlife refuges and other users. The Congressional Research Service describes the CVP as one of Reclamation's largest water-conveyance systems, delivering an average of about 5 million acre-feet to agriculture and 600,000 acre-feet to municipal and industrial users in a typical year, in addition to substantial environmental water commitments. That puts the ruling squarely in the territory of business continuity and capital planning, since companies dependent on Central Valley agriculture may never be parties to a federal water contract themselves even though their suppliers can be. A food manufacturer assessing a processing facility, a lender underwriting agricultural exposure or a company examining water risk in its supply chain therefore needs to know more than whether the local district possesses long-term contractual rights; it needs to understand the reliability of the water behind them, a distinction that grows more consequential the deeper water liability is embedded in a company's corporate and supply-chain structure.
Water Due Diligence Needs Two Numbers
The ruling offers finance teams a useful way to think about water risk. The first number is contracted supply: how much water a facility, supplier or water district has a legal right to receive. The second is reliable supply: how much of that water can reasonably be expected under the hydrological, regulatory and operational conditions that matter to the investment. Those numbers can be very different, and that difference should influence facility valuation, supplier concentration analysis, business-continuity planning and decisions about alternative supplies, storage, recycling or efficiency investments, particularly as more companies discover that standard withdrawal-based disclosure metrics don't actually answer the basin-level reliability question underwriters care about.
The same distinction applies when evaluating the apparent security created by a long-term contract. Contract duration can reduce legal and renewal risk, improve visibility and make infrastructure investment easier to underwrite, but it should not be used as a proxy for physical availability. The Ninth Circuit has made the contractual side of the Central Valley Project equation considerably clearer, a step that arrives as water reliability more broadly becomes a harder constraint on where and how industrial growth can happen. For companies dependent on the water moving through it, the harder question remains exactly where it was before Monday's ruling: how much water will actually be there when it is needed.
