Thursday, December 16, 2010

Financing a Big Delta Tunnel will Require Big Water Exports

For the past two years, I have said that "beneficiary pays" financing of the peripheral canal only pencils out if it increases water deliveries to record levels.  After reviewing Wednesday's state and federal BDCP updates and subsequent news stories, it is becoming more obvious that this is true.

These quotes from Mike Taugher's article are particularly revealing.
"We need to know that the yield of the project that is going to be proposed is at a level that is cost-effective for us," said Jim Beck, general manager for the Kern County Water Agency...

Still, the state report suggested that water districts in the San Francisco Bay Area, San Joaquin Valley and Southern California could receive 5.4 million to 5.9 million acre-feet a year on average under the plan. The federal report said it appeared that the plan could result in more than 5.2 million acre-feet a year.

That's an improvement over the 4.7 million acre-feet that can be delivered on average with new restrictions in the Delta but less than the 6 million acre-feet a year delivered from 2000 to 2007.

"If it's under 5.9 ... it will require our water users to re-evaluate whether BDCP meets their water supply objectives," Beck said.
Some back of the envelope calculations reveal that the exporters' concerns are very valid.  At $13 billion and over $80 million annual operations costs, the annual costs of operating the 15,000 cfs tunnel for exporters will be about $900 million per year.  As Taugher reports above, the BDCP highlights report reveals that conveyance is only expected to increase diversions between 0.7 and 1.2 million acre feet.  Thus, the each additional af of water delivered because of the canal will cost about $900 per af.  And that only gets the water to Tracy, delivery from there to end users and treatment for urban users further increases costs.  That is well beyond the ability of agricultural users to pay, and it makes conservation, recycling and desal. look a lot cheaper to urban users.

Of course, most of this is fixed costs, so if deliveries were increased by 2 maf or more, the unit costs drop quickly.  This is a simplistic calculation worthy of no more than blog publication, but it is nonetheless revealing. (I am aware that the project adds value not just through additional water, but by increasing reliability or the risk of disruptions...but conservation, water recycling and desal. provide equally if not more reliable water.)  It is rather obvious that the pressure to increase deliveries beyond whatever limits will be agreed upon in the BDCP will be enormous.  And if it doesn't happen, it is likely that agricultural water exporters will be unable to meet their financial requirements and there will be calls for billion dollar taxpayer subsidies or a lot more costs will be dumped on Socal urban users than they expected.

Why, after 4 years, can't a 100 page document on the BDCP take its financial analysis one baby step forward?  Some real economic analysis early in the process would have helped create more realistic expectations on the part of participants and greatly increased the probability of reaching a solution.  (I also note that Met's new water plan says they are only planning on a $2.3 billion contribution to the Delta plan.  Is that realistic?  Who do they think is going to come up with the other $10.7 billion the BDCP allocates to water exporters?)

This is part of the reason I have been so critical for so long of the economic analysis in the 2008 PPIC study that exagerrated the willingness of exporters to pay for a canal as well as the costs of "doing nothing".  In doing so, they gave a lot of people false expectations about the financial viability of a BDCP type plan.  I am disapointed in the way the federal document seems to cite the 2008 PPIC report as the sole, infallible source of Delta analysis.  Indeed, my pastor typically cites more non-Bible sources in his Sunday sermons than the federal government cites non-PPIC/Davis sources on the Delta.  The PPIC report does not follow the federal governments own guidelines for cost-benefit analysis for infrastructure, and exagerrates the costs of alternative water supplies among other problems.  According to PPIC, water exporters should be willing to pay for a $20 billion canal AND ecosystem improvements.  So, either these exporters are lying or PPIC's calculations were wrong.  I believe it is the latter.

(lightly edited from original at 8 am)


  1. Exports per year is not really the number to look at; it should exports per month. A conveyance that could make huge short-term deliveries during times of big freshwater flows (like right now) would permit curtailing, or even briefly eliminating exports during critical periods in the summer.

  2. Yes, that would be a benefit to be considered. What is the value of that benefit?

    Actually, it is total costs and total benefits that matter (the stream of monthly costs/benefits in that total need not be constant). If a conveyance was a tool that I could lease for a month when it was really valuable then return it to the store, monthly costs/benefits would matter more. Unfortunately, the conveyance under consideration is a $13 billion, permanent, landscape altering piece of infrastructure.