New PPIC Survey Makes A Strong Case for a No-Tunnel BDCP Alternative

The latest PPIC Delta report includes the results of an interesting survey of scientists and stakeholders on options to improve the Delta ecosystem. 

Looking at the key table of findings (table 2, page 14), the tunnels are down in the bottom right of the PPIC table, low potential impact for fish, low scientific consensus, and high cost.  It is the worse possible outcome in this ranking (upper left quadrant is best, lower right is worst).  Nevertheless, the PPIC calls the BDCP "promising" even though it is completely focused on the lowest ranking, most controversial option, and unnecessarily ties many of the more valuable, less costly, and less controversial habitat measures into a package with the tunnels.

As I have stated repeatedly, the ESA does not require the tunnels!  The state can and should develop strong no-tunnel options for the BDCP.

Although the tunnels fared terribly in their survey, the PPIC does not highlight that conclusion.  Instead they offer reasons they think the tunnels are better than they look in this ranking.  For instance, they talk about how the measures interact with one another, but they do so in a biased way - pointing out how the tunnels might support some measures while omitting how they work against other measures.  For example, on page 14, they state "If managed for conservation objectives, a tunnel could facilitate more variable flow patterns (#20) and reduce entrainment (#16)—two actions scientists consider quite promising."

What is the offsetting factor that they leave out?  The tunnels conflict strongly with the strategy of reduced exports (#17) which was also one of the highest ranking options for effectivness.  Their study finds that reducing exports has both higher environmental benefits and lower costs than the tunnels, thus I find it strange that they keep advocating the tunnels over reduced export strategies.  It is clear that exports will not be reduced with the tunnels, and will likely be increased from current levels.

Two other quick observations from the new PPIC report:

1.  Water exporters received, by far, the lowest grade for scientific knowledge of any of the stakeholder groups.  They even got a negative score for 2 out of 3 categories!  At least the Delta folks got a passing grade.  Table 7 from this supporting report has the results.

2.  The cost of the tunnels are only $$$!  Why did they use these 3 cost ranges with symbols? , $, under $10m annually, $$, 10m - $99m annually, and $$$, is $100m or more.  Why didn't they put numbers for the estimated cost ranges in the table?  And if they are going to use symbols, they must have a consistent meaning.  This is the kind of PR garbage that professors routinely mock in the first week of statistics.  It makes it look like the cost of the tunnels are not that high, even though they are orders of magnitude higher than measures that received the same symbolic rating.  It is reminiscent of the early BDCP screening studies I criticized for their biased, pro-tunnel analysis.  See this old post, "Would BDCP staff accept dots instead of dollars in their paychecks?" 

If a $ equals an annual cost of $10 million, then the cost of the tunnels is not $$$, but ranges from approximately

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ to
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

Sacramento Kings Surprise

It looks like the Kings' are staying in Sacramento.  I had been putting the odds of that as 1 in 3, so I view the announcement of the NBA committees unanimous recommendation to vote against moving the francise as a bit of an upset.

Last year, I was against the railyards arena proposal, but I think that the new downtown plaza plan is significantly better, enough so to move me to a neutral position on the wisdom of the city's arena subsidy.  (See this post for my initial reaction to the new proposal.)

Although it has been a painful year of uncertainty, it looks like things may work out significantly better for Sacramento because the Maloofs' backed out of the original deal. 

BDCP Appears to Have Canceled Their Statewide Benefit-Cost Analysis (Updated 4/24 3:30 PM)

In Fall 2012, BDCP announced it was finally going to do a statewide benefit-cost analysis after refusing for years.  The framework and preliminary results from some components were described by Dr. David Sunding in BDCP Finance Working Group Meetings in November and January that I attended, and a scope of work was released.  While I was initially encouraged, it became clear in these meetings that BDCP was not going to allow Dr. Sunding the freedom to do a correct and comprehensive benefit-cost analysis.  I submitted comments at the requested deadline that said BDCP should stop saying they are doing a benefit-cost analysis since they are not following the guidelines established by their own agencies.

I had not heard anything else about it until yesterday when the new BDCP glossy sheet describing economic studies was released.  It describes six "studies" and none of them are the statewide benefit-cost analysis they said they were doing.  The six studies include:

• BDCP Chapter 8:  Costs and funding sources.  Notably, they say this will still not be a complete financing plan.
• Alternatives to Take:  This sounds like it could include some interesting new analysis but details are murky.  It is described as an economic feasibility analysis to undefined alternatives to take which are said to be different than the alternatives in the EIR.
• Economic benefits of the proposed project to participating water agencies.  This will be an update and detailed technical report of the informative, but narrow one-sided analysis Dr. Sunding has already presented at several meetings. 
• Statewide Economic Impact Study:  This sounds more useful than it is.  It will look at economic impacts on some stakeholder groups who oppose BDCP, like Delta farmers, but is not nearly as balanced as it sounds.  It will likely generate some useful information, but like most economic impact reports, it will lend itself to distorted interpretations and generate lots of talking points for PR flaks.  Notably, it does not seem to include any estimate of the economic impacts of higher water rates on consumer spending and industrial activity or the economic impact of diverting dollars from the state general fund to pay the water bond.
• Employment Impacts of BDCP:  This was already released and is being used for pro-BDCP talking points.  What the pro-BDCP PR flaks who write these memos aren't pointing out is that the 137,000 job years over 50 years for over $20 billion in public spending over that period is actually pathetically weak job creation.  It is roughly 6 jobs per $1 million in public spending which is about the worst job bang for the buck I have ever seen.  Most public works programs create 10-20 jobs per $1 million.  BDCP alternatives will undoubtedly create more jobs.
• Socioeconomic Impact from the Environmental Impact Report (EIR):  Nothing new here, a required part of the EIR.

The new economics glossy says they are going to let the public interpret this hodge podge of narrow reports, rather than have their consultants put this and other information together into a comprehensive benefit-cost analysis.  While there is some additional analysis, this is a complete regression to the position BDCP was taking a year ago when they were dodging the benefit-cost analysis question.  The summary of the glossy sheet says:    

By examining the costs of BDCP in Chapter 8, the benefits of BDCP to the participating agencies in the contractor benefits study, and the economic impacts of BDCP on other affected parties in the statewide economic impact study, the public can determine whether the BDCP is a good investment for California.

While that may sound democratic and inclusive, and is more accurate than mislabeling their reports as benefit-cost analysis, I am sure the public and the legislature would appreciate it if they would let their esteemed professor interpret his own studies in a comprehensive benefit-cost analysis, and defend it in independent peer review.  I haven't talked with Dr. Sunding in quite a while, but think I know him well enough to guess that he would prefer that too.

Instead, we will have Jerry Meral and the pro-BDCP flaks helping the public interpret his work.  As an antidote to the spin, I recommend the public read my preliminary benefit-cost white paper from last summer.  Using BDCP's own numbers, I concluded the benefits fell $7 billion short of the costs.  I will update it if these new and revised studies yield new information, but preliminary results revealed to date do not show a huge difference.

There still are some problems with the definition of BDCP alternatives in these studies.  Although it sounds like they have made some improvements and are going to look at something resembling the small-tunnel "portfolio" plan, they also appear to be continuing to ignore the seismic levee upgrade alternatives.  And thus the BDCP that makes a big deal about natural disasters in the Delta will continue to ignore a lower-cost alternative that addresses the co-equal goals while creating the additional benefits of saving hundreds of lives in the event of an earthquake, in addition to protection of the billions of dollars in private property, transportation and energy infrastructure damage that will receive no protection from the BDCP.   The results of the BDCP studies will depend a lot on what they assume as the "no action" or no-tunnel alternative in terms of water supply and flood protection.

One can't help but wonder what prompted the cancellation of the benefit-cost analysis just a few weeks before it was supposed to be released in final form.  I went back to the scope of work of the purported benefit-cost analysis and made note of the descriptions of Task 3, due in late March or early April, and Task 4 due in mid-May.

Task 3. Prepare Draft Technical Report
Once the analysis is complete, a draft technical report will be prepared that describes the
methods used, the results, and draws overall conclusions about the cost and economic benefit of BDCP. This final section will offer an opinion about whether benefits exceed costs from a statewide perspective, and over what time frame. The concluding section will also summarize the impacts in various regions of California, and to various interest groups.
The draft technical report will be submitted for review by the California Department of Water Resources (DWR), Reclamation, and the water contractors involved in the BDCP.

Task 4. Prepare Final Technical Report Based on comments received on the draft, the Contractor and Brattle Group will revise the technical report and prepare a final report suitable for public distribution and web posting.

Perhaps cancelling the benefit-cost analysis report in favor of this release of a hodge podge of mini-studies was the revision ordered for Task 4.

Update 4/24:  I added a bullet list of the 6 studies with brief comments, and deleted a reference to the $23 billion BDCP that caused some confusion.  The $23 billion came from a 2012 estimate of $14b tunnel construction, $4b habitat construction, $5b operation and maintenance costs over 50 years.  Some had misinterpreted that I was saying that building the tunnels would cost $23 billion.  A few other minor edits too.

Is Westlands Exagerrating Drought Impacts Again?

After a dry winter, it's looking like another tough year for Westlands Water District.  The latest CVP allocation announcement was 20%, and like the 2009 drought, it has brought out claims of economic loss.  The claims of loss are higher than were experienced with the 10% allocation in 2009, so on the surface they would appear to be exagerrated.

For example, Westlands General Manager Tom Birmingham says Westlands farmers alone will lose $350 million in revenue, and total economic impact will exceed $1 billion.  In this letter (that I only read thanks to Mark Borba's infamous rant), Congressman Costa says there will be agricultural production losses in the San Joaquin Valley of $873 million and economic impacts of $2.2 billion.  Neither statement reveals the source of the numbers.

The Westlands website (which to their credit, provides nice data) includes a page with historic water supplies and fallowing, and includes a prediction of 2013.  Their forecast for 2013 is for an all-time high of 175,000 fallowed acres.  That's 20,000 acres of fallowing more than in 2009, when they had 100,000 af less water.  That doesn't seem right, but maybe there is a logical explanation for it (if you know why, or have a plausible explanation, feel free to put it in the comments). 

I created some simple regression models this afternoon, and got forecasts ranging from 113,000 to 120,000 acres of fallowing for Westlands in 2013.  If I use my prediction of 120,000 acres of fallowing instead of their predicted 175,000 acres, what is the economic loss.  Baseline fallowing in a wet year is about 60,000 acres, so my prediction is that about 60,000 acres more out of production in 2013 compared to a wet year.  Of that 60,000, no more than about 20,000 could be reasonably blamed on environmental restrictions, the rest is due to the dry weather.

What will be fallowed?  If history is a guide, it will mostly be cotton.  So my quick estimate of the impact of the biological opinions in 2008 on Westlands is about 20,000 acres of lost cotton production, representing about $50 million in farm revenue.  [Of course, the farmers loss is more than that, because supplemental water and groundwater pumping is more expensive than CVP supplies.  However, Westlands cost for water transfers is another farmer's income in the Valley.]

Across the entire San Joaquin Valley, I think a reasonable estimate would be $100-150 million in revenue losses and about 2,000 jobs due to the biological opinions in 2013. 

That's a real economic impact that shouldn't be ignored, but it is about 85% less than claimed by Mr. Birmingham and Congressman Costa. 

What Should We Assume About New Technology in California Water Policy?

When we talk water in our Center at Pacific, my colleague Dr. Pogue always brings up the lack of emphasis on new technology in California water debates, and the assumption of constant technology that undergirds virtually all economic and planning studies.  Dr. Pogue's PhD is in the economics of technological change, and I should listen to his advice more.  But I am as guilty as anyone in making conservative technology assumptions, as I don't want to be accused of making unrealistic assumptions to tilt an analysis.

However, California water policy is driven with built in expectations of sea-level rise, changing precipitation and levee-exploding earthquakes.  We accept those assumptions, but not assumptions about advancing technology.  I am confident that we will have game-changing technological advances concurrent with if not before any of those climate change and natural disaster impacts hit California water in a large way, and I am certain we would if our policies did more to encourage these technological advances.  If water policy analysis is going to assume 18 or more inches of sea-level rise by 2050 and a 2/3 chance of levee destroying earthquake by 2050, it seems realistic to also assume that the real cost of alternative water supplies, including desaliniation, will drop by half or more in the same time frame.

In fact, last month, Lockheed Martin acheived a patent for Perforene, a carbon membrane the width of a single molecule that promises to reduce the energy requirements of desalination by one-hundred times. 

we believe that this simple and affordable solution will be a game-changer for the industry,” said Dr. Ray O. Johnson, senior vice president and chief technology officer of Lockheed Martin...At only one atom thick, graphene is both strong and durable, making it more effective at sea water desalination at a fraction of the cost of industry-standard reverse osmosis systems.

But that isn't the only new desalination technology on the horizon.  In the past year, Lawrence Livermore National Lab has been touting its own technological breakthrough, flow-through electrode capacitive desalination.  They have a prototype and patent application pending, and are seeking industrial partners to help it bring the technology to market.

LLNL has developed an innovative technology that promises to unlock an almost inexhaustible water source for U.S. and global population markets.

And they aren't the only ones working on new desalination technologies, and more advances continue in water efficiency, recycling, and stormwater capture.  Now that we have reached the point where two highly credible sources like LLNL and Lockheed Martin are a few years from bringing important new technology to the market, I think it is time to more explicitly embrace technological innovation in California water planning and policy. 

If California were to focus more on these types of technological breakthroughs, we would not only be solving our own water problems but helping to solve a critical present and even greater future problem in poor, developing countries.  We could develop technologies and advanced manufacturing here, and sell to a global market.

Instead, California water policy is fixated on a pair of $14+ billion concrete tunnels, where an estimated $3 billion of the total will be spent on foreign tunneling machines and plumbing components.  It seems so last century and unCalifornia to me.  This is the state that funds stem cell research, that has moved ahead with cap-and-trade and supported alternative energy supplies, and has the most innovative technology center in the world in Silicon Valley.

What if it became a goal of state policy to shut-down the state water project pumps over the Tehachapi mountains in 20 years?  What if both southern California and Silicon Valley were to stop importing water from the Delta.  It sounds less crazy to me than past technology goals like putting a man on the moon, or current California policy goals like bringing carbon dioxide emissions down to 1990 levels by 2020. 

Unlike the current Delta plan, developing these water supplies would actually increase the state's water supply, and pumping less over the mountains would make more low-cost water available for San Joaquin Valley agriculture as well as support higher outflows for fish.  Developing these alternative water supplies would create thousands of jobs in California, save energy, and foster the development of new California industries to sell water technology around the globe.  The only loser would be the Metropolitan Water District (the agency itself, their customers would benefit), and therein lies a major problem.

The only way to finance the collosal debt of the Delta tunnels will be to keep southern California and silicon valley dependent on Delta water.  I have heard people say the state should do the BDCP and develop advanced water technologies and alternative supplies, but the two visions are fundamentally in conflict.

Could Stockton Bankrtupcy Case Threaten Proposition 13?

As the Stockton bankruptcy case moves into the next phase, two questions will loom large:
1.  Does the City's plan of adjustment treat similarly situated creditors equitably?
2.  Can Federal bankruptcy law invalidate state laws?

These are the headline issues because the bond insurers argue that pensions, protected by state law, should be adjusted in the City's bankruptcy.

CalPers made an interesting response to this argument in a recent op-ed in the Sacramento Bee titled "CalPers Protects State Constitution."

  In bankruptcy court, the bondholder creditors – and their insurers – are seeking to use the power of the federal government to invalidate this decision of the city. These creditors have argued that federal bankruptcy laws allow the court to ignore California law and to impose a type of "pension reform" on the city, against its will.

The legal dispute is not over the level of benefits provided to city workers; instead, it will turn on a much broader issue: the ability of the federal government to invalidate laws enacted by California that govern its cities, their pension plans and the pension benefits provided to public workers.... 

We also shouldn't ignore the inherent danger in accepting the arguments made by bondholders and their brethren insurers. If the bankruptcy court can invalidate state laws governing pensions, then why not other state laws? For example, why not Proposition 13? Of course, raising taxes would be in the interest of these creditors and they have argued that the city should be thrown out of bankruptcy court because it failed to increase taxes. 

I wonder if this foreshadows where CalPers will take the bankruptcy case if creditors are successful in their argument that pensions can be cut despite state law.  Will CalPers make the argument that property taxes should be raised above Proposition 13 limitations if the City isn't constrained by state law in federal bankruptcy protection?  Would the City itself even argue that it prefers property tax increases to pension cuts in this case?

Update:  I should note that I am not a lawyer, and just found this to be an interesting argument I have not seen elsewhere.  This argument about invalidating Prop. 13 may be a good political argument, but a weak legal one.  It could be that the federal bankruptcy law is limited in its scope to impairing contracts and would not have broader applicability.  This case is going to get more interesting as it progresses.   

Krugman's California Turnaround

I have a lot of respect for Paul Krugman as an economist, and I have spent many hours defending him and explaining him to business people.  However, his commentary on California published yesterday was not very good.

Below is a graph of California per capita personal income as a percentage of U.S. per capita personal income.  The 2012 data was released last week, but has not been updated in this graph.  It showed that California per cap income held steady at 105% of U.S. per capita income in 2012.  Hardly a comeback story.

This graph does not account for the changes in the cost of living.  According to the CPI, since the 1982-84=100 benchmark, the CPI increased by 5% more in major California metro areas than the rest of the U.S. over the past 30 years.  Thus, if this graph were recreated as real personal income, California real per capita personal income dropped from 115% of the U.S. average to even in a generation.

There are some disturbing signs for the future too.  Education worries me the most.  Levels of education for Californians under 35 are not great, and education funding in the state has gone from good to very low by any measure.  The relative high skills and education level of California's workforce is skewed upwards by the older population which is not the workforce of the future.

This Sacramento Arena Deal Looks Better

The new Sacramento arena proposal is a significant improvement over last year's proposal.  Overall, I think it generates more value for both the City and the investors, and it appropriately shifts some of the risk away from the City and onto the investors.  I will never endorse an arena subsidy for economic development purposes, however if it is the City's goal to retain the Kings' and have a downtown entertainment district, then I think this is a good proposal that could accomplish that objective at a manageable cost. 

This is the conclusion to my commentary about last year's deal that the Maloofs rejected:

The Mayor has worked hard to retain the Kings and has come up with the best proposal he could, one that pushes the City to its financial limit, and yet still doesn’t appear to be a better deal for the Kings than the alternatives, including the status quo. The inevitable conclusion is that, like most sports arenas in medium to small markets, a $391 million arena in downtown Sacramento simply doesn’t generate enough new value to equal its cost. No amount of financial engineering is likely to change that. The new arena is simply infeasible without an owner and/or a City that is both wealthy and passionate enough about pro basketball in Sacramento to overlook significant financial risks. Judging from recent events, both sides seem to have an abundance of passion, but a shortage of wealth.

The latest proposal is an improvement along several dimensions.  First, the site is shifted from the Railyards to the downtown plaza, in the heart of the City's existing commercial district.  This site has better transportation, highly-compatible adjacent land uses, and should generate more spin-off value to private and city-owned assets (like the convention center) in the vicinity.  The railyards site did less for the city's commercial core, and potentially interfered with housing development and other future uses of the railyard site.  In sum, the downtown plaza needs a catalyst like the arena, but I don't think it is necessary at the railyards site, in fact that development of that area may work better without the arena.

Second, the new Kings investor group would bear more of the risk than the City.  They would be responsible for pre-development costs and potential cost overruns, rather than the City.  This didn't necessarily come free for the City, as the city has added 3 small land parcels to the deal compared to last year that are in the vicinity of the arena.  Between these parcels, and the remainder of the downtown plaza site, the investors have the potential to capture a significant amount of the spin-off value for the arena.  They are also a financially stronger investment group than the Maloofs, and they don't currently own an NBA team and an arena (something they presumably want for more than just investment returns).  Thus, they are more willing and able to bear the risk, and it has been shifted to them.

So how much is the risk to the City?  I think the term sheet and the city staff report could be clearer here.  The city is going to contribute about $220 million in cash and several land parcels.  Most of the cash will come from a bond issue.  If we assume 5% interest and 30 year term, and that the city rolls some of the issuance cost into the loan, debt service on a loan of this size would run about $14 million per year (although it sounds like there will be an interest only structure to relieve the burden in early years).  The fact that the city will specifically pledge parking revenues for the payments with TOT (hotel) tax as a backstop is an important detail, but the revenue source that city chooses to use for its subsidy is not as important as the amount of the subsidy itself. 

The net loss to the general fund will be less than this due to what the proposal calls the "backfill."  The proposed amount needed to "backfill" the general fund is the $9 million current contribution of parking to the general fund, but I think this is a deceptive presentation.  The bottom line is the city is taking on new debt for an investment, and the question is will that investment generate enough new revenue to pay for the new debt.  The new revenue sources are a 5% ticket surcharge, and anticipated increased tax collections such as property and sales tax.  The amount of these new revenues is highly uncertain, it depends on ticket revenue, the amount of additional development spurred by the arena, and the increase in visitor spending (i.e. restaurants) in the City that results.  I think this will likely be less than the new debt service.  Thus, the arena will be subsidized, and my best guess is that it will increase the strain on the general fund by $4-8 million per year.

But before anyone howls too much about that, you need to recognize the City budget subsidizes all sorts of things, including recreation such as parks and theaters.  The most relevant comparison in Sacramento would be the Community Center Fund (convention center, community center theater and memorial auditorium).  The Community Center facilities do not come close to generating enough revenue to cover their operating expenses, let alone debt service.  They are "subsidized" by $16 million in dedicated TOT (hotel) taxes each year, although they also generate some spin-off sales tax and parking revenue that could be deducted from this subsidy.  The bottom line is that the subsidy to the Community Center venues is much higher than what is being considered for this arena, and I suspect the arena could give the convention center a boost.  My guess is that some people's position on the arena subsidy has to do with how much they like the arts versus sports.

The arena is no free lunch for the city, and no one should think it is without risk and pays for itself.  While subsidized, I think this is a reasonable plan, and clearly better than last year.  

As a non-resident and part-time commuter into Sacramento who also happens to be a basketball fan, this plan is all benefits and no cost for me!  So I am all for it personally.

State Water Board Meeting Reminds Me of the Hunger Games

Yesterday, the State Water Resource Control Board (SWRCB) opened a 3-day hearing dominated by a discussion of whether (and how much) to increase flows from San Joaquin River.  It brought out the fish versus farmers debate, and I watched passionate testimonials from both sides to the board.

I have worked with all these groups at one point or another (tributary farmers and cities, delta farmers and cities, and fisherman), and all of them are part of the region that we study and serve on a daily basis in our economic research center.  For me, this proceeding is pitting neighbors and family members against one another, an ugly and painful spectacle to watch.

Why did it remind me of the Hunger Games?

Exempted from the fighting arena, and undoubtedly watching the webcast on their computers, were a group of wealthy interests who are influential in the Capitol.

The state and federal water contractors divert massive amounts of water from this river system to places outside the watershed.  They have junior water rights, are wealthier, not even in the river watershed, and in many cases have cost competitive alternative water supplies that they aren't adequately utilizing.  They are a huge part of this problem, whether it is the lack of flow on the San Joaquin from their upstream diversions before it gets to this area, the contaminated runoff from their westside farming, and the massive diversions in the South Delta.

How can they be absent from this proceeding while the peasants (i.e. the relatively small farmers represented by relatively small water districts with senior water rights, both tributaries and Delta, the fisherman, and the environmentalists) are pounding the crap out of each other?

The state/federal contractors must be enjoying the webcast of this gruesome spectacle. I have been watching off and on, and it is making me depressed and angry.

I hope the warring neighbors can stop hitting each other for a moment and find some unity around their common problem with the state/federal contractors.  They need to jointly demand a change to the narrow scope of this process.

P.S.  Yes, I have teen and pre-teen daughters, so the Hunger Games books/movies have been everywhere since we moved past the Harry Potter days.

New County Population Forecasts: Is San Joaquin County growth set to lift off in 2015?

The California Department of Finance released long-term population forecasts at the county level last week.  Their last county level forecasts were issued in 2007.

Overall, their forecast is for significantly slower growth for California, less than 1% annual population growth over the next 50 years.  Their forecast ends in 2060 with a statewide population of 52.7 million and annual population growth falling to below 0.5% and trending down.  If you extrapolate from there, it is unlikely that California sees 60 million in population before 2100.

Despite the slow growth for California, they still predict rapid population growth in the Valley - especially for Kern and San Joaquin County.

In fact, they have San Joaquin County growth accelerating over 2% per year as soon as 2015 and sustaining over 2% growth through 2035.  That is significantly faster than our forecast for San Joaquin County.  According to DOF, San Joaquin County will break 1 million residents by 2030; 75,000 people more than our projection for the same year.  If you use 3 people per house as a simple rule of thumb; that is 25,000 more homes that would be built in the County over the next 20 years than we project - and that is just one of the economic impacts.

While DOF has faster growth than us in some areas, it has slower growth in others, especially in the Bay Areas but also some inland areas such as the Sacramento area.  I am surprised DOF doesn't see faster growth for Sacramento.  For example, DOF is not projecting Placer County growth to increase substantially from the pace of recent years, remaining barely over one percent for the foreseeable future.  I have a hard time seeing San Joaquin County growing twice as fast as Placer County over the next twenty years; as Placer County has often been the state's fastest growing county of late.  I still see a lot of room to develop around Roseville, Rocklin and Lincoln.

BDCP Benefit-Cost Analysis Is Going Off-Track

I attended the second update on the new BDCP benefit-cost analysis on Thursday.  I was optimistic after the initial meeting in November, but I am not anymore.  In November, I was optimistic because they had finally agreed to do benefit-cost analysis, hired a good economist to lead it, and appeared open to feedback.

After this latest meeting, I am left with the impression that they are not responsive to feedback, and that the analysis is not really directed by the economists or established benefit-cost principles.  It is directed by Jerry Meral, the Governor's chief advisor on the BDCP, who is not fair and impartial, let alone qualified to direct benefit-cost analysis.  He has a clear mission to implement the Governor's vision for the twin tunnels, and he is keeping the consultants on a short leash.  He does not appear to be following key elements of his agency's own benefit-cost guidelines.

In many cases when participants make good suggestions that would make the analysis more consistent with accepted guidelines, the economic consultants defer to the boss (Mr. Meral) or state that it is outside the scope of work.  The scope of work should be really simple, one sentence is sufficient really.  "Conduct a peer-reviewed, independent, benefit-cost analysis of the key elements of the BDCP following recently published guidelines by the Department of Water Resources (2008)."   Mr Meral shouldn't be dictating anything.  He should just send comment letters like everyone else.

[Update 1/29: I just became aware that the scope of work has been posted.  I see nothing in this scope that changes my opinion.  The lengthy scope of work is inconsistent with DWR's own guidelines for this type of analysis, contains no provisions for peer review, and provides draft documents to the water contractors first.]

Here are several areas where I feel the benefit-cost analysis is heading off-track.

Incorrectly Bundling The Tunnels Together With the Habitat

B-C principles are clear on this issue, and the principle is clearly stated in DWR's own rules.  Each of the major components of the BDCP must independently satisfy the benefit-cost test.  Since the big controversy surrounding the BDCP are the proposed tunnels, B-C guidelines clearly indicate that conveyance (i.e. the tunnels) should be analyzed separately.

This element of proper B-C analysis seems to bother people who see BDCP principally as an environmental restoration package.  My initial draft B-C analysis was criticized for ignoring environmental benefits of BDCP, which misses the point.  It was an analysis of the tunnels - not the whole BDCP.

This concern can be avoided by considering a proper range of BDCP alternatives.  These alternatives, including no-tunnel with seismic levee upgrades, and various sizes and configurations of water conveyance (i.e. the NRDC small tunnel proposal) should all be paired with appropriate habitat and operations that meet the requirements of an HCP under the ESA.

All these alternatives would then have roughly equivalent environmental values.  Thus, the environmental values would cancel out when comparing alternatives and allow the resources of the benefit-cost analysis to squarely focus on the critical questions of conveyance.

Unfortunately, Dr. Meral appears to be prescribing an analysis that ties the habitat improvements to building a tunnel.  This is invalid, and his own consultants have even said so by stating that the ESA doesn't require the tunnels, and the habitat investments could be made without the tunnels.

Inadequate Alternatives

This is closely related and somewhat redundant with the above concern.  However, it is so important it needs to be emphasized.

Mr. Meral has made it very clear that they would only be looking at one alternative, the Governor's plan, and comparing it to a no action alternative.  This is a clear source of bias, and is well-known way to game benefit-cost analysis.

At minimum, there should be a strong no-tunnel BDCP scenario (similar to the DPC economic sustainability plan) and a strong small tunnel scenario (similar to the NRDC plan).  The alternatives need not be limited to that, but those two are musts.  If these alternatives are included, then I wouldn't complain if the No Action alternative were dropped entirely from the analysis.

I actually think an analysis of this type would be clearer, faster, and cheaper, because it would largely avoid the morass of non-market environmental valuation and allow clear apples to apples comparisons of conveyance options.

Is the Value of Regulatory Uncertainty Back?  Playing games with the No Action alternative.

This meeting also raised a new red flag for me.  While the consultants are restricted to only consider one alternative to achieve the BDCP goals, it sounds like the consultants have been given the liberty to play games with the No Action Alternative.  I say that because Dr. Sunding kept mentioning that the results are sensitive to the level of water exports in the No Action Alternative, strongly suggesting he is going to lower water supplies in the No Action Alternative below the 4.7maf average, potentially as low as 3maf.  The 4.7maf number is based on the current biological opinions governing operation of the projects, and is consistent with the BDCP's draft EIR documents and the definition of No Action that has been used in every BDCP related presentation I have seen to date.

This is a distortion of how No Action alternatives are typically defined in B-C analysis and in EIRs. The No Action alternative assumes a continuation of current conditions and policies.  A future deviation from current policy would only be considered in rare cases if it is the clear direction and intention of the relevant government agency, in this case, the Department of Water Resources (DWR).  However, DWR is litigating the current biops along with the Delta water exporters, and is on public record in court that they feel they are too restrictive and that higher levels of exports should be allowed.  So it seems to me that the only deviation from a No Action alternative based on the current biological opinions that could be remotely justified is an increase in water exports, not a decrease in water exports, and certainly not to something as low as 3 maf.

I asked Dr. Sunding if this low water export scenario would be part of an additional HCP alternative, and he said no, it would be the No Action alternative.  I wouldn't mind including a no-tunnel alternative with lower water supplies than the current Biops, but such an alternative should be a BDCP alternative (i.e. meeting the requirements of an HCP under the Endangered Species Act), packaged with habitat and levee investments that would generate comparable levels of environmental benefits and seismic risk reduction to water supplies.

With this manipulation of the No Action Alternative, I believe Dr. Sunding is trying to resurrect his value of "regulatory certainty" theory in the form of a super restrictive No Action Alternative.  This hides it by not including regulatory certainty as a separate value category like he did in his July presentation on economic benefits.  However, it effectively embeds the concept inside the valuation of water supplies and seismic risk.

Until this is cleared up, I am taking back my praise from 2 months ago that he has dropped the regulatory certainty argument.  A No Action alternative should be relatively non controversial, but the discussion in this meeting makes me worried that they are going to adopt whatever creative definition of the No Action alternative is necessary to justify the Governor's twin tunnels.

Blowing Up Earthquake Risks

This is now the 4th time I have seen Dr. Sunding present the losses of an earthquake induced Delta collapse that conveniently occurs in 2025, the date the tunnels are assumed to be complete.  Of course, assuming this perfect timing generates the largest possible numbers for his table.

In addition, he always presents the earthquake risk reduction benefits as raw numbers without multiplying by the probability it happens.  The scope of work they developed for the "benefits analysis" last year stated that this would be multiplied by probabilities, but he isn't doing it in presentations.  Why?  Even the exagerrated DRMS estimates placed the probability at about 2% per year.  He also includes 2 and 3 year outages that are thought to be highly improbable.  I applied the DRMS probabilities to his tables and found the present value of earthquake risk reduction to be no more than 5% of the construction cost of the tunnels.

Most irritating to me, Dr. Sunding is assuming that the state will not eliminate the earthquake risk to water exports through seismic levee upgrades.  The probability that this will be done in a No Action, No Tunnel alternative is certainly greater than zero, and I would argue this is far more likely than the 3 maf of exports he is seriously discussing as part of his no action alternative.  Building the tunnels will probably mean that there will be no seismic upgrades of Delta levees which will result in unnecessary enormous losses of lives, property and economic activity in the event of the big earthquake event.  From this broad perspective, I could make an argument that the Earthquake value of the tunnels is negative.

I believe my suggestion that the earthquake risk reduction benefits of the tunnels are negative (in other words it is a cost, not a benefit, since it will result in poor seismic protection for everything else that matters in the Delta) is far less of a stretch than the "regulatory certainty" theory Dr. Sunding has conjured up.

Super Low Discount Rate

The consultants presented a justification for an unusually low discount rate of 2.275%.  One could present equally convincing justification for a 7% discount rate, especially when focused on opportunity costs of state funds rather than today's currently low long-term interest rates that are being manipulated in unprecendented ways by the Federal Reserve.  

Another reasonable approach is to look at the DWR guidelines here.  In January 2008, when DWR issued its guidelines recommending a 6% discount rate, the yield on a 30 year Treasury Bond averaged 4.33%.  BDCP is arguing that todays super-low market interest rates suggest a lower discount rate should be used.  At the end of last week, the 30 year Treasury bond yield was 3.14%, which is only 1.19 percentage points lower than when they released their guidelines endorsing a 6% discount rate.  So I don't see how DWR can make a market interest rate argument for lowering the discount rate by much more than 1 1/4%, which would be a discount rate of 4.75%.

This is an unsettled issue in Economics, and it isn't going to be settled now.  The proper way to handle this is to do a sensitivity analysis that shows the results with a range of values, say 2% to 7%.

A low discount rate is the oldest trick in the book for biasing a B-C analysis in favor of a project, and by adopting a single, super low discount rate, they are just fueling perception of a rigged study.

Concerns With the Non-Market and Recreation Values 

I mentioned two of these in the meeting: the noise and visual pollution of the intakes, and accounting for the lost non-market values of prime farmland.  And it isn't clear to me that BDCP would result in any net gain in recreational values.  After all, the folks who are currently in the Delta recreational business are some of the biggest opponents.

I also have concerns with the benefits transfer approach, but I won't bother with that here.  As discussed above, I believe this is an area of intense controversy.  And it is really unnecessary, because what folks really want is a benefit-cost analysis that focuses on the tunnels.

[5:00 PM, lightly edited for clarity and grammar]

FYI for Governor Brown: Katrina and Sandy killed over a thousand people and destroyed thousands of homes

Governor Brown's state of the state speech invoked the destruction of Katrina and Sandy as the primary justification for his plan for the tunnels.

The primary tragedies of Katrina and Sandy were lost lives and destroyed homes and property.  Katrina killed over a thousand Americans and Sandy killed over a hundred, and caused billions in local property damage.  The state's assessment of a mass flood, Delta earthquake scenario predicts similar levels of fatalities and local property damage.

In both Katrina and Sandy, there were also some significant secondary disruptions on gasoline markets and some other effects that spread outside the affected area.  For a massive Delta flood, there would be similar impacts: the focus has been on disruption to export water supplies, but there would also be costly disruptions of transportation, energy, and local water systems.

In his speech, Governor Brown declared that his plan to protect the state from a Delta flood is to worry about only one of the secondary interests (water exports) at enormous costs while ignoring the lives, homes and businesses that would be destroyed in the very unlikely but catastrophic flood event in the Delta.

Can you imagine if the Governor of Louisiana or President of the U.S. gave a speech that said that the lesson of Katrina is that we need to move oil refineries out of vulnerable areas around the Gulf without mentioning or offering to help the thousands of people who lost their lives and homes in these events?  Jerry Brown just did the equivalent when discussing a Delta flood, and only showing concern for out-of-area interests in his comments and in his action plan (tunnels).    Where is the backlash?  The media is praising him for his visionary rhetoric while ignoring that his actions/plan show a cruel indifference to whether hundreds or thousands of Californians perish in a catastrophic flood.

In this case, Brown's speech is not only insensitive but is bad economics.  The state is now sitting on 2 studies that clearly show that seismic levee improvements are cheaper than the tunnels, and provide more economic benefits because seismic levee upgrades protect water exports from interruption, and also provide additional benefits of protecting in-Delta lives and property, and significant non-water energy and transportation infrastructure.

First Impression of the NRDC Portfolio Delta Plan

 The "new" NRDC proposal is very similar to a compromise based on the 3,000 cfs pipeline proposal Greg Gartrell and Jonas Minton were talking about a lot back in 2009 and 2010.  I thought was the best proposal out there in 2010 and early 2011. 

 

At that time, I thought the small tunnel was necessary for a lifeline water supply in the event of the earthquake.  All I knew about Delta earthquakes and levees was what I read in the newspapers and heard from Dr. Doom.  After working on the DPC Economic Sustainability Plan, I now realize that the earthquake risk to water exports can be reduced by as much or more as building tunnels through the common sense approach of upgrading the levee system, an action which also has enormous non-water benefits.  To their credit, this new portfolio plan doesn't make seismic risk reduction the principal justification for the 3,000 cfs tunnel and the plan does call for significant levee investments.     

I didn't notice any agricultural water agencies on the NRDC water agency support letter.  I don't think their small and still very expensive tunnel, and their portfolio of alternative water supplies provides a lot of value to agriculture, both outside and inside the Delta.  While the 3,000 cfs tunnel has the advantage of being cheaper and thus leaving more money to invest in the rest of the portfolio, I'm not sure a $5-7 billion, 3,000 cfs tunnel with 4 to 4.3 maf of average exports is a good investment compared to a no-tunnel BDCP with potentially more levee and habitat investment. 

Farm water supplies is where I think Bob Pyke's West Delta Intake plan may have an edge over this NRDC/Barry Nelson adaptation of the Gartrell/Minton little tunnel plan, it provides more water to agricultural users who have fewer alternative investment options than urban agencies.  We need further development of both of these conveyance alternatives.

 

Overall, I think the new NRDC portfolio proposal is a welcome development, even if it is mostly repackaged old ideas put forward by an interesting coalition.  It is clearly better than the current BDCP, and it deserves serious consideration. 

 

At the moment, I count three credible alternatives to the current BDCP that are not receiving enough serious consideration: NRDC portfolio plan (little tunnel), DPC economic sustainability plan (no tunnel), and the West Delta Intake concept (big tunnels downstream).  I am pretty sure all of them have lower costs and higher benefits than the current BDCP proposal, and that all of them satisfy the co-equal goals of state law.

 

It's Time For a Serious Study of the West Delta Intake Concept

I admit that I didn't pay much attention the first time I heard Bob Pyke describe the West Delta Intake concept nearly two years ago. 

Then I started talking to local fisherman, boaters and farmers for the DPC Economic Sustainability Plan.  I recall talking to one gent in Lodi who had been fishing the Delta for decades who said, "They should just put the intakes in the Carquinez Straight."  I asked, "Do you know Bob Pyke?"  "Nope."  Over the next few months, I heard some other comments from Delta locals suggesting intakes at the Antioch Bridge, Rio Vista, etc.  "Do you know Bob Pyke?" I asked.  No, they said.  While they claim not to know him, I am pretty convinced Bob stole his idea from some Delta locals while drinking in a local bar.  It involves too much common sense to spring from the mind of a Ph.D.

Seriously, these conversations made me realize that this was a conveyance concept that might get in-Delta support, and I can't recall ever hearing a local say they should just build a little pipe (or a 3,000 cfs tunnel).  West Delta intakes passes the common sense and fairness test of many people who actually live in the estuary.  That's nice I thought, but it isn't a good enough reason to build it.  I still mostly dismissed it as an expensive civil engineers' flight of fancy.

Over the past year, Dr. Pyke has been filling in details to the concept while the BDCP tunnel concept flounders, delivering less water and more cost with each iteration of the BDCP plan.  And the more I learn, the more I think West Delta intakes could be a viable option, and apparantly I am not alone.  At this point, it seems very likely to me that the West Delta concept delivers more benefits at lower cost than the BDCP tunnels.    

In the recent article in the Record, the sub-headline focuses on the potential cost savings, just like most coverage of the fat, seismic-resistant levees we recommended in the Economic Sustainability Plan.  But I think the key to appreciating both the fat levees and West Delta Intakes is to understand that they provide more benefits than the alternatives, rather than focus on the costs.

Of course, this all needs to be studied in detail.  I agree with Larry Ruhstaller in the Record article,

Simply studying the plan can't hurt, Ruhstaller said Friday.

"If there's a fatal flaw, let's find it," he said. "We think there's a lot of fatal flaws" in the governor's plan.

Why should we be looking at this alternative?  Take a quick look at the some of the more significant potential benefits and costs.  It certainly seems promising.  What's the harm in a study?

Potential Benefits of the West Delta Intakes Compared to the Tunnels

1.  More Water Exports.  For years, I have been hearing about the "Big Gulp, Little Sip" approach to the Delta; that we need to take more water in wet years and less in dry years.  That has been a selling point of the tunnels, but it appears that the tunnels aren't able to actually take that big of a gulp.  Bob's design would allow a bigger gulp by having significant storage between the intakes and the aquaducts, and having ten miles of "intakes" along wide channels on Sherman island feeding conveyance tunnels with 15,000 cfs capacity as opposed to 9,000 cfs in the current BDCP plan.  Because the intake location would create water quality issues in dry years, it seems there would be no choice but to take a little sip in dry years. 

Overall, it seems the average level of exports would be higher than the BDCP tunnels.  The failure of the current BDCP to significantly increase water exports in return for a $14 billion investment from water exports is a key reason why BDCP makes no economic sense, especially for farmers.  While the tunnels offer some water quality benefits for exporters, the water supply is more important.  By my rough calculations, average water exports need to get to 6.5 to 7.0 maf before a $14 billion investment in conveyance makes economic sense for water agencies.  We know BDCP can't get to those levels.  The West Delta concept has a shot, and it should be studied.

2.  More Benefits for Fish.  The West Delta "intakes" would be 10 miles of coarse sand and rock levees where water would be pulled in at much lower velocity than the proposed BDCP intakes, which might collectively add up to nearly a mile of screened intakes.  The channels are much larger near Sherman island too, so it intuitively makes sense to me that salmon and other fish would pass by much more easily.  And the design of the plan would put a physical constraint (not a rule that can/will be broken) on dry year water exports, which is said to be critically important to fish.

But I don't know anything about fish, so don't listen to me.  Let's get the biologists to study it.  While DWR has expressed concerns about Delta Smelt in this region, I seem to recall some environmental experts touted by DWR - and high-level Delta Stewardship Council officials saying things like we must accept that we might lose some species in order to improve the overall ecosystem and achive the co-equal goals.  I am not saying that we should let the Smelt go or even that the West Delta concept is harmful to Smelt.  I am saying that concerns about Smelt is not sufficient justification not to study the West Delta concept given that they have continuously studied conveyance concepts that are known to harm endangered species.

3.  Better for in-Delta interests.  There is no arguing this. And yes, they matter.

4.  Better for non-water concerns such as transportation and public safety.  Dr. Pyke's proposal talks about transportation improvements on Sherman Island, but I would make the larger point that his plan would build upon levee upgrades throughout much of the Delta as recommended in the Economic Sustainability Plan.  If you believe that the risk of a major seismic event in the Delta is high enough to demand action, then you must realize that transportation, life loss and other infrastructure and property loss in the event of a Delta quake is a much larger risk than water exports.  Real solutions to seismic risk in the Delta protect all these values, not just water exports, and the BDCP tunnels fail on this criteria.  West Delta intakes aligns the water exporters interests with the rest of the state when it comes to addressing seismic risk.  This is a critical issue that I will write about in the future.  These levee upgrades need to be done regardless of any conveyance solution that may be implemented, but there is a real risk it won't happen if the BDCP tunnel plan goes forward. 

In addition, it offers an advantage over the BDCP tunnels in that it improves all stakeholders relative to the so-called "status quo". That is an attribute with real societal value, and it also has practical value when it comes to navigating lawsuits, politics and getting a conveyance permitted and built. 

Potentially Lower Costs Than the Tunnels

Would the construction costs be lower than the tunnels?  I'm not sure, but it seems unlikely to be significantly higher.

The most obvious saving is that the conveyance tunnels would be less than one-half the length of the BDCP proposal.  That is a large cost saving on tunnels, but the West Delta concept also includes additional costs for new storage.  The reconfiguration of Sherman Island, dredging out the peat, building the 10 miles of permeable sand/rock levees and other improvements will be expensive, but might not be much more than the North Delta intakes and forebay in the BDCP plan, which are also really expensive.  

So what's my preliminary conclusion on the WDIC.  I think there is a significant probability that the concept has higher overall benefits than BDCP tunnels, and it is unlikely to cost more and might have lower costs than BDCP tunnels.  It definitely merits a rigorous study.   

For the details and a better explanation, check out Bob's accessible 13 page description of the concept and why it makes sense here.  He's got a brief addendum floating around to that gives more details on permeable levees too.  I don't have a link to the addendum, but will try to post one later.

Update:  Here is a link to the addendum.

Thoughts on the (Yawn) Governor's Budget Proposal

Well, that was boring.  First time in years that the Governor's budget proposal didn't include huge budget cutting or a major new proposal which makes sense because it is his 3rd budget and he has already laid out much of his policy vision. 

And with Prop. 30 passing and the economy hasn't thrown any major surprises over the last year, the budget is more or less balanced along the lines of last year.  So no need for new slashing, and no new money for major initiatives or restoring old cuts. 

The big story is going to be the weighted student funding formula that would direct most of the new funding to schools with lots of english language learners and poor kids.  That was initially proposed last year, but implementation was contingent on increased overall funding - which meant Prop. 30 passing.  I am a little surprised that opponents of Prop. 30 didn't use the weighted-student funding proposal more in their campaign against the taxes (something like "Jerry Brown's tax increase won't increase funding for all schools, politicians and bureaucrats will choose which schools get the extra funding and some schools will be left out.  Do you trust Sacramento to treat your community fairly...")  I wouldn't be surprised to see Democrats lower the vote thresholds for school parcel taxes to help ease resistance from suburban school districts that will be harmed by the weighted student funding formula.  This issue has huge implications for the Valley, and still has to overcome a lot of resistance, so I will be watching this issue closely.  

People most often ask me about the economic and revenue forecast in the budget.  I think it is a little optimistic, but not unreasonable, and it is important to note that their forecast optimistically assumed the 2% payroll tax cut would be extended for 2013.  That assumption obviously turned out to be wrong, and will have an effect on future forecasts for the May revision.  My initial estimate is that revenues are probably going to be $1-2 billion less than their projections, a little larger than the budget's reserve.