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.

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. 

Finally, some exciting news about water in California.

New $100M Innovation Hub to Accelerate R&D for a Secure Water Future: A research consortium led by Berkeley Lab, along with three other national labs, will head a DOE desalination hub to provide secure and affordable water 

https://newscenter.lbl.gov/2019/09/23/new-100m-innovation-hub-to-accelerate-rd-for-a-secure-water-future
https://www.energy.gov/articles/department-energy-selects-national-alliance-water-innovation-lead-energy-water-desalination

I would suggest the Governor borrow a few quotes from the LBL news release about NAWI when he announces a bold new vision for California water priorities.  For example, "NAWI’s vision for creating a stable and resilient water supply for agriculture, industry, and communities involves a circular water economy, where water is treated to fit-for-purpose standards and reused locally, rather than transporting freshwater long distances."

This big announcement is $100 million over 5 years.  How much does California spend on water technology R&D?  I know we will spend more than that just on planning for a single tunnel in the Delta, that's before the $10+ billion on the thing itself.  California will spend more than that on operations of the Delta Stewardship Council over the same period.  The state will spend ten times this much subsidizing the so-called "ecosystem benefits" of a single dam.

It's nice to have the headquarters of this new consortium in California, but there could be much more of this activity in the state.  California could totally dominate R&D, new technology development, and commercialization of alternative water technology with a relatively small amount of investment and policies to push local adoption.  I strongly believe supporting and adopting new technologies should be the focus of the state's future water vision, including any future water bonds. This would create lots of high-paying jobs, as we develop technologies to solve our own problems that have broad applicability and worldwide commercialization potential.  Most importantly, it could create new water in a sustainable and cost-effective manner while diversifying our sources so we are more resilient to climate change and natural disasters.

I find the current direction of state water policy very uninspiring.  Eventually, the administration will figure out that a single-tunnel in the Delta isn't viable, and that putting green window-dressing on last centuries concrete mega-infrastructure visions isn't very effective - economically or environmentally. It's time for a new vision focused on developing and deploying new technologies.

"$7 an acre foot? No way, it's worth more than $200 to you." If California is going to adopt voluntary agreements over the regulation of Delta water, the fish need a real negotiator.

Recently, the California Department of Fish and Wildlife (CA DFW) and the CA Department of Water Resources announced a voluntary agreement, negotiated in secret, as a proposed substitute to new regulations in the Bay-Delta Water Quality Control Plan that would limit water diversions from the environmentally troubled Delta.

While the negotiations were secret, I recently obtained a training video that CA DFW leaders used to prepare for the high-stakes negotiations with delta water diverters.  (The yellow convertible represents the revised Bay-Delta plan that has been under development for nearly a decade.)       

O.K., that's a joke - but it isn't far off from the giveaway of the water quality control plan in this proposed deal, especially when it comes to the projects diverting from the south Delta (the CVP and SWP).  It does not appear that the CVP/SWP have offered any water or habitat projects that are not already required by existing regulations or plans, and it proposes an $800 million subsidy from state taxpayers to the deal by redirecting water bond funds.  As far as I can tell, the only new requirement on the CVP/SWP is some modest funding in the form of a $5 per acre foot fee to compensate upstream water diverters who may lose water supply in other components of the deal, and an additional $2 per AF for a science program they would control.

There has been confusion about whether the CVP/SWP contractors are actually giving up any water in this deal. For example, this Fresno Bee op-ed by two CVP executives, describes the CVP/SWP contractors as voluntarily giving up 300,000 AF for fish.  However, many environmentalists dispute this characterization and argue that they could actually get more water under this deal than under the current, decade-old biological opinions that are supposed to regulate delta pumping.  In comments to the Metropolitan Water District (MWD) board earlier this week, MWD staff seemed to confirm the environmental argument that the 300,000 AF is nothing more than compliance with existing regulations according to this account in Maven's Notebook.

In the settlement that was produced for the December 12 briefing, [the parties] put forth a proposal that had ... a commitment on the CVP and SWP of 300,000 acre-feet, largely met by incidental flows that are met through export constraints that are in the current biological opinions, so basically committing to those dedicated flows that are in the biological opinions, said Mr. Arakawa.

Considering that this agreement is proposed to substitute for a new Bay Delta water quality control plan that would likely require the CVP/SWP give up 1.3 million acre feet of current average annual diversions to allow more Delta outflows for environmental benefits, this is an enormous amount of regulatory relief for the bargain price of $7 per acre foot (about $30-35 million in a typical year).

Thankfully, the State Water Resource Control Board (SWRCB) did not accept the proposed agreement, but it did encourage further negotiation to complete the deal.  The environment and the fishing community deserve a stronger negotiator in the future.  How would a better negotiator respond?

"$7 an acre foot, are you kidding me?  You have told others that protecting this water supply from the new water quality control plan was worth $200/AF to you."

Why do I say that the water agencies value this protected water supply at 30+ times what they have offered?  Because they have been pushing the $20 billion Delta tunnels (aka WaterFix) that would provide a very similar benefit after this 15-year agreement would expire.  Water agencies have argued that the point of WaterFix is to protect 1.3 million acre feet of water supply from future regulatory actions like the water quality control plan.  And they* say they are willing to pay $1+ billion in annual debt service to protect this water supply.  Averaged across the roughly 5 million acre feet of water they hope to divert from the Delta in the future, this would be a $200 per acre foot charge on their diverted water.  WaterFix would provide a few additional benefits to these water agencies, but this voluntary agreement would generate about 80% of the benefits that WaterFix would, according to the water agencies' previous economic analysis of WaterFix.  Thus, the proposed voluntary agreement would provide about 80% of the annual benefits of WaterFix to SWP/CVP contractors for only 3-4% of the annual cost of the WaterFix.  What a deal!

I am not opposed to a negotiated agreement, and have actually recommended a settlement with these elements in the past.  In an October 2013 op-ed in the Sacramento Bee, I argued that the State's economic analysis of the tunnels-oriented Bay Delta Conservation Plan supported the value of a negotiated habitat conservation plan, but not the Delta tunnels themselves.  I argued that the State's own analysis showed that a habitat conservation plan with Delta exports in the low 4 million AF range with water agencies paying for the habitat measures was a better deal for all parties than the BDCP tunnels (now renamed the WaterFix).

Governor Newsom supported the concept of a negotiated agreement as Governor-elect.  If he continues this approach as Governor, he needs to install a much tougher negotiating team on behalf of the environment.  Based on the WaterFix proposal, my suggested counter-offer is something like a 20-40% reduction from the proposed water quality control plan regulations, and a charge of $50-75 per acre foot of diverted water to pay for all of the costs of the non-flow habitat measures (no taxpayer bond funding would be required).  Any funds collected in excess of the requirements to pay for the habitat restoration would be given to an independent third party to make grants for alternative water supply projects that would reduce demand for Delta water in the areas served by Delta exports.

If the SWP/CVP water agencies want better terms, such as a lower fees, then the environmental negotiators should ask them to drop the twin tunnels/WaterFix plan.  If they are unwilling to do this, then that is very revealing about their expectations for the tunnels.  It shows the water agencies aren't actually willing to pay costs on the order of the WaterFix project just to "protect" their existing levels of Delta water diversions.  If they will only pay at these levels to "protect" the water supply with tunnels, it suggests these agencies do not expect they will have to follow the constrained operations of the tunnels described in their voluminous EIR.  Thus, it confirms the fears of environmentalists that the tunnels' large capacity would be used to increase diversions after they are built - regardless of any current promises not to do so.

Not all environmentalists would be on board with a negotiation like this, as it does represent a concession on the environmental side relative to the Water Board's proposed regulations.  In fact, some of my environmental friends criticized me back when I wrote that 2013 op-ed proposing a no-tunnel BDCP since it included some substitution of non-flow measures for flow measures.  That is a scientific matter on which I have no expertise, but if there are no substitutes for flow at any level - then there probably is no point in negotiating at all.

The bottom line is that if we are going to have negotiated agreements, the fish need a much stronger negotiator.  If Governor Newsom wants to continue supporting an attempt at a negotiated deal, he must install better negotiators for the environment. 

-----------------------
* Yes, I know the CVP contractors have not said they are not willing to spend that much on WaterFix at this time.  But MWD approved financing the CVP share with expectation of being reimbursed by CVP in the future.  Thus, they have collectively approved spending at this level to protect delta exports from this regulatory cut.

November 2018 Propositions: How I am voting

The November 2018 California ballot has 11 Propositions, most of which are focused on economic issues.  Because of this focus on economic issues, the Center for Business and Policy Research included recommendations and analysis from myself and Associate Director Thomas Pogue (the guest blogger on proposition 7) in the economic forecast we released this morning.

This morning I took a look at the Democratic and Republican parties endorsements, and found that I agree with Democrats on 6 out of 11 Propositions, and agree with Republicans on 6 out of 11 Propositions as well.  I guess that makes me a moderate.  Interestingly, Democrats and Republicans agree on three Propositions (2-Yes, 3-Neutral, and 7-Yes).  I disagree with both parties in one of these cases, Proposition 3, where I oppose and both parties are neutral.

In general, bond issues have a lot more credibility when they go through the legislature like Propositions 1 and 2, and thus have been considered in the context of the full state budget.  Voters should be highly skeptical of bond propositions that go directly to voters to seek public subsidies like Propositions 3 and 4.  The enormous size of the water bond ($9 billion, 50% larger than the combined total of legislatively backed housing bonds) is a good example of the fiscal problems of special interest financed bond initiatives.

Proposition	CBPR	Dem	Repub
1	Yes	Yes	No
2	Yes	Yes	Yes
3	No	Neutral	Neutral
4	No	Yes	No
5	No	No	Yes
6	No	No	Yes
7	Yes	Yes	Yes
8	No	Yes	No
10	No	Yes	No
11	Yes	No	Yes
12	Yes	Yes	No

Proposition 1:  Yes.  Proposition 1 authorizes $4 billion in bonds for various affordable housing programs.  The availability and affordability of housing is a worsening problem across all of California, and is arguably the State’s biggest economic challenge.  The cost of developing affordable housing is extremely high in California, more than double some other states, and thus the funding in this bond will not deliver as much housing as it should.  While it is tempting to vote no until stronger actions are taken to reduce costs, the need for affordable housing is so great that we support the bonds.  

Proposition 2:  Yes.  Proposition 2 authorizes $2 billion for housing programs for individuals with mental illness.  It passed the California Senate unanimously, and the Assembly 72-1.  This bond deserves support, although we urge further actions to reduce the cost of developing affordable housing in order to maximize the benefits of this funding.

Proposition 3:  No.  Proposition 3 would authorize $8.9 billion in bond borrowing for a variety of water related projects, and creates an unjustified subsidy from the state’s greenhouse gas cap and trade program for 4 designated water agencies supporting the bond, including the Metropolitan Water District and Westlands Water District.  While a portion of Proposition 3’s funding would go to needs that are worthy of state public funding, the majority of Proposition 3 is terrible policy that provides undeserved subsidies to special interests that represents California water politics at its worst.  Since 2014, the legislature and Governor Brown have supported over $11 billion in new water related bonds in 2 separate elections, including the $4 billion Proposition 64 in June 2018.  Thus, most of Proposition 3 consists of poorly justified subsidies that couldn’t make it through a legislature and Governor that have been very supportive of water spending.  In addition to the enormous size and weak justification of the Bond, the hidden inclusion of an energy subsidy for water agencies that divert and pump water uphill from the environmentally troubled Delta is reason enough to vote no on Proposition 3.

Proposition 4:  No.  Proposition 4 would authorize $1.5 billion in bonds for children’s hospitals and was placed on the ballot by a petition funded by an association of children’s hospitals that would receive the subsidies.  While children’s hospitals are valuable institutions in California, funding them through state general obligation bonds is poor public policy. 

Proposition 5:  No.  Proposition 5 would expand the property tax limitations from Proposition 13 for California homeowners over the age of 55, by allowing them to transfer the lower property tax bill of their current home to any other home they purchase in the state.  Proposition 5 would address one of the negative consequences of Proposition 13, inefficient “house lock” that occurs since moving often triggers higher property tax bills for homeowners because the new home is assessed at its current market value.  Proposition 5 eliminates this perverse incentive, and thus would have a positive effect.  Unfortunately, Proposition 5 solves a Proposition 13 problem by further increasing the large tax burden inequities embedded in Proposition 13. 

Proposition 13 is inequitable because homeowners with similarly valued homes pay vastly different property tax bills based on when they purchased the home.  It conveys large tax benefits on older homeowners who bought their houses decades ago, as well as those who had fortunate market timing and bought during the dips of California’s roller coaster real estate cycles.  The Executive and Associate Director of CBPR both bought houses in 2010 near the bottom of the market, and would likely benefit handsomely from Proposition 5 in a few years as we become eligible empty nesters.  While we would personally benefit from Proposition 5, we oppose it because it perpetuates and expands Proposition 13’s inequities and distortion of California’s real estate markets and local public finance.  The “house lock” incentives could be addressed by reforming Prop. 13 to reduce its inequities rather than by expanding them.      

Proposition 6.  No.  Proposition 6 would repeal gas and vehicle taxes passed by the legislature in 2017 to fund transportation projects around the state.  While we don’t generally favor tax increases and understand that the high cost of motor fuels imposes a heavy cost burden on many Californians, these taxes are an appropriate and fair approach to funding much needed transportation improvements.  Fuel and vehicle taxes are far more economically efficient than funding transportation with general fund revenues (primarily income and sales taxes) as many Proposition 6 advocates have argued. 

Proposition 7. Yes.  Proposition 7 would start a process that could lead to year round daylight savings time (DST) with federal approval.  The proposition would potentially end twice yearly time changes and their associated disturbance to sleep patterns. While the energy saving benefits of DST are questionable, increasing evidence shows the sleep disruption from the time changes may be associated with a range of social costs ranging from pedestrian, motor vehicle, and workplace accidents to workplace productivity losses and declines in student learning. The proposition’s adoption of year-round DST would also facilitate potential increased consumer impacts in shops and restaurants as well as outdoor recreational activities because of the extra-daylight.  Plus, if Tom were to recommend a no vote his wife and son would combine their late-night and early morning preferences to ensure he is sleep-deprived no matter what the time change. 

Proposition 8.  No.  Proposition 8 would regulate prices charged by dialysis clinics based on the cost of care.  In general, attempts to limit prices by law reduce economic efficiency, reduce the supply of goods and services and can have many unintended consequences.  Prop. 8 has been supported and funded by labor unions seeking to unionize staff of dialysis clinics, and is opposed by the owners of dialysis clinics, and many major medical professional organizations in the State.

Proposition 9.  “Three Californias” initiative was removed from the ballot.

Proposition 10.  No.  Proposition 10 would greatly expand the ability of local governments to enact rent controls on residential property.  Economic theory and decades of research are clear that rent control reduces the quality and quantity of rental housing over time, leads to an inefficient allocation of rental units by reducing mobility and encouraging overconsumption of housing by those who are able to secure rent controlled apartments.  California’s affordable housing crisis is severe, and the desire for rent controls to create some immediate relief and cost savings for some is understandable.  On the other hand, the many harms caused by rent controls accumulate more slowly over time and the research is clear that it will do more harm than good for California’s housing market in the long-run.

Proposition 11.  Yes.  Proposition 11 would allow private ambulance companies to require their employees remain on call during meal and rest breaks.  This is current practice, but a recent ruling in a lawsuit requiring uninterrupted breaks for private security guards, is expected to end the practice of on-call breaks by ambulance companies.  Eliminating on-call breaks would significantly increase the cost of maintaining current EMT service standards, requiring increased staffing that would raise health insurance and local government costs.

Proposition 12.  Yes.  Proposition 12 would require cage-free housing for egg-laying hens by 2022, and increase required space for breeding pigs and veal calfs.  Interestingly, UC-Davis agricultural economists have been silent on the economic effects of this bill after receiving withering criticism and a lawsuit from the Humane Society over a study of the costs of 2008’s Proposition 2, which increased space requirements for hens but did not go as far as the current proposition to require cage free production.  Economic studies have shown Prop. 2 raised egg prices in California by between 50 cents and $1 per dozen.  The cost of living index data we collect for the Stockton and Sacramento areas finds that eggs are more than twice the price seen in many other parts of the county, a much higher cost differential than any other grocery product we survey.  Proposition 12 will likely further increase the cost of eggs in California and its costs will be disproportionately felt by low-income households.  However, the California cost difference will likely decrease over time as major retailers and restaurant chains around the country have announced plans to shift to cage free eggs that will change production methods across the industry.  Surprisingly, the most public opposition is not from the agriculture industry or consumer activists, but animal welfare activists who claim the Prop. 12 does not go far enough.  While concerned about the cost to low-income households, we recognize the legitimacy of growing animal welfare concerns and that an industry shift is already underway.  Plus, if Jeff were to recommend a No vote, his wife and kids would have him sleeping outside next to his backyard chicken coop.

WaterFix results in $1 billion in harm to winter-run chinook salmon according to California guidelines used for storage projects

Two major water infrastructure policy processes are moving towards critical decision points that will determine their financial viability: a) the WaterFix (Delta Tunnels) led by the Department of Water Resources (DWR) and b) $2.7 billion in Proposition 1 (Water Bond) funding towards public benefits from new storage administered by the California Water Commission.  

One of these processes (Prop 1, California Water Commission or CWC) is treating economics seriously in the planning process, while the other (WaterFix) has not.  Sadly, there is a lot more money and environmental risk associated with the tunnels project that has been ignoring and/or suppressing economic analysis of the project.    

Recently, I was reviewing the California Water Commission's guidelines for valuing ecosystem impacts from new storage projects for the purposes of awarding Proposition 1 funds.  It led me to ponder what would happen if WaterFix followed the California Water Commission's guidelines for benefit-cost, including valuing ecosystem impacts, and had to compete for funding like these storage projects.  

I believe the results would be similarly ugly for WaterFix as the benefit-cost analysis I did in 2016. Using the CWC guidelines, the value of water would be higher than I used (especially after SGMA is implemented), but the yield would remain a meager 225,000 acre feet per year.  However, the increase in benefits from higher value water would be offset by a host of environmental costs that I did not include in the 2016 analysis.

For example, the CWC gives explicit guidance on how to value changes in endangered and threatened salmon populations estimated with a life-cycle model, and the biological assessment for the WaterFix gives clear results of this type of assessment for winter-run chinook salmon.  Applying the values and procedures from the CWC guidelines to the WaterFix results in a $58 million annual loss from the damage of the WaterFix to winter-run chinook salmon.  Extended over 100 year life of the project (beginning 2031) with a 3.5% discount rate, it is a nearly $1 billion social cost from the tunnels.

The $1 billion cost is just for winter-run chinook from operations.  Thus, it does not include costs to winter-run chinook from construction or consider impacts from both operations and construction on spring-run or fall-run salmon, steelhead or delta smelt.  It would take more work (and help from biologists) to estimate values for these, but is not hard to see this adding up to a cost of several billion dollars from the WaterFix tunnels.

The applications for Prop. 1 storage money are due in a few days.  It will be really interesting to see how the different applications apply these guidelines to value the public benefits, as well as the overall feasibility and benefit-cost for the storage projects.  Then it will be really interesting to see how the CWC evaluates these applications.  That will be the real test of the extent to which economics and science or politics is allocating the funds.  

It's inexcusable that the WaterFix tunnels, despite 11 years and hundreds of millions in planning, hasn't produced any feasibility or economic analysis comparable to what these storage projects are required to do.

How can a $6.5 billion farm subsidy to Central Valley farmers provide no benefit to Valley farms and the Valley economy? When it is used to subsidize the delta tunnels.

For my detailed comments on last fall's Brattle analysis,  reported by the AP today, see the memo I wrote that is posted on Restore the Delta's website.  Restore the Delta surprised me late last week by sending me a copy of this report and related emails from their PRA request and asked for my thoughts.  I wrote the comments memo over the weekend, and gave them permission to distribute it with the report.

If you have followed this blog over the years, it should be obvious that I was not at all surprised by the findings that the tunnels' are a bad deal for farmers - even if there is a enormous federal subsidy for costs allocated to the Central Valley Project.  The benefit-cost report I published last month stated, “If only the benefits and costs to water exporters who would pay for the tunnels are considered the costs still exceed benefits by more than $7 billion in the most optimistic scenario.”  

The big surprise to me in the Brattle report, was that it explicitly stated the need for federal subsidies, and then openly advocated for additional state subsidies. Coming from a state consultant, that is very newsworthy, especially given 10 years of public denials that there would be any public subsidies.  In addition to the draft report RTD released today, I saw several similar drafts in the PRA documents that went back and forth between the consultants and the state last fall.  The only substantive difference I detected in these drafts was the section with the weak rationalization of state taxpayer subsidies expanded in later drafts.  So it seems pretty obvious to me that the state sponsors were pushing the consultant to find a solid argument for state taxpayer subsidies.  However, the consultant was unable to develop a compelling case despite their best efforts, because there simply isn't one.

It is important to realize that even if there is a combined $6.5 billion in federal and state taxpayer subsidies for agriculture's costs of the tunnels, the net benefit to farmers who would receive water from the tunnels is still zero.  Add in the negative impacts on Delta farmers, and some risks for other farmers upstream from the Delta, and the tunnels are clearly a bad deal for the overall Valley economy.  Why no net benefit?  The subsidy would not pay all of agriculture's cost share for the tunnels - they are still responsible for $3-4 billion in direct payments for the tunnels even if the subsidy is $6.5 billion.  Thus, the billions in costs that they would still pay consumes all of any water benefits they would get from the tunnels.

The Valley economy has many, many needs.  It breaks my heart to think that anyone in government would contemplate a $6.5 billion subsidy to Valley agriculture that provides no net benefit to the Valley economy.  If such a subsidy were to happen, it would be a tragic example of ineffective and wasteful government.  If the government feels compelled to spend billions in industry subsidies in the Valley, I would suggest spending a much smaller amount to entice some other industries that would diversify the economy and create good paying jobs.  If a subsidy proposal is ever formalized, every mayor in the Valley should oppose it and offer up an alternative economic development package that is much cheaper and does more for their constituents.

Three additional comments that occurred to me this evening as I read the AP report and some reactions to it.

1.  Why did I say $6.5 billion in subsidy, when the AP and report only quotes $3.9 billion from the study?  Two reasons:  First, the $3.9 billion figure in the report is a discounted present value, so I have converted it to a $4.6 billion undiscounted value that is comparable to the estimated $16 billion construction cost.  The other $1.9 billion is the amount of additional subsidy that would be needed to get the tunnels break even for farmers, and it is the reason for the extended discussion of additional subsidies for the project.  So while the report does not assume a specific amount for state subsidies, the minimum amount of state subsidy the consultant is trying to justify is pretty clear.  The AP reporter is just being careful to quote exactly what the report said about a federal subsidy, and she also notes that agriculture still comes up short.

2.  Does Californians For Water Security have a secret financial plan for the tunnels?  CWS's response reminds me a little of Donald Trump's secret plan to defeat ISIS.  They said, the draft report "doesn't account for the latest thinking on financing the project."  So, what exactly is the latest thinking?  Please inform everyone.  What exactly is the plan?

If there was an actual finance plan for the tunnels, this "outdated report" wouldn't be so newsworthy. Tunnel advocates have no one to blame but themselves for not putting out a financial plan after 10 years.  An information vacuum will be filled, and this is the best information available.

3.  Doug Obegi's comments on the report are well worth reading.  He highlights some additional points that I didn't discuss, and explains some other points in a different way that may be more understandable to some people.

What does Westlands SEC penalty mean for the delta tunnels plan(aka WaterFix)?

Last week, the SEC found Westlands Water District was misleading bond investors, making Westlands only the second municipal bond issuer to ever pay a penalty to the SEC.  Bond rating agencies immediately placed Westlands' bonds a negative outlook.

The announcement puts a spotlight on an issue that I have been talking about since 2012: the agricultural water districts can not and will not pay for their proportional share of the $16 billion delta tunnels. In 2013, I said the financial hole in the delta tunnels plan was comparable to the hole in the high speed rail business plan:

In both cases, the "hole" in the capital financing for the project is an unrealistic projection of funds provided from a key source.  In the case of high-speed rail, the hole comes from federal government appropriations that are unlikely to materialize.  In the case of the tunnels, the hole comes from the unrealistic expectation that farms will pay the majority of the costs since the majority of the water is for irrigation.

I am hardly the only one to come to this conclusion.  Even WaterFix supporters openly acknowledge that the agricultural contractors might not be able to pay, even as they keep telling urban households that the tunnels will cost them $5 per month, a calculation that depends on the assumption that farmers pay the majority of the tunnels' cost.  If the farmers drop out of the plan, these household costs are likely to triple. 

While I have been continuously skeptical of agricultural districts ability to pay, I was surprised by the SEC fine.  It shows the situation was even worse than I thought.  Even for a relatively small amount of bond debt, Westlands had to resort to "Enron accounting" to boost their revenue in a drought.

So what now?  It should be clear now that a proportional cost allocation isn't going to work.  The Central Valley Project (mostly farmers) may even have to drop out completely, leaving the State Water Project (mostly urban agencies) to attempt financing the tunnels themselves. 

The Metropolitan Water District has discussed a "subscribed capacity" model as a potential solution to the cost allocation problem.  In this approach, individual water agencies would choose how much of the tunnels' capacity they want to pay for - allowing some districts to opt out entirely and others to pay a larger share in return for a larger share of the tunnels' benefits.  Although the details are unclear, I foresee a lot of problems with this approach, starting with the critical issue of defining the tunnels' capacity in a way that has enough capacity to pay the $16 billion tab and does not harm the water users who opt out.  I will leave that analysis for a future post.

For now, the Westlands/SEC situation shows why the WaterFix plan must stop dragging their feet and put forward a detailed financial plan and cost allocation now.  It is critically important for that plan to demonstrate how the bond requirements will be satisfied in periods of drought when water agencies experience their greatest financial challenges, and that financing the tunnels will not jeopardize other investments in the California Water Action Plan.  Paying the tunnel bonds' in a drought when water sales revenue is low will be a challenging even for wealthy urban agencies like Metropolitan and Santa Clara and it will be even more difficult if these urban districts have to stand behind the agricultural contractors who would be likely to miss payments in a drought.  Environmental approvals for the WaterFix depend on the project maintaining its promise not to export more water in a drought, and various regulatory entities must require the WaterFix to demonstrate that its proposed operations are financially feasible during a drought.

The Consequences of a Massive Earthquake-Induced Delta Flood

The tunnels' PR campaign and some state leaders, including Governor Brown, talk about the catastrophic delta flood scenario as if the only consequence is water exports.  Given that the direct devastation of such an event would be in the Delta itself, there are some serious economic and moral problems with this argument that should be raised given it is the main argument made for the controversial tunnels.

The source usually cited by tunnels advocates for the earthquake risk is the DRMS Phase I study which assessed flood risk and consequences in the Delta.  Its assessment of levee failure probabilities was highly controversial but I will ignore that debate here, and focus on the consequences analysis.  The report described the consequences as follows in the fourth sentence of its executive summary.

"Levee failures and the flooding that follows can cause fatalities, destruction of property and infrastructure, interruption of a large portion of California's water supply, environmental damage and statewide economic impacts."

The first thing it mentions is fatalities, the second is property and infrastructure destruction in the Delta, and the third is water supply.  The DRMS authors put that list in the proper order, as public safety is typically given the highest priority in risk-assessment and the DRMS analysis found that the economic loss to property and infrastructure exceeded the economic loss from interrupted water exports.  Here are the Figures from the reports' executive summary that outline the public safety and economic costs.

For comparison, Katrina killed over 1,800 people and caused hundreds of billions in economic losses.  The 1989 Loma Prieta earthquake in the Bay Area killed 62 people and caused over $6 billion in structure damage and more in total economic costs.  DRMS describes a horrific scenario that could be worse than Loma Prieta and smaller than Katrina, but with a similarly devastating mix of fatalities and economic costs.  However, the public discussion of the Delta scenario is driven by water exporters and focuses almost exclusively on economic losses, whereas discussion of these other events have focused much more on life loss and public safety.

In recent years, I have heard informally that subsequent modeling has shown that shut-down of the export pumps in this Delta flood scenario are more likely to be weeks or a few months, rather than years that are more often heard in the media.  DWR Director Mark Cowin has recently said weeks and months.  I am aware of this presentation to BDCP from a few years ago that supports weeks and months.

I am not aware of any more recent analysis of fatality risk.  Perhaps that would decline in a more recent assessments as well - especially if the levee failure probabilities have been reduced to account for the lower frequency of floods seen in the past decade and levee and emergency response improvements.  However, it should be noted that the fresh water inflows which reduce the length of water export outages in some cases could still be just as devastating to lives, property and infrastructure in the Delta.

In this recent Bee op-ed, my language on this issue was probably too strong, and I would have toned down my earthquake statement if I had known the Bee was going to use it as a call out subtitle.  But this earthquake, salt water, shut-down the pumps argument has once again become the principal case for the tunnels' made by many state political and business leaders.  If that is the main argument, then it needs to face more tough questions about its economic, technical and ethical merits.

Addendum, July 29:
I realize I failed to include a graphic that shows DRMS found water export interruption was only 20% of the cost.  It is tedious to tabulate this from the appendices, but it is relatively easy to derive from this table from DRMS Phase 2 report (taken from Table 18-2).

The table shows that these two types of costs it categorizes as "Statewide" (water export interupption and state highway damage) are only 38% of the total cost from the mass flood scenario, and that water exports is only 51.5% of this 38% share.  Thus, water export interruption is 19.6% of the total cost (.515*.38).

New Data Shows Surprisingly Small Impacts of Drought on Farm Employment

While I have a long record of saying that drought impacts on the economy tend to be overblown, even I was surprised by the minimal drought impacts in the data released this morning.

The Bureau of Labor Statistics' Quarterly Census of Employment and Wages is the most reliable data on employment (it is a census of quarterly tax filings).  Data for the 3rd quarter of 2014 was released this morning, representing the peak season for farm employment when drought impacts should be most evident.  As shown in the table I compiled below, there is virtually no difference in farm employment between 2014 and 2013 in the 3 counties that are thought to be most devastated by the drought. (Jobs are listed under each month in the table, NAICS sector 11 is 99+% agriculture in these counties, the increase in total wages suggest decreased hours is not a big part of the explanation even though the minimum wage increased on July 1, 2014.)

There is more data that needs to be compiled before jumping to conclusions, but I think it is important to get this information out there since the rhetoric on jobs, unemployment and water shortages is heating up again.

In my view, the impacts of drought are much larger in environmental data such as plummeting fish abundance, than in jobs.  I surprised a reporter earlier this week when I said that I thought the drought was a bigger environmental crisis than an economic one, and the recent data about 6 delta smelt found in the recent survey compared to virtually no change in agricultural jobs is an example.

How to explain this?  

As I said, there is more data to sift through, but it is important to recognize that this drought is coming in the midst of a strong expansion period of Valley agriculture.  The total number of acres irrigated and harvested has been growing every year for most of the past decade, even in the face of scarce surface water.  Thus, in the absence of drought, I suspect 2014 employment would have been even higher.  The drought is causing significant fallowing of relatively low value, and non-labor intensive field crops, while new acreage is coming into production by tapping groundwater.  Thus, there are farmers laying people off, I don't think the farmers in news reports are lying.  But clearly, there are others that were hiring.  In other words, the baseline for agriculture activity is rising, as I discussed last spring in this post.  

I'm happy the Legislature and Governor have agreed on a new water bond, but I will probably still vote against it.

The most important benefit of approving the new $7.5 billion water bond last night for the fall ballot is that it repeals and replaces the terrible, $11.1 billion bond leftover from the 2009 water package.  The 2009 bond was seen as unlikely to pass, but it had a chance with the drought deepening, and that would have been the worst outcome of all.

From my initial read, the new bond is a significant improvement in two major areas:

1. It is nearly $4 billion smaller, and some of the more egregious "pork" spending items are gone.

2. While the bond may not be 100% Delta tunnels neutral, it cuts $2 billion in direct funding for Bay Delta Conservation Plan (BDCP) habitat from the 2009 version.  It seems to me that this is a major blow to the already unlikely prospect that the BDCP/tunnels can develop a credible financial plan sufficient to gain regulatory approval of the project.  

While I will withhold making final judgement until I know more about the details, I don't think these improvements are enough to switch me from a position of opposing to supporting a water bond.  

My main objection is that many if not most of the projects supported by this bond, even good and worthy projects, could and should be paid for with water rates instead of General Obligation Bonds that take money directly away from education, health and public welfare programs and are repaid with income and sales tax revenue. Funding for the safe drinking water crisis in the San Joaquin Valley is a relatively small part of the bond, and it should be funded as a stand-alone measure outside of the bond package.  

My second objection is the $2.75 billion in "continuous appropriation" for surface storage projects that have highly dubious public benefits, small water yields, and a very poor return on investment.  As I have discussed elsewhere, the Temperance Flat dam feasibility study is woefully deficient and the mammoth project is simply a bad investment.  My understanding is that Sites reservoir is a better project, but I have not yet reviewed it in depth.  If it is a good project, then the "continuous appropriation" is unnecessary and it should be able to compete against other storage projects and priorities.  [Update: I am told that the storage funding will be allocated by California Water Commission in a competitive process, and could go to something other than these dams.  I have heard major doubts of whether these dams are viable even with state funding support from the bonds.  There will be lots of political pressure on the CWC to fund reservoirs even if they are non-competitive as that is what many of the bonds supporters think they are voting for.]  

Another objection is the issue Restore the Delta is raising about the bond authorizing $485 million to be spent buying water upstream of the Delta to augment Delta flows - even as the state pushes the Delta tunnels that will reduce Delta flows.  I don't know anything more about this then what RTD keeps sending to my inbox, and if it is illegal as they say then I won't worry too much.  

I should also state that I am bothered that the water bond appears to have elbowed a school bond off the ballot.  Public schools are free and can't be financed with user fees like water infrastructure (although new schools can be financed with impact fees), thus it is an appropriate use of a GO bond.  More importantly, California's woeful support of education is a far greater problem to its economy and long-run prosperity than water.  The Governor has his priorities backwards on these bond issues.

Thus, I'm happy the Legislature and Governor have agreed on a new water bond to remove the beast from 2009 from the ballot, but I will probably still vote against it.  I suspect some of the legislators who voted overwhelmingly for putting the new bond on the ballot feel the same way and will not be campaigning for it.

BDCP Cost and Yield Deception

Last week, BDCP released what it describes as "cost and yield information,"  although I didn't see any new information in the glossy newsletter summary with the pretty bird. The newsletter makes 2 main claims: 1) BDCP provides reliable water for $5 per month, and 2) BDCP is cheaper than the alternatives.  Both of these claims are deceptive and are based on invalid comparisons and inaccurate assumptions.

I'll start with the second claim, BDCP is cheaper than alternative water supplies, which is illustrated in the BDCP glossy with this graphic.

I see six major problems with these comparisons.

1. Subsidized BDCP costs are compared to unsubsidized alternative costs.  However, the proposed water bond subsidizes both BDCP and these alternatives.  According to BDCP, water agencies would pay 68% of BDCP's estimated $25 billion cost, and most of the rest would be paid by state water bonds.  While the agencies would pay all the cost of the Delta tunnels, the public subsidy of BDCP includes things essential to securing an endangered species "take permit" for the Delta tunnels, including billions for habitat construction projects and purchasing water from upstream sources to augment Delta freshwater in-flows which would be greatly reduced by the tunnels.  My understanding is that the current water bond proposal has more public funding for these alternative water supplies like recycling and groundwater cleanup than BDCP projects.  Thus, if the costs of BDCP to water agencies are displayed assuming water bond subsidies, then the alternative costs to water agencies should also reflect subsidies that would result from the same water bond(s).
2. BDCP costs are reported as the change to the average cost of a large system with existing projects (i.e. State Water Project) whereas alternative costs are reported at the project level.  A consistent comparison to the alternatives requires BDCP costs per acre foot to be calculated at a project level (i.e. marginal costs), which means looking at the increase in water supplies from implementing the project.  The BDCP cost figure deceptively averages the cost over all State Water Project supplies - including those that would be provided without the BDCP.  Dr. Rodney Smith has an excellent example of a correct calculation of BDCP costs for comparing to alternatives on this blog post.  Dr. Smith states that "Under alternative “no tunnel” scenarios, the best case for the cost of BDCP water would be well over $1,000/AF for a non-firm water supply.  There are some scenarios where the BDCP investment may yield even a lower water supply.  In those circumstances, the BDCP investment in tunnels would become the “bridge to nowhere” in waterworld."  It should be noted that Dr. Smith's "well over $1,000" is untreated water at the Tracy pumps and does not include the cost of treatment and pumping hundreds of miles over mountains to southern California cities.
3. Uncertain BDCP costs and yields are compared to alternatives with known or much more certain costs and yields.  The alternative costs in the chart are based on projects that are already built, under construction, more advanced in design and/or use existing technology.  There is a lot more certainty about the costs of these alternatives.  In contrast, the BDCP tunnels are only at 10% design and it is a unique project that presents enormous engineering challenges.  Furthermore, the BDCP water yield is not known and is given as a range.  BDCP cost estimates assume no cost escalation and optimistic yields.  Thus, BDCP is much riskier than these alternatives.   
4. Alternatives are more reliable than BDCP.  Unlike BDCP, these alternatives are relatively drought proof, whereas BDCP provides no additional water in dry years.  For BDCP to generate comparable reliability, you would have to include significant costs of new storage which would raise the per-acre foot cost of BDCP water.
5. Lower-cost alternatives are ignored.  The comparison chart picks the high-cost, high-capital alternatives under the assumption that most of lower-cost alternatives like conservation have already been implemented or will be implemented anyway. Many experts, such as those at the Pacific Institute, disagree with this pessimistic assessment of conservation.  It should also be noted that this comparison only looks at urban alternatives, when most of the BDCP water supplies go to agriculture. The simplest alternative for agriculture is to fallow lower-value crops, an action which is generally estimated to cost about $150 per acre foot.  
6. Ignores technological advance in alternative water supplies.  While I don't fault the BDCP for not wanting to speculate about the cost of future technologies, it should be noted that the cost of these alternatives is dropping and there is a lot of technological innovation in the pipeline on water supply alternatives.

As for the first claim, $5 a month for water supply reliability.

• $5 a month per household assumes that farmers pay the majority of the tunnel costs, which is widely known to be infeasible and this cost allocation issue is the main reason that even a draft BDCP finance plan is years overdue.  There are also some unrealistic assumptions about no cost escalation, delays and financing terms embedded in this.  I expect urban household costs to be about 3 times what BDCP estimates.
• BDCP water is not that reliable.  Given the current drought, I think most people would not view a $15 billion piece of water infrastructure that is idle in drought years as substantially increasing reliability.

New Temperance Flat Feasibility Study Claims Salmon Benefits and Delta Earthquake Risk Reduction Justify the New Dam and a Big Taxpayer Subsidy

I spent a good part of the afternoon reviewing the new feasibility study for the Temperance Flat dam and compared it to the one released in 2008.  The Bureau of Reclamation's claimed benefit-cost ratio in the new feasibility study is much higher than the one from 2008 that infamously found a B-C ratio of 1.0 to 1.06 despite the fact that the estimated water yield is lower.

Some observations about the benefit-cost estimates.

1.  Estimated construction costs of the dam dropped by nearly $1 billion (new estimate is about $2.5 billion compared to original of about $3.5b), even though the current estimate is in 2013 dollars and the old one was in 2006 dollars.  I am told the cost reduction is attributed to a change in the hydroelectric mitigation required.  Apparantly, it isn't true that estimated construction costs always go up.

2.  The new feasibility study justifies the dam for its ecosystem benefits to salmon.  It values the ecosystem benefits 2-10 times higher than the water supply benefits.  In addition to economically justifying the dam, this finding also is convenient for justifying a much higher taxpayer subsidy of the dam than proposed in 2008 (more on that later).  These multi-billion dollar ecosystem benefits (annual benefit estimates ranged up to $500m per year) result from the report's estimate that the dam will increase long-run average abundance of salmon from between -0.7% and 4.9% per year.  I'm not a biologist, but that doesn't seem like a huge benefit to me for a river that is projected to have relatively small salmon populations.  This recasting of the dam as a salmon project is very surprising to me as I am not aware of any environmental groups or fishery experts pushing Temperance Flat dam as a priority, and there are even some environmental groups who are opposed.

3.  The report is quite honest that the traditional water supply, flood control, hydropower, and recreation benefits that are associated with dams are not nearly high enough to justify the construction costs of this project.  And that's even after the report inflates these traditional benefits...

4.  In the "best" scenario, the report estimates $19 million in annual agricultural water supply benefits from an average increase to ag. water supply of 41,000 af.  That's a healthy $461 af in current dollars, a value that is about 3 times higher than typically used for incremental ag water in benefit-cost assessments.  Given the special role of agriculture as the economic base of the Valley, I have sometimes argued for using a more generous economic development measure that includes multiplier effects.  Like many of these assessments, this feasibility study also calculates the economic development value in a separate section.  In Table 5-12, the report estimates this annual value at $10.8 million for agriculture, which seems about right for 41,000 af of annual yield.  The strange thing is that this economic development value is lower than the value used in the benefit-cost estimate, and it is usually the other way around.  This seems to confirm my suspicion that the $19 million value associated with ag. water supply reliability is an error.  Bottom line, the agriculture water supply benefits are overestimated by a factor of 2-3, at least $10 million per year.  [Update:  I have now seen the technical appendix, and it turns out that this huge agricultural value results because the model they are using allocates the majority of new agricultural water produced by Temperance Flat to recharge groundwater where it has a much higher economic value than growing crops. This is an interesting finding and if it accurately measures the value of recharging groundwater and/or the external cost of pumping groundwater on other users of the aquifer, it makes a powerful argument for regulation of groundwater.]

5.  Delta earthquake and flood protection benefits.  The feasibility study estimates $25 million in annual benefits from emergency water supplies Temperance Flat would provide in the event of a catastrophic Delta flood.  This benefit is inflated due to ridiculous assumptions about levee failure probabilities among other issues.  As a point of comparison that shows the foolishness of this number, it is almost identical to the risk-reduction benefits the BDCP estimates for the Delta tunnels which are thought to preserve several million acre feet of water exports in the case of these catastrophic events.  [The BDCP estimates 50 years of this benefit has a present value of $364m to $460m, use the present value formula to solve for the annualized value and it is in the neighborhood of $25 million annually.  This Temperance Flat study allocates over $400m of construction costs to taxpayers due to this benefit.]   

6.  The benefit-cost analysis uses annual costs and benefits.  It annualizes capital costs over 100 years with a 3.75% discount rate.  That is a very generous assumption, and it understates the annual costs.

Some observations about the proposed cost allocation for Temperance Flat.

1.  Only 26% of the cost of the dam would be allocated to water users (12% ag, 14% municipal/industrial).  In contrast, the 2008 study of the dam allocated the majority of costs to water users.

2.  About 73% of the cost of the dam would be paid by federal and state taxpayers.  The 73% allocation can be broken down into three general categories of claimed public benefits: 49% ecosystem, 8% recreation/flood control, and 17% emergency water supply benefits from a Delta flood (see #5 above).  This 73% share is only direct construction costs, and does not count the subsidy in the Bureau's 0% financing of agricultural users contribution.

So that is about $1.25 billion in taxpayer dollars towards dam construction for claimed salmon benefits (direct costs, this doesn't count interest costs on the water bond that would finance the state's share).  I wonder what a salmon expert would do if you gave them $1.25 billion of taxpayer funds and said spend this to improve salmon habitat.  

In addition, it allocates 17% of the dam's costs (nearly $500 million) to state/federal taxpayers due to the Delta flood risk reduction benefits (see #5 above).  Taxpayers might prefer to spend $500 million in Delta risk reduction would be better spent directly on Delta levees themselves - providing flood protection benefits for water supplies and protecting property, other infrastructure and lives in the Delta. 

Some observations about financial feasibility calculations for water users.

  

Unlike BDCP, this report correctly proposes a cost allocation before making any conclusions about financial feasibility. 

1.  Agricultural water supply is allocated $264 million of construction costs.  Assuming 40 year repayment period with no interest, and operating costs comes to $8.7 million per year.  The report estimates the cost of the incremental water supply to the agricultural users is $212 af.  That's a hefty cost for agricultural water, and note that this is the cost even with the Reclamation's generous no-interest financing and taxpayers picking up 73% of the estimated construction cost of the dam.

2.   Municipal and industrial water supply is allocated $362 million of construction costs.  The report assumes a 40 year repayment of capital costs and 5.37% interest.  Principal, interest, and operating costs come to $27.4 million annually, and the incremental water supply cost to M&I users is $1,305 per acre foot. That's a pretty expensive municipal and industrial water supply, even with taxpayers picking up 73% of the estimated cost of the dam.

Overall, it's not a very convincing feasibility study, and I don't believe it provides strong economic justification for Temperance Flat dam.  It's disappointing, because I believe in the value and need for storage and I would like to be able to support storage projects in the Valley.  But there are better uses of taxpayer dollars for these and other purposes, and the water it is still an expensive option for water users even with the large taxpayer subsidies.  

What's the value of water to agriculture?

Over the past month, lots of people have been emailing me the $1,100-$1,200 per acre foot price for price irrigation water is selling for in a Kern County auction.  It is indeed an incredible price for agricultural water.  It shows that this drought is very severe and likely will impact some high-value permanent crops, and it tells us what orchard owners are willing to pay for one year to keep an orchard alive when they have few other alternatives.

But what does this data point tell us about the value of water to agriculture in California?  What is the value of agricultural water that should be used for major policy analysis - such as evaluating infrastructure investments such as Delta tunnels, new reservoirs, alternative agricultural water supply investments (like solar powered groundwater desal), or intra-regional conveyance to facilitate more local transfers between Valley farmers?

I would caution people from over-interpreting the $1,100 per acre foot price.  In fact, the same article in the Bakersfield Californian that reported the $1,100af auction, also reported this...

Buena Vista plans to use part of the proceeds from the auction to pay for a land fallowing program within its district. It has offered to pay farmers $400 per acre not to farm this year to reduce demand on the aquifer.
It had hoped to be able to fallow 4,000 to 5,000 acres.
The district ended up getting applications for 11,000 acres, Etchechury said.
After weeding through all the applications, he said, it looks like about 7,500 acres are eligible for the fallowing program, which could cost the district $3 million.

Thus, in the same county where farmers are willing to pay $1,100 per acre foot, a 50,000 acre water district on the west side of the Valley has 7,500 acres (about 15% of the district) accepting $400 per acre to forgo planting. Assuming 3-4 feet of water to grow a crop, this second data point suggests the marginal value of water in agriculture on the west side of Kern County is about $125 per acre foot.  [Data on irrigated land rental rates from the California Department of Food and Agriculture (see page 2) imply a similar value.  CDFA reports irrigated cropland rents for an average of $340 per acre in 2012, and non-irrigated land rents for $40 an acre, a difference of $300 per acre.]

This $1,000 af difference in agriculture water values in the same year in the same area shows large gains could come from local trades, and that there would be considerable value to infrastructure and market institutions to support local, intra-county and intra-basin trades between farmers.  It seems that these sorts of investments could make a lot more financial sense for the San Joaquin Valley than the $15 billion tunnels under the Delta.

Listen to the Hydrowonk

Is the Hydrowonk (Dr. Rodney Smith) legit?  In a word, yes.  I highly recommend his series of posts on BDCP finance and economics.

He has been posting detailed commentary on BDCP costs and benefits on his blog faster than I can respond.  His perspective is strictly evaluating the prospective investment from the point of view of a water agency.  Unlike me, he isn't worrying about fish, in-Delta or statewide impacts in his analysis. 

The only serious critical comment I have had about Dr. Smith's commentary until now is that he takes the exaggerated water yield estimates in the BDCP economics reports at face value.

I delivered that comment to him in San Diego last week in person, and he immediately responded with his most recent post and its very handy list of costs under different water yield assumptions.  Now, my only criticism is that his table assumes all the water yields are positive!  The EIR tables show a negative water yield under one scenario, and the biological opinions are still being litigated.

The cost per acre foot is really important.  It is why I rudely butted in for the last word at the legislative hearing last month.  I couldn't let the last word be Dr. Sunding saying the cost of water from the tunnels would only be $300 af. 

Anyway, I have been telling people for some time that my best guess for the cost of the water is around $1,700 af based on the EIR yields which looks reasonably accurate according to Dr. Smith's table.  And as the Hydrowonk notes, you shouldn't compare BDCP water to desal. (Desal is super expensive, but it is treated, drought-proof water, delivered someplace much closer to you than Clifton Court forebay, uses proven and improving technology, and doesn't require you to become business partners with dozens of other water agencies who may not be as trustworthy or financially strong as your local agency.) 

After making some calls for knowledgeable opinions about BDCP water yields, the Hydrowonk concludes that the yield is lower than Dr. Sunding's assumption but potentially more than my EIR-based assumption.  [Thus, my first question for Dr. Smith's ingenious idea for a water policy prediction market:  What are the combined SWP/CVP in 2025 if there is no BDCP and the tunnels are not built?]

His conclusion/advertisement is priceless:

For Hydrowonk, I’m concluding (as of today) that the cost of BDCP water will cost in excess of $1,000/AF (inflation adjusted).  Since this is a non-firm supply of untreated water in the Delta, I urge all parties wishing to acquire non-firm supplies at these prices to contact me immediately.  I’m sure that my firm can help meet your water needs well in advance of 2025.

The NRDC Portfolio Proposal and The Cost Allocation Problem

There is much to recommend in Kate Poole's response to the Natural Resource Agency's weak attempt to dismiss the NRDC Portfolio alternative to the Bay Delta Conservation Plan (and the first comment by Dr. Gartrell is also a must read).  The core of the portfolio plan is to save several billion dollars by building a smaller 3,000 cfs tunnel instead of the BDCP's preferred 9,000 cfs tunnels and invest the savings in alternative water supplies, storage and levee improvements. 

I agree with NRDC that alternative water supplies, storage, and levee improvements have a better return on investment than the tunnels.  I agree with NRDC that the extremely costly tidal marsh restoration with uncertain environmental benefits is another area where BDCP can produce a better return on investment by shrinking in size.  Their proposal is a major step in the right direction, and has sparked a useful discussion.

But the NRDC portfolio proposal still has tunnel vision.  I am unconvinced that the smaller tunnels have a positive benefit-cost ratio, although it may be better than the big tunnels.  Even more important, I think the proposal exacerbates the cost/benefit allocation issues between urban and agricultural contractors that doom a viable finance plan for the big tunnels.

Just like the BDCP, the NRDC tunnel plan can only demonstrate financial viability if it moves beyond the macro analysis of total cost and water supply and get into the allocation issues.  The alternative water supplies that would be paid for with the savings are all urban water supplies, so how much of the little tunnel savings will accrue to urban agencies?  It isn't the total cost reduction that matters. 

For the sake of argument, assume the small tunnels cost $9 billion and the big tunnels cost $15 billion(the state argues the cost difference is much lower).  Now apply cost allocations.  If urban agencies pay 40% of the cost of either plan, the urban costs are $3.6 billion for small tunnels versus $6 billion for big tunnels and the savings to urban agencies is only $2.4 billion.

If urban agencies pay 80% of the cost in both cases, the cost difference to urban agencies is $7.2 billion versus $12 billion and the savings to urban agencies is $4.8 billion.  It is no wonder that the urban agencies that are most interested in the portfolio, like San Diego, are those that are most concerned about a cost shift towards urban users, especially if it causes other urban agencies to further cut reliance on Metropolitan's imported water.

However, a shift to a higher urban cost share is even more likely for the smaller tunnels.  In fact, many people interested in the small tunnels have suggested 100% financing by urban agencies.  If the urban agencies pay 100% of the cost of a $9 billion small tunnel, the urban savings drop to only $3 billion even if you assume they pay 80% of the large ones, and the savings drop to zero if you assume they pay 60% of the cost of the large tunnels. Whatever cost allocations you assume, the urban agency savings are a lot less than the total savings.  And thus, the funds available to invest in alternative local water supplies are less than NRDC states.

Similarly, what about the water supply allocation?  Overall, NRDC argues that the portfolio will generate a higher total water supply than BDCP.  But it appears that it will generate a lot more water for urban areas, and result in less water for agricultural users even if the total water supply is higher.

The bottom line is that I don't believe there is evidence that peripheral tunnels are financially viable at any size.

NRDC is on the right track, but they don't go far enough.  The tunnels need to be entirely eliminated from BDCP.  A smart portfolio of alternative water supplies, levees, storage, habitat and flows will provide far more benefits at lower cost than tunnel-centered proposals.  And this no-tunnel portfolio could be a habitat conservation plan under the ESA, and thus provide the more stable regulatory environment that the water contractors seek.