PPIC California Water Myths Review: Part #2

As mentioned in the first part of this review, I think the biggest problem with the PPIC's new California Water Myths report is the inconsistency between it and their influential 2008 Comparing Futures report that recommended building the controversial peripheral canal. Their peripheral canal justification was deeply flawed and built on assumptions that the PPIC calls "myths" in their new report, yet they continue to promote the canal.

The economic analysis in Comparing Futures suffers from 3 fatal flaws.
1. Grossly overstates future urban water demand and the cost of alternative water supplies.
2. Does not value environmental services or even the market values of recreation and fishing.
3. Ignores established scientific methods for evaluating investments over time which skews their analysis to favor big capital projects like canals.

In late 2008, I posted a review of Comparing Futures that focused only on the first fatal flaw, and demonstrated that their analysis would probably favor reducing/eliminating Delta exports over a peripheral canal with more realistic assumptions. It generated a lot of tough questions for the PPIC, but Ellen Hanak and Jay Lund of the PPIC team brushed it aside, defended their assumptions, and did not show any results from appropriate sensitivity analysis to show their results were robust to alternative values, the same values they now cite as facts in Water Myths.

The key inconsistencies between the reports include (Note: most of the Comparing Futures values are found in Appendix F of the report):

Water Myths: In Myth #5, they explain at length the importance of measuring the economic value of environmental services and techniques scientists use to do it.

Comparing Futures: They explicitly chose not to calculate a value for environmental services, because it is "too controversial." When they recommended a peripheral canal, they imposed their own unscientific opinion about these values since their scientific research showed other options had better environmental performance.

Water Myths: Urban water recycling costs range from $300 to $1300 per acre foot. (p. 11)

Comparing Futures: Water recycling costs $1,480 per acre foot in 2050 (outside the current range, technology goes backwards!)

Water Myths: Desalination costs range from $500 to $2,500 per acre foot. (p. 11)

Comparing Futures: Desalination costs $2,072 per acre foot in 2050 (high end of current range, technology assumed to go backwards again.)

Water Myths: In Figure 1, they correctly show that total urban water use in California has been decreasing even as population grows, thus per capita urban water demand is going down.

Comparing Futures: Urban water demand is constructed with old estimates from when they built their model in the 1990s (before the decline in demand). They assume future water demand will grow at the same rate as population growth (no future conservation except what is induced by higher prices). This greatly inflates the value of future Delta water to urban users, helping to economically justify the peripheral canal.

Water Myths: Correctly, cites a California Department of Finance (DOF) population growth forecast (2007) that estimates 59 million population in 2050. [Most forecasters think 55 million is more likely, but at least DOF 2007 is a real credible source.]

Comparing Futures: Made up a fictional DOF population forecast reference to a non-existent 2008 study to justify assuming 65 million Californians. Apparantly, it is easier to make up a reference to justify an aggressive number they built into their model for another study than to actually adjust the data. If you assume enough urban users (however unrealistic), you can justify the cost of a peripheral canal.

Water Myths: Myth #3 says there is no silver bullet strategy, and cautions against overemphasizing a single solution.

Comparing Futures: I hope they fired their media person, because the press release for this report clearly presented the peripheral canal as a silver bullet. The title was "Peripheral Canal is best strategy", not study weighs options, examines trade-offs, etc. To be fair, the details of the reports are more nuanced, but most of their op-eds and other pieces emphasize building the canal, and that message was the take away for 99% of the audience because of the way they present it.

The effect of most of these inconsistencies is that the PPIC greatly overstates the value of a peripheral canal to southern California urban users. A non-technical way to illustrate it is to note that Ellen Hanak has pointed out that their study shows (and you can do it yourself on the spreadsheets on their site) that water exporters should be willing to pay up to $25 billion for a peripheral canal. However, some current news reports (corroborated by what I have heard through my admittedly poor location in the water gossip grapevine) suggest that many southern California urban water districts are not eager to pay the current $10 billion (and rising) price for a peripheral canal, because they have more cost-effective local options.

I won't delve into the technicalities of the third fatal flaw at this point (maybe a future post if I want to flog this study even more).

The bottom line is that the PPIC has very serious problems with the economics in their water reports. In addition to the errors in their peripheral canal analysis, the economists within this group botched the water jobs analysis this year (80,000 lost jobs, revised to 40,000 lost jobs, revised to 20,000 lost jobs, if they cut it in half for the 3rd time I will call it close enough), and now is promoting a specious argument that Central Valley Project water subsidies are a myth.

It's very unfortunate, because an interdisciplinary research team like the PPIC/UC-Davis group could be a very positive force in the water debate. I suggest Dr. Moyle and the PPIC consider partnering with some other economic analysts.

Click here to read part 1 of this review.
(lightly edited from original post for spelling and grammar)