Tuesday, May 1, 2012

Will Water Contractors' Have a Maloof Moment on the BDCP?

Over the past month, the Sacramento arena deal collapsed when the Sacramento Kings' owners, the Maloofs, backed out of the deal.  Many people were incredulous at the Maloofs flip-flop, as they have been saying they needed a new, modern arena for years.  The Maloofs killed the deal because they realized that the a new arena wouldn't generate enough new revenue compared to their imperfect current facility to justify the new debt.  While City officials are upset with the Maloofs, city taxpayers should not be.  The Maloofs may have accidentally saved the City of Sacramento from a financial fiasco as well.

I think we may be headed towards a similar moment with some of the water contractors and the BDCP deal.  The agricultural contractors are most likely to play the role of the Maloofs and wake up to the financial reality.  According to the draft BDCP, the marginal cost of new water the contractors get out of the tunnel is going to be $1,000 af ($1.2 billion in debt service and new operation cost for an average of 1.2 maf of new water).  Environmental deficiencies with the draft BDCP could mean even less new water, driving the marginal cost of new water supplies even higher for the contractors.  If you prefer to look at averages (spreading the $1.2 billion over all 6 maf), all the water delivered through the tunnel will cost about $200 af more.  Without the BDCP, the contractors would still receive the vast majority of that water, that's why the marginal cost for incremental water supplies is the most important number for decision making. 

I have heard farmers in the Valley talk about the burden of paying $200 af for supplemental water in 2009 to keep their almond orchards alive while railing against the Delta Smelt.  How can they seriously support a plan that would raise their water costs of all their water (not just the supplemental supplies) to this level in wet and dry years?  The BDCP is a solution to the Delta Smelt problem that will cost Valley farmers far more than the Smelt and Salmon biological opinions ever will.

With so much political effort expended to get the BDCP and a potential tunnel/canal to this point, it's promoters are not going to let it die easily.  The public officials, including water agency directors, and some environmental groups pushing the project are not the ones who will pay the costs, and like Mayor Johnson and the arena, the public officials will not be the ones to back out of the deal.  It will be the farmers, who like the Maloofs, take a step back, look at the numbers and come to their financial senses.


  1. Jeff - My question is whether, given the numbers you present, this project will instead follow the old western water infrastructure development path of general taxpayers (California or federal) subsidizing the water users again?

  2. I don't see how they build the project without subsidizing the agricultural contractors in some way. In addition to taxpayers it could be subsidy from urban ratepayers, but that is hard to see if they are already paying $1200 af at the margin for their own supplies.

  3. @all -- the farmers will ASK for subsidies (as usual). It's OUR job to point out that taxpayers will be on the hook for them. It's getting harder (if only a LITTLE) to rob Peter to pay Paul...

  4. The BDCP is a solution to the Delta Smelt problem that will cost Valley farmers far more than the Smelt and Salmon biological opinions ever will.

    It's will cost the fish in the end too. Not enough water through the Delta is doing that now. Stop the insanity - fix the levees add more storage and we will all have enough water.