Wednesday, February 29, 2012

Isolated Conveyance Tunnel Debt Service $1.1 billion annually

The BDCP finally posted chapter 8 on financing.  This is the most important sentence regarding the estimated cost of the revenue bonds the state and federal water contractors would use for the proposed tunnel (page 8-88).
The annual debt service would average approximately $1.1 billion from 2021 through 2055.
This is much higher than the working number of $670 million per year that has been out there for the past year or two.  (see this MWD presentation for an example)  Why is it higher? The capital costs haven't gone up, they are still using $12.7 billion for a tunnel rather than the $14 billion suggested in a recent Sacramento Bee article.  The difference is they are now using more realistic financing terms.

The preliminary estimates had assumed 50 year financing at 5%.  It is very unlikely that there would be a market for a 50 year revenue bond for a risky project at those rates.  

The new estimates assume 40 year revenue bonds issued in 4 stages throughout construction.  It estimates an interest rate a little over 6%, and that 1-2 years of the initial interest would be capitalized to reduce repayment burden during the construction period.  I think that is a far more realistic financing assumption.

Given that the incremental water supply being discussed by the conveyance is 0.3 maf to 1.5 maf requested by the water contractors.  That comes out to between $3600 and $730 per acre foot of new supply - not counting operations costs - just to get the new water to the Tracy pumps.  Add a few hundred dollars more for operating costs and pumping to Los Angeles.  [I deleted a confusing sentence here from the original post and updated below.] 

Is it any wonder that south Valley agricultural interests prefer the Nunes bill to the BDCP?  Even desal sounds cheap by comparison to new BDCP water, and it is more reliable.  

There is a lot of hullabaloo about benefit-cost analysis vs. financial feasibility analysis at the moment.  The debate may be moot, because I can't see how the conveyance can clear the financial feasibility bar with these numbers.

Update 3/1: This afternoon I am told BDCP said 5.9 maf of exports which implies more incremental supplies than my initial interpretation of the EIR above. Perhaps I misread the EIR. I will try to confirm this and update in the future.

Update 2:  I now see the 5.9 maf in the BDCP documents, and 1.2 maf in incremental supplies.  With an $84m annual cost for operations and maintenance bringing the $1.1b in debt service up to about $1.2b per year, the 1.2 maf would be about $1,000/af

However, the EIR and  BDCP discuss alternative operations with lower exports that could be required to meet environmental goals.  It looks like this would cut the level of additional water exports to an increase of .558 maf, that would be about $2,000/af. 

The different scenarios and the volume of documents may take a while to sort out definitively, so these per af costs should definitely be interpreted as a preliminary impression.

Update 3:  And to be fair, I should point out that the project will presumably continue to provide incremental new water supplies for the exporters after the 40 year bond repayment period is over.  Thus, the cost over the entire life-cycle per af would be somewhat lower.  It will be good to see more accurate, formal analysis of these issues that should be available in the coming months.


  1. Thanks for this. This is exactly what I was hoping for ($/af) when I stopped by.


  2. Please read the update at the bottom. I'm not sure the $/af is very reliable yet since their is uncertainty about the supplies. But the ranges should be reasonable.

  3. Big Jeff, I still think that it is legitimate to base the cost per acre-foot on the new total supply, not just the increment because without a project of some kind there will be no incidental take permits and possibly no exports at all. A far bigger problem than the escalating costs is that none of the options currently on the table have a legitimate chance of securing incidental take permits. See, for instance, Jon Rosenfield's reported comments. There is also no reason to expect that the NRC review panel will be any kinder re the effects analysis than they were last time. For better or worse bureaucracy trumps economics! Little Bob

  4. Little Bob,

    No exports at all over a permit? I might grab a people vs. fish sign if that happened.

    The average costs would be more like $200/af, and most political discussions will discuss the average costs and the impact on the average bill. But the increment over the no action alternative is the appropriate comparison for decision making.


  5. I was wondering about that. If there were a big levee failure in the Delta that prevented conveyance, in those years, shouldn't the costs of the PC be spread over all the water it could deliver (since the alternative would be no Delta water until a system were restored)? The rest of the time, putting the costs on the increment makes sense to me.


  6. There are two other components of value to water users over water supply benefits, 1) protection from the earthquake scenario, and 2) water quality benefits.

    If you believe DRMS, the earthquake protection appears to be about $2 billion in present value terms, or about 15% of the capital cost of the tunnel. So accounting for that value would bring the $1000 down to about $850/af.

    For southern california, you still have the cost of transport and treatment, but the treatment costs would be lower for all the Delta water, not just the increment so it is hard to say how that would come out. David Sunding is working on all this stuff and I expect will have some pretty good analysis out there this spring.

    The point is that it is very expensive as an urban water supply and not very reliable compared to many of the local alternatives. We are talking averages from a tunnel, but it will be more in some years and none in others.

    And I don't see how this makes more sense for agricultural users than the current system.

  7. At the economic sustainability Conference in Stockton saturday I had the opportunity to ask Jerry Meral how much an acre/ft of water was going to cost.
    His answer was $100 to $150 per acre foot.
    This article begs the question:
    Is Mr. Meral that unfamiliar with the work product of the BDCP or is he being intentionally misleading ?

  8. Chris,

    He is citing the average cost over all water supply delivered through a canal. It isn't exactly wrong, because that is how they will bill people for it. And he is using the older financing assumptions, so people have been discussing $100 to $150 per af on average for quite a while. However, average cost pricing and thinking has long been at the root of most bad economic decisions when it comes to utility infrastructure.


  9. Jeff, help me out here.
    If the actual cost of water is $850per acre foot and is billed out at $150 per acre foot (for whatever reason)does this mean someone (read taxpayer/ratepayer)is going to cover the difference ?
    At some point this needs to be defined in terms we can all understand.

  10. No subsidies, just differentiating between the new water supply they would receive with a tunnel vs. what they would still receive without it.

    To use round simple numbers, suppose there are 5 maf of exports without a canal, and 6 maf with it and the cost of the canal is $600 million. The cost of canal will be spread over all 6 maf of exports, adding $100af to rates (600/6). However, the $600 million only results in 1 maf of new supply (5 maf they would get anyway), so you can say they are paying $600af for the extra 1 maf of supply.

    It is the incremental cost that is relevant for comparing to other alternative supplies.

  11. The whole thing sounds like a house of cards.
    There is little wonder that water contractors are so adamantly oppsed to doing a cost/benefit analysis of this.
    Keep up the good work.
    I enjoy hearing your thoughts on the subject.