Tuesday, December 10, 2013

Comparing the Financial Hole in the Delta Water Tunnels Plan to High-Speed Rail

A comment I made comparing the tunnels to high speed rail was printed in the San Jose Mercury News, "The financial hole in this is at least as large as the financial hole in the high-speed rail plan."  People are interested in the comparison between these so-called legacy projects, so here are some of the simple calculations behind the statement.

In both cases, the "hole" in the capital financing for the project is an unrealistic projection of funds provided from a key source.  In the case of high-speed rail, the hole comes from federal government appropriations that are unlikely to materialize.  In the case of the tunnels, the hole comes from the unrealistic expectation that farms will pay the majority of the costs since the majority of the water is for irrigation.

The high-speed rail business plan estimates capital costs for the full blended system at $68 billion.  It estimates of non-federal sources of funding at $26 billion, mostly from 2008 Prop 1A bond funds and a defensible estimate of private capital contribution.  The big problem is $39 billion of the $68 billion is projected to come from Federal funds, but only $3 billion has been committed and there is no reasonable expectation of more in these days of sequester.  So that is a $39B hole in a $68B cost, or 57% of the capital costs. [The recent court ruling against HSR was partially based on the financial hole in the initial operating segment of the HSR line which is estimated to cost $31 billion, and unrealistically assumes $20 billion in additional federal funds.]

As for the tunnels, construction costs are estimated at $15 billion in 2012 dollars.  (Note: The HSR cost estimate is in year of expenditure dollars and accounts for inflation, and tunnel costs have not been.  A similar adjustment to tunnel construction costs would increase capital costs to $19 billion.)

Urban agencies have committed to paying for about 1/3 of the tunnel costs for 1/3 of the water.  (I have heard anything from 25% to 40%, so I will go with 1/3 to keep it simple.)  Their leaders have repeatedly vowed they won’t subsidize the agricultural costs, and all the statements they have made about ratepayer effects depend on this assumption. 

That leaves a 2/3 share for agriculture.  What can we reasonably expect them to pay?  What is it worth to them?  BDCP’s optimistic modeling shows that SJ Valley agriculture will see gross revenue increases of about $130 million per year if the tunnels are built.  If I assume a 40% profit margin on growing these crops, that would be about $50 million in increased profits. San Joaquin Valley farmers also get some water quality and purported seismic risk benefits from the tunnels, that might push up the willingness and ability to pay for the tunnels to a total of $100 million per year.  Under the optimistic scenario in a recent presentation on Delta tunnel finance to the Westlands Water District board, debt service and operating costs for the tunnels will be $1.3 billion per year.  Thus, it is only reasonable to assume that agriculture should only be willing to pay about 8% of the tunnel debt service.  Thus, if urban ratepayers pay 33%, farmers pay 8%, the hole is 59% of the tunnel capital costs which is a little bit more than the 57% hole in the HSR capital funding plan.

Another quick way to look at the agriculture benefits from BDCP is to consider the value of land that would be fallowed without it.  BDCP would keep between 0 and 200,000 acres of marginal cropland in production (the tunnels do not help water supply in dry years, and farmers rationally fallow the worst land first, so BDCP isn't impacting the best land).  That marginal land might sell for $6,000 an acre, so if we optimistically value keeping that land in production at $6,000 per acre, it comes to $1.2 billion of the $15B tunnel costs, or 8% of the total.  Add that to the 33% urban share, and there is still a 59% hole.

There are fancier ways to measure this financial problem, but it will not change the conclusion that there is large hole in the tunnel financial plan that will have to be filled with a massive subsidy of farmers by urban ratepayers or taxpayers.  

P.S.  I should mention that there are actually two holes in the BDCP financial plan, and the funding shortfall for the habitat components typically get even more attention.  BDCP habitat plans depends on water bonds passing and uncertain federal funding.  That's a major problem too.


  1. A reasonable analysis of just the tunnel funding issues - let alone the other half of the hole-making - the ecosystem co-equal goals funding...

  2. While all the assumptions you list here look fine to me, I do believe it is misleading to state, "The financial hole in this is at least as large as the financial hole in the high-speed rail plan."

    We pay taxes in dollars, and so financial holes should also be measured in dollars, not percentages. The financial hole for HSR is $39B. The financial hole for BDCP is $8.85B (59% * $15B). The comparison you make based on percentages leads to a superficial similarity; the difference in absolute dollars is the relevant metric for California public policy.

  3. Good point, I should say the financial hole is proportional.

    There are definite similarities between the projects. In both cases, the benefits of the project are much smaller than was originally stated, and taxpayers/ratepayers will have much higher costs than they were told.

    This is well-known in the case of HSR, and is becoming more and more apparent with the tunnels.

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