“How can we go to farmers and urban customers and say, ‘We’re going to pay our portion of this $15 billion project and we’re going to get the same amount of water or less?’ It doesn’t compute,” said Jason Peltier of the San Luis & Delta-Mendota Water Authority, which delivers Delta water to much of the west side of the San Joaquin Valley. “It’s totally inconsistent with the goals we started with, which are ‘we need to restore our water supplies.’ ”Jason is correct, just as he was in June 2012, when the Department of Water Resources was first rolling out its economic rationale for the tunnels in the BDCP. That rationale relied critically on the regulatory assurance embodied in the habitat conservation plan - the part of the plan that was jettisoned in the change from BDCP to WaterFix.
Below I have republished a post I wrote in June 2012 with a few current notes added in [Bold italics]. It is one of the most read posts ever on this blog, and many people have told me it helped them better understand the economic debate. It's still very relevant today.
June 23, 2012
Is BDCP a good deal for water agencies? Jason Peltier and David Sunding disagree
In the first part of the BDCP meeting on Wednesday, Jason Peltier of Westlands Water District, the water agency that may have the most at stake in the BDCP, said,
Dr. Sunding went through a presentation that had sophisticated analysis of the usual categories of benefits attributed to the tunnels, a)water supply, b) water quality, and c)seismic risk reduction. All together, these three added up to about 50 cents of benefits for every $1 in costs to the agencies (using the realistic seismic risk scenario, not the worst case). [This benefit is even lower now, as projected water exports for the WaterFix have decreased.] So how did he figure that the benefits exceeded the costs for the agencies?
It came from a new category of benefit that was not in his original scope of work with DWR: the value of eliminating regulatory uncertainty. He put forward a scenario where regulatory assurance was more valuable than all the rest of the benefits combined. $11 billion in one scenario. And he argued that regulatory assurance was the main objective of the agencies in the BDCP process, and a normal component of HCPs under the ESA. He is right about that. But environmental lawyers tell me that there are significant limits on the legal assurances in HCPs, and there are serious doubts about whether the BDCP can deliver much regulatory assurance at all due, in part, to enormous uncertainty about the environmental effects of the tunnels. [This whole debate about the extent of regulatory assurance is now moot, since the WaterFix proposal is no longer an HCP.]
Thus,Dr. Sunding's conclusion should have been worded "It's beyond serious debate at this point that strong regulatory assurances are required for the benefits of the BDCP to the water agencies to exceed the cost to the water agencies." If he said that, I would agree, and that is very important information for the people negotiating BDCP. It isn't just posturing, the water agencies really need the assurance in order to seriously consider a $13 billion investment in infrastructure.
With words like "crapshoot", Mr. Peltier is clearly not very impressed with the regulatory assurance in the BDCP. Apparantly, not many other people are either. I asked a small sample of objective scientists, lawyers, and environmentalists outside the Delta if strong regulatory assurances would or could be part of the BDCP. The responses were "Not a chance", "No way", and "Sunding analyzed a project that is rejected by the regulatory agencies." [These predictions look pretty good today. BDCP was rejected, and the HCP is gone.] Maybe there are experts who disagree, but it is clear that Sunding touched on a very controversial topic in the BDCP. I am pretty sure that any project that might offer some level of regulatory assurance will have lower exports, and thus lower water supply values, than the scenarios he modeled.
I look forward to further debate of the concept of regulatory uncertainty, how much can be provided, and how it should be valued (I'm not buying the $11 billion estimate, more on that later). But it is important to realize that regulatory assurance isn't very important for statewide benefit-cost analysis. The regulatory assurance isn't a statewide benefit, it is shifting risk from the exporting water agencies to the environment and everyone else who will have to pay if the tunnels don't work for fish.
The good news is we finally have a rational discussion and debate about economics, and some reliable numbers out in public. It's about time. While I disagree with a few parts (mostly with the scenarios he has been given to evaluate), for the most part, I think Dr. Sunding's quantitative estimates are very reliable, and they inform the planning process. [Unfortunately, the subsequent analysis went off the rails. Primarily because he stopped including the value of the HCP regulatory assurance as a separate component, and embedded it inside the water supply benefit by changing the no-tunnel water supply baseline to something inconsistent and much lower than in the Environmental Impact Report.] Benefit-cost isn't just a pass/fail test at the end of the process. BDCP would have been much better off if they had hired him years ago.
"[The BDCP is] a crappy path for us. This is a crapshoot. Unacceptable... We can't finance it.”However, in the closing presentation of the meeting, Dr. David Sunding, an economist and principal at the Brattle Group hired by the state Resources Agency, said,
"I think it's really beyond serious debate at this point that the benefits of BDCP to the agencies ... exceed the cost,"Now that is a disagreement. It's natural to suspect Mr. Peltier is posturing to negotiate a better deal, and there may be some of that, but I think he is right.
Dr. Sunding went through a presentation that had sophisticated analysis of the usual categories of benefits attributed to the tunnels, a)water supply, b) water quality, and c)seismic risk reduction. All together, these three added up to about 50 cents of benefits for every $1 in costs to the agencies (using the realistic seismic risk scenario, not the worst case). [This benefit is even lower now, as projected water exports for the WaterFix have decreased.] So how did he figure that the benefits exceeded the costs for the agencies?
It came from a new category of benefit that was not in his original scope of work with DWR: the value of eliminating regulatory uncertainty. He put forward a scenario where regulatory assurance was more valuable than all the rest of the benefits combined. $11 billion in one scenario. And he argued that regulatory assurance was the main objective of the agencies in the BDCP process, and a normal component of HCPs under the ESA. He is right about that. But environmental lawyers tell me that there are significant limits on the legal assurances in HCPs, and there are serious doubts about whether the BDCP can deliver much regulatory assurance at all due, in part, to enormous uncertainty about the environmental effects of the tunnels. [This whole debate about the extent of regulatory assurance is now moot, since the WaterFix proposal is no longer an HCP.]
Thus,Dr. Sunding's conclusion should have been worded "It's beyond serious debate at this point that strong regulatory assurances are required for the benefits of the BDCP to the water agencies to exceed the cost to the water agencies." If he said that, I would agree, and that is very important information for the people negotiating BDCP. It isn't just posturing, the water agencies really need the assurance in order to seriously consider a $13 billion investment in infrastructure.
With words like "crapshoot", Mr. Peltier is clearly not very impressed with the regulatory assurance in the BDCP. Apparantly, not many other people are either. I asked a small sample of objective scientists, lawyers, and environmentalists outside the Delta if strong regulatory assurances would or could be part of the BDCP. The responses were "Not a chance", "No way", and "Sunding analyzed a project that is rejected by the regulatory agencies." [These predictions look pretty good today. BDCP was rejected, and the HCP is gone.] Maybe there are experts who disagree, but it is clear that Sunding touched on a very controversial topic in the BDCP. I am pretty sure that any project that might offer some level of regulatory assurance will have lower exports, and thus lower water supply values, than the scenarios he modeled.
I look forward to further debate of the concept of regulatory uncertainty, how much can be provided, and how it should be valued (I'm not buying the $11 billion estimate, more on that later). But it is important to realize that regulatory assurance isn't very important for statewide benefit-cost analysis. The regulatory assurance isn't a statewide benefit, it is shifting risk from the exporting water agencies to the environment and everyone else who will have to pay if the tunnels don't work for fish.
The good news is we finally have a rational discussion and debate about economics, and some reliable numbers out in public. It's about time. While I disagree with a few parts (mostly with the scenarios he has been given to evaluate), for the most part, I think Dr. Sunding's quantitative estimates are very reliable, and they inform the planning process. [Unfortunately, the subsequent analysis went off the rails. Primarily because he stopped including the value of the HCP regulatory assurance as a separate component, and embedded it inside the water supply benefit by changing the no-tunnel water supply baseline to something inconsistent and much lower than in the Environmental Impact Report.] Benefit-cost isn't just a pass/fail test at the end of the process. BDCP would have been much better off if they had hired him years ago.
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