Review of Delta Conveyance Project Benefit-Cost Analysis

My complete review and discussion of the implications from the Department of Water Resource's benefit-cost analysis of the $20 billion Delta Conveyance Project was published online this morning. California is in a cost of living crisis, so it is critical to examine the value of an enormous megaproject that be paid for through higher water bills. Beyond its cost, the DCP also has substantial environmental impacts for Delta communities and both endangered and commercially-valuable fish species. DWR's consultant report falls far short of the objective analysis such an important issue requires.  The executive summary of the review is below.  The full report is about 30 pages, and available at this link

https://www.pacificcbpr.org/wp-content/uploads/2024/06/DCP-BCA-review-062424.pdf

Executive Summary

At its recent estimated cost of $20.1 billion (2023$), the Delta Conveyance Project (DCP) is an enormous financial commitment for water agencies facing increasing constraints on their customers’ ability to pay. The Department of Water Resources (DWR) claims its latest benefit-cost analysis of the DCP (2024 BCA or benefit-cost analysis) supports a decision to build the DCP, because the analysis has a benefit-cost ratio of 2.2. This review finds the benefit-cost ratio is inflated and unreliable. However, before reviewing the numbers and assumptions, it is important to understand how to interpret a benefit-cost analysis and the insights these analyses provide to finance, planning, and decision-making.

A benefit-cost ratio is a tool that ranks alternatives. A benefit-cost ratio below one indicates a bad investment regardless of how alternatives perform, but a benefit-cost ratio above one is only meaningful in comparison to alternatives. The 2024 BCA analysis does not consider any other alternatives, and thus the summative benefit-cost ratio of 2.2 does not indicate it is a good investment. Any water supply alternative would have a high benefit-cost ratio if evaluated under the generous valuations and assumptions of DWR’s 2024 BCA. Nevertheless, the report does provide useful information on the comparative scale of benefit categories that has implications for project finance and long-range planning. Accepting the inflated benefit estimates, there are still three important conclusions that can be drawn from examining the materials provided in the 2024 BCA.

1.For agriculture, the benefit-cost ratio is only 0.39, an estimated 39 cents in benefits for farmers for each $1 in cost.

➢Implication: Farmers will likely opt-out or default. Thus, the DCP should be viewed as an urban only project, and the Metropolitan Water District (MWD) would likely pay 75% of its costs -not 47% as currently planned. Other urban State Water Project water agencies will also likely see their cost shares rise by about 60%.

2.The Seismic reliability benefits are relatively small.

➢Implication: Seismic risk reduction is a poor justification for the DCP, and there are less costly and controversial ways to address the risk.

3.Water supply accounts for almost all of the DCP’s benefits.

➢Implication: MWD (and other State Water Project agencies) should evaluate the DCP like any other water supply project in the context of their long term water planning.

In the critical case of MWD, it should evaluate the DCP as part of its Climate Action Master Plan for Water (CAMP4W) process. CAMP4W is structured around adaptive management with incremental investment decisions made at 5-year intervals. This incremental approach is sensible, because only one of the four future scenarios requires any major development of new water supplies at all, including conservation programs. To address the unlikely event that CAMP4W’s high-demand “Scenario D” turns out to be the future, the plan identifies potential investments, but does not move ahead unless or until specified “signposts” reflecting current conditions warrant such investments.

MWD’s Long-Range Finance Plan – Needs Assessment projects that meeting the water supply needs of the high-demand Scenario D would require $15 billion in capital investment over 20 years that would add 500,000 acre-feet (AF) of new water supply and 250,000 AF of new storage. In comparison, a 75% share in the DCP would supply only 60% of the required water supply and 0% of the required storage for the full Scenario D capital investment. In essence, if MWD chooses to commit financing now to the DCP, it is essentially abandoning its own CAMP4W framework in favor of a premature bet on the unlikely “Scenario D” growth projection, putting the entire projected $15 billion capital investment into a single risky and potentially unnecessary project.

So how does DWR’s benefit-cost analysis for the DCP arrive at a surprising 2.2 benefit-cost ratio for such a questionable investment? This report reviews the details and finds the conclusion is based on a series of unjustified, optimistic assumptions that compound into a grossly inflated valuation of benefits. Specifically, the BCA:

● Inflates urban water supply values by assuming extreme demand growth, including a stunning 2.8 million new households on single-family lots by 2045 in MWD service area. The result is a projection of extreme future water shortages that drives excessive water supply values in their methodology.

● Includes an optimistic (100 year) assessment of project lifespan, resulting in an extended benefit evaluation to year 2144 while applying low capital replacement costs and extremely low (sub-2%) discount rates.

● Ignores largest sources of project risk in its sensitivity analysis: cost escalation, lower water demand, endangered species regulation, lifespan and interest rates.

● Ignores impacts on salmon and other threatened and endangered fish species.

DWR and the Delta conveyance Design and Construction authority (DCA) have compounded the flaws in the BCA with misleading public relations materials. For example, in some of its online materials DWR features an erroneous cost comparison that uses a levelized cost per acre foot costfor the DCP based on a 100-year operating period and sub 2% interest rates and compares it to alternative water supply costs from other studies that used 25-50 year life spans, and interest rates 2-3 times higher. If a levelized cost of DCP water supplies is calculated with comparable time horizons and interest rates that were used for calculating other water supply sources, the DCP water supply costs are $3,000 to $5,000 per acre foot plus conveyance costs from the Delta, higher than other water supply alternatives.

Comment letter on Delta Conveyance Project benefit-cost analysis

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

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

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

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

DWR's Delta Conveyance Project Analysis Finds a 0.39 Benefit-Cost Ratio For Agricultural Users. It Won't Be Long Before Even More Agricultural Agencies Are Dropping Out or Filing Lawsuits Against the Project

 A benefit-cost ratio specific to agricultural users is not reported anywhere in the report, but it is pretty easy to calculate from the reports Table 1 and projected water allocationfrom the reports Table 1 and projected water allocation.  

According to Table 1, the water supply and water quality benefits to agricultural users has a present value of $2.36 billion.  Assuming, they receive a share of seismic benefits that is proportional to their share of total water supply and quality benefits (6.4%), they also receive an additional $60 million in seismic reliability benefits for a total of $2.42 billion in benefits.

The benefit-cost analysis also estimates that agricultural users will receive an average water yield of 148,500 af, which is 36.35% of the total projected water yield of 403,000 af. That means that agricultural users would be responsible for 36.35% of the DCPs costs. Excluding the environmental impact cost which would not be paid by water users, agricultural users share of project costs would have a present value of $6.213 billion.  The benefit-cost ratio for agricultural users is 0.39, clearly a terrible investment for agricultural users even when analyzed using the exaggerated values and generous assumptions of the DCP benefit-cost analysis. The analysis assumes 100-year project lifespan, a real discount rate below 2%, and that agricultural water users are willing-to-pay over $460/af for an unreliable water supply on a sustained, long-term basis.  I suspect farmers will use much more conservative assumptions in their personal benefit-cost estimations, and thus in reality agricultural users would be likely to receive far less than 39 cents of benefits for each $1 invested in the DCP.

The implications for the future of the DCP are large.  As more and more agricultural water agencies make the rational choice to opt-out, the remaining cost share and risk for urban water agencies rises.  For Metropolitan Water District that likely means that the 50% cost share they are hoping for will increase to 75% or more.  And with an estimated cost of $20 billion, that increased cost share is an additional $5 billion to a total of $15 billion or more.  MWD is already dealing with declining revenue from water sales, and a $15+ billion capital expenditure on the Delta tunnel is going to be very, very challenging to incorporate into its long-run financial plan.

It also broadens the opposition to the tunnel in political and legal arenas.  Yesterday, a SWP contractor, Tulare Lake Basin Water Storage District, was leading litigation seeking an injunction against exploratory drilling for the DCP according to the Courthouse News Service.  The article states, "The Tulare district in its suit wrote that the delta tunnel project would add costly new infrastructure to state water facilities and potentially affect the cost and amount of water it can buy from the state.” https://mavensnotebook.com/2024/05/31/courthouse-news-california-judge-weighs-injunction-for-planned-water-conveyance-project/

Delta Conveyance Facility (DCF) Water Is More Expensive Than Desalination, Not Less As DWR Claims

The Department of Water Resources (DWR) puts out a lot of misleading information around the Delta Conveyance Facility (DCF).  When DWR released its updated construction cost estimate and benefit-cost analysis for the DCF, the featured graphic states that DCF water supplies have costs comparable to conservation programs and less than half the cost of desalination.  Specifically, DWR takes a $1325/af 100-year levelized cost from their DCF benefit-cost analysis out of context, and lays it next to estimates from other studies that make very different assumptions about interest rates, project life and other key inputs.  

DWR's cost comparison is garbage.  You don't have to be an economist or engineer to see why.  Simply compare the basic cost drivers of a desalination plant (the most expensive alternative) and the DCF: capital costs, energy use, and water yield.

Capital Cost:  Recent large scale desalination projects/proposals in southern California (Huntington Beach, Carlsbad) have capital cost estimates of about $1.5 billion in 2023 dollars for about 50,000 acre feet (af) of reliable water supply ($30,000 per annual af).  The DCF is $20 billion for highly variable water yield that is projected to average about 400,000 af ($50,000 per annual af ). (Advantage: Desal)

Time to Build:  Large-scale Desalination, about 5 years.  DCF, about 15 years.  (Advantage: Desal)

Energy Use:  Desalination uses about 5 megawatt hours of electricity per af.  Energy use of the State Water Project are 3-5 megawatt hours per acre foot, depending on final delivery site.  Additional water supplies from the DCF have to be pumped hundreds of miles through the SWP to users whereas Desal plants are located near users.  DCF operations (pushing water through the Delta tunnel) would add energy costs to the SWP total.  The bottom line is that getting water through the DCF and to its end users will have electricity requirements similar to desalination.  They are the most energy intensive water sources in California, desalination forcing water through membranes, whereas DCF water must be pumped hundreds of miles and over mountain ranges.  (Advantage: DCF somewhat lower energy use for some locations, and even for other locations)

As the above make clear, DCF water supply is likely to be more expensive than desalination, not less.  And if DCF is at or above desalination costs, DCF water is way more expensive than conservation, recycling, brackish water desalination, and stormwater capture.  How does DWR get the opposite result?

Taking cost inputs and calculating a levelized cost per acre foot requires a few additional assumptions which need to be consistently applied.  The DCF assumptions from its benefit-cost analysis are wildly different than those used in the reports they are using for comparison.

1. Interest rates:  The DCF estimate is based on a social discount rate that starts at 2% and declines over time.  The cost comparison estimates are based on studies by Pacific Institute, PPIC, and CPUC that base their interest rate on the cost of capital.  I don't have the CPUC report, but the Pacific institute report uses 6% and PPIC 3.5%.  So the comparison studies are using interest rates two to three times higher than the DWR's DCF analysis.

2.  Assumed project lifespan:  The DCF report spreads its cost over 100years.  These other studies spread the project costs over 25 to 50 year time periods.   

If you use an interest rate that is one-half or one-third the level in the comparison study, and spread the project costs over 2-4 times more years than the comparisons, you can make the most expensive water supply look like the least expensive.  

Reasonable people can disagree on the exact values for these interest rate and lifespan assumptions, but consistency is required.  DWR is not doing this.  They are comparing their cost estimates to studies with wildly different assumptions about interest rates and operating lifespan so they can make a graph that claims up is down.

The bottom line is that water agencies evaluating the cost-effectiveness of the DCF should do their own math.  DWR's comparative cost analysis is not credible.

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May 20 Addendum:  After posting this, I decided to calculate an estimated a levelized cost with 50 years of operations, the costs, timing and water supply listed in the benefit-cost report, at a 2%, 3.5%, 6% rate.  The 50 year operations and 3.5% and 6% rates make these estimates more comparable to the PPIC and Pacific Institute estimates shown.  If you are going to use this graph for comparison, these are the values you would use (with a big caveat that this is untreated water at the Delta).

2% = $1,971

3.5% = $2,889

6% = $5,089

For a more accurate comparison, you could put $2,889 to $5,089 as the DCP values on the DWR figure below that is the subject of this blog.  However, that is too low because that is the cost of untreated water at the opposite end of the California aquaduct.  I am not sure of exactly what to add on for that, I have heard estimates of up to $600 af to move water from the Delta to SoCal.  At minimum, one would add the cost of 3-5 megawatt hours of electricity per acre foot to the operating costs.  Whatever the additional costs of conveyance, the results are consistent with my initial argument that the DCP is more expensive than desalination, and substantially more expensive than other alternatives.   

Quick Reaction to Delta Conveyance Benefit-Cost Analysis

Received the B-C analysis about 2 hours ago, and I am getting requests for instant reaction.  Posting here rather than respond to individual messages.  Three quick observations.    

1.  Seismic risk reduction benefits are low.  They are about 2.5% of the project's benefits according to Sunding and quite small relative to costs.  

Sunding's analysis confirms that earthquake risk is not a compelling reason to build the tunnel, a consistent finding over time.  

Can tunnel advocates stop hyping this point.  Even DWR's own analysis shows the tunnel is a lousy way to address earthquakes and flood risk.

2.  The project is all about urban water supply.  It accounts for virtually all the benefits, and urban water agencies (mostly Metropolitan Water District) will be pay the vast majority of costs. 

Urban water agencies, their decision makers and stakeholders need to take a critical eye at these estimates.  The value placed on this urban water seems extremely high.

3. Comparison to 2018 single-tunnel analysis raises questions about whether the benefits are overestimated.  

In 2018, he estimated 850,000 af of annual water yield from a tunnel, and in this analysis is it is 400,000 af.  

In 2018 analysis, urban users valued a larger water supply at $9.9 billion (2018$).

Now, a much smaller amount of water is valued at $33.3 billion to urban users (2023$)

It's a massive increase for less water.

A good chunk of the difference is due to inflation (2023$) and a lower discount rate (2% vs 3%) based on revised federal guidance.  If that 2018 analysis was redone with 2% discount rate and 2023$, that $9.9 billion would nearly double by my back of envelope math, let's call it $20 billion.  So consistency on inflation and discounting covers about half the gap.

But how do we get from $20billion to $33 billion urban water supply value, especially when the new project has a lower increase in water deliveries?  In other words, this report shows 50% more value from 50% less water.  

I will note that the urban water values are based on future urban water demand as estimated in agencies 2020 urban water management plans.  Experience shows those plans consistently overestimate demand growth, and I suspect that piece requires a lot of scrutiny.  He estimates the tunnel will reduce future water shortages in urban areas from 9% to 5%.  However, future urban water shortages are likely to be much lower with an updated or alternative estimate of demand growth.

Please note that this is instant reaction. I have not had time to review carefully.

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

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

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

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

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

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

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

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

• If not following the EIR.  Why?  

• Does this analysis include environmental costs of the tunnel?

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

• Why not?  

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

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

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

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

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

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

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

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

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

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

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

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

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

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

___________________________________________________________________________________

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

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

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

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

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

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

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

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

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

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

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

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

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

Income-based Fixed Charge for Electricity? There must be a better way

I support the efforts of lawmakers to put the income-based fixed charge proposal on hold.

I understand the objectives, but it seems to me that income-based fixed charges would have very high administrative costs and the potential for a lot of errors and privacy concerns.  There are other ways to administer a fixed charge, even a progressive one, if that is necessary and desirable.

There are lots of people living in households that are not economic units - roommates and extended family who are multiple taxpaying units with multiple income streams who are on the same electric meter.  There are also some housing units that are not separately metered within a building.  And income varies wildly from year to year and is hard to verify.

It seems you could accomplish most of the same objective in a much simpler way by having a fixed cost that varies by the size of the housing unit (square footage).  While not perfectly correlated with income, variation by size of the unit would still be progressive and much easier to administer.  Square footage is stable from year to year and the information is easy to obtain and verify without being personally intrusive.  

Finally, there is an issue of adding more "means tested" programs that phase-out in the same income bands.  Too many of these well-intentioned programs, usually developed independently, can create high the equivalent of high "marginal tax rates" and benefit "cliffs" for households that can create negative economic incentives and unfair surprises for households. 

Of course, there is a second issue about whether fixed costs make sense at all.  Having a fixed cost on a bill is better aligned with the true cost structure of a utility which includes fixed and variable costs, but recovering all the costs through rates encourage conservation and efficiency from customers.  The incentive for conservation may be secondary to the objective of getting people to switch fuel sources and electrify appliances and vehicles.  Fixed charges that would normally be bad environmentally, may make more sense in that context.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is DWR Lying About The Low-Utilization Operating Plan For The Delta Conveyance Project?

The most significant change from the twin-tunnel, three-intake, 9,000cfs capacity WaterFix to the single-tunnel, two-intake, 6,000cfs capacity Delta Conveyance Project (DCP) isn't the number of tunnels, but how they are utilized.  

It would seem logical that lowering the capacity of the Delta tunnel(s) would result in the remaining capacity being used more intensively. That was how it worked when DWR briefly switched to a staged, single-tunnel plan for the WaterFix in 2017, as well as other alternatives with lower capacity.  

Instead, the draft EIR for the single-tunnel DCP states that the tunnel will be used much less than the WaterFix twin-tunnels.  In fact, the operation modeling shows zero diversions through the tunnel most of the time.  In the DCP, the tunnel only makes up 13.5% of projected Delta water exports, compared to 50% of total Delta water exports in the WaterFix.  

Is this low-utilization rate of the DCP believable?  Will the state spend $20 billion on the most expensive water infrastructure project in history and not operate it most of the time (or as Osha Meserve said, why buy a Maserati and only drive 10 miles per hour)?  

That is indeed the official plan as described in chapter 3 in the EIR, and subsequently used in all the analytical chapters that follow. 

However, the Draft EIR itself contradicts these operations in chapter 2: Purpose and Objectives and in and Appendix 3a where it interprets and elaborates on the purpose to screen out all alternatives.  The project objective is to achieve the following 4 purposes in a cost-effective manner.

1. Climate resiliency

2. Seismic resiliency

3. Water Supply for State Water Project

4. Operational Flexibility

The problem is that achieving 3 out of the 4 project purposes, as described in the alternatives analysis in Appendix 3A, require shifting diversions from the south Delta to the north Delta intakes and through the tunnel.  In other words, 3/4 of the stated project goals are in conflict with the project description and EIR modeling which focuses exclusively on a low-utilization scenario.

Goal 1, Climate resiliency:  Appendix 3A states that only tunnel alternatives satisfy climate resiliency because they can divert from the north when the south is too salty. Stunningly, this flat out ignores the water quality commitments and limited north delta diversion in the actual project description.  (In Appendix 4A, the EIR models a climate change scenario, and finds that there are actually fewer days on the calendar that the tunnel can be used under climate change.  Thus the incremental water supply benefit decreases as climate change accelerates, in contrast to Appendix 3A that assumes higher tunnel use under climate change when screening out other alternatives.)

Goal 2, Seismic resiliency:  Appendix 3A assumes that if brackish water fills the Delta in a seismic-induced mega-flood, then the north Delta intakes and tunnel will be used intensively in place of the south Delta pumps which would be unavailable for months due to bad water quality. This assumption is inconsistent with the project description which commits to operating the project to support Delta water quality objectives and limits use of the north Delta intakes. The EIR provides no explanation of why the environmental restrictions and water quality objectives in the Delta would be waived in such a scenario where the Delta communities and environment are experiencing an emergency, and it provides no modeling of the environmental impacts of operations in such a case.

Goal 4, Operational flexibility: Appendix 3A describes this as a certain kind of flexibility - shifting south Delta diversions to the north Delta. Again, directly in conflict with the project description which does not include such flexibility or any analysis of the environmental impacts of this alternative operating scenario.

The final part of the project goal, which is the only one not in the Appendix 3A screening criteria, is to achieve the goals in a cost-effective way.  The EIR is completely silent on cost-effectiveness, but this is another goal that would seem to be in conflict with the low-utilization of the tunnel in the project description.

So back to my original question: Is DWR being truthful?  Will they really keep the north Delta intakes off and the tunnels empty most of the time?

The alternatives analysis and how it interprets the project goals show they are not really committed to the low-utilization project description.  When this is combined with the lack of economic and financial feasibility analysis, I believe the project description lacks credibility.  

While it is tempting to rate the EIR project description as "Pants on Fire" on the Truth-o-Meter, I'll keep my rating at "lacks credibility" or "inadequate support" as I am sure there are honest folks who worked on this draft EIR who truly believe in their $20 billion mostly-empty tunnel proposal. 

In summary, the DCP EIR has many problems, and I have only touched on one of them here.  As a result, I believe this single-tunnel proposal will fail like the twin-tunnel proposals that preceded it. 

Agricultural Jobs Data for 2021 Show Drought Impacts

The best quality jobs data (QCEW) was released earliest this month through the end of 2021, and gives the first reliable data on the state of agricultural employment during 2021, a year impacted by drought and lingering impacts of Covid.  The graphs below show employment and wages data over time for all of California in NAICS 11 (Agriculture, Forestry, Fishing and Hunting). Agriculture accounts for 99% of jobs in this industry category in California.

As you can see on the graph, jobs had steadied near 423,000 in the years prior to Covid, and then declined by about 15,000 during the first year of the pandemic.  In 2021, Covid impacts on the farm labor were lower, but drought impacts likely prevented recovery.

While I say this is the first reliable data, UC-Merced (in partnership with others) released a projection in February 2022 that the drought eliminated 8,744 jobs in California agriculture compared to what they would expect in non-drought conditions.  Their estimates suggest 2021 employment would have been just under 420,000 in the absence of drought.  That seems pretty accurate to me and I am happy to see that this modeling of drought impacts seems to be much better than what UC was producing a decade or so ago.         

Overall, this is just over a 2% decline in employment relative to non-drought conditions.  While drought employment declines grab the headlines, the more impactful story in the ag jobs data is the continued strong growth in wages.  Average wages in the agriculture industry in California increased again in 2021, and have risen about 60% over the past decade (not adjusted for inflation) after years of stagnation.  While it is still the lowest-paying sector in California, this wage growth is significant and has benefited thousands.  

What will 2022 bring?  The drought continues, and the impacts of the pandemic and less abundant and more expensive labor are also continuing to some degree.  Thus, a recovery is unlikely this year.

Stanford scientists find that the Delta Conveyance Project is a much worse idea than converting Diablo Canyon into a giant nuclear-powered desalination plant.

 

A recent study from Stanford scientists has caused some policy makers, including Governor Newsom, to reconsider the timeline for closing the Diablo Canyon nuclear power plant, California's last operating nuclear plant.

https://energy.stanford.edu/sites/g/files/sbiybj9971/f/diablocanyonnuclearplant_report_11.19.21.pdf

Among the future visions for Diablo Canyon plant evaluated in the study was using it as a mega-scale desalination facility.  Mega-scale nuclear-powered desalination!  I can see my environmentalist friends recoiling in horror at the idea.  I am not persuaded it is a good idea either, but the Stanford team clearly demonstrated that it is far from the worst idea in California water.

Here is the second highlighted finding in the Executive Summary

Using Diablo Canyon as a power source for desalination could substantially augment fresh water supplies to the state as a whole and to critically overdrafted basins regions such as the Central Valley, producing fresh water volumes equal to or substantially exceeding those of the proposed Delta Conveyance Project—but at significantly lower investment cost 

Here are some quotes from the desalination chapter,

One of the intermediate sized Diablo Canyon-powered desalination options would produce significantly more fresh water than the highest estimate of the net yield from the proposed Delta Conveyance Project at less than half of the investment cost.

It is also notable that the projected capital cost of the Delta Conveyance Project, at $15.9 Billion, is more than twice the capital cost of the Diablo Canyon Desalination Option 2, discussed below, which, at a capital cost of approximately $6.5 Billion, yields up to seven times the amount as the DCP. 

This comparison really caught my attention because pre-Covid I had given one or two talks on the Delta Conveyance Project where I started by comparing the State Water Project and Diablo Canyon Nuclear Power Plant with a series of multiple-choice questions.   The gist was if it is reasonable to close Diablo Canyon, then it should also consider closing the State Water Project since it has a worse safety record, similar share of statewide importance (5-6% of electricity and water supply respectively), lower economic value and tremendous costs to keep in service, not to mention environmental harm.

2020 data shows Covid impacts on agricultural jobs

The best quality jobs data (QCEW) was released yesterday through the end of 2020, and gives a first reliable look at the state of agricultural employment during the 2020 pandemic year. The graphs below show employment and wages data over time for all of California in NAICS 11 (Agriculture, Forestry, Fishing and Hunting). Agriculture accounts for 99% of jobs in this industry category in California.

As shown above, 2020 resulted in the biggest decline in agriculture employment since the drought year of 2009 (the graph also shows how ag jobs did not decline during the last drought). While an essential sector, agriculture jobs did not expand like employment in grocery stores and e-commerce fulfillment. One cause of the decline may have been worker health - Covid hit ag workers and communities hard. Reductions in immigration and crop shifts may have also played a role (for example demand for labor intensive speciality crops and fresh produce may have declined as much of the restaurant sector shut down). We are now well into a drought year and there will inevitably be questions about the impact on farm jobs. It will be even harder to discern the impacts this year as Covid has distorted what had become a pretty level baseline and is also continuing to impact labor markets into 2021. Even more important than the number of jobs, the new data release provides solid data on agricultural wages. Ag worker wages continued strong gains in 2020, both in the aggregate and as an average. The average wage gain is particularly impressive - increasing $60 per week on average in 2020 compared to 2019, and up $200 per week since 2014. Overall, this is a very positive trend for the Valley economy. Total wages paid in this industry was $16.1 billion in 2020, up from $15.3 billion in 2019 and $10 billion in 2011. In general, Covid effects on agricultural labor look similar to the economy in general - jobs down but average wages up.

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

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

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

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

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

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

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