Monday, February 17, 2020

Delta Voluntary Agreement Costs Soar from $1.1 billion to $5.3 billion

The first update of the Delta voluntary settlement agreements (VSA) last winter had an estimated cost of $1.1 billion over 15 years.  In the latest update, the cost of implementing the voluntary agreements has soared by over $4 billion to a whopping $5.3 billion.  Governor Newsom failed to mention the enormous and growing costs in his oped praising the voluntary agreement framework.

The delta water users contribution has increased from about $300 million to $2.34 billion.  On one hand, I am happy to see the extra $2 billion given that I previously ridiculed how cheap the water agencies initial offer was compared to the enormous benefits they receive from this agreement compared to the alternative. This additional $2 billion from water users only accounts for half of the cost escalation, the government negotiators also "volunteered" an additional $2 billion in taxpayer funds for a total of nearly $3 billion from federal and state governments.

Over $5 billion in taxpayer and ratepayer funds is a lot for a 15 year Delta operations agreement.  Taxpayers and ratepayers should be asking whether these $5+ billion is better invested on developing alternative local water supplies and new technologies that will provide benefits far beyond the 15 years of this agreement.

The $3 billion in state and federal funding deserves the most scrutiny.  It seems that most of the funding for habitat in these agreements appears to come from existing state bonds dedicated to environmental enhancement - meaning that habitat investment is going to happen anyway with or without this voluntary agreement.  I have heard that many of the specific projects were already required.  So are the habitat improvements in the VSA any different than would occur without the VSA?  If they are the same, then they should be in the baseline and their benefits not attributed to the VSA deal.  If they are different, then we need to consider what other habitat projects are lost to support the VSAs.

The spending plan summary also says that about $1.2 billion of the funds would go to water purchases which would average less than 200,000 af per year over 15 years.  That's a pretty good price for irrigation water, I wonder how they determined the amount.  Another $456 million for paid fallowing that would presumably provide some of the other flows from the Sacramento and San Joaquin Valley. 

I find it interesting that if water supplies and fallowing is the result of regulation, the focus of the anti-regulatory protests (as well as the Governor's explanations for not suing the Trump administration over weakened environmental regulatons) are the low-paid farm worker jobs that could be lost if water diversions are curtailed.  However, the VSA deal pays $1.6 billion to landowners (farmers) to reduce farm water supplies and fallow fields, and $0 to farm workers and communities that these politicians and landowners say are harmed the most by land fallowing.  I wonder if the environment and Central Valley communities wouldn't both be better off if the state stuck with the original regulations and directed $1.6 billion in public funds to other economic and community benefits in the Valley.
   
I am not opposed to the concept of a voluntary agreement, but it should have a simple structure in which water users only provide funding for environmental goals in return for a lower regulatory burden - rather than the needlessly complicated VSAs that mix in lots of funding and projects that do not depend on the VSA.  A simple structure is very common in a variety of regulatory settings.  A common example is a developer paying a fee to satisfy a regulatory requirement rather than direct action by the developer to set aside land or housing units for other social/environmental needs. 

Tuesday, February 4, 2020

Delta Tunnel EIR Scoping Comments Part 1: Finance drives operation, so feasibility study should come first not last

The EIR scoping meetings for the single-tunnel delta conveyance facility (DCF) began this week.  My comments focus on two critical areas where DWR appears to be repeating their mistakes of their past despite the Newsom administration's stated intention of taking a fresh approach: 1) postponing financial feasibility and benefit-cost analysis to the end instead of the beginning, and 2) ignoring known alternatives with higher and more broadly distributed benefits and likely lower costs.

Point 1:  Finance drives operational and sizing decisions, and thus must be considered up-front.

This is hardly a controversial point for water infrastructure planning.  Feasibility studies, which include financial plans informed by benefit-cost analysis at their core, are typically conducted in tandem with environmental impact reports for water infrastructure.  This is common sense as financial considerations have important consequences for project design, sizing and how infrastructure is operated.  If financial feasibility analysis and environmental impact analysis are not done together in an integrated fashion, it is the EIR that should follow after feasibility, because the EIR guidelines frequently refer to feasibility as a factor in the development and consideration of alternatives.  DWR itself has stated this principle,
The most efficient way to prepare environmental documentation may be to initiate the process in the second half of the feasibility study process or immediately after the feasibility study is completed, when alternatives are clearly formulated and analyses and adequate information are available to informatively discuss the project and its impact and benefits to the stakeholders.(Guidance for a state-led feasibility study, page 26) 
However, DWR appears to be doing it backwards for the single-tunnel plan and risks repeating the mistakes of the WaterFix experience.  The notice of preparation for single-tunnel delta conveyance doesn't mention that it will be doing feasibility or economic analysis, and in an accompanying FAQ document states that it will do this analysis after a preferred alternative has been selected.
There will be a cost estimate, as well as both a Benefit-Cost Analysis and a Financial Analysis, developed during the planning process. At this point, the NOP is a start of the environmental review, which focuses on the relative environmental impacts rather than economic issues. Cost analyses will come later in the process, after a preferred alternative has been selected (Delta conveyance NOP Q&A question 17, page 4)
What's wrong with doing it backwards?  The most obvious problem is that stakeholders and agencies, both proponents and opponents of the project, can waste enormous amounts of money and time analyzing an infeasible project.  Another problem is that rushed last minute project changes can occur when financial problems finally emerge that do not receive adequate scrutiny.  We certainly saw both of these problems with the twin-tunnel WaterFix.

Another serious problem with this backwards approach is that it makes it easy for a project proponent to make claims and promises to operate in an environmentally friendly way in a report, just to get environmental approval and permits to build it.  Feasibility analysis can tell you whether those promises are likely to be kept, or whether the operation of a facility like the tunnel is likely to be changed later in response to financial needs as well as economic and political pressure.  Like a politician who makes promises they won't keep while they are trying to get elected, DWR appears to be making environmental promises they won't keep to get their permit to build.

To be fair, I should mention the NOP says that it will consider the results of contract negotiations that are related to financing the project.  That's at least a small step in the right direction, and the latest developments in those contract negotiations are a perfect example of how finance can change the operation and description of a project.  Of course, starting with the feasibility study would have helped inform those contract extensions too.

Governor Newsom's administration says this is a new project and he is taking a fresh perspective, but this is starting to look like the same people, repeating the same mistakes, and destined to fail in the same way on a slightly smaller version of the same project.  A fresh approach would mean looking at a much broader set of alternatives - which is the subject of my second point and a future post.

Monday, January 20, 2020

As water agencies balk at the tunnel’s price tag, DWR turns to a desperate ransom strategy: taking water from non-payers that is not attributable to the $10+ billion tunnel.

Since July, the Department of Water Resources (DWR) and State Water Contractors have engaged in fruitless negotiations over how to pay for a single-tunnel Delta Conveyance Facility (DCF is the new term now that the twin-tunnel “WaterFix” is gone). On December 23, right before the holidays, DWR made their 6th proposal to the State WaterContractors with a major shift in approach.

Two things are apparent from the new proposal:

1. The majority of the south of Delta water agencies who are supposed to be beneficiaries of the DCF don't believe the project is worth it. Unlike the DWR executives who stubbornly refuse to follow their own guidelines for financial feasibility and benefit-cost analysis, these water agencies’ leaders correctly recognize the DCF’s enormous costs are not worth its small water supply benefits and enormous risks.

2. DWR is threatening to punish agencies who won’t pay, by redefining the water supply benefits received by those who pay for the DCF as including water that is not attributable to or dependent on the construction of the project. They propose to take away water supplies that would be received without the WaterFix from fiscally-responsible and/or less powerful water agencies (primarily agricultural) if they aren’t willing or able to write a blank check to finance the construction and operation of the $10+ billion DCF. The strong-armed move goes far beyond the withdrawn proposals of Governor Brown’s administration, and seems like a desperate tactic to save a failing project.

A closer look at these two points:

1: Most water agencies don’t want the DCF, but the Department of Water Resources leadership refuses to accept that. 

It is well known that Delta and environmental interests oppose the DCF, but it is now clear that the majority of the water agencies that would supposedly benefit from the DCF don’t want it either. To see this, it is important to remember that the Central Valley Project, which receives nearly half of water exported from the Delta, has already abandoned the project – leaving it as a State Water Project-only project. Thus, it barely has half of the support of Delta water exporter interests even if SWP support is unanimous. The preface to this latest proposal reveals that the DCF is only supported by the staffs of 16 of the 29 state water agencies, meaning that overall support of a Delta conveyance facility from all the agencies which receive Delta water exports is considerably less than 50 percent. And these are staff recommendations, which are frequently more supportive of expensive projects than their boards. For example, Metropolitan Water District (MWD), whose staff are the the biggest booster of Delta conveyance, only received 61% support from their board for financing the twin tunnel WaterFix – even after receiving enormous misinformation from MWD staff and personal lobbying calls from the Governor.

    
Perhaps the worst news in this new proposal is that the current DWR leadership admits that they are surprised by the lack of support for DCF in the preface explaining their shift to this ransom style approach. After years of planning, the surprise of DWR’s leadership on this issue raises real questions. They would not be surprised if they properly understood the relative value and cost of their project. Instead, DWR leadership have for years refused to have their staff or independent 3rd parties conduct proper feasibility and benefit-cost studies, and have become extremely reliant on MWD staff and consultants. They are to blame for their own ignorance of the value and financial feasibility of their latest and previous proposals for Delta conveyance. 


2: DWR’s new proposal redefines the water supply impact of investing in the DCF and threatens to take away much of the water supplies SWP agencies would receive in the absence of the tunnels. 

DWR says the big change in the new proposal is shifting from an opt-in to an opt-out approach for participation. But the structure of the participation decision from opt-in to opt-out is not very important – the critical change in this proposal is the definition of the water supply benefit gained from investing in the DCF. Reviewing previous draftsof the proposal reveals this critical change. 

At the beginning of the negotiations, the water supply benefit of participating was defined by the term DCF project water, defined as follows:
“Delta Conveyance Project Water is established as a new type of SWP project water that represents the additional amount of total SWP water that can be conveyed with the Delta Conveyance Project compared to the amount that can be conveyed without the Delta Conveyance Project.”
This language was adjusted in later proposals to be much fuzzier, using the term “attributable,” with DWR trying to insert language that added whether water was physically conveyed through the DCF to the definition, whereas the State Water Contractors proposing to strike out the language from the proposal.
“Delta Conveyance Facility Water (DCF Water) shall mean Project Water diverted at and attributable to the Delta Conveyance Facility.”  (Note: DWR inserted the terms “diverted at and” and water agencies struck out the disputed language in their counter-offer.)

Now, in its new proposal DWR has eliminated the term DCF water entirely. Rather than water supply benefits being defined as attributable to the DCF, DWR will ignore what would have happened without the DCF and basically deny non-payers from receiving any water supplies conveyed through the DCF – even if they would have received the water anyway without the DCF. And then on top of this, non-payers are also severely restricted in their ability to receive so-called “Article 21” water, which is supplemental water that is generally available in wet years. The terms “water grab” and “hostage taking” are a bit overused in California water discussions but seem appropriate here. The proposal further states that water agencies that did pay for the DCF (most likely comparatively wealthy agencies like Metropolitan and Santa Clara) would have the option of receiving the water supply taken from the comparatively poorer agencies that did not pay for the DCF.

To illustrate the importance of this change, consider how it would have worked with the old twin-tunnel WaterFix proposal. According to the WaterFix EIR/EIS project description and modeling, the total water exported by the CVP/SWP was estimated to be about 5% higher with the WaterFix than without the WaterFix. So that 5% incremental increase is the water supply benefit of investing in the project, which is the correct way to define the project benefits and the way the negotiation started with the original definition of DCF water.

However, the WaterFix EIR/EIS also indicated that about 50% of total water exports would be diverted at the north Delta and conveyed through the tunnels if WaterFix were built. Thus, under the new proposal DWR is putting forward – those who do not pay would not only be forgoing their claim to the 5% incremental increase in water supply – they could lose up to 50% of their current water supply.

Thus, DWR’s current proposal could have significant impacts on the less wealthy, primarily agricultural agencies, and would likely lead to a significant reallocation of California water from agricultural to urban areas based on their willingness and capacity to pay for DWR’s multi-billion dollar mega-project. Some water agencies might succumb to the pressure and pay DWR’s ransom to keep their water supply.  While these agencies might participate in DCF if this proposal stands, they will still be worse off than if the DCF was not constructed. These agencies could end up in the awkward position of remaining in the project (choosing not to opt-out) while simultaneously taking legal and other actions to stop the DCF.  MWD stands to gain from this new proposal at the expense of other SWP agencies which raises questions of whether DWR is being unduly influenced by their cozy relationship with the MWD.

I am quite surprised that Governor Newsom’s administration would float such a proposal, and wonder whether it has been seriously vetted by his administration beyond DWR. Governor Newsom’s administration has been very concerned about the Central Valley and inter-regional equity, and this financing proposal is clearly harmful to these interests. And I doubt that these strong-arm ransom tactics are the direction that Governor Newsom had in mind when calling for a single-tunnel as a compromise. Eventually, I expect the Governor will come to realize that a single-Delta tunnel project simply isn’t viable and isn’t necessary or helpful in advancing California’s water resiliency.

PS. January 21: Corrected a formatting error, and also wanted to add a thank you to the Sierra Club California Water Committee for their tweet over the holidays which brought this new proposal to my attention.  https://twitter.com/SCCAWatCom


Monday, December 9, 2019

Water Supply Reliability Out, Endangered Species Killing Incentives In With New Federal/State Delta Pumping Rules

Delta water exporters are lauding the new biological opinions released by the Trump administration and the state's new regulations known as "Trump lite" by many environmentalists.  Water exporters are praising the new rules for their use of real-time operations, as opposed to the old rules that were "calendar based."  It's great PR messaging, but lousy policy.  The message appeals on the surface - new rules are modern and with high-tech real time adjustments, while the old-rules are primitive and based on calendars.  Good political messaging, but I would argue that it does not conform to the best available social science and policy design as it reduces water supply reliability and generates strong incentives to harm endangered species.

Let's start with the goal of water supply reliability - made state law by the 2009 Delta Reform Act.  For years, I heard water exporters assure us that they didn't need more water - they needed more predictability about the operation of the water pumps so that they could plan with certainty.  Seeing a political opportunity to get more water at the expense of reliability, they have quickly changed their tune.  Calendars are old-fashioned, but they are extremely reliable, whereas real-time operations based on species location are highly uncertain, and are pretty much the opposite of reliability.

But the even bigger problem with the real-time operation of the Delta pumps are the incentives and reward structure it creates.  You do not need a Ph.D. in fisheries to realize that they lower the fish population, the less likely they will be detected, and the less restricted water pumping from the Delta will be.  On the other hand, if endangered species populations actually recover, they are more likely to be detected near the pumps, which would reduce water supplies to exporters under the proposed real-time operations. 

Scholars of the endangered species act have known for a long time that triggering regulations by the presence of endangered species creates scores of negative incentives.  During the 1980s and 1990s, there were many articles about the perverse incentives for economic interests.  These incentives became known colloquially by the acronym SSS, "shoot, shovel and shut-up," and preemptive habitat destruction in more academic circles.  I was a contributor to this literature in the 1990s and early 2000s, it was the subject of my PhD dissertation.  The policy response to this was not abandoning the ESA, but creating positive incentives through Habitat Conservation Plans (HCP) and safe harbor programs.

These new Delta policies claim to be science-based, I can't judge that, but they certainly aren't based on the best available social science or policy design.  They clearly create an incentive where water agencies are rewarded when protected species do poorly - and my understanding is that other parts of these new biological opinions create rules in other areas (like cold water habitat upstream from the Delta) that will be harmful to endangered Delta smelt and salmon.  If we wanted to save species, if they experience bad conditions somewhere else in their lifecycle (whether that was due to natural fluctuations of ocean conditions or human mismanagement of Shasta dam or other human managed parts of the system), then we would have stronger restrictions at the pumps to make up for it.  Under these rules, bad management upstream works to reduce protections at the Delta pumps, the very definition of negative incentives.

It seems to me that the appropriate policy approach for water supply reliability and species protection/ecosystem enhancement in the Delta would be a Habitat Conservation Plan.  This is something that the PPIC is currently talking about in their recent publications on ecosystem management (see I don't always disagree with them).  But sadly, the only time HCPs have been seriously proposed in the Delta is when they were being used as green gift wrap around 15,000 cfs Delta conveyance tunnels in the BDCP.  Environmentalists haven't been warm to HCPs in the Delta either, but perhaps that might change as the BDCP becomes a more distant history.

The state's own economic consultant's analysis showed the value of the BDCP was in the regulatory certainty produced by the HCP, not the tunnels themselves.  But under Governor Brown, the state decided to throw out the HCP and proceed with the tunnels only WaterFix.  If the Newsom administration wanted to correct course on the Brown administration WaterFix plan, it wouldn't downsize from two tunnels to one, it would bring back the concept of an HCP (rebrand it ecosystem management if you want) and throw out the tunnels. 

Do jobs per drop calculations support more use of water markets?

The UC-D Watershed Center counters crops per drop calculations with jobs per drop calculations and then makes a rather large leap to their conclusion ... we need more water markets - not rules and regulations.

I am not persuaded.  The biggest impact of expanded water markets, especially if combined with expensive conveyance infrastructure like Delta tunnel(s) also supported by the PPIC/Davis group, will be more ag-to-urban water transfers that direct water away from Central Valley agriculture.  The economic impact of the out-of-ag transfers on the Valley could outweigh any marginal efficiency benefits from reallocating water between higher and lower revenue farmers.  Coastal urban areas should be encouraged to develop alternative local supplies, so I would be more supportive of water transfers if ag-urban or out of basin transfers were limited.   

Water is not the only thing that can be moved around in the Valley.  As water becomes more scarce, I believe within basin transfers will be part of the solution, but it may be less costly and more efficient to move crops, farm workers, and capital to more water rich locations in the Valley than it is to move water long distances out of watersheds.  (an acre foot of water weighs 2.7 million pounds and is worth a few hundred dollars in agricultural use)     

I also wonder about the validity of these types of calculations that suggest water/jobs ratios are fixed.  Water/nut ratios cited by environmentalists might vary widely too, but I suspect their is even greater variation in water/job ratio based on local conditions and production technology.  In fact, I have long wondered the extent to which labor and water can be substitutes in the agriculture production function.  This could be part of the reason that farm job loss during droughts has generally been less than predicted by simplistic fixed proportions analysis.  For example,  Santa Clara researchers found nearly 34% of vegetable crops went unharvested in California fields during 2016-17, and that there was a lot of variation in the unharvested amounts by field even for the same crops, and that labor availability/costs was a factor.  I wonder if the unharvested percentage declines in a drought year, some fields might be fallowed, but more labor could be applied to the fields that are planted increasing the harvested crop per drop on the remaining fields.  And there might be other ways that water-labor could be substitutes, for instance in more closely monitoring/managing irrigation equipment.

I am very much a market oriented economist, but I am deeply skeptical about the potential of water markets to be a major part of California water solutions.  The transactions costs are extremely high (both transporation and regulatory), the potential for third-party impacts is large, and markets are unlikely to be competitive. 

And as water becomes increasingly scarce, I believe regulatory limits on planting decisions could be warranted some day, and could be part of long-run management plans.  We could use market principles to limit the cost of the regulations, for example if we have licenses that limit plantings of certain permanent crops - these could be transferable in markets.  I once heard a very smart salmon fisherman say (sadly I forget their name) something like "we have to deal with transferable catch limits and quotas to avoid the tragedy of the commons in the oceans, why not an ITQ (individual transferable quota) for trees to avoid the tragedy of the commons in groundwater."

The job per drop data also suggest reducing field crops like corn and rice that have low labor intensity and relatively low revenue per acre.  I worry if that were to go too far.  These crops often provide valuable wildlife habitat, and fallowing these types of crops in drought years provides an important buffer to reduce water use while minimizing economic disruptions due to their relatively low labor intensity and relatively high ability to substitute with imported crops.

Of course, these calculations of jobs per drop are based on 2010 data and probably already outdated.  The cost and scarcity of labor is having a much bigger impact on most farmers than the cost and scarcity of water.  As discussed above, labor scarcity could increase the jobs per drop calculation for vegetables but the change in that number would not necessarily be very meaningful for water management. 

While I have cautioned about drawing too many conclusions from these numbers above, I would also be very interested in seeing updated calculations for 2020 and the years ahead as data becomes available. 

Monday, October 7, 2019

Finally, some exciting news about water in California.

New $100M Innovation Hub to Accelerate R&D for a Secure Water Future: A research consortium led by Berkeley Lab, along with three other national labs, will head a DOE desalination hub to provide secure and affordable water 

https://newscenter.lbl.gov/2019/09/23/new-100m-innovation-hub-to-accelerate-rd-for-a-secure-water-future
https://www.energy.gov/articles/department-energy-selects-national-alliance-water-innovation-lead-energy-water-desalination

I would suggest the Governor borrow a few quotes from the LBL news release about NAWI when he announces a bold new vision for California water priorities.  For example, "NAWI’s vision for creating a stable and resilient water supply for agriculture, industry, and communities involves a circular water economy, where water is treated to fit-for-purpose standards and reused locally, rather than transporting freshwater long distances."

This big announcement is $100 million over 5 years.  How much does California spend on water technology R&D?  I know we will spend more than that just on planning for a single tunnel in the Delta, that's before the $10+ billion on the thing itself.  California will spend more than that on operations of the Delta Stewardship Council over the same period.  The state will spend ten times this much subsidizing the so-called "ecosystem benefits" of a single dam.

It's nice to have the headquarters of this new consortium in California, but there could be much more of this activity in the state.  California could totally dominate R&D, new technology development, and commercialization of alternative water technology with a relatively small amount of investment and policies to push local adoption.  I strongly believe supporting and adopting new technologies should be the focus of the state's future water vision, including any future water bonds. This would create lots of high-paying jobs, as we develop technologies to solve our own problems that have broad applicability and worldwide commercialization potential.  Most importantly, it could create new water in a sustainable and cost-effective manner while diversifying our sources so we are more resilient to climate change and natural disasters.

I find the current direction of state water policy very uninspiring.  Eventually, the administration will figure out that a single-tunnel in the Delta isn't viable, and that putting green window-dressing on last centuries concrete mega-infrastructure visions isn't very effective - economically or environmentally. It's time for a new vision focused on developing and deploying new technologies.

Governor takes opposite approach to the NCAA and water interests

I have long been a LeBron James' fan, so I was happy to see Governor Newsom appear on his new talk show to sign a bill taking on the NCAA for its restrictions on college athlete's ability to earn money for their talents through endorsements and other means.
 

LeBron praised the Governor for taking strong action in the face of political pressure to reject the bill and give time for leaders to negotiate incremental reforms.  The Governor was lobbied heavily by college presidents and others.  But the Governor thought a strong law was required to initiate real change as expressed in this interview with the New York Times.

"Unless we force their hand, they’re not going to reform. If we just let them do it voluntarily, they’ll come up with some window dressing — a nice thing here, a nice thing there — but they won’t fundamentally reform"

The Governor is taking a different approach on the environment and California water, encouraging plans and voluntary agreements while opposing strong regulatory (SWRCB) or legislative (SB1) actions by the state.  If the Governor continues on this path, the outcome is likely to be just as he predicts "they'll come up with some window dressing - a nice thing here, a nice thing there - but they won't fundamentally reform"




Thursday, May 16, 2019

Mayor Steinberg's Self-Managed Pension Bond Proposal

Sacramento Mayor Darrel Steinberg has recently proposed issuing bonds (long-term debt) as a mechanism to protect much of the revenue from a recently passed sales tax hike from going to employee compensation, primarily the City's rapidly growing pension costs.     

It's a bold and very risky strategy. 

It is not unusual for Cities to turn to risky bond strategies when pension obligations squeeze their budget, but Steinberg's approach to the bonding is very unusual.  Typically, city issued bonds to deal with pension costs take the form of pension obligation bonds - where cities issue large amounts of municipal debt and deposit the proceeds in their pension fund, such as CalPers, which invests the money to pay future pensions.  Pension bonds are essentially a bet that the investments made by the pension fund will grow faster than the interest rate on the bonds.  Borrowing money to invest in the markets is a very risky strategy.  The outcome often comes down to market timing luck.  Sometimes the bets succeed and sometimes pension bonds fail in a big way - like when Stockton issued over $100 million in pension bonds in 2007, contributing significantly to its 2012 municipal bankruptcy. 

Mayor Steinberg is not proposing a pension bond.  He wouldn't give the proceeds to CalPers to invest.  Instead, he would use the bonds to solve the city's long-term pension/budget ills by making investments in the City that he argues would grow the tax base enough to both pay the on-going debt service of the bonds and the Calpers debt.  Rather than gamble on the markets, he would gamble on his (and the City Council's) acumen in making investments in "inclusive economic growth" that would increase community prosperity and thus increase long-term tax revenue for the City. 

I am calling the Mayor's plan a self-managed pension bond since the budget logic is similar.  Rather than rely on outside investment managers, he is just putting himself in charge of a committee of investing up to $400 million in bond proceeds to achieve his civic and budget goals.  He is arguing that he should be in charge of the second half-cent of sales tax revenue, even borrowing so the revenues beyond his term can be spent/invested today, because it would not exist if not for his idea and push to go for the larger tax increase.  He believes he and the city council will make the right investments today that "change the economic arc of the City."

Below are some quotes from when the Mayor put forward his vision a few weeks ago for how to spend the second half cent of the Measure U sales tax,

By the end of the five-year budget forecast, the city will owe CalPERS an additional $39 million a year to pay for pension obligations for existing city employees.  We are also at the beginning of collective bargaining for nearly all of our city employees. Assuming modest wage increases, and we should always treat our employees with respect and real support, the additional outlay for the city will be at least $15-$20 million per year.
“These numbers are easily verified. Add them together – the pension obligation and the low end of the salary increases -- and they total at least $54 million. ...“The second half cent equals $50 million. If we keep the second half cent in the general fund, every penny will go to pension and salaries.
I will argue confidently throughout these next weeks that if I had not laid out a clear, inclusive economic agenda for the city in my first years as mayor, the city would have sought only to renew the original Measure U at half a cent, so there would not have been a second half cent to consider for pensions, or salaries, or basic services...
“Since we pass only one budget at a time, and you cannot bind future city councils, there is only one way I know of to guarantee that significant resources will be dedicated long-term to the promise we made to our voters and to our neighborhoods. I will ask the treasurer to come back over the next weeks with a proposal to securitize $25 million a year from the second half cent. A commitment of $25 million a year for 25 years would allow us to create a capital equity fund of more than $400 million.

Monday, January 14, 2019

"$7 an acre foot? No way, it's worth more than $200 to you." If California is going to adopt voluntary agreements over the regulation of Delta water, the fish need a real negotiator.

Recently, the California Department of Fish and Wildlife (CA DFW) and the CA Department of Water Resources announced a voluntary agreement, negotiated in secret, as a proposed substitute to new regulations in the Bay-Delta Water Quality Control Plan that would limit water diversions from the environmentally troubled Delta.

While the negotiations were secret, I recently obtained a training video that CA DFW leaders used to prepare for the high-stakes negotiations with delta water diverters.  (The yellow convertible represents the revised Bay-Delta plan that has been under development for nearly a decade.)       



O.K., that's a joke - but it isn't far off from the giveaway of the water quality control plan in this proposed deal, especially when it comes to the projects diverting from the south Delta (the CVP and SWP).  It does not appear that the CVP/SWP have offered any water or habitat projects that are not already required by existing regulations or plans, and it proposes an $800 million subsidy from state taxpayers to the deal by redirecting water bond funds.  As far as I can tell, the only new requirement on the CVP/SWP is some modest funding in the form of a $5 per acre foot fee to compensate upstream water diverters who may lose water supply in other components of the deal, and an additional $2 per AF for a science program they would control.

There has been confusion about whether the CVP/SWP contractors are actually giving up any water in this deal. For example, this Fresno Bee op-ed by two CVP executives, describes the CVP/SWP contractors as voluntarily giving up 300,000 AF for fish.  However, many environmentalists dispute this characterization and argue that they could actually get more water under this deal than under the current, decade-old biological opinions that are supposed to regulate delta pumping.  In comments to the Metropolitan Water District (MWD) board earlier this week, MWD staff seemed to confirm the environmental argument that the 300,000 AF is nothing more than compliance with existing regulations according to this account in Maven's Notebook.
In the settlement that was produced for the December 12 briefing, [the parties] put forth a proposal that had ... a commitment on the CVP and SWP of 300,000 acre-feet, largely met by incidental flows that are met through export constraints that are in the current biological opinions, so basically committing to those dedicated flows that are in the biological opinions, said Mr. Arakawa.
Considering that this agreement is proposed to substitute for a new Bay Delta water quality control plan that would likely require the CVP/SWP give up 1.3 million acre feet of current average annual diversions to allow more Delta outflows for environmental benefits, this is an enormous amount of regulatory relief for the bargain price of $7 per acre foot (about $30-35 million in a typical year).

Thankfully, the State Water Resource Control Board (SWRCB) did not accept the proposed agreement, but it did encourage further negotiation to complete the deal.  The environment and the fishing community deserve a stronger negotiator in the future.  How would a better negotiator respond?

"$7 an acre foot, are you kidding me?  You have told others that protecting this water supply from the new water quality control plan was worth $200/AF to you."

Why do I say that the water agencies value this protected water supply at 30+ times what they have offered?  Because they have been pushing the $20 billion Delta tunnels (aka WaterFix) that would provide a very similar benefit after this 15-year agreement would expire.  Water agencies have argued that the point of WaterFix is to protect 1.3 million acre feet of water supply from future regulatory actions like the water quality control plan.  And they* say they are willing to pay $1+ billion in annual debt service to protect this water supply.  Averaged across the roughly 5 million acre feet of water they hope to divert from the Delta in the future, this would be a $200 per acre foot charge on their diverted water.  WaterFix would provide a few additional benefits to these water agencies, but this voluntary agreement would generate about 80% of the benefits that WaterFix would, according to the water agencies' previous economic analysis of WaterFix.  Thus, the proposed voluntary agreement would provide about 80% of the annual benefits of WaterFix to SWP/CVP contractors for only 3-4% of the annual cost of the WaterFix.  What a deal!

I am not opposed to a negotiated agreement, and have actually recommended a settlement with these elements in the past.  In an October 2013 op-ed in the Sacramento Bee, I argued that the State's economic analysis of the tunnels-oriented Bay Delta Conservation Plan supported the value of a negotiated habitat conservation plan, but not the Delta tunnels themselves.  I argued that the State's own analysis showed that a habitat conservation plan with Delta exports in the low 4 million AF range with water agencies paying for the habitat measures was a better deal for all parties than the BDCP tunnels (now renamed the WaterFix).

Governor Newsom supported the concept of a negotiated agreement as Governor-elect.  If he continues this approach as Governor, he needs to install a much tougher negotiating team on behalf of the environment.  Based on the WaterFix proposal, my suggested counter-offer is something like a 20-40% reduction from the proposed water quality control plan regulations, and a charge of $50-75 per acre foot of diverted water to pay for all of the costs of the non-flow habitat measures (no taxpayer bond funding would be required).  Any funds collected in excess of the requirements to pay for the habitat restoration would be given to an independent third party to make grants for alternative water supply projects that would reduce demand for Delta water in the areas served by Delta exports.

If the SWP/CVP water agencies want better terms, such as a lower fees, then the environmental negotiators should ask them to drop the twin tunnels/WaterFix plan.  If they are unwilling to do this, then that is very revealing about their expectations for the tunnels.  It shows the water agencies aren't actually willing to pay costs on the order of the WaterFix project just to "protect" their existing levels of Delta water diversions.  If they will only pay at these levels to "protect" the water supply with tunnels, it suggests these agencies do not expect they will have to follow the constrained operations of the tunnels described in their voluminous EIR.  Thus, it confirms the fears of environmentalists that the tunnels' large capacity would be used to increase diversions after they are built - regardless of any current promises not to do so.

Not all environmentalists would be on board with a negotiation like this, as it does represent a concession on the environmental side relative to the Water Board's proposed regulations.  In fact, some of my environmental friends criticized me back when I wrote that 2013 op-ed proposing a no-tunnel BDCP since it included some substitution of non-flow measures for flow measures.  That is a scientific matter on which I have no expertise, but if there are no substitutes for flow at any level - then there probably is no point in negotiating at all.

The bottom line is that if we are going to have negotiated agreements, the fish need a much stronger negotiator.  If Governor Newsom wants to continue supporting an attempt at a negotiated deal, he must install better negotiators for the environment. 

-----------------------
* Yes, I know the CVP contractors have not said they are not willing to spend that much on WaterFix at this time.  But MWD approved financing the CVP share with expectation of being reimbursed by CVP in the future.  Thus, they have collectively approved spending at this level to protect delta exports from this regulatory cut.

Monday, January 7, 2019

The CVP "No Harm" deal for the Delta Tunnels does a lot of harm to MWD's business case for their $12+ billion investment.

Why did the Central Valley Project want a "Do No Harm" agreement about the delta tunnels?

Last year, Central Valley Project (CVP) contractors made a rational and predictable decision not to pay their share of the WaterFix.  To save the project, Metropolitan Water District (MWD) staff convinced their board to add a multi-billion dollar blank check to fill the enormous financial hole.  To do so, MWD staff argued that the extra funding would allow them to receive the benefits that the CVP would have gotten from their investment.  MWD staff did this with a highly speculative estimate of future water supply benefits from financing the second of the twin tunnels, the so-called "unsubscribed capacity".   Last June, I wrote...
"when MWD staff is using this speculative no-tunnel baseline assumption to define the additional water supply benefits they will receive for the extra investment, the additional water supply is water that goes to the CVP under current regulations.  Thus, in this unsubscribed capacity scheme, MWD staff is using this speculative future baseline to argue that financing the full WaterFix will give them control of water supply that CVP currently diverts from the south Delta...  MWD board members should be very, very skeptical that it will actually work that way."
In testimony before the State Water Resource Control Board this summer, I presented the following estimates of average annual water deliveries (in acre feet) derived directly from the information MWD staff presented to their board in order to persuade them to commit additional billions from their ratepayers.  The second line is the MWD staff scenario where CVP pays MWD to use all the 33% "unsubscribed capacity" and the 3rd line is the MWD staff scenario where CVP doesn't pay and the 33% capacity is utilized by MWD.


CVP
SWP
Total
No Action Alternative
2,115,000
2,585,000
4,700,000
CWF (67% SWP/33% CVP)
2,094,000
2,906,000
5,000,000
CWF (67% SWP/33% MWD)
1,665,000
3,056,000
4,721,000

The second line shows no water supply benefit for CVP compared to No Action.  Comparing the first line to the last line where MWD pays for the CVP share shows that according to MWD staff, the primary effect of implementing WaterFix is to redistribute 450,000 acre feet of water from the CVP to MWD.  The incentive of the CVP to participate in WaterFix is to avoid this potential harm.  Thus, it's not hard to see why the CVP would want a "no harm" agreement regarding the future effects of California WaterFix (CWF).

MWD staff would argue that a "no harm" agreement doesn't change their water supply benefit because under the agreement, they only have to compensate CVP for impacts that are attributable to the WaterFix.  They would argue that the decreased CVP water supply is due to regulations on south Delta pumping that they argue are equally likely with or without the WaterFix, thus there is no problem.  Are they right? 

To answer this, you should look at the official WaterFix documents, and ignore the sales pitch from MWD staff and other WaterFix proponents.  That is certainly what a court will do.  The "No Harm" agreement states that the WaterFix is described by the Final WaterFix EIR/EIS, and that document clearly states that the new OMR regulations and other more restrictive operating criteria are part of the WaterFix project itself, and are included as a response to expected environmental changes caused by operating the tunnels and the new north Delta intakes.  As an example, here is a quote from the Final EIR/EIS
“These newly proposed OMR criteria (and associated head of Old River gate operations) are in response to expected changes under the PA, and only applicable after the proposed north Delta diversion becomes operational." (note: PA stands for "proposed action" which is the WaterFix)
Thus, it seems pretty clear to me that the "No Harm" means the CVP can't lose any water supply as a result of these new regulations that are clearly defined in the EIR/EIS as an integral part of the WaterFix project.  The agreement is not specific about how the CVP would be compensated, but it seems likely that they will have to receive water delivered through tunnels without paying for the tunnels.  Thus, the water supply benefits to MWD will be significantly less than the MWD board was told when approving the extra billions.

The "no harm" agreement also reduces the already remote chance that MWD will ever be reimbursed by the CVP for its investment in the second tunnel.  The argument pushed by MWD and DWR that farmers/CVP would pay them back for the 2nd tunnel has always been as laughable as President Trump's claims that Mexico will reimburse the cost of his border wall, and this "no harm" agreement makes it even more clear.

In addition to this "no harm" agreement, the new coordinating operating agreement between the SWP and CVP could also greatly affect the water supply benefits of the WaterFix to MWD.  Nine months ago, MWD staff described a "Master Agreement" with DWR that defined MWD's use and control of the 2nd tunnel, but that agreement still has not been made public despite MWD staff promises.  MWD staff description of this "Master Agreement" was key to the MWD board's funding vote, but it seems to conflict with this new "Do No Harm" agreement with the CVP.

The bottom line is that these new agreements appear to substantially reduce promised water supply benefits to MWD ratepayers while increasing their share of the costs.  In order for the MWD board to fulfill their fiduciary duty to their ratepayers, they need to fully review the effects of these significant new agreements on the WaterFix return on investment and potentially reconsider their previous funding commitments.

Wednesday, January 2, 2019

California population growth rate drops to all-time low: housing growth rate now exceeds population growth

Recent estimates from the U.S. Census Bureau show California population growth has dropped to an all-time low of 0.4% in 2018.  The U.S. population growth rate declined slightly to an 80-year low of 0.64% according to the Bureau.  California's pace of population growth is tied with Iowa, one spot below Indiana and one place above Wisconsin - state's that are rarely compared to California when it comes to demographics or economics.  This is the 3rd straight year California population growth has been slower than the U.S. even as job growth continue to exceed the U.S. average. 

As the housing crisis has worsened, it has become common for analysts, including me, to say that California is not building enough housing to keep up with population growth.  That is no longer true thanks to the combination of decreasing population growth and slow, steady growth in new permits.

Between 2017 and 2018, California's population grew by 158,000 people, and the state is on a pace for issuing permits for nearly 120,000 new residential units in 2018.  Even with the devastating number of homes lost to fire this year, that is still enough to keep up with population growth. 

This is contributing to the flattening out of home values and rents that is currently underway.  Of course, this doesn't mean that the housing crisis is solved - the exodus is largely driven by the pain endured by Californian's dealing with the housing crisis.  California still needs to prioritize efforts to expand supply and reduce housing costs.


Friday, October 12, 2018

November 2018 Propositions: How I am voting

The November 2018 California ballot has 11 Propositions, most of which are focused on economic issues.  Because of this focus on economic issues, the Center for Business and Policy Research included recommendations and analysis from myself and Associate Director Thomas Pogue (the guest blogger on proposition 7) in the economic forecast we released this morning.

This morning I took a look at the Democratic and Republican parties endorsements, and found that I agree with Democrats on 6 out of 11 Propositions, and agree with Republicans on 6 out of 11 Propositions as well.  I guess that makes me a moderate.  Interestingly, Democrats and Republicans agree on three Propositions (2-Yes, 3-Neutral, and 7-Yes).  I disagree with both parties in one of these cases, Proposition 3, where I oppose and both parties are neutral.

In general, bond issues have a lot more credibility when they go through the legislature like Propositions 1 and 2, and thus have been considered in the context of the full state budget.  Voters should be highly skeptical of bond propositions that go directly to voters to seek public subsidies like Propositions 3 and 4.  The enormous size of the water bond ($9 billion, 50% larger than the combined total of legislatively backed housing bonds) is a good example of the fiscal problems of special interest financed bond initiatives.

Proposition CBPR Dem Repub
1 Yes Yes No
2 Yes Yes Yes
3 No Neutral Neutral
4 No Yes No
5 No No Yes
6 No No Yes
7 Yes Yes Yes
8 No Yes No
10 No Yes No
11 Yes No Yes
12 Yes Yes No

Proposition 1:  Yes.  Proposition 1 authorizes $4 billion in bonds for various affordable housing programs.  The availability and affordability of housing is a worsening problem across all of California, and is arguably the State’s biggest economic challenge.  The cost of developing affordable housing is extremely high in California, more than double some other states, and thus the funding in this bond will not deliver as much housing as it should.  While it is tempting to vote no until stronger actions are taken to reduce costs, the need for affordable housing is so great that we support the bonds.  
Proposition 2:  Yes.  Proposition 2 authorizes $2 billion for housing programs for individuals with mental illness.  It passed the California Senate unanimously, and the Assembly 72-1.  This bond deserves support, although we urge further actions to reduce the cost of developing affordable housing in order to maximize the benefits of this funding.
Proposition 3:  No.  Proposition 3 would authorize $8.9 billion in bond borrowing for a variety of water related projects, and creates an unjustified subsidy from the state’s greenhouse gas cap and trade program for 4 designated water agencies supporting the bond, including the Metropolitan Water District and Westlands Water District.  While a portion of Proposition 3’s funding would go to needs that are worthy of state public funding, the majority of Proposition 3 is terrible policy that provides undeserved subsidies to special interests that represents California water politics at its worst.  Since 2014, the legislature and Governor Brown have supported over $11 billion in new water related bonds in 2 separate elections, including the $4 billion Proposition 64 in June 2018.  Thus, most of Proposition 3 consists of poorly justified subsidies that couldn’t make it through a legislature and Governor that have been very supportive of water spending.  In addition to the enormous size and weak justification of the Bond, the hidden inclusion of an energy subsidy for water agencies that divert and pump water uphill from the environmentally troubled Delta is reason enough to vote no on Proposition 3.
Proposition 4:  No.  Proposition 4 would authorize $1.5 billion in bonds for children’s hospitals and was placed on the ballot by a petition funded by an association of children’s hospitals that would receive the subsidies.  While children’s hospitals are valuable institutions in California, funding them through state general obligation bonds is poor public policy. 
Proposition 5:  No.  Proposition 5 would expand the property tax limitations from Proposition 13 for California homeowners over the age of 55, by allowing them to transfer the lower property tax bill of their current home to any other home they purchase in the state.  Proposition 5 would address one of the negative consequences of Proposition 13, inefficient “house lock” that occurs since moving often triggers higher property tax bills for homeowners because the new home is assessed at its current market value.  Proposition 5 eliminates this perverse incentive, and thus would have a positive effect.  Unfortunately, Proposition 5 solves a Proposition 13 problem by further increasing the large tax burden inequities embedded in Proposition 13. 
Proposition 13 is inequitable because homeowners with similarly valued homes pay vastly different property tax bills based on when they purchased the home.  It conveys large tax benefits on older homeowners who bought their houses decades ago, as well as those who had fortunate market timing and bought during the dips of California’s roller coaster real estate cycles.  The Executive and Associate Director of CBPR both bought houses in 2010 near the bottom of the market, and would likely benefit handsomely from Proposition 5 in a few years as we become eligible empty nesters.  While we would personally benefit from Proposition 5, we oppose it because it perpetuates and expands Proposition 13’s inequities and distortion of California’s real estate markets and local public finance.  The “house lock” incentives could be addressed by reforming Prop. 13 to reduce its inequities rather than by expanding them.      
Proposition 6.  No.  Proposition 6 would repeal gas and vehicle taxes passed by the legislature in 2017 to fund transportation projects around the state.  While we don’t generally favor tax increases and understand that the high cost of motor fuels imposes a heavy cost burden on many Californians, these taxes are an appropriate and fair approach to funding much needed transportation improvements.  Fuel and vehicle taxes are far more economically efficient than funding transportation with general fund revenues (primarily income and sales taxes) as many Proposition 6 advocates have argued. 
Proposition 7. Yes.  Proposition 7 would start a process that could lead to year round daylight savings time (DST) with federal approval.  The proposition would potentially end twice yearly time changes and their associated disturbance to sleep patterns. While the energy saving benefits of DST are questionable, increasing evidence shows the sleep disruption from the time changes may be associated with a range of social costs ranging from pedestrian, motor vehicle, and workplace accidents to workplace productivity losses and declines in student learning. The proposition’s adoption of year-round DST would also facilitate potential increased consumer impacts in shops and restaurants as well as outdoor recreational activities because of the extra-daylight.  Plus, if Tom were to recommend a no vote his wife and son would combine their late-night and early morning preferences to ensure he is sleep-deprived no matter what the time change. 
Proposition 8.  No.  Proposition 8 would regulate prices charged by dialysis clinics based on the cost of care.  In general, attempts to limit prices by law reduce economic efficiency, reduce the supply of goods and services and can have many unintended consequences.  Prop. 8 has been supported and funded by labor unions seeking to unionize staff of dialysis clinics, and is opposed by the owners of dialysis clinics, and many major medical professional organizations in the State.
Proposition 9.  “Three Californias” initiative was removed from the ballot.
Proposition 10.  No.  Proposition 10 would greatly expand the ability of local governments to enact rent controls on residential property.  Economic theory and decades of research are clear that rent control reduces the quality and quantity of rental housing over time, leads to an inefficient allocation of rental units by reducing mobility and encouraging overconsumption of housing by those who are able to secure rent controlled apartments.  California’s affordable housing crisis is severe, and the desire for rent controls to create some immediate relief and cost savings for some is understandable.  On the other hand, the many harms caused by rent controls accumulate more slowly over time and the research is clear that it will do more harm than good for California’s housing market in the long-run.
Proposition 11.  Yes.  Proposition 11 would allow private ambulance companies to require their employees remain on call during meal and rest breaks.  This is current practice, but a recent ruling in a lawsuit requiring uninterrupted breaks for private security guards, is expected to end the practice of on-call breaks by ambulance companies.  Eliminating on-call breaks would significantly increase the cost of maintaining current EMT service standards, requiring increased staffing that would raise health insurance and local government costs.
Proposition 12.  Yes.  Proposition 12 would require cage-free housing for egg-laying hens by 2022, and increase required space for breeding pigs and veal calfs.  Interestingly, UC-Davis agricultural economists have been silent on the economic effects of this bill after receiving withering criticism and a lawsuit from the Humane Society over a study of the costs of 2008’s Proposition 2, which increased space requirements for hens but did not go as far as the current proposition to require cage free production.  Economic studies have shown Prop. 2 raised egg prices in California by between 50 cents and $1 per dozen.  The cost of living index data we collect for the Stockton and Sacramento areas finds that eggs are more than twice the price seen in many other parts of the county, a much higher cost differential than any other grocery product we survey.  Proposition 12 will likely further increase the cost of eggs in California and its costs will be disproportionately felt by low-income households.  However, the California cost difference will likely decrease over time as major retailers and restaurant chains around the country have announced plans to shift to cage free eggs that will change production methods across the industry.  Surprisingly, the most public opposition is not from the agriculture industry or consumer activists, but animal welfare activists who claim the Prop. 12 does not go far enough.  While concerned about the cost to low-income households, we recognize the legitimacy of growing animal welfare concerns and that an industry shift is already underway.  Plus, if Jeff were to recommend a No vote, his wife and kids would have him sleeping outside next to his backyard chicken coop.

Tuesday, September 25, 2018

Bay Area Home Price Appreciation Has Accelerated Again


Last year, Bay area home price growth had slowed.  In addition, it seemed that the limits on mortgage interest and SALT deductions in the new tax law combined with higher mortgage rates would bite harder in the high-priced Bay Area.  Thus, I felt home value appreciation would slow down further if not flatten out in the Bay Area.

It appears I was wrong.  Check out this graph of SF home values as measured by the Case-Shiller Index (from MarketWatch).  Bay area home values are growing at a 10%+ annual rate while other areas have slowed.  Median home prices show the same trend.



What explains this rebound?  The tax law certainly had plenty of benefits for high-income Bay Area residents, so perhaps the gain to their overall after tax income fueled demand more than the loss of tax deductions.  And speaking of income, Bay Area wages continue to grow at super fast rates.  The latest QCEW data shows annual wage gains of about 10% in Bay Area counties.  With housing scarce in the area, it is natural that area residents would spend some of those gains on housing, and incomes have grown proportionally with the housing costs.

For a few years (2016, 2017), Valley housing costs were rising faster than the Bay Area, narrowing the gap.  Now it appears that the housing cost differential between the Bay Area and inland areas is widening again which along with rising mortgage rates, increases the incentive for middle class households to migrate inland. 

New WaterFix Economic Analysis is Even Worse Than I Originally Thought

It turns out my initial reaction to the Brattle Group's latest WaterFix benefit-cost analysis was too nice.  I am receiving feedback that the sea-level rise analysis that the Department of Water Resources' touts as "innovative" assumes WaterFix is operated in ways that harm fish, would violate state and federal laws, and contradicts the commitments that DWR is making about WaterFix to the State Water Resources Control Board and other regulatory bodies.  My quick take didn't mention any of these important fish or legal issues.  

This quote from the Brattle/Sunding report explains its justification for estimating an enormous new sea-level rise benefit from WaterFix.
"DWR modeling indicates that Delta exports are highly sensitive with respect to sea level rise. A rise in sea level means more salinity intrusion from the ocean via the San Francisco Bay, affecting the water quality of exports and requiring more fresh water to be released from upstream reservoirs to meet salinity standards. By 2100, a 2-foot sea level rise becomes a more important contributor to reduced annual south-of-Delta export than does annual inflow change, a result also shown by Fleenor et al. (2008).  The DWR study published by Wang et al. (2011) concludes that sea level rise can be expected to reduce Delta exports by over 119,000 acre-feet annually by mid-century, and by over 520,000 acre-feet annually by 2100. Construction of the WaterFix would prevent these losses by giving water managers the capability to divert water directly from the Sacramento River upstream of the Delta.”
I asked several knowledgeable experts if this was legitimate and received a resounding "No."  Here is an example,
There is no reason to think that building the tunnels will allow a change in water quality standards.  Those standards protect fish and wildlife (the “X2 standards”) and in-Delta agricultural, municipal and industrial uses.  The studies Sunding relied upon (without any apparent understanding on his part of how they were done, what they mean and what their assumptions were) show that with expected sea level rise and assuming no islands flood and all channels get deeper—so they continue to be dredged to the same levels as they are now even though they don’t need to be—more outflow will be needed to meet the current water quality standards.  
Sunding assumes, quite incorrectly, that with the tunnels the extra outflow caused by sealevel rise can instead be pumped through the tunnels, which means the Delta gets saltier and the water quality standards won’t be met.  That would be a disaster for fish, wildlife and those in the Delta who rely upon it for water.  Assuming the water quality standards go away because the tunnels are built is either fantasyland or the worst fears of the in-Delta water users and enviros.  It means either Sunding has no clue about Delta water quality and the reason for those standards, or he and his clients think they can fool people into thinking this project works economically or he and his clients are completely disingenuous about their intentions once the tunnels are built.  So once again, Sunding’s assumptions are complete BS.
Yes, there is quite a track record of Brattle/Sunding making unjustified assumptions to increase the estimated benefits of the tunnels.  Every revision of the tunnels project has made its economics worse, but Brattle/Sunding just make another new assumption to push the benefit-cost ratio over the magic number of 1.

Summer 2012:  After the initial analysis of economic benefits of the Delta tunnels (water supply, water quality, and seismic risk reduction) falls far short of its costs, Sunding/Brattle unveil a new 4th category of benefits bigger than all the rest combined:  "the value of regulatory certainty."  The justification for the benefits are the regulatory assurances that are part of a habitat conservation plan under the ESA.  Critics call regulatory certainty a BS assumption.

Summer 2015:  DWR releases new EIR and revised tunnel plan that shifts from BDCP habitat conservation plan to tunnels only WaterFix.  The new EIR also has substantially lower water supply benefits compared to no action.  Both these changes substantially impact the economic benefits of the tunnels, and DWR promised a new economic analysis within months but never releases it.

Fall 2016:  The suppressed 2015 economic analysis comes out in a public records request.  In order to get a positive B-C ratio in this report, Brattle/Sunding assume away $6.5 billion in costs by assuming a massive, unjustified subsidy.  They also assume the water supply benefit of the tunnels are more than 5 times higher than estimated in the EIR/EIS by continuing to assume the tunnels are exempt from future regulations that are certain without the tunnels.

September 2018:  As the economics of the tunnels get worse, the ridiculous assumptions needed to generate a positive benefit-cost ratio get bigger too.  The analysis released last week embeds a number of inaccurate assumptions:

  • Introduces unjustified $5.7 billion sea-level rise benefit discussed above which implicitly assumes WaterFix doesn't have to comply with Delta water quality standards.  Costs exceed benefits without this assumption.
  • Implicitly assumes the No Tunnel Scenario complies with proposed Bay-Delta outflow requirements, but that the WaterFix scenario does not.  This unjustified assumption increases estimated water supply benefit to more than 6 times the level in the WaterFix EIR/EIS.
  • Introduces a new multi-billion dollar cross subsidy from Metropolitan Water District ratepayers to the Central Valley Project in the form of a low "wheeling rate" for access to the tunnels' conveyance capacity.  
  • Falsely claims that an analysis that is not statewide, and only narrowly focused on participating water agencies, is consistent with the DWR economic analysis guidelines.

Thursday, September 20, 2018

Quick Reaction to the Latest WaterFix Economic Analysis

This afternoon, the Department of Water Resources released a new report from the Brattle Group, "Economic Analysis of the WaterFix: Benefits and Costs to Project Participants."  I gave it a quick review this afternoon, and judging by my inbox, there is high demand for instant analysis - so here it is.

This report is different in several respects from previous analysis of earlier versions of WaterFix by the same consultants.  These 4 points highlight this new information.  The 1st and 4th bullet points in this list are going to cause trouble for the Metropolitan Water District (MWD) in the recent Prop 13 and Prop 26 lawsuit filed against them.
  • It assumes a massive new subsidy for agricultural users cost share from urban water users.  The agricultural subsidy is contained within a "wheeling rate" that it assumes that Metropolitan Water District (MWD) would charge the Central Valley Project (CVP) for using the tunnels' conveyance capacity.  To illustrate this, I used Table 2 and Table 6-7 in the report to calculate the % of water supply benefit and % of project costs for 3 groups, State Water Project Urban (which is mostly MWD), SWP Agricultural, and CVP (which is mostly farms).  
SWP Urban SWP Ag CVP
% of Water Yield 44% 24% 32%
% of Costs 63-69% 14-19% 18%
(The % costs is a range because it is unclear whether table 6 or 7 is comparable to the water yield estimates in table 2.  Either way the urban to agriculture subsidy is clear.)
  • The positive benefit-cost ratio depends on a dubious new benefit: the value of sea-level rise protection benefits.  The report estimates the present value of these sea-level rise benefits at a whopping $5.7 billion, a value that exceeds the study's estimated total net benefit of the WaterFix.  That means the benefit-cost ratio is negative for all user categories if this dubious new benefit is removed.  This estimated benefit has never been included in any previous study of WaterFix, and thus it is a new benefit category created for this report when the old methodology fell short of giving a postive benefit-cost ratio.  So how is it estimated?  They use a 2011 DWR report that estimates the water supply loss from maintaining Delta salinity standards under sea-level rise scenarios using the existing no-tunnel system.  Then it assumes that WaterFix eliminates 100% of that loss, which seems to assume that they won't have to meet the salinity standards if they can divert from the new intakes further upstream.  Thus, it seems that this benefit to WaterFix benefits comes at the cost of non-participants downstream from the north Delta intakes.  Those costs are not included in this analysis of benefits/costs, because it only looks at participants.  Furthermore, it is worth noting that the study from which these water supply benefits are calculated does not include any modeling of the Waterfix tunnels operation, and thus it is not clear that the WaterFix would/could prevent this loss.  Why didn't DWR model this with WaterFix?  Why use an old study and make this unjustified assumption?
  • The report, press release and webpage falsely claim that this benefit-cost analysis is consistent with DWR's Economic Analysis Guidebook.  The Economic Analysis Guidebook clearly states that "Although economic analyses can be evaluated from many different perspectives (individuals, communities, etc.), DWR conducts these analyses from a statewide perspective."  The report is clear, even in its title, that it is an analysis from the perspective of water agencies that participate in WaterFix.  It does not consider statewide impacts - which include costs to other water users or the environment - both of which are very large for this project.  This is especially true if one uses the No Tunnel baseline used in this economic study which is extremely different than the No Tunnel baseline used in the environmental impact report and other regulatory documents.
  • The single-tunnel scenario is clearly better for MWD and urban water users if one compares this study to a February 2018 analysis of single-tunnel by the same consulting firm.  While that single-tunnel report had many of the same problems as this one, it did not need to include a highly questionable estimate of over $5 billion in sea-level rise benefits to get a positive benefit-cost ratio.  Comparing these reports shows that financing the 2nd tunnel by MWD adds enormous costs for their ratepayers for little/no additional benefit.   
Serious problems with previous reports, especially the use of a deceptive no project baseline to artificially increase water supply benefits, are repeated in this report.  I have written about that extensively elsewhere and will not repeat it here.  I may amend this analysis later once I have time to review in more detail.