The NRDC Portfolio Proposal and The Cost Allocation Problem

There is much to recommend in Kate Poole's response to the Natural Resource Agency's weak attempt to dismiss the NRDC Portfolio alternative to the Bay Delta Conservation Plan (and the first comment by Dr. Gartrell is also a must read).  The core of the portfolio plan is to save several billion dollars by building a smaller 3,000 cfs tunnel instead of the BDCP's preferred 9,000 cfs tunnels and invest the savings in alternative water supplies, storage and levee improvements. 

I agree with NRDC that alternative water supplies, storage, and levee improvements have a better return on investment than the tunnels.  I agree with NRDC that the extremely costly tidal marsh restoration with uncertain environmental benefits is another area where BDCP can produce a better return on investment by shrinking in size.  Their proposal is a major step in the right direction, and has sparked a useful discussion.

But the NRDC portfolio proposal still has tunnel vision.  I am unconvinced that the smaller tunnels have a positive benefit-cost ratio, although it may be better than the big tunnels.  Even more important, I think the proposal exacerbates the cost/benefit allocation issues between urban and agricultural contractors that doom a viable finance plan for the big tunnels.

Just like the BDCP, the NRDC tunnel plan can only demonstrate financial viability if it moves beyond the macro analysis of total cost and water supply and get into the allocation issues.  The alternative water supplies that would be paid for with the savings are all urban water supplies, so how much of the little tunnel savings will accrue to urban agencies?  It isn't the total cost reduction that matters. 

For the sake of argument, assume the small tunnels cost $9 billion and the big tunnels cost $15 billion(the state argues the cost difference is much lower).  Now apply cost allocations.  If urban agencies pay 40% of the cost of either plan, the urban costs are $3.6 billion for small tunnels versus $6 billion for big tunnels and the savings to urban agencies is only $2.4 billion.

If urban agencies pay 80% of the cost in both cases, the cost difference to urban agencies is $7.2 billion versus $12 billion and the savings to urban agencies is $4.8 billion.  It is no wonder that the urban agencies that are most interested in the portfolio, like San Diego, are those that are most concerned about a cost shift towards urban users, especially if it causes other urban agencies to further cut reliance on Metropolitan's imported water.

However, a shift to a higher urban cost share is even more likely for the smaller tunnels.  In fact, many people interested in the small tunnels have suggested 100% financing by urban agencies.  If the urban agencies pay 100% of the cost of a $9 billion small tunnel, the urban savings drop to only $3 billion even if you assume they pay 80% of the large ones, and the savings drop to zero if you assume they pay 60% of the cost of the large tunnels. Whatever cost allocations you assume, the urban agency savings are a lot less than the total savings.  And thus, the funds available to invest in alternative local water supplies are less than NRDC states.

Similarly, what about the water supply allocation?  Overall, NRDC argues that the portfolio will generate a higher total water supply than BDCP.  But it appears that it will generate a lot more water for urban areas, and result in less water for agricultural users even if the total water supply is higher.

The bottom line is that I don't believe there is evidence that peripheral tunnels are financially viable at any size.

NRDC is on the right track, but they don't go far enough.  The tunnels need to be entirely eliminated from BDCP.  A smart portfolio of alternative water supplies, levees, storage, habitat and flows will provide far more benefits at lower cost than tunnel-centered proposals.  And this no-tunnel portfolio could be a habitat conservation plan under the ESA, and thus provide the more stable regulatory environment that the water contractors seek.