Monday, February 17, 2020

Delta Voluntary Agreement Costs Soar from $1.1 billion to $5.3 billion

The first update of the Delta voluntary settlement agreements (VSA) last winter had an estimated cost of $1.1 billion over 15 years.  In the latest update, the cost of implementing the voluntary agreements has soared by over $4 billion to a whopping $5.3 billion.  Governor Newsom failed to mention the enormous and growing costs in his oped praising the voluntary agreement framework.

The delta water users contribution has increased from about $300 million to $2.34 billion.  On one hand, I am happy to see the extra $2 billion given that I previously ridiculed how cheap the water agencies initial offer was compared to the enormous benefits they receive from this agreement compared to the alternative. This additional $2 billion from water users only accounts for half of the cost escalation, the government negotiators also "volunteered" an additional $2 billion in taxpayer funds for a total of nearly $3 billion from federal and state governments.

Over $5 billion in taxpayer and ratepayer funds is a lot for a 15 year Delta operations agreement.  Taxpayers and ratepayers should be asking whether these $5+ billion is better invested on developing alternative local water supplies and new technologies that will provide benefits far beyond the 15 years of this agreement.

The $3 billion in state and federal funding deserves the most scrutiny.  It seems that most of the funding for habitat in these agreements appears to come from existing state bonds dedicated to environmental enhancement - meaning that habitat investment is going to happen anyway with or without this voluntary agreement.  I have heard that many of the specific projects were already required.  So are the habitat improvements in the VSA any different than would occur without the VSA?  If they are the same, then they should be in the baseline and their benefits not attributed to the VSA deal.  If they are different, then we need to consider what other habitat projects are lost to support the VSAs.

The spending plan summary also says that about $1.2 billion of the funds would go to water purchases which would average less than 200,000 af per year over 15 years.  That's a pretty good price for irrigation water, I wonder how they determined the amount.  Another $456 million for paid fallowing that would presumably provide some of the other flows from the Sacramento and San Joaquin Valley. 

I find it interesting that if water supplies and fallowing is the result of regulation, the focus of the anti-regulatory protests (as well as the Governor's explanations for not suing the Trump administration over weakened environmental regulatons) are the low-paid farm worker jobs that could be lost if water diversions are curtailed.  However, the VSA deal pays $1.6 billion to landowners (farmers) to reduce farm water supplies and fallow fields, and $0 to farm workers and communities that these politicians and landowners say are harmed the most by land fallowing.  I wonder if the environment and Central Valley communities wouldn't both be better off if the state stuck with the original regulations and directed $1.6 billion in public funds to other economic and community benefits in the Valley.
I am not opposed to the concept of a voluntary agreement, but it should have a simple structure in which water users only provide funding for environmental goals in return for a lower regulatory burden - rather than the needlessly complicated VSAs that mix in lots of funding and projects that do not depend on the VSA.  A simple structure is very common in a variety of regulatory settings.  A common example is a developer paying a fee to satisfy a regulatory requirement rather than direct action by the developer to set aside land or housing units for other social/environmental needs. 

Tuesday, February 4, 2020

Delta Tunnel EIR Scoping Comments Part 1: Finance drives operation, so feasibility study should come first not last

The EIR scoping meetings for the single-tunnel delta conveyance facility (DCF) began this week.  My comments focus on two critical areas where DWR appears to be repeating their mistakes of their past despite the Newsom administration's stated intention of taking a fresh approach: 1) postponing financial feasibility and benefit-cost analysis to the end instead of the beginning, and 2) ignoring known alternatives with higher and more broadly distributed benefits and likely lower costs.

Point 1:  Finance drives operational and sizing decisions, and thus must be considered up-front.

This is hardly a controversial point for water infrastructure planning.  Feasibility studies, which include financial plans informed by benefit-cost analysis at their core, are typically conducted in tandem with environmental impact reports for water infrastructure.  This is common sense as financial considerations have important consequences for project design, sizing and how infrastructure is operated.  If financial feasibility analysis and environmental impact analysis are not done together in an integrated fashion, it is the EIR that should follow after feasibility, because the EIR guidelines frequently refer to feasibility as a factor in the development and consideration of alternatives.  DWR itself has stated this principle,
The most efficient way to prepare environmental documentation may be to initiate the process in the second half of the feasibility study process or immediately after the feasibility study is completed, when alternatives are clearly formulated and analyses and adequate information are available to informatively discuss the project and its impact and benefits to the stakeholders.(Guidance for a state-led feasibility study, page 26) 
However, DWR appears to be doing it backwards for the single-tunnel plan and risks repeating the mistakes of the WaterFix experience.  The notice of preparation for single-tunnel delta conveyance doesn't mention that it will be doing feasibility or economic analysis, and in an accompanying FAQ document states that it will do this analysis after a preferred alternative has been selected.
There will be a cost estimate, as well as both a Benefit-Cost Analysis and a Financial Analysis, developed during the planning process. At this point, the NOP is a start of the environmental review, which focuses on the relative environmental impacts rather than economic issues. Cost analyses will come later in the process, after a preferred alternative has been selected (Delta conveyance NOP Q&A question 17, page 4)
What's wrong with doing it backwards?  The most obvious problem is that stakeholders and agencies, both proponents and opponents of the project, can waste enormous amounts of money and time analyzing an infeasible project.  Another problem is that rushed last minute project changes can occur when financial problems finally emerge that do not receive adequate scrutiny.  We certainly saw both of these problems with the twin-tunnel WaterFix.

Another serious problem with this backwards approach is that it makes it easy for a project proponent to make claims and promises to operate in an environmentally friendly way in a report, just to get environmental approval and permits to build it.  Feasibility analysis can tell you whether those promises are likely to be kept, or whether the operation of a facility like the tunnel is likely to be changed later in response to financial needs as well as economic and political pressure.  Like a politician who makes promises they won't keep while they are trying to get elected, DWR appears to be making environmental promises they won't keep to get their permit to build.

To be fair, I should mention the NOP says that it will consider the results of contract negotiations that are related to financing the project.  That's at least a small step in the right direction, and the latest developments in those contract negotiations are a perfect example of how finance can change the operation and description of a project.  Of course, starting with the feasibility study would have helped inform those contract extensions too.

Governor Newsom's administration says this is a new project and he is taking a fresh perspective, but this is starting to look like the same people, repeating the same mistakes, and destined to fail in the same way on a slightly smaller version of the same project.  A fresh approach would mean looking at a much broader set of alternatives - which is the subject of my second point and a future post.

Monday, January 20, 2020

As water agencies balk at the tunnel’s price tag, DWR turns to a desperate ransom strategy: taking water from non-payers that is not attributable to the $10+ billion tunnel.

Since July, the Department of Water Resources (DWR) and State Water Contractors have engaged in fruitless negotiations over how to pay for a single-tunnel Delta Conveyance Facility (DCF is the new term now that the twin-tunnel “WaterFix” is gone). On December 23, right before the holidays, DWR made their 6th proposal to the State WaterContractors with a major shift in approach.

Two things are apparent from the new proposal:

1. The majority of the south of Delta water agencies who are supposed to be beneficiaries of the DCF don't believe the project is worth it. Unlike the DWR executives who stubbornly refuse to follow their own guidelines for financial feasibility and benefit-cost analysis, these water agencies’ leaders correctly recognize the DCF’s enormous costs are not worth its small water supply benefits and enormous risks.

2. DWR is threatening to punish agencies who won’t pay, by redefining the water supply benefits received by those who pay for the DCF as including water that is not attributable to or dependent on the construction of the project. They propose to take away water supplies that would be received without the WaterFix from fiscally-responsible and/or less powerful water agencies (primarily agricultural) if they aren’t willing or able to write a blank check to finance the construction and operation of the $10+ billion DCF. The strong-armed move goes far beyond the withdrawn proposals of Governor Brown’s administration, and seems like a desperate tactic to save a failing project.

A closer look at these two points:

1: Most water agencies don’t want the DCF, but the Department of Water Resources leadership refuses to accept that. 

It is well known that Delta and environmental interests oppose the DCF, but it is now clear that the majority of the water agencies that would supposedly benefit from the DCF don’t want it either. To see this, it is important to remember that the Central Valley Project, which receives nearly half of water exported from the Delta, has already abandoned the project – leaving it as a State Water Project-only project. Thus, it barely has half of the support of Delta water exporter interests even if SWP support is unanimous. The preface to this latest proposal reveals that the DCF is only supported by the staffs of 16 of the 29 state water agencies, meaning that overall support of a Delta conveyance facility from all the agencies which receive Delta water exports is considerably less than 50 percent. And these are staff recommendations, which are frequently more supportive of expensive projects than their boards. For example, Metropolitan Water District (MWD), whose staff are the the biggest booster of Delta conveyance, only received 61% support from their board for financing the twin tunnel WaterFix – even after receiving enormous misinformation from MWD staff and personal lobbying calls from the Governor.

Perhaps the worst news in this new proposal is that the current DWR leadership admits that they are surprised by the lack of support for DCF in the preface explaining their shift to this ransom style approach. After years of planning, the surprise of DWR’s leadership on this issue raises real questions. They would not be surprised if they properly understood the relative value and cost of their project. Instead, DWR leadership have for years refused to have their staff or independent 3rd parties conduct proper feasibility and benefit-cost studies, and have become extremely reliant on MWD staff and consultants. They are to blame for their own ignorance of the value and financial feasibility of their latest and previous proposals for Delta conveyance. 

2: DWR’s new proposal redefines the water supply impact of investing in the DCF and threatens to take away much of the water supplies SWP agencies would receive in the absence of the tunnels. 

DWR says the big change in the new proposal is shifting from an opt-in to an opt-out approach for participation. But the structure of the participation decision from opt-in to opt-out is not very important – the critical change in this proposal is the definition of the water supply benefit gained from investing in the DCF. Reviewing previous draftsof the proposal reveals this critical change. 

At the beginning of the negotiations, the water supply benefit of participating was defined by the term DCF project water, defined as follows:
“Delta Conveyance Project Water is established as a new type of SWP project water that represents the additional amount of total SWP water that can be conveyed with the Delta Conveyance Project compared to the amount that can be conveyed without the Delta Conveyance Project.”
This language was adjusted in later proposals to be much fuzzier, using the term “attributable,” with DWR trying to insert language that added whether water was physically conveyed through the DCF to the definition, whereas the State Water Contractors proposing to strike out the language from the proposal.
“Delta Conveyance Facility Water (DCF Water) shall mean Project Water diverted at and attributable to the Delta Conveyance Facility.”  (Note: DWR inserted the terms “diverted at and” and water agencies struck out the disputed language in their counter-offer.)

Now, in its new proposal DWR has eliminated the term DCF water entirely. Rather than water supply benefits being defined as attributable to the DCF, DWR will ignore what would have happened without the DCF and basically deny non-payers from receiving any water supplies conveyed through the DCF – even if they would have received the water anyway without the DCF. And then on top of this, non-payers are also severely restricted in their ability to receive so-called “Article 21” water, which is supplemental water that is generally available in wet years. The terms “water grab” and “hostage taking” are a bit overused in California water discussions but seem appropriate here. The proposal further states that water agencies that did pay for the DCF (most likely comparatively wealthy agencies like Metropolitan and Santa Clara) would have the option of receiving the water supply taken from the comparatively poorer agencies that did not pay for the DCF.

To illustrate the importance of this change, consider how it would have worked with the old twin-tunnel WaterFix proposal. According to the WaterFix EIR/EIS project description and modeling, the total water exported by the CVP/SWP was estimated to be about 5% higher with the WaterFix than without the WaterFix. So that 5% incremental increase is the water supply benefit of investing in the project, which is the correct way to define the project benefits and the way the negotiation started with the original definition of DCF water.

However, the WaterFix EIR/EIS also indicated that about 50% of total water exports would be diverted at the north Delta and conveyed through the tunnels if WaterFix were built. Thus, under the new proposal DWR is putting forward – those who do not pay would not only be forgoing their claim to the 5% incremental increase in water supply – they could lose up to 50% of their current water supply.

Thus, DWR’s current proposal could have significant impacts on the less wealthy, primarily agricultural agencies, and would likely lead to a significant reallocation of California water from agricultural to urban areas based on their willingness and capacity to pay for DWR’s multi-billion dollar mega-project. Some water agencies might succumb to the pressure and pay DWR’s ransom to keep their water supply.  While these agencies might participate in DCF if this proposal stands, they will still be worse off than if the DCF was not constructed. These agencies could end up in the awkward position of remaining in the project (choosing not to opt-out) while simultaneously taking legal and other actions to stop the DCF.  MWD stands to gain from this new proposal at the expense of other SWP agencies which raises questions of whether DWR is being unduly influenced by their cozy relationship with the MWD.

I am quite surprised that Governor Newsom’s administration would float such a proposal, and wonder whether it has been seriously vetted by his administration beyond DWR. Governor Newsom’s administration has been very concerned about the Central Valley and inter-regional equity, and this financing proposal is clearly harmful to these interests. And I doubt that these strong-arm ransom tactics are the direction that Governor Newsom had in mind when calling for a single-tunnel as a compromise. Eventually, I expect the Governor will come to realize that a single-Delta tunnel project simply isn’t viable and isn’t necessary or helpful in advancing California’s water resiliency.

PS. January 21: Corrected a formatting error, and also wanted to add a thank you to the Sierra Club California Water Committee for their tweet over the holidays which brought this new proposal to my attention.