High Speed Rail Business Plan Assumes People Will Pay $2500 Per Month to Commute from Fresno to San Jose

The new California High-Speed Rail Business Plan's switch to connect the Valley with San Jose first generated effusive praise from rail boosters about the economic benefits from linking Fresno's workforce and housing with the Bay Area.  The Business Plan states,

"The implications of the Silicon Valley to Central Valley connection are tremendous. Today it takes about three hours to drive from Fresno to the Bay Area; flights are available but often at exorbitant prices. With this new connection, a trip from Fresno to San Jose will take about an hour on high-speed rail which is a game changer both for the people and the economy of the Central Valley and for Silicon Valley as well. New job markets will be opened up for people living in the Central Valley and creating a high-speed connection to the Central Valley would help address the affordable housing crisis in the Bay Area."

Rail boosters gave these effusive quotes for Tim Sheehan's article in the Fresno Bee:

“Today it takes three to four hours to drive from Fresno to the Silicon Valley,” [CA HSR Authority CEO Jeff] Morales said. “We’re talking about a rail connection of 45 minutes or so, and that’s a game changer for both economies, opening opportunities for people in the Central Valley and helping the Bay Area with its housing crisis.”

In the Bay Area, Silicon Valley Leadership Group executive director Carl Guardino was ecstatic about the new rail plan. “What excites us most is that this is a convergence of commute options all into downtown San Jose,” 

This all sounds really exciting, so I looked deeper in the business plan for more details on the length and cost of this commute.  According to the Ridership and Revenue Forecast, it is a 72 minute (not 45 minutes like Morales claimed) ride and a 1-way ticket would be $63 in 2015 dollars.  That's a long ride but people are making similar length train commutes to Silicon Valley on ACE and BART today.  However, nobody is paying that kind of cost for commuter rail.  ACE from the North San Joaquin Valley to Silicon Valley costs $20-$25 for a round trip, and a monthly pass is $300 to $350.  An hour long commute on BART is about $12 round trip.

A daily round-trip from Fresno to San Jose would be $126 per day, $630 for a 5-day week, and over $2,500 for a month of commuting.  So is this really a solution for the affordable housing crisis and Valley economy?  Housing cost differences are extreme between the two locations.  A two-bedroom apartment in San Jose goes for about $3,000 per month, and about $1,000 in Fresno - so the rent savings for a commuter is less than the cost of their HSR tickets.  Cheaper rent in Fresno is not an affordable housing solution for Bay Area workers if it raises their total cost of living, and SJV workers will not see enough of a wage boost to be worth these commuting costs.

The bottom line is that I think the commuter/housing benefits of a HSR link between Fresno and San Jose are way overblown.  I want to believe it, but I don't see this as an economic "game changer".

I am not totally negative on HSR, it could create a lot of value for the state.  But the project does not create that much value unless it directly links the LA area and the Bay Area, and there still is no viable plan to make that happen.  I question whether they should spend any more money on construction until they have a realistic finance and engineering plan to get to LA.

P.S.  When comparing these costs to existing commuter rail options, it is important to remember that commuter rail operating costs are subsidized.  If the operating subsidy were eliminated, a "Valley to Valley" commute on ACE would be nearly $1,000 per month.  The high speed rail bonds do not allow an operating subsidy.  But even if Fresno-San Jose train commuter received a similar subsidy as a San Joaquin County to San Jose ACE commuter, it would still be about $2,000 per month for the Fresno commuter on HSR according to the information in the HSR business plan.

"Troglodytes" Defend the Governor's Delta Tunnels

Governor Brown has become an international leader on taking action to combat climate change, repeatedly calling business-funded opponents of such action "troglodytes."  Thus, I found it surprising that the chief sponsor and promoter of the most broadly ridiculed and discredited report opposing California's climate change policies was the author of the rebuttal of my recent op-ed criticizing the economic rationale of the tunnels.

The Small Business Association's infamous climate-change report predicted that implementing AB 32 would create an economic doomsday that would permanently erase 1.1 million jobs, and cause a 26% decline in discretionary spending by California households among other ridiculous findings.  The report is a prime example of why Governor Brown calls his climate change opponents "troglodytes", and it was universally and very publically blasted by academic experts, and even the LAO.

In this pro-tunnels Sac Bee op-ed, Ms. Toccoli, the long-serving President of the California Small Business Association, once again shows an inability to interpret an economic report, a lack of understanding of environmental projects/policies, and a taste for bogus, doomsday economic scenarios.

Here is a look at the 4 "facts" she uses to support the tunnels.

First, she dismisses the importance of the 50-year regulatory assurance from an ESA section 10 permit that is no longer in the plan.  Never mind the permit, she says without the tunnels we face

"a guaranteed future of diminishing water supplies if we fail to act. According to economist David Sunding, without a new conveyance system, if wildlife agencies impose continued or even greater flow restrictions to protect fish, we could lose more than 1 million acre-feet of water supply a year."

Read more here: http://www.sacbee.com/opinion/op-ed/soapbox/article31330550.html#storylink=cpy

Wrong.  Dr. Sunding's scenario was intended to capture the benefit to water exporters of the regulatory assurance from the BDCP's proposed 50-year permit that was the hoped for result of the combined conveyance and habitat restoration plan.  It does not stem from building the tunnels as she claims.  It's irrelevant now, because the revised Water Fix plan does not include this element.  The water exporters have no regulatory protection from an increase to flows that may be needed to protect fish, even if they build the tunnels.  It is well known that they are extremely concerned about this important change that Ms. Toccoli dismisses.

Second, and most importantly, she wildly overstates the earthquake risks and consequences, misrepresenting the protection offered by the tunnels a 100 times with some numbers taken out of context from an old report.  She concludes, 

"The total cost of disruption to our water system would cost the economy $30 billion to $40 billion over five years – more than twice the total construction costs of the pipelines."

Read more here: http://www.sacbee.com/opinion/op-ed/soapbox/article31330550.html#storylink=cpy

Wrong on multiple levels.  First, I will point out that the report she authoritatively cites in her first argument, estimated the cumulative avoided costs of the earthquake scenario at $400 million over 50 years, 1% of the value Ms. Toccoli uses.  And unlike regulatory assurance, the amount of earthquake protection is something that is unchanged between the 2013 BDCP proposal and the 2015 Water Fix.  That means Sunding's report is a current source for valuing earthquake protection, but outdated on water yield and regulatory protection.

Here is the source she is using to support her claim of $30-40 billion in costs.

Ms. Toccoli's $30-40 billion comes from the far right (72 month disruption) corner of the figure.  Unfortunately, she isn't alone in inaccurately throwing around outrageously inflated cost figures for the doomsday earthquake scenario. Specifically,

• She assumes a ridiculous 6 year disruption.  Even DWR says it would be "weeks or months" which is the far left corner of this graph where the costs in billions are low single-digits and hard to distinguish from zero in some cases.
• She assumes the tunnels protect from all of these costs.  In fact, DWR's documents show exports would still decline by about 50% with the tunnels in place, so the tunnels only protect against about half of these costs.
• She uses the top-line economic impacts, when the lower bottom set of lines, economic costs, are the appropriate measure to use for comparing to the cost of the tunnels.
• Her 68% probability of a catastrophic 20+ island flood over the next 25 years is inflated too, although it is often cited as the probability of a large quake in the Bay Area that could damage delta levees.

Rather than plucking numbers out of context from obscure reports that she does not appear to understand, I recommend using a common sense comparison to other water surface-water shortages.  In the unlikely event of a Delta-destroying earthquake flood, the tunnels would protect 50% of Delta exports for a period of weeks or months according to DWR.  That's a shortage of about 1 maf of surface water supplies, a significant shortage, but one that the state already has plenty of experience managing.  In fact, it's only about 10% of the loss of surface water supplies in the current drought, and the economy still grows robustly.  The disaster talk to water supplies sounds much scarier than the reality.  We should be more focused on water shortages from an extended drought (a scenario where the tunnels do little to help), and less afraid of water shortages from a Delta earthquake.

And like most tunnel proponents, Ms. Toccoli callously ignores the death and destruction in the Delta itself from the disaster scenario she is hyping for water exporters.  Seismic levee upgrades would actually offer more protection for water exports than the tunnels, and would save lives and other vital transportation, energy and water infrastructure that benefit her small business supporters.  Why keep pushing expensive and divisive tunnels instead of a lower-cost, win-win alternative?

Third, she makes a claim about wet year water exports that is mostly a repackaged version of the invalid first argument.  The wet year yields described in the EIR/EIS are not as large as she claims.  It is just a repeat of the argument that the tunnels benefit water exporters because they are hoped to stave off more environmentally-protective operating rules in the future.  As I have pointed out previously, this line of argument directly contradicts the EIR/EIS. 

Fourth, she makes an inaccurate comparison to the costs of alternatives.

A comparison of various alternatives shows the relative affordability of California WaterFix. The cost of water will be approximately $1,000 per acre-foot for Southern California and less than $500 per acre-foot for Central Valley farms. A recent recycled water project in San Francisco came in at more than $8,000 per acre-foot, while the Poseidon desalination plant in San Diego comes to more than $2,200 per acre-foot.

Read more here: http://www.sacbee.com/opinion/op-ed/soapbox/article31330550.html#storylink=cpy

Wrong again.  A consistent and correct comparison focuses on the incremental or marginal costs of alternative projects.  Ms. Toccoli's figure averages the cost of the tunnels across all 4.9 maf of expected exports after the tunnels are built, including spreading the costs over the roughly 4.7 maf that water exporters would receive anyway.

The San Diego desalination plant is 100% new water supply to the system, all 56,000 af of yield is an incremental new supply.  A valid comparison to the tunnels, only looks at the new incremental water yield that results, which is a little over 250,000 acre feet according to the EIR/EIS.  Veteran water economist Rodney Smith published a handy table that shows the cost of water from the tunnels under various assumptions of incremental water yield.  At the yields in the latest EIR, the tunnels water supplies are over $3,000 per acre foot.  Not only are the tunnels more expensive than desalination, their water supply is less reliable, lower quality, and hundreds of miles away from where it would be used.  Of course, the choice isn't really tunnels vs desal, but tunnels versus myriad alternatives including fixing leaking pipes, recycling, stormwater capture, groundwater clean-up, and conservation that the state has not come close to fully developing.  Desalination is the most expensive alternative, and used for comparison only to highlight the tunnels' extreme cost.

The article wraps up with the $5 per month ($60 per year) cost which it describes as "a pittance." That will only pay for Metropolitan Water District's 25% share, and is hardly a pittance to many households.  The tunnels will cost some irrigation districts hundreds of millions of dollars each year, and there are individual farming operations that could be on the hook for a million or more each year. The word pittance best describes the tunnels' contribution to the State's water supply, and its cost is best described as by far the most expensive and risky water supply investment in the State's history.

Ms. Toccoli is a savvy political player with a lengthy history of political advocacy which includes passing out coveted business endorsements to Democrats.  I don't know about her positions on other issues, and perhaps she is a positive factor in other discussions.  But her inaccurate forays into economic analysis of environmental issues have distorted serious policy debates, and are ultimately unhelpful to the small business interests her organization represents.

How much has Cap and Trade Increased the Price of Gas in California?

My parents are visiting from Ohio, and a favorite topic of conversation on these visits is what is more expensive here than "back home" and how much.

While driving past a gas station with my Dad this weekend he suddenly whistled, "Whoa, it's $2.59 at home, that's the biggest difference I have ever seen.  What's going on?"  I mentioned that we now have AB 32 (cap and trade) covering motor fuels, and that the most quoted studies predicted about a 10 cent increase per gallon, but I haven't studied it in detail.

That conversation led me to conduct some in depth research on Gas Buddy, which generated the following chart comparing California and Ohio.

I looked going back 8 years, and it looks like the historical difference is 25-50 cents per gallon with the gap being larger in the summer.  So far in 2015, it looks the difference has been 50 cents to a dollar with the current difference being about 75 cents a gallon.  Dad was right.

The data is volatile and it is a little premature to draw conclusions, but it looks to me like the AB 32 effect is about 25 cents per gallon.

I seem to recall predictions that a price of about $10 per ton for carbon emission permits would translate into about 10 cents per gallon.  So far in 2015, the carbon price has been $12-13 per ton, so the gas price increase/gap seems higher than expected.  I wonder how the cap and trade revenue being collected by the state compares to the increased amount California drivers are paying for gas.

I am sure there are many people who are properly researching this issue, and we will be hearing a lot about it in the months and years to come. 

California Population is 37.25 million according to Census 2010

Today's Census 2010 results have enormous implications for policy analysis in California.  Most of the news will focus on redistricting and political implications, but the biggest impact could come through the effect on major policy analysis.

Since the last Census in 2000, a chasm has opened up between the annual population estimates for California issued by the Department of Finance (DOF) and the Census Bureau.  The gap stood at about 1.5 million people, and was driven by differences in how the two demographic projections measure migration.  Wonky types in the state have been debating this for years and have been waiting for today's once per decade enumeration to settle the dispute.  Among researchers in the state, the majority such as Steve Levy's Center for the Continuing Study of the California Economy, state agencies, and the PPIC have projections that follow the Department of Finance; whereas our Center and others have believed annual Census Bureau estimates to be more accurate and have based our projections on these.  (The difference is based on migration rates which Census estimates with addresses on IRS tax returns, whereas DOF primarily uses drivers license data.)

Since so many of our projects rely in part on population projections, I am pleased that the Census 2010 results released today closely match the projections we have been using.  On a practical level, it saves a lot of work adjusting and reestimating models, and means we won't have to back track from conclusions drawn from them.

While some will moan that these estimates are bad for California since we won't gain Congressional clout, it is actually a win for California policy analysis to get away from the overly-high DOF population estimates.  The DOF estimates and projections are being used to justify big public spending proposals such as a peripheral canal, dams, high-speed rail and more.  Let's hope the Census numbers will finally get all the various analysts to revise down their demand projections to more realistic levels, and take a second look at these projects and see if they still make sense with fewer people to both use the services and pay the bill.

The first to fix their models should be the PPIC/Davis water wonks.  As I pointed out over 2 years ago, they were exagerrating the already overstated CA DOF projections.

The Cost of AB 32 vs Delta Levee Failure

Quiz: Choose the smaller amount of money?
A.  $4 billion to $34 billion
B.  $0 to $1.6 billion

If you answered that A is a smaller number, Congratulations!  You can get a job analyzing environmental policy for the state of California.   If you answered B is lower, you might be pretty upset since A is clearly 20 times larger.  But in California environmental policy, the amount of costs don't matter, it is the issue.

If we are talking about global warming, any cost to reduce greenhouse gases is modest and small.
If we are talking about water supply, any disruption has catastrophic costs.

An open letter from economists released yesterday calls the cost of AB 32 on California "modest."  The Air Resources Board has also called the cost small.  So what is small?  According to the ARBs latest analysis that most economists think is the best standard, the annual cost in 2020 will range between $4 billion and $34 billion.

What about the scenario of the Delta earthquake that floods 30 islands, etc?  We are always told that this would be catastrophic for the California economy, a "$40 billion disaster."  According to the analysis from URS corporation done for the Department of Water Resources (look at figure 6a if you want 1 picture), the range of expected 25 year cumulative costs is between $0 and $40 billion.  The midpoint (50% exceedance probability) looks to be $15 billion cumulative over 25 years.    On an annual basis, the midpoint is $0.6 billion with a range from $0 to $1.6 billion.

Obviously, it isn't a perfect comparison, one event is the estimated cost of doing something (AB 32), whereas the other is the estimated cost if we do nothing in the Delta.  There are other key differences too.

Still, the differences between the adjectives that are used is very revealing.  AB 32 is small and modest, whereas not "fixing" the Delta in the way preferred by water exporters will cause "catastrophe", the economy to "run dry", and cut off the economys "lifeblood." 

(last sentence deleted due to error.  ARB/AB 32 is not funded by the state General Fund)

More AB 32 Costs: Rep. Niello needs to check math

In today's Sacramento Bee, Rep. Roger Niello defends the highly criticized Varshney/Tootelian estimates of the costs of AB 32 (which are annual cost of $183 billion and 1.1 million jobs for California), saying that they are not out of line with other estimates.

For evidence, he points to CBO analysis of similar proposed U.S. cap-and-trade laws that CBO estimates cost the U.S. economy $1.2 trillion (and California $156 billion) between 2009 and 2018. CBO is a credible estimate, but it is an estimate of cumulative costs over a 10 year period. The Varshney/Tootelian cost estimate is for a single year, and is higher. So, by the numbers Niello is citing, Varshney/Tootelian would appear to be too high by at least a factor of 10.

That is what Professor Sweeney at Stanford has said in his review - that Varshney/Tootelian cost estimates are too high by at least a factor of 10.

I don't disagree with some of Niello's points in his piece, and I have been critical of how some environmentalists have been spinnng the latest AB 32 studies as "good for the economy." But his math is simply wrong here, and the numbers matter. So, I am recinding the favorite legislator award I gave Niello a few posts back for bravely voting against the latest round of homebuyer tax credits.

New AB 32 Cost Studies: What does small mean?

Finally, we have some good economic modelling of AB 32. California Air Resource Board (CARB) and Charles River Associates (CRA) have released a pair of reasonable assessments with good models.

CARB is highlighting the best case scenario, which is roughly no impact, and most media articles are reporting the costs are low or zero. A summary of the results.

CARB: Income declines 0.2% - 1.4%, jobs decline 6,000 to 300,000
CRA: Income declines 1.4% - 2.2%.

I think the most likely case is a decline of 1% to 1.5% of income, and 200,000 to 300,000 jobs. In other words, this amounts to about $500 per capita annually, and an annual cost of $20 to $30 billion.

Can the state afford it? Sure. But is it correct to call it a small cost? Here are some comparisons.

Today, the BEA released estimates of California personal income for 2009. Per capita income in California dropped 3.5% between 2008 and 2009, and it is more like a 5% decline if you don't count increased government transfer payments like unemployment. We lost roughly 900,000 jobs in California over the same period.

So, the on-going cost of AB 32 on the economy is likely to be about 1/4 of our loss in the heart of the recession, and 1/5 to 1/6 of the entire loss in the Great Recession. Certainly, we can survive that, but is it small?

Let's think of another environmental case: the big Dr. Doom earthquake scenario in the Delta that floods dozens of islands and is said to take the pumps off-line for a year or two. The cost of that has been estimated at $30 billion to $40 billion spread over several years. But that is just a short-term impact whereas the AB 32 costs are perennial. So, the costs of AB 32 are much larger than the big Delta earthquake.

If is said that this Delta earthquake would "cripple" the California economy and cut off it's "lifeblood." Well, the costs of AB 32 look to be larger so shouldn't those same people be saying that AB 32 would kill the economy. (Actually, some folks like Dave Cogdill are consistent with their criticism, I'm thinking more of the Governor here. And I don't think AB 32 does kill the economy, just as I don't think the Delta quake is as devastating as it is portrayed.)

The other interesting thing in the CARB report are the estimated costs by industries. These industries will endure above average costs and job loss: construction, transportation/warehousing, agriculture, manufacturing. In other words, the costs of AB 32 will fall directly on the Valley's economic base. These industries are projected to have below average costs or gains: Information and services, the coastal economic base.

I would recommend some detailed geographical modeling to CARB, and some measures to mitigate the costs on the Valley if my hypothesis is correct.

None of this is to say that we should repeal AB 32 or that the costs are too high for California to afford. But we shouldn't be too dismissive of these costs either, especially when it comes to the Central Valley.