tag:blogger.com,1999:blog-8236405782975490260.post1661413699847482829..comments2024-03-20T22:55:32.772-07:00Comments on Valley Economy: Initial Thoughts on the latest BDCP Economic Analysis PresentationJeffhttp://www.blogger.com/profile/10344751623916759400noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-8236405782975490260.post-91702299342249722922012-12-06T10:18:22.184-08:002012-12-06T10:18:22.184-08:00I am not sure why Jeff is referring to the BDCP a ...I am not sure why Jeff is referring to the BDCP a $14 billion project. With the habitat conservation components, it is my understanding that the cost is likely to be nearly twice that amount. Unless there is some credible argument that the tunnels could be permitted on their own without the habitat restoration, I don't think $14 billion is the correct number to be discussing.<br /><br />Osha Meserve<br />Local Agencies of the North Delta/Stone Lakes National Wildlife Refuge AssociationOsha Meservehttps://www.blogger.com/profile/18348527831889988504noreply@blogger.comtag:blogger.com,1999:blog-8236405782975490260.post-11335345617547337242012-12-03T11:51:31.393-08:002012-12-03T11:51:31.393-08:00One more thought on Rodney's comment.
Altho...One more thought on Rodney's comment. <br /><br />Although technical, I recommend a recent exchange of articles in the Journal of Benefit-Cost Analysis. The lead article by Burgess and Zerbe (Issue 2, April 2011), considers arguments made by some environmental economists for low discount rates like 3%, but rejects them and concludes 6%-8% is the appropriate range.<br /><br />The next issue includes a pair of comments arguing for lower discount rates, specifically the 3-4% rates often used in Europe. Burgess and Zerbe then counter with a discussion of opportunity costs of displaced consumption/investment and defend the 6-8% rates historically used in the U.S. <br /><br />I am certainly not an expert in the discount rate debate. My point is that most economic arguments of the discount rate are occuring between 3% and 7% real discount rates. Thus, it is clear that 2.275% used in the most recent BDCP analysis is extremely low and pushing the boundaries.<br /><br />Given the extremely controversial nature of the $14 billion tunnels, one would hope that it can clear a net present value test using conventional assumptions.Jeffhttps://www.blogger.com/profile/10344751623916759400noreply@blogger.comtag:blogger.com,1999:blog-8236405782975490260.post-72804516607178579102012-12-03T11:09:13.657-08:002012-12-03T11:09:13.657-08:00Nick: Thanks for continuing to promote a no-tunne...Nick: Thanks for continuing to promote a no-tunnel alternative. I am concerned the EWC no-tunnel proposal is too restrictive on water supplies. I assure you David is right about the interest rate on bonds and BCA, although it is highly relevant to financial feasibility. But the real discount rate he is using is very low. See Rodney's comment.<br /><br />Rodney: Thanks for your comments. You make a good case for real discount rates well below 7%, but it also clear from your comments that 2.275% is pretty darn low.<br /><br />Time horizon and discount rates are key to benefit-cost. David is pushing both assumptions to the defensible limits that help his clients get the answer they want (build the canal). While there is an argument that can be made, it is clear that the assumptions are not consistent with most BCA analysis, nor the recently established state precedent for high-speed rail analysis or the 2008 DWR economic analysis guidelines. <br /><br />Thus, I am fairly confident that most economists would be uncomfortable with the infinite horizon and 2.275% real discount rate assumptions, and believe that nearly all would agree that at minimum some sensitivity analysis to shorter time horizons and higher rates is needed.Jeffhttps://www.blogger.com/profile/10344751623916759400noreply@blogger.comtag:blogger.com,1999:blog-8236405782975490260.post-16998697555846948152012-12-03T10:08:08.778-08:002012-12-03T10:08:08.778-08:00Jeff:
Thanks for sharing your views. You raise s...Jeff:<br /><br />Thanks for sharing your views. You raise some good issues that I would like to chime in on:<br /><br />Project Life: I'm ok with an "extended time horizon" provided that the analysis addresses the unfolding of material risks during the selected time horizon.<br /><br />Credit Market Conditions: Agree that today's credit market conditions are not relevant. Instead, what are the likely conditions at the time of investment (which is in the future). One scenario worth considering is pre-2008 conditions under assumption that, by time a project is actually financed, abnormal conditions of today are no longer relevant.<br /><br />Discount Rate: Would be useful to divide the discussion into the underlying components:<br /> time preference: Treasurey Inflation Protected Securities (TIPS). TIPS are an inflation-indexed, so yield is the "real interest rate" Pre-financial crisis, TIPS traded below 2%--around 1.8%<br /> Expected Inflation: look at differential between treasury yield and TIPS for guidance. Pre-2008 crisis, differential suggested expected inflation around 2.5% (in neighborhood of actual CPI experience post 1982)<br /> Default Risk: this is where a 7% real interest rate is potentially high. If real time preference is 2%, for example, then 7% real interest rate suggests a 5% risk premium. This implies an EXPECTED life of 20 years. In my opinion, the best way to run down this issue is to identify the nature of material risks expressly. For example, if 100-year flood destroys the project, then the default risk is 1%, not 5%. <br />As one thinks about risk, one can conclude that the default risk premium is not the best analytic method. Instead, include modeling of risk directly. For example, if 100 year flood occurs, it would probably damage the project and require "recovery expenditures". Better to run down this scenario directly and incorporate into analysis of project water supply benefits and cost structure. While the water industry has not used this method, most other industries have. A good reference is "Risk Analysis: A Quantitative Guide", David Vose (Wiley). <br /> Market Risk: this last component is probably not signifcant for water projects. Financial risk is probably a fully diversiable risk and, therefore, no need to add this risk premium to the discount rate. <br /><br />Keep up the dialogue. Critically important that CA water investment alternatives are properly analyzedRodney Smithhttp://www.stratwater.comnoreply@blogger.comtag:blogger.com,1999:blog-8236405782975490260.post-12807615117201577722012-12-01T09:50:59.288-08:002012-12-01T09:50:59.288-08:00Jeff,
Two important points:
1. The EWC has submi...Jeff,<br />Two important points:<br /><br />1. The EWC has submitted a no tunnel alternative to the Delta Stewardship Council. It is on the record and is referred to as "Alternatice 2" in the Delta plan. A more accurAte description is on our web site (www.ewccalifornia.org) as the "Reduced Exports Plan." We have presented it informally at a BDCP-NGO meeting and this month I will send it formally to BDCP.<br /><br />2. I am concerned that David feels it is appropriate not to include the interest rate on bonds or borrowed monies as part of the CBA. I believe he is wrong that this ia common practice for CBA's. his view is a precursor of the bias that he may build into his CBA.<br /><br />Nick Di Croce, EWCAnonymousnoreply@blogger.com