Comment letter on Delta Conveyance Project benefit-cost analysis

On Monday, the Department of Water Resources Director and consultants will be presenting their latest cost-estimate of the delta tunnel and a recently released benefit-cost report to the Metropolitan Water District (MWD).    

Their presentation is posted now, and it is an all positive promotional pitch that does not seriously engage with the financial and environmental issues with the estimated $20 billion project.  The presentation also conceals some of the extreme assumptions that are used to inflate the benefits of the project, and makes a misleading and inaccurate cost comparison of DCP water to alternative supplies.

This afternoon, I sent a letter to the MWD board highlighting some of the shortcomings in the analysis. Link to letter

The letter points out several key issues that are ignored in the presentation.  I hope the critical perspective, helps the board and the public be more informed about the economics of the Delta Conveyance Project.  

Questions for the release of the Delta Conveyance benefit-cost analysis

This evening, I learned that the long-awaited benefit-cost analysis for the Delta Conveyance Facility (DCF) is being released tomorrow morning.  DWR put out an FAQ in advance of the release last week, but it didn't include any of the questions below - so perhaps someone who is invited can ask them directly.  Dr. Sunding did these analyses in the 2010s for the WaterFix, including an analysis of a single-tunnel option.  His old analysis of a single-tunnel WaterFix suggests the current single-tunnel DCF would fail his own benefit-cost analysis, as I explained in the past here and here, because the DCF water supply benefits are lower and the costs higher than in 2018.  Perhaps this is why we have had to wait so long for this update, it must take a lot of time and creativity to figure out a way to increase the benefits. (Note: This first paragraph was revised 5/16 9:30 AM, the morning after the original post.)

This report is being released over five years after Governor Newsom directed DWR to switch to a single-tunnel plan, and nearly two years after DWR released the details of its preferred project design in the Draft EIR.  The Final EIR was released last year.  

• Should benefit-cost analysis be conducted before or after an alternative is selected?

When WaterFix considered switching to a single-tunnel, staged implementation, you produced a benefit-cost analysis for a single-tunnel alternative in a few months.  

• Why did it take so long to release this report?  

In your WaterFix benefit-cost analyses in the 2010s, you did not use the same no-tunnel baseline and project description as the EIR, and you did not include any environmental costs.

• In this analysis of the DCF, are you being consistent with the EIR baseline and project description?  

• If not following the EIR.  Why?  

• Does this analysis include environmental costs of the tunnel?

None of the previous analyses you did for the WaterFix were ever submitted to the State Water Board or the Delta Stewardship Council as evidence that the WaterFix was in the public interest.

• Why not?  

• Will this analysis be added to the current petition before the State Board?  

In your WaterFix benefit-cost analysis, you found that expected economic benefits from earthquake risk reduction due to the tunnels were relatively small.

• Are your current findings the same?  If not, why?

• Considering the fatalities, infrastructure and property loss from mass levee failure, is a water tunnel the best way for the State to address this risk?

• Have you done benefit-cost analysis comparing levee investments to a water tunnel to address earthquakes and flood risk?

The Central Valley Project, which was supposed to pay 45% of the cost of WaterFix, has already decided not to participate in the DCF due to cost.  Several agriculture serving State Water Project agencies are also declining to participate due to costs.

• What does your analysis say about whether the remaining agricultural water suppliers can afford their share of the DCF?

• Does your analysis predict that agricultural water agencies will stick with the project, or does it predict that more agricultural water users will drop out of the project?

Metropolitan Water District’s sales have declined in recent years, and population has declined in its service area.  Its 10-year financial projection forecasts rates will increase at 3-times the expected rate of inflation over the next decade with flat or declining water sales.  

• Does your analysis project increasing or decreasing water demand for MWD?

• Have you analyzed its ratepayers and member agencies capacity to pay for the tunnel?

In your other work, you have written a lot about how uncertainty reduces the benefits of investing in a project, including regulatory uncertainty.  There is a lot of uncertainty about how the DCF will be operated, including uncertainty about environmental effects.  Adaptive management is part of the plan.  

• Did you reduce your estimates of benefits to account for uncertainty?

• Did you account for uncertainty in the estimates of cost?

___________________________________________________________________________________

Last week, DWR released an FAQ document that reserved its only call-out for 4 bullet points describing “benefits of the Delta Conveyance Project will not be quantified in the benefit-cost analysis and yet are also compelling for decisions-makers.”  These comments and questions are regarding these four bullet points in the FAQ.  

Groundwater supplies.  In previous studies of WaterFix benefits and costs, Dr. Sunding explicitly accounted for constrained ground water supplies and limits on groundwater pumping, it significantly increased the value of water supplies to farms. It seems likely that DWR’s statement about this in its FAQ is false and these benefits are quantified in the benefit-cost analysis.

• Are constraints on groundwater included in the valuation of water supply benefits?

Job creation.  You have estimated jobs created from tunnel construction, which DWR calls a benefit in its FAQ document describing your report. 

• If the costs increased, wouldn’t the jobs increase too? 

• Have you ever said that jobs are a measure of costs not benefits with respect to benefit-cost analysis?

• If funds were spent on tunnel alternatives instead of DCF, how many jobs would be created? 

• When higher water rates reduce household income, how many jobs are lost?

• For every dollar spent, do tunnel alternatives create more or fewer jobs than the tunnel?

Increased Operational Flexibility:  Like groundwater benefits, this could be included in the benefit estimates for water supply and water quality.  This issue does raise questions about whether DWR intends to actually operate the tunnels as described in the EIR.  Regarding tunnel operations, the EIR states that “Shifting from south Delta intakes to proposed north Delta intakes has trade-offs and is not expected…” 

• Do your benefit estimates reflect flexibility from the project operations in the EIR?

Delta Community Benefits Program:  The program is speculative and undefined.  Funding is expected to be minimal.  Is funding for this undefined program included in the cost estimate? If not, it shouldn’t be mentioned here. 

[5/19 Note: I have seen the report now and it is a lot different than the WaterFix reports, and thus it answered quite a few of these questions. Most importantly, it doesn't change the project description from the EIR, the biggest problem with the old WaterFix reports.  But the new analysis does some new things that are also very questionable.  I'll leave this post up as the blog is a personal journal, but note the date, 5/15.  There will be more analysis, some of it on this blog.]

Final Delta Conveyance EIR Released Without Cost Estimate or Benefit-Cost Analysis: A Quick Look At Old DWR Analysis of Single-Tunnel Alternatives Shows This Proposal Is Likely A Bad Deal For SWP Agencies. (and even worse for a State that cares about the environment and non-SWP regions)

 The Final EIR for Delta Conveyance was released today.  I just read the press release summary.  Here is my quick take.

The press release case for the tunnel argues that the project will result in about 500,000 AF in additional water supply for State Water Project agencies once operational.  They continue to ignore updated cost estimates, and economic/financial analysis of the project.

However, in 2018, DWR did analyze the effects of a single-tunnel proposal that would result in 660,000 additional AF, over 30% more water than the current proposal, that was estimated to cost $11 billion in 2017 dollars.  While no cost estimate for the current proposal has been released, it is well-known that costs of the current proposal are much, much higher - even after accounting for inflation.

In 2018, DWR's consultant found that a single-tunnel proposal barely penciled out for SWP agencies (benefit-cost ratio was about 1.2), and the benefit-cost ratio would have been negative if the project yield were the same as the current EIR (a greater than 30% decline in water supply benefits).  Thus, it appears the current proposal would not pencil for SWP agencies out even if the costs had not increased at all, but it is well-known that the cost has escalated substantially.    

Is it any wonder that DWR still has no cost estimate or benefit-cost analysis for a project with well-known financial troubles.

A few additional things to consider when comparing to 2018 single-tunnel analysis:

• That analysis only considered benefits and costs to SWP contractors.  It was not a comprehensive benefit-cost analysis that incorporates environmental harm or impacts on non-SWP supplied regions of the state like the Delta.  The project is bad for SWP agency ratepayers, but it is even worse for the state as a whole.
• Economic and finance will drive operations.  Thus, the missing economic analysis is a critical oversight, and the EIR lacks credibility without it.
• State population growth forecasts have plummeted since the earlier analysis, meaning that future demand will be much lower, and the costs will be spread over fewer households which means larger rate increases.  
• Projects like this can be good for SWP agency leaders and staff, and provide political value to the Governor, even when they are bad for their ratepayers and citizens.  It is one reason why objective benefit-cost analysis is so critical.  

At some point next year, I may have time to update a comprehensive benefit-cost analysis of this proposal.  However, there is plenty of reason to doubt the economic and financial viability of this project based on what we know now. 

My Comments on Three Sacramento City Council Members Propose Significant Strengthening Of Rent Control and Tenant Protections

Several members of the Sacramento City Council led by Katie Valenzuela, are proposing a substantial increase in rent control and tenant protections in Sacramento.  It motivated me to quickly write some written comments tonight, which felt like I was blogging again, so I thought I would post my comments here too. The key elements of the proposal, which they call Sacramento Forward, is summarized as below in the City Council Law and Legislation Committee report. 

2. Build More Affordable Housing: a. Establish an inclusionary housing requirement that a percentage of all new units be affordable to low and very low income households.

3. Stop People from Losing Their Homes: a. Enact “just cause” eviction protections at 30 days. b. Require reporting of any evictions to the city. c. Establish a Right to Counsel for tenants and landlords needing legal support. d. Reduce the percentage of allowable annual rent increases to align with wages/income and limit rent increases during tenant turnover, with a process for hearings to allow exceptions when necessary to cover landlords’ costs. 

4. Prevent Corporate Purchases of Property: a. Adopt a “Sacramento Opportunity to Purchase Act” that would require any tenantoccupied building that is listed for sale to be sold to a tenant or eligible community group if they can meet the initial listing price.

5. Generate More Funding: a. Pursue a 2024 ballot measure to generate funding to support the acquisition, construction, and protection of affordable housing units, as well as important support programs like emergency rent assistance.

(Note: I left out some parts of the proposal that I didn't comment on for brevity. See the full proposal here.)  Below are my comments, which I indicated neutral but probably lean more towards opposed than in favor.  (some edits made December 8, 2023)

Elements I Support: (numbered as in the proposal)
4. “Sacramento Opportunity to Purchase Act.” This is a creative and interesting proposal.
5. Pursue a 2024 ballot measure for funding. I support this because it places financial support for affordable housing programs on the government's general resources where it belongs, rather than fees and regulations that place the financial burden on market-rate housing which can be counter-productive by reducing the overall supply of housing.  While I support putting it on the ballot, I am not sure how I would vote on a local tax ballot measure.  I would be more supportive if it were County or region-wide, and not just Sacramento City.  I do support the concept of going in this direction for new funding sources.

Elements That I Might Support If Revised: With Some Suggested Revisions.
3.a. “Just Cause” eviction protections at 30 days is too short, suggest 6 months at minimum. There is an unintended consequence here of damaging a market for 1-6 month rentals, often furnished, which serve new residents, travel-nurses and others in housing transitions. This measure will really discourage the production of backyard ADUs, and could limit housing available for traveling health-care professionals and those in housing transition. No evidence is provided for why the current 1 year 1-day rule is failing to protect tenants and needs to be shortened, and changes should be incremental in the absence of such evidence.
3.c. “Right to counsel” seems like a potentially costly entitlement, and could might encourage the use of legal actions when there are less costly remedies. I appreciate the need for low-cost or no-cost legal assistance, and perhaps this should be revised to increase funding towards that if current services are inadequate.
Financial Considerations – Recommend low or no fees for small landlords: This element suggests that the City will just impose fees (presumably on landlords) to offset the City’s staff costs of implementing the ordinance which would be consistent with other practice. Landlords and property managers will also have significant compliance costs for such a complex ordinance, even before paying the City’s costs with fees. Understanding and complying with these rules is especially difficult for small landlords, and will encourage rental housing to be controlled by large investors or shift small landlords towards large corporate management companies. Thus, I suggest reduced or waived compliance fees for small landlords based on the number of units they own and/or self-manage.

3.d.1 Reduce the percentage of allowable annual rent increases from 5%+CPI to annual CPI or wage increases is something I can support IF it does not apply to new tenancies.

Elements I Oppose:
3.d.part 2. While I support rent increase limits one existing tenants, rent should not be controlled for new tenancies, and instead should be allowed to reset at market rates. Limits on rent at new tenancies will encourage landlords to increase rent by the maximum allowable amount on existing tenancies every year, raising costs for those the ordinance is trying to protect from displacement. In addition, rent controls at new tenancy greatly disincentive maintenance, investment and repair of the housing stock, as much maintenance and investment in units occurs when units turnover with landlords motivated by the ability to charge market rent to a new tenant. Landlords are not going to replace old appliances, freshly paint units, replace carpets or do anything more than the bare minimum health and safety repairs if rents are restricted at turnover.
2. Inclusionary housing requirements. These policies risk unintended consequences by increasing the cost of market-rate development and thus reducing the overall supply of housing. The Keyser-Marston Associates report cited as support for this proposal does not provide compelling empirical evidence, and they do not cite any of the research on inclusionary zoning policies and the potential negative effects on private development. Inclusionary zoning does have a potential social benefit in that it promotes mixed-income neighborhoods as opposed to concentrated low-income housing, but this social-benefit should be financed more broadly and not through higher market-rate production costs.

Finally, I will note that the past few years have seen a tremendous increase in multi-family housing development in the City, and many of these units have yet to hit the market as planning and construction takes years. Given the increase in supply, and clear evidence of rent stabilizing or declining in the past year or two as new supply is starting to come on the market, one might reasonably conclude that current housing policies are starting to work and to be cautious in implementing the more aggressive measures that could discourage new investment.

New $15.9 bil. Delta tunnel cost estimate: Revisiting DWR's 2018 single-tunnel economic analysis with updated costs shows it is a bad investment for water agencies.

As reported in the Sacramento Bee, the cost of a single-tunnel Delta conveyance is now estimated at $15.9 billion.  In a previous 2018 analysis to support a short-lived proposal to stage the twin-tunnel WaterFix proposal, DWR estimated the single-tunnel 1st stage of WaterFix at $11.1 billion in 2017 dollars, which is equivalent to $11.7 billion in 2020 dollars.  This is a 35% increase in constant dollars, and should lead the Governor and the dwindling number of water agencies that still support the single-tunnel delta conveyance facility (DCF) to reevaluate the investment.

That 2018 analysis wildly overstated the economic benefits of a single-tunnel to participating water agencies, but for now let's accept their estimate of benefits.  The image below shows the results of that analysis (Table 5, with no federal subsidy).

Simply updating the costs to this latest estimate ($15.9 billion in 2020 dollars is equivalent to $15 billion in the 2017$) reduces the benefit-cost ratio for SWP urban agencies from 1.23 to 0.92, and for agricultural agencies from 1.17 to 0.87 in the trading scenario.

That's a bad investment, but it is actually much worse than that.  The 2018 analysis assumed the project would be operational in 13 years, whereas the new cost estimates a 20 year delivery period.  I didn't incorporate the extra 7 year wait for benefits in the above recalculations of the b-c ratio, but it would make it even lower.

At some point, we might see a revised economic analysis that manufactures new benefits to magically get the benefit-cost ratio over 1.  Readers of this blog know that DWR and MWD already have an established track record of inventing new benefits as new information reveals the delta tunnel(s) to be a worse and worse investment.  

P.S.  Thanks to Restore the Delta for archiving the 2018 analysis online for the public record.  DWR has wiped their previous links, and I couldn't find a saved copy in my files.   

Water Blueprint proposes a valley wide sales tax to fund their irrigation water plan. Is it equitable? Is it feasible?

 Earlier this month, CSU-Fresno hosted the event "Funding Water Infrastructure in the San Joaquin Valley." The vast majority of the event was focused on the so-called "Water Blueprint for the San Joaquin Valley," a high profile new investment plan for irrigation water.

At the event, the Blueprint rolled out a proposed funding plan - the centerpiece of which is a proposed 0.5% special sales tax in the 8 counties of the San Joaquin Valley.  While the sales tax would provide the vast majority of funding for the Blueprint's multi-billion investment strategy, the funding plan also includes a modest $4 per acre foot charge on water users and hoped for matching funds from the state and federal government.  In most years, the Blueprint projects the sales tax would generate 7 times more revenue than water user fees. 

The sales tax is a bold new idea in water finance, but not a good one as proposed.  It is inequitable across geography and income.  It probably isn't politically feasible either, despite the optimistic spin from a new poll presented at the event.  Below, I briefly discuss these issues and suggest some changes to the Water Blueprint to improve the equity and political prospects of their proposal.

Geographical Inequity - Taxes North San Joaquin Valley Counties Without Benefit

The tax is proposed for 8 counties, although the Blueprint plan only provides benefits to 5 counties from Madera south to Kern. The proposal would get 1/3 of its revenue from the North San Joaquin Valley counties while providing zero benefits to them - and potentially harm San Joaquin County's Delta region.

The Blueprint can correct this problem by dropping the 3 northern counties from their proposal, and leaders in the North San Joaquin Valley should demand that they do so.

I have argued for years that San Joaquin, Stanislaus, and Merced counties are ill-served by the 8-county region often used in state planning efforts.  The Blueprint, which has gained some influence with state leaders, is an excellent example of this problem.

Geographical Inequity - Benefits Wealthy Out-of-Valley Landowners 

In a previous post, I have pointed out that the biggest beneficiaries of the Blueprint agenda are farm owners, not poor farmworkers as much of the Blueprint PR claims.  Many of those farm owners, especially the wealthiest ones, live in wealthy communities far from the Valley.  These individuals can afford to pay for their own water infrastructure, and certainly shouldn't be subsidized by a sales tax imposed on the Valley's cash-strapped households.

The Blueprint can fix this adjusting their financial plan such that user fees are charged at full cost. The sales tax revenue would be used to provide water rate assistance to water users who live within 50 miles of their farm.  Income and acreage limits on the recipients of the sales tax funded water rate assistance should also be considered.

Inequity Across Industries - Agriculture Is Exempt From Sales Tax, But Other Industries Pay

There are many exemptions to sales tax, most notably to services and food.  Farming inputs and supplies are also exempt from sales tax, whereas most non-agricultural businesses in the Valley pay sales taxes.  It is bold for the Blueprint to propose a special sales tax benefit for an industry that already has an exemption from paying sales tax.

Income Inequity - Regressive Sales Tax Primarily Benefits Well-Off Landowners

The primary general argument against sales taxes are that they are regressive.  Lower-income households pay a higher share of their income in sales taxes than higher-income households.  The situation is the same here, and it is particularly problematic in this case as the largest beneficiary of the tax are the owners of farms - who generally have above average incomes in the Valley and include some truly rich out-of-Valley landowners as described above.

The Blueprint can improve this inequity by including funding to repair unsafe drinking water systems in the Valley to their plan.  The tax is still regressive, but funding clean drinking water with its proceeds will at least direct more of the benefits to low-income communities.

Political Feasibility - Will it Pass?

The Valley is not an easy place to get voter approval for a tax increase.  And as a special tax, I believe the Blueprint proposal would require a 2/3 vote to pass.  That's a tough hurdle, and the poll results are interesting if reliable.

First, while the poll focused on the sales tax proposal - in the one question that presented both a "water consumption tax surcharge based on use" and a "special sales tax" - respondents favored the use charge over the sales tax by a nearly 2-to-1 margin.  My read on this is that a proposal as I suggested above - user charges to cover the full cost with special tax revenue to defray costs to local users meeting residency, income and acreage restrictions - would be seen as more equitable and popular to Valley voters.

Second, the poll had a note of positive news for the sales tax: 69% of the respondents said they would be "very likely" or "somewhat likely" to support a special sales tax for water.  Is this poll reliable?  Is there really that much support?  A look at the last voter poll the Institute for Leadership and Public Policy did in cooperation with Valley water users suggests there polling may be too optimistic.

In October 2018, a few weeks before the vote on the Proposition 3 water bond, the same group released a poll of likely voters in the 8 San Joaquin Valley counties that found the following support for Prop 3. 64% Yes, 10% No, and 26% Don't Know.  In reality, 50.1% of voters in the 8 counties voted No, so their polling of Valley voters missed by an enormous margin in 2018.

I believe the Blueprint's special sales tax will lose big as proposed.  It might have a chance if the Blueprint adjust it to be more equitable in the following ways.

• Eliminate the 3 North San Joaquin Valley counties.
• Add funding for safe drinking water in disadvantaged communities.
• Propose a full cost user charge with the sales tax to defray expenses for non-wealthy water users who live in the Valley.