Friday, August 11, 2017

Initial reaction to Metropolitan Water District Financing White Paper

I am leaving for the airport in 30 minutes, but judging from my Inbox, there is a high demand for a reaction to Metropolitan Water District's recently posted white paper on financing and ratepayer costs of the Delta Tunnels.  Here is my reaction after an initial review.

All the calculations and modeling in the paper relies on 3 huge assumptions which are almost certainly false.

  • It assumes farmers (and wildlife refuges) pay the vast majority (approximately 2/3) of the estimated $17 billion cost.  Multiple analysis and statements by various potential participants have shown this is unlikely.  Drop this assumption, and Met's cost share could triple.
  • Cost comparisons are based on an assumed average annual yield (incremental increase in water supply) of 1.3 million acre feet per year.  This is a wildly optimistic estimate.  The WaterFix official documents (permit application) is based on an annual average yield of 225,000 acre feet.  Using more realistic and correct yield estimates increases the incremental cost of the project by a factor of 6.  (This issue is a bit wonky and I will have a future post that tries to simplify the issue and explain why it is more than an academic debate that could come back and bite water agencies and ratepayers.)  At minimum, board members should demand/expect to be shown cost comparisons over a range of plausible project yields - not just the base scenario.
  • The paper describes a host of critical financing issues as still "under negotiation" or being developed.  Agencies have been working on these issues for years and still have not come to a resolution.  The paper assumes all these issues will be handled in way that is satisfactory to the board.  Ratepayers, taxpayers and board members should be very uneasy about the way these issues are being deferred to the future.
One of the key issues where all 3 of these bullet points interact is what happens if (when) some agencies choose not to participate.  The white paper hints (and I have heard a few water agency board members suggest this too) that it could be a good business opportunity because they can pick up extra water from the non-participants.  Not so fast, there are a lot of downsides and risk here.

For one, how will they determine the water supply the non-participants receive?  They will not be using the no-tunnel baseline that results in the 1.3 maf yield calculation, thus handing over their water allocation to MWD.  They will use the baseline in the official permit applications (with good justification), and this is just one of the ways where the rosy projection of 1.3 maf of water yield made by MWD staff could disapear.

A few other notes:
  • Costs for the Contra Costa Water District settlement and new tidal marsh from the Biops do not appear to be included.
  • The other big projects from the past in the comparison chart are all urban projects.  None of them were counting on farmers and wildlife refuges to pay 2/3 of the cost.
  • Few details included about how this JPA issuing bonds will work, and how the 45% CVP share will be paid directly?  
  • If MWD does pick up transferred shares from others - how will those be paid?  Will MWD have to guarantee to accept transfer or purchase of unwanted allocations in order to finance the project?
  • How will cost overruns be handled?
  • Most businesses are owned by local people, so the non-residential costs fall on them too.
  • What about comparing the cost of tunnel water to conservation/efficiency, stormwater capture, and other more cost-effective options.
Off to airport security.  Fortunately, I understand the MWD board won't be voting on this until late September so there will be time to ask and hopefully receive better answers to these questions than the white paper provides.  This document surely doesn't provide the information that is required to make a public policy decision of this consequence.


Wednesday, August 9, 2017

WaterFix results in $1 billion in harm to winter-run chinook salmon according to California guidelines used for storage projects

Two major water infrastructure policy processes are moving towards critical decision points that will determine their financial viability: a) the WaterFix (Delta Tunnels) led by the Department of Water Resources (DWR) and b) $2.7 billion in Proposition 1 (Water Bond) funding towards public benefits from new storage administered by the California Water Commission.  

One of these processes (Prop 1, California Water Commission or CWC) is treating economics seriously in the planning process, while the other (WaterFix) has not.  Sadly, there is a lot more money and environmental risk associated with the tunnels project that has been ignoring and/or suppressing economic analysis of the project.    

Recently, I was reviewing the California Water Commission's guidelines for valuing ecosystem impacts from new storage projects for the purposes of awarding Proposition 1 funds.  It led me to ponder what would happen if WaterFix followed the California Water Commission's guidelines for benefit-cost, including valuing ecosystem impacts, and had to compete for funding like these storage projects.  

I believe the results would be similarly ugly for WaterFix as the benefit-cost analysis I did in 2016. Using the CWC guidelines, the value of water would be higher than I used (especially after SGMA is implemented), but the yield would remain a meager 225,000 acre feet per year.  However, the increase in benefits from higher value water would be offset by a host of environmental costs that I did not include in the 2016 analysis.

For example, the CWC gives explicit guidance on how to value changes in endangered and threatened salmon populations estimated with a life-cycle model, and the biological assessment for the WaterFix gives clear results of this type of assessment for winter-run chinook salmon.  Applying the values and procedures from the CWC guidelines to the WaterFix results in a $58 million annual loss from the damage of the WaterFix to winter-run chinook salmon.  Extended over 100 year life of the project (beginning 2031) with a 3.5% discount rate, it is a nearly $1 billion social cost from the tunnels.

The $1 billion cost is just for winter-run chinook from operations.  Thus, it does not include costs to winter-run chinook from construction or consider impacts from both operations and construction on spring-run or fall-run salmon, steelhead or delta smelt.  It would take more work (and help from biologists) to estimate values for these, but is not hard to see this adding up to a cost of several billion dollars from the WaterFix tunnels.

The applications for Prop. 1 storage money are due in a few days.  It will be really interesting to see how the different applications apply these guidelines to value the public benefits, as well as the overall feasibility and benefit-cost for the storage projects.  Then it will be really interesting to see how the CWC evaluates these applications.  That will be the real test of the extent to which economics and science or politics is allocating the funds.  

It's inexcusable that the WaterFix tunnels, despite 11 years and hundreds of millions in planning, hasn't produced any feasibility or economic analysis comparable to what these storage projects are required to do.