Sunday, November 21, 2010

Will State Leaders Ever Get Real About Peripheral Canal Costs?

The Director of the California Department of Fish and Game touts the peripheral canal in today's Sac Bee without mentioning costs.

A few days ago, Natural Resources Agency Secretary Lester Snow sends a press release about the BDCP without mentioning costs.  The release says the new BDCP reports "will also identify issues that require further resolution, including additional scientific analysis to improve upon water operations for Delta fisheries, ecological metrics to measure progress, and ongoing development of an adaptive management plan."  No cost or financing on that list either. 

How can you be a state agency head in November 2010 and push a $13+ billion public works project without even mentioning cost?

Tuesday, November 16, 2010

Fresno Bee Illegal Immigration Series

The Fresno Bee is running a week-long series on illegal immigration titled, In Denial.

So far, I think it's good.  Each day has a feature story, and two shorter supporting stories.  The biggest economic topics: budgets, jobs, visas, consumers are in the days to come and should make for good blog material.

If you haven't seen it, here is the link.

Would BDCP staff accept "dots" instead of dollars in their paychecks?

For a process that makes all sorts of high-minded statements about being guided by science, the flim-flam that passes for economics in BDCP is stunning.  Here is the summary of the cost assessment in the BDCP options evaluation. (table E-2, page 13 of executive summary).  Options 3 and 4 include isolated conveyance, a peripheral canal/tunnel.  4 dots is the highest ranking, 3 dots second highest, 2 dots is third highest, and 1 dot is the lowest ranking.

I thought the canal/tunnel had high costs, but according to BDCP, it is the choice that minimizes costs.

How did they do it?  A look at the methods document is revealing.  Instead of adding up dollars, they used unique rating scales for each cost category, thereby converting dollars to "dots" with an arbitrary, subjective scale.  Here is an example of the scale they used (from page 2-59 of the assessment).

Construction Costs Rating Scale:
High Rating = cost less than $1 billion
Moderate Rating = cost likely $1 to 3 billion
Low Rating = cost likely $3 to 5 billion
Very Low Rating = cost likely greater than $5 billion

Reduced Downstream Water Treament Costs Rating Scale:
High = greater than $2 billion
Moderate = $1.5 to 2.0 billion
Low = $1.0 to 1.5 billion
Very Low = less than $1 billion

Apparantly, BDCP analysts reject the notion of assessing all costs with a consistent, uniform measure (dollars) that happens to be the same units that those costs will be paid in the real world.  They reject the idea of using the units utilized by all credible economic assessments and budget analyses.  Instead, it is better to slice the costs up into categories, apply arbitrary and inconsistent rating scales to each category, qualitatively assess the results, and then assign them a ranking. 

It reminds me of those Wall Street geniuses who divided up and rebundled all those sub-prime mortgages into securities that magically made all the risk go away.

What a bold scheme.  A cost category that is unfavorable to your preferred outcome can be assigned $2 billion between increments, whereas a category that is favorable to your preferred outcome can be arbitrarily assigned $0.5 billion per unit on the rating scale.  Even better, we can assign all costs exceeding an arbitrary threshold to the lowest/highest rating.  Thus, if the canal ends up costing more than $5 billion, say $8 billion, $13 billion, it doesn't matter at all, since everything above $5 billion is in the same rating class.

I wonder if this clever financial innovation can be used when it is time to pay back the bonds issued to finance the BDCP.  If Wall Street bond buyers need a demonstration project to ensure it works, I recommend we use BDCP staff salaries as a pilot program, and issue paychecks in dots instead of dollars.  We can redeem the "dots" for 25 cents on the dollar, using the same arbitrary "exchange rate" used in the BDCP options analysis.  Also, mirroring the options evaluation, anyone earning more than a $100,000 per year will receive a fixed $25,000 payment since all salaries over the threshold are in the "very high" category and treated the same. 

There are even more issues with the cost analysis, from the relevant cost categories that were eliminated, the double counting of issues already assessed for other criteria (cost is one of only 17 criterion used), to the comparison of "economic impacts" with direct costs as if they are the same thing.

Yes, I know the options evaluation was done in 2007, but it remains a critically important assessment.  This is the analysis that was used to conclude isolated conveyance was the "most promising" option, a statement that BDCP participants had to accept to be included in the process.  It is the analysis that was used to justify the singular focus on isolated conveyance from the beginning.

If (when?) BDCP fails, it will most likely be due to excessive costs and the lack of a real financing plans.  Blame will be placed on the recession and other unknowns, but these assessments reveal that BDCP never treated costs or economics seriously from the beginning.

On second thought, I've got to try this with my wife.  "Honey, as you can see in Figure 3, for your new car, a cost over $20,000 gets a high cost rating, but for my new car the scale shows that it has to go over $80,000 to get rated as high cost.  Using this scientific scale, it is clearly optimum for us to get a BMW for me and a KIA for you.  You might think it's unfair, but this is the same process used by the largest, and most complex habitat conservation plan in history that is committed to scientific rigor.  Trust me."

Wednesday, November 10, 2010

Sacramento Wastewater Treatment Plant: Updated Impact Report

We have updated our assessment of the cost of upgrading the Sacramento Wastewater Treatment Plant as would be required by the tentative discharge permit under consideration by the Central Valley Regional Water Quality Control Board.  Over the next 30 years, the report finds that meeting the requirements of the draft permit would reduce Sacramento area incomes by an annual average of $246 million and reduce employment by 976 jobs in an average year.  While the construction and operation of the advanced treatment facility will create some jobs and income, these gains are more than offset by the negative impacts of a 140% to 210% increase in wastewater bills and fees on Sacramento households and businesses.

Link to full report.  The executive summary is below.

Ecological problems in the Sacramento-San Joaquin Delta have raised concerns about the discharge from the Sacramento Regional County Sanitation District (SRCSD) wastewater treatment plant that serves most of Sacramento County and West Sacramento in Yolo County. The Central Valley Regional Water Quality Control Board recently released a Tentative NPDES Discharge Permit that would require over $2 billion in upgrades to the Sacramento Regional Wastewater Treatment Plant. This report evaluates the economic costs to the Sacramento region of complying with tentative permit. All costs and economic impacts in this report are measured in 2009 dollars.

The project would require nitrification, denitrification, microfiltration, and UV disinfection. The capital cost is estimated at $2.083 billion, and operation and maintenance of the completed facility is estimated at $77 million per year. We project that the project will require SRCSD to generate an additional $239 million annually through increased rates and fees. SRCSD is projecting even higher rate increases, because they anticipate larger debt coverage requirements to maintain their bond rating and continued slow growth in their service area. The range of potential rate and fee increases is as follows:

• The typical Sacramento household wastewater treatment bill would increase between $28 and $42 per month ($336 to $504 annually) from their current level of $20 per month.
• Government, commercial and industrial users would also face proportional wastewater treatment cost increases between 150% and 200%.
• New development wastewater treatment impact fees would increase from $7,450 to between $15,000 and $35,000 per ESD (equivalent single family dwelling). In-fill development impact fees would increase from $2,800 to between $6,000 and $13,000 per ESD.

In addition to higher bills, the total economic impact of the project was assessed by estimating the negative effects of reduced disposable income on consumer spending, the negative effects of reduced construction activity, and the positive effects of building and operating the wastewater plant. Considering all the effects, the average annual economic impacts over the 30 year analysis period on the Sacramento Region are:

• Annual income loss of $246 million.
• Annual employment loss of 976 jobs.

This is a conservative assessment of regional impacts. SRCSD estimates rate increases will be even larger than our projections. We also assume increased impact fees will only have a small effect on the amount of new development over 30 years, and only reduce the average output of the construction industry by an amount equivalent to the increased fee payments. While the impact on development over 30 years will be relatively small, the effect will be greatest in the near term, pushing back the date at which many development projects become financially feasible for several years and delaying Sacramento’s recovery from the recession. The report assumes no effect on local electricity costs, although the project will generate a substantial increase in SMUD’s electricity demand. We assume increased wastewater treatment rates will not be significant enough to affect the location, operation or investment decisions of businesses, and that lost corporate income flows outside the region. Due to these conservative assumptions, the negative impacts could be larger than we estimate. On the other hand, the negative impacts could be smaller than we estimate if less advanced, lower cost treatment options suggested by Central Valley Regional Water Quality Control Board consultants were developed in more detail and proven to satisfy regulatory requirements as well as the scale and site requirements of the SRCSD plant.

The results of this study inform planning and regulatory decisions regarding the San Joaquin-Sacramento Delta, and can be compared to analysis we have conducted on other aspects of the Delta issue. In a recent analysis conducted in cooperation with UC-Davis researchers, we estimate that reduced agricultural water supplies due to Delta pumping restrictions to protect endangered species result in an income loss of $72 million and the loss of 1,400 jobs in the San Joaquin Valley. We have also estimated that the closure of the salmon fishery in 2008 and 2009 created an annual loss in California of about 1,800 jobs and $120 million in income. Our initial analysis of Sacramento wastewater treatment upgrades was limited to nutrient reduction, and we estimated an average loss of 390 jobs and $94 million in income. The $246 million estimate of lost income from the Tentative NPDES Discharge Permit for Sacramento are more than double the loss estimated in these other cases, whereas the job loss is lower since sewer impacts are distributed across hundreds of thousands of households rather than being concentrated on a low-wage industry such as agriculture.

Tuesday, November 2, 2010

Our Katrina? More like our Dennis.

Tom Philp, executive strategist for the Metropolitan Water District, is the latest to compare a seismic-induced Delta flood to Katrina.

Katrina is a bad numerical comparison, but the exploitation of the greatest American tragedy since 911 to push his employers' business agenda is offensive.  Are Tom Philp and Met comparing dead grass in an LA lawn to Americans dying in the Superdome?

His post emphasizes water supply, and does not mention the potential loss of life or property in the Delta region which is the only loss that is comparable to Katrina (in type not magnitude).  The tunnel solution he pushes in the post does nothing to protect against Katrina-type losses (lives or property in the Delta), it would just protect some of the exporters water supply.  In fact, the agenda Philp is pushing explicitly recommends letting large chunks of the Delta be lost in Katrina-type floods because fixing the levees is too expensive.  While I don't advocate unlimited spending on Delta levees, if there is anyone who has a legitimate case to invoke Katrina to support their Delta cause, it would be the people living in the Delta who want more public investment to upgrade levees.

On to the numbers, Katrina killed nearly 2,000 people, and caused $125 billion in direct property losses.  I have read the studies Philp and others reference, and it looks to me like the comparable property damage and fatalities of the big Delta earthquake scenario is about 1-2% of Katrina.  It might get to 3-4% if you added in crop losses.  It would be a tragedy, but in the low range on this NOAA list of the 96 largest U.S. weather disasters over the past 30 years.  A catastrophe for sure, but a manageble one.

Yes, I know the state's study says there could be as much as $40 billion in losses from a Delta earthquake.  But that number includes the value of lost services (such as what people are willing to pay to keep their lawns green), estimated multiplier effects from crops not grown, etc.  A comparable number for Katrina would include losses for all sorts of business transactions that did not take place as a result, plus multiplier effects.  A comparable total from Katrina would easily be in the trillions and still increasing five years later.

In the future, I hope Philp uses more correct and relevant comparisons to California natural disasters.  From this chart, the Valley freezes, the 1995 floods, and wildfire outbreaks that occur every few years would be most comparable.  The linked chart doesn't include earthquakes, but I believe this Delta quake scenario is a lot less costly than the 1989 and 1995 California earthquakes too, so the freezes and wildfires seem the best comparisons.

At least he used a question mark.