Monday, July 6, 2020

Reaction to CalMatters essay, "A social justice perspective of the Delta tunnel project"

Gary Kremen, vice chair of the Delta Conveyance Finance Authority, argues that building the Delta conveyance tunnel promotes social justice.  His argument is built around a rhetorical question that he fails to answer correctly. Kremen asks,
In a catastrophic levee failure, who stands to be hurt the most?
Correct Answer:  The people who die!  Shockingly, Mr. Kremen completely omits any mention of fatalities, which is rather obviously the most significant harm caused by the catastrophic flood he describes.  The earthquake induced flood he describes would come with virtually no warning, and if it triggered enough widespread flooding to harm water exports - it would surely be a mass fatality event wiping out small communities, family farms, and critical transportation, energy and local water infrastructure.  A more likely smaller earthquake induced flood would still do much of this damage with minimal impacts on water exports.  But the $11+ billion tunnel Kremen is promoting would protect none of the lives and also would not protect against most economic impacts.  It would not even fully protect water exports.  In contrast, investing in levee improvements protects all of these interest - including water exporters and human lives - from this catastrophic event.  Levee investments benefit all stakeholders.  That certainly sounds more like social equity to me.

I had high hopes that this kind of disaster rhetoric would die down after the Oroville disaster nearly killed thousands and wiped communities after the map.  Especially after post-Oroville reviews slammed the Department of Water Resources for safety lapses and prioritizing water export agencies over public safety.  Mr Kremen's commentary gives me little hope that public safety is a high priority for the Delta Conveyance Finance Authority he vice chairs. 

Since everyone has to make a COVID comparison in our commentary now, I should also point out that the state's response to COVID shows California is very willing to prioritize saving lives over maintaining economic activity during a disaster.  Building levees that protect lives and businesses would be consistent with California's clearly expressed values, whereas building a tunnel that protects certain business interests while ignoring death and destruction in vulnerable communities is not.

Here is another strange and incorrect passage from Kremen's so-called social justice argument.  He warns that not building the tunnel will reduce water to Central Valley agriculture, and
Reduced water to Central Valley agriculture would mean higher prices for food, higher carbon footprint from food importation and decreased food security. Higher food prices disparately affect those who are poor and vulnerable. It is well documented that the transportation related pollution for importing food especially damages communities of color.
First, I would point out to Mr. Kremen that the only agriculture output that would definitely be lost in the catastrophe he describes is in the Delta itself - and the tunnels would do nothing to protect it.  The droughts of 2014-15 reduced water supplies by more than double the amount exported from the Delta in a full year, and these had negligible impacts on food prices despite hundreds of thousands of acres fallowed.  The tunnels would not protect the poor from rising food prices, nor would it protect them from rising water bills.  The carbon footprint, food importation comment is just weird.  Kremen suggests central valley farm products don't travel far, and are mostly sold at your local farmers market.  In fact, Central Valley agriculture is extremely export oriented, very industrial, and ships its crops across the world.  Why would a decrease in Central Valley farm output increase global food shipping costs? 

But the really strange part of this comment is the suggestion that the tunnel is actually good for agriculture - a statement which is demonstratively false.  Many agricultural agencies - including the entire Central Valley Project and multiple agricultural state water project contractors are not participating in the Delta tunnels because it makes water too expensive for farming.  The financial plan for the tunnels that Kremen and others have developed will result in farmers not participating and giving up a portion of their water exports to urban areas due to its extreme costs.  I have heard leaders of urban agencies, including Kremen himself, suggest that tunnels that price farmers out of the state and federal water projects is a business opportunity for urban agencies to pick up their water supplies. 

As On the Public Record points out in their comments on Kremen's column, the Delta tunnel is an engineering project not a social justice project.  For years, proponents of this Delta conveyance have tried to put green wrapping paper around the project (a tradition Kremen continues here with his claims about the carbon footprint of food importation).  This attempt to wrap it in the cause of social justice is even more disturbing.  Let's hope this isn't a new trend.   

Tuesday, June 23, 2020

Covid-19 Pandemic Causes Historic Drop In Farm Employment

The latest employment data released by the California EDD on June 19 shows a massive decline in farm jobs since the Covid pandemic hit.  The graph below shows seasonally adjusted farm employment from January to May for each year since 2013, a period which includes some of the most severe droughts in California history.  None of those events came close to eliminating jobs like the Covid pandemic.  I am not surprised at the loss in jobs, but the magnitude caught me by surprise.  EDD estimates a loss of over 100,000 farm jobs since February (seasonally adjusted), a nearly 25% decline in farm jobs compared to a 14% decline in non-farm jobs over the same period.

This may seem surprising since farm workers are defined as "essential" and most essential industries have seen lower than average job loss - and some like grocery stores and delivery drivers have seen no loss in employment at all.  In addition, a large share of farm workers do not qualify for enhanced unemployment benefits that have discouraged some lower-wage workers from seeking employment.  So why such a large decline?  A loss of this size is probably caused by a combination of factors.

Covid rates are high in farm labor communities.  Imperial County has by far the highest Covid case per capita in the state, and many other big agricultural counties have seen big increases and increasingly rank among the hardest hit locations in the state.  Crowded living and working arrangements and poor access to health care make Covid a particularly difficult challenge for farm worker communities.  Illness among workers and their families, concern about dangerous working conditions, and increased caregiving responsibilities can all reduce the supply of people willing and able to work farm jobs.  Changes to the flow of people across the U.S.-Mexico border during the pandemic are also likely contributing to changes in labor supply, although H-2a agricultural visas have been exempted from new immigration restrictions for now.

In addition, there have likely been changes to farm labor demand as food demand has shifted from restaurants to home cooking.  Restaurant closures have substantially reduced the demand for fresh produce, and other labor intensive specialty crops. It is likely that these crops are not being harvested or planted at typical levels which reduces labor demand.   Grocery store shelves suggest most people at home are making eggs, pasta, and rice - not salad.  

I am sure there are more contributing factors to this historic shift in the data.

Finally, I should mention two notes of caution.  First, these initial employment estimates are based on samples and are subject to future revision as full employment tax filings are tabulated.  Historically, revisions have seemed higher in the farm sector than other areas so caution is always warranted.  But I have never seen a decrease anywhere this magnitude, so it seems very likely that me that there will still be very large losses even if the numbers are eventually revised higher.  Second, the graph I displayed above is seasonally adjusted data - so the decrease it shows is actually a smaller than usual seasonal increase in the unadjusted data.  Farm jobs have increased by 30,000 since March, but that is much much lower than the typical increase in spring, and California farm employment is estimated to be 20% lower (almost 100,000 fewer jobs) than last May.

Monday, April 6, 2020

Social Distancing Benefits Exceed the Costs

There is a lot of shocking economic news at the moment with new terrible projections of economic impacts of Covid-19 by the day.  I will be contributing to the scary economic projections with some local/regional assessments later this week.

When reading all this news, it is natural to wonder if the economic costs of fighting the pandemic through stay-at-home orders and social distancing is too great.  President Trump has repeatedly said, “We can’t have the cure be worse than the problem.”  

Readers of ValleyEcon know that I believe in cost-benefit analysis as a tool to help us analyze complex issues like Covid-19 regulations.  The data is bad, but do not by themselves suggest we should be focused on reopening the economy over fighting the virus.  In fact, economic cost-benefit analysis strongly supports the stay-at-home, social distancing orders in California and the extension of those policies nationwide. 

It is important to note that current estimates economic decline are not the cost of stay-at-home policies, because the baseline for comparison is not a business-as-usual no-pandemic scenario.  To estimate the cost of stay-at-home policy, we would have to compare it the economic loss if the pandemic were allowed to spread unchecked as schools and businesses tried to remain open in the face of much larger levels of illness and fatalities.  While the economic loss under our current stay-at-home policies is massive, about 30% of daily economic output according to Moody’s, it may not be significantly higher than the economic losses under a no-policy scenario.

Well-established economic tools can also help us estimate the benefits of stay-at-home policies, which are widely estimated to prevent 1-2 million fatalities in the U.S. compared to a do-nothing scenario.  The value of a statistical life is a concept that has been rigorously estimated and refined over decades and used in cost-benefit analysis of environmental, public health and safety regulations for air quality, chemicals, highway improvements and more. 

Back of the envelope estimates of the benefits of reduced coronavirus fatalities from social distancing efforts in the United States range between $10 and $20 trillion.  A detailed paper from University of Chicago economists using very conservative approaches, including low-end estimates of averted fatalities and acontroversial value of a statistical life that decreases with age, estimates the value of social distancing policies at more than $8 trillion.  That conservative estimate of benefits equates to about one-third of U.S. annual GDP, far exceeding any reasonable estimate of the cost of social distancing policies compared to a no-action coronavirus scenario.

In this case, strong public health policies are also the best economic policies.  

Sunday, March 8, 2020

Economic Impacts of Potential Water Reductions in the San Joaquin Valley: Reaction to the Blueprint Report

The Water Blueprint for the San Joaquin Valley released a report (hereafter referred to as the Blueprint Report) on the economic impacts of the Sustainable Groundwater Management Act (SGMA) and additional potential water supply reductions in the San Joaquin Valley.  The Blueprint is a group advocating a plan to replace up to 2.4 million acre feet of groundwater overdraft through increasing water exported from the Delta and a variety of government subsidized water supply infrastructure.

My assessment is that the Blueprint Report substantially overestimates the total economic loss to the San Joaquin Valley from sustainable groundwater and environmental policies, and provides misleading analysis of the distributional impacts of the costs between landowners and laborers. Specifically, the Blueprint Report
  • Overestimates the economic impacts of reduced water supplies with estimates that are 3 times higher than other, more credible, reports,
  • Hides the finding that farm land owners are the biggest beneficiary of its agenda, inaccurately suggesting that the Blueprint's primary impact will be to help disadvantaged communities,
  • Fails to acknowledge the limitations in its economic model or place its results in the context of current and future labor market conditions in the Valley, and
  • Fails to recommend strategies to help disadvantaged communities other than the old failed approaches of more subsidized water and weaker environmental regulation.

1. The economic impacts are inflated, about three times higher than PPIC estimated for SGMA impacts from a similar amount of farmland fallowing or retirement.

Comparing the Blueprint Report to recent PPIC analysis of similar issues show that both estimate similar acreage of farmland fallowing or retirement due to SGMA, 798,000 vs 749,000.  However, the Blueprint Report estimates that the decrease in crop production due to SGMA will have roughly the same distribution of crops as current crops grown in the region, whereas PPIC uses an economic model to estimate that the decrease in production will be concentrated in lower revenue crops.  Unlike PPIC, the Blueprint Report does not explain the model used to translate water reductions into crop reductions, but does state that "future restrictions on ground and surface water use in the region may reduce the scale of farming in the Valley by roughly one-fifth. Farm revenues and net income fall by similar percentages."

Specifically, the Blueprint Report estimates about 60% of the decreased crop acres are in trees/vines, compared to about 20% in the PPIC report.  The Blueprint Report forecasts that just over 20% of the acreage losses are to field/hay/pasture crops, whereas PPIC projects about 2/3 of the decrease in acreage is in field/hay/pasture crops.  As a result, the Blueprint Report estimates farm revenue and employment losses about three times higher than the PPIC for a similar decrease in water supplies and acres taken out of agricultural production.  Past experience with water shortages, economic theory and common sense suggest the PPICs estimates are likely to be more accurate than the Blueprint Report.

As shown above, the Blueprint Report is a strong repudiation of the economic findings in the 2019 PPIC report, and yet it doesn't even mention them.  This is another way that the Blueprint Report is highly misleading.  A credible report would cite other estimates and explain why they believe their approach is better.  I wonder if the PPIC researchers will have anything to say about these estimates that are three times higher than their own, or follow the Blueprint Report's lead and pretend each others work doesn't exist.

2.  The analysis obscures and ignores the implications of its most significant result, that direct losses to farm owner income total $1.9 billion per year in its main scenario - almost double the direct change to farm employee compensation.  

For the SGMA + scenario, the BluePrint Report estimates a whopping $1.9 billion income loss to owners of farms on a gross crop revenue loss of just over $7 billion.  This result, which is ignored in the Blueprint Report's summary, reflects an average 27% operating margin for these farm owners, a profit margin that would make the most profitable tech companies and Wall Street CEOs envious.  It certainly would have been interesting to see the report trace the calculations and geography of the $1.9 billion income change to farm owners in the same detail as it traces the estimated $1.1 billion loss to farm labor compensation.  How much of the $1.9 billion annual loss to owner income accrues outside the Valley in non-disadvantaged communities like Beverly Hills, Pebble Beach, or Manhattan?

If their report is accurate and the Blueprint would protect nearly $2 billion in annual income to farm owners, then perhaps these landowners should be willing to pay for most or all of the Blueprint projects themselves instead of asking for federal and state taxpayers to cover the bill.  If the Blueprint is really about helping farm workers as Blueprint PR suggests, then it seems reasonable to ask the farm owners to pay up to a billion dollars per year (just over half of their self-estimate of protected income) to implement the Blueprint's agenda and keep more farm workers employed.

Of course, I do not expect that the farm owners are either willing or able to pay for their multi-billion dollar water infrastructure agenda.  As discussed in Point #1 above, more credible assessments show that both the $1.9 billion farm owner loss and $1.1 billion loss to employee compensation are about three times too large.  The public should interpret the failure of the farm owners to offer substantial funding to implement the Blueprint as strong evidence that the economic impacts in this report are overblown, and that much of the Blueprint agenda is not cost-effective.

3.  The Report does not recognize the limitations of its employment model, and fails to put its findings in the context of the broader demographic and economic changes that will occur in the Valley over the 20 year SGMA implementation horizon.

I am an IMPLAN user myself, so I am not going to criticize the model choice, but the report should reveal more about its shortcomings in this application.  IMPLAN is best used for descriptive analysis of the current economy and its linkages, and short-run analysis of relatively small changes to output or demand.  It is not designed for long-run analysis, or for analyzing labor-markets that do not fit the underlying assumptions of the model.  The assumptions include no input price effects or supply constraints.  This implies a perfectly elastic labor supply curve where jobs shift proportionately with a change in production and labor demand, whereas the evidence shows farm labor markets have some characteristics of monopsony where a labor demand shift has a smaller than proportional effect on employment.   IMPLAN does not model labor supply or unemployment.  Even without getting into the econ weeds to explain why, long-time observers of the Valley economy will recall that these IMPLAN based studies have a history of overestimating employment losses in California during water supply and agricultural production declines events such as droughts.

It is also important to put the resulting changes into the context of change phased in over 2 decades when there will be significant demographic and economic changes in the Valley that have large effects on the farm labor force and agriculture in general.  The IMPLAN model assumes no supply constraints, meaning that the current data it uses to calibrate the model assumes farms currently have all the labor they want. 

This 2019 report from the California Farm Bureau Federation provides much needed context and background on labor market conditions.  Below is a summary from UC-Davis' Rural Migration News.
A California Farm Bureau Federation-UCD survey of growers in Spring 2019 found that 56 percent of the 1,071 respondents could not hire as many workers as they wanted at some point during the previous five years, rising to 70 percent in 2017-18. As a result, more than a third delayed activities such as weeding or pruning, or did less of these activities than in the past.
In response to fewer workers and rising wages, over half of respondents are using mechanization where available, a third are changing crops, often switching from crops harvested by hand to tree nuts, and some are raising wages to attract and retain employees.
Every economic and demographic projection of the Valley and its farm economy project that farm workers are only going to become more scarce.  Crops already go unpicked due to labor scarcity.  The Valley's population is growing, but fewer and fewer of its residents want to be farm laborers.  In this context, there is no reason to expect that a decline in farm output or acres cultivated will lead to a directly proportional shift in farm employment or rising unemployment as this report suggests.  In fact, since the majority of farmers actually want to hire more labor under current conditions, it is certainly plausible that farmed acreage can contract to some degree without any decrease in employment.

Final Thoughts

I know several people involved in the Blueprint initiative who are very sincere and have good intentions.  I listened to their presentation in Fresno at the California Economic Summit.  The focus seemed to be on finding a message to give the Blueprint appeal to a broader political audience, but it seemed more focused on environmental impacts - not a plan to pitch the agenda as a benefit to the poor.  My suggestion to a few people at the meeting who were involved in the rather fuzzy Blueprint organization is that they add stronger emphasis on new technologies and consider reducing water shipped out of the Valley to coastal urban areas as a better way to keep more water in the Valley than squeezing more out of the over-tapped Delta.  I also reminded them that most of the Delta is in the San Joaquin Valley, and that perhaps they should call it Blueprint for the Tulare Basin.

I don't remember hearing any mention of an economic impact report focused on disadvantaged communities.  Perhaps they walked away from that conference and all the discussion of inclusive economic growth with a strategy to market their agenda as a benefit to disadvantaged communities.  Unfortunately, the Blueprint agenda doesn't do much to lift up the poor in the Central Valley.  It is a status quo agenda about preserving the current Valley economy with its persistent outcomes of poverty, inequality, pollution and high prosperity for most of the Valley's landowners.  The new Blueprint Report misleadingly suggests that the biggest beneficiaries of their agenda are disadvantaged communities, when the main beneficiaries would be the land owners and water agency management and consultants behind the Blueprint.

Is it possible to advance a water agenda that supports inclusive economic growth in the Valley?  Yes, but it is going to take political courage from the Newsom administration and some folks within the Blueprint organization as it continues to develop its proposal.  The Newsom administration wants inclusive economic growth in the Valley, and the farmers behind the Blueprint want more government investment in their priorities and relaxed environmental regulations.  The State has some leverage, and the Governor should use it to demand better outcomes from any public investment and changes to future management.

Thus, I suggest that future government actions to support the water user agenda (including the voluntary agreements) be conditioned on significant changes that improve equity in the San Joaquin Valley agricultural economy and ensure more of the economic benefits accrue to farm workers and the communities in which they live. Here are my initial suggestions for a progressive Governor to consider in a "Blueprint for an Inclusive Economic Development Agenda for San Joaquin Valley Water."
  • ban the sale or transfer of related water supplies from Valley agriculture to urban areas outside the Valley;
  • require farms receiving water from the government financed projects to pay a higher prevailing wage, similar to the requirements on affordable housing developers who receive public funds.
  • impose a modest fee on agricultural water supplies to match state investments in safe drinking water for Central Valley disadvantaged communities.
  • require increased regional self-sufficiency and reduced imports from the Delta in coastal urban areas, freeing up Delta water supplies for the benefit of the environment and agriculture.
  • support increased R&D and early implementation of new water technologies, especially those that could be produced and developed in the Valley and marketed to solve solve growing water challenges across the globe.  
  • require landowners to live on or near (within 30 miles) their property that receives water from the government projects.
  • orchard planting permits.
If Valley water users are not willing to consider anything other than unconditional subsidies and lower environmental protection, the Newsom administration should not be afraid to walk away.  Walking away from the Blueprint agenda doesn't mean walking away from the San Joaquin Valley.  The Valley economy is capable of adapting to a smaller agricultural footprint over the next two decades, and public investment towards inclusive economic development in the Valley can focus on building the non-agricultural economy through initiatives like Fresno Drive.

P.S.  After posting this, I saw Lois Henry's article about the Water Blueprint presentation at the Kern County Water Summit, and took a look at the Scott Hamilton powerpoint she described.  I am intrigued by the concept of diverting from the Delta with low-velocity perforated pipes under gravel that he presented even if I am skeptical it can yield an additional 2 million acre feet per year from the Delta (one wonders if that estimate is as exaggerated as the doom predictions in their economic impact report).  The concept is somewhat reminiscent of Bob Pyke's idea of permeable levees in his West Delta Intakes proposal and I encourage creative thinking like this.  Importantly, it illustrates the need of agricultural water users for Delta proposals that are substantially less expensive than the tunnel vision promoted by the Department of Water Resources and Metropolitan Water District.  And it shows the foolishness of DWR's approach with the Delta tunnels to postpone economic and financial analysis until after the EIR for the tunnel is done.  I also noticed that Hamilton's Powerpoint did not hide the farm owner income effect or focus predominantly on disadvantaged communities when referring to the economic report, so that is encouraging too.

Thank you to Lois for posting this.

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.