Wednesday, August 7, 2013

The BDCP Economic Impact Study

Between a family vacation and the University of the Pacific network meltdown (entering day 5 of no email), I am in both physical and virtual isolation.  I did see the press release and a few news articles about the release of the BDCP's statewide economic impact report.

A few quick thoughts.  This is not a valid benefit-cost analysis.  Without even getting into some of the deficiencies in the calculation details (e.g. overestimates future water demand, discount rate is too low, etc.), it suffers from three fatal structural flaws.  While the consultants are very capable economists, their report contains these flaws and ridiculous assumptions for the simple reason that the Delta tunnels can not be economically justified without them.  Below is my summary of the three big structural flaws.

1.  The $15 billion Delta tunnels must be subject to a separate analysis.  BDCP invalidly ties environmental restoration projects together with the tunnels into a bundle, although these conservation projects could be pursued without the tunnels. The principles of benefit-cost analysis, and the state's own guidelines are crystal clear here, the tunnels must be justified independently.  

2.  The BDCP analysis compares the project to a single ridiculous alternative, where export water supplies are cut another 25% below the current restrictions in the biological opinions.  While this might be an extreme scenario to bracket the analysis, and some environmental groups support such restrictions, it is disingenuous to portray it as the most likely outcome in the absence in the BDCP.  This is particularly true since the water contractors and the state Department of Water Resources are suing that the current biological opinions are too restrictive and unjustified by science, and they even won the last skirmish in court on this issue.  The Department of Water Resources can only argue that this is the most likely outcome if they think that the science and law supports an additional 25% cut in water exports, a position that is in direct conflict with the stance they have taken in federal court for years.  BDCP has to take this contradictory position to economically rationalize the tunnels since spending $15 billion on tunnels that don't increase water supply rather obviously doesn't make economic sense.

The EIR (environmental impact report) uses a completely different no-action alternative, a continuation of the current biological opinions, which can be justified.  Using this more realistic baseline as the basis for comparison, the tunnels fail the benefit-cost test by a wide margin.  I demonstrated this last summer, and the state's consultant, Dr. Sunding acknowledged this in response to a question at the Metropolitan Water District.

In addition to an alternative that continues current regulations, the tunnels should also be analyzed against a set of no-tunnel BDCP alternatives.  These would include options focused on seismic levee upgrades, as the Delta Protection Commission has advocated, and would include a version of the delta corridors plan which is the through-delta alternative discussed in the EIR.  These no-tunnel alternatives would be BDCP alternatives, meaning they would convey the same regulatory assurances to the contractors under the Endangered Species Act as the state's preferred project with the tunnels.  They would contain the environmental restoration elements of BDCP, so the environmental benefits of restoration would cancel each other out, and the benefit-cost analysis would focus squarely on the tunnels.

3.  The BDCP economic impact analysis does not place an economic value on the most important environmental impacts, particularly the endangered and threatened fish species that are driving the entire conflict.  This issue is critically important here, because the BDCP economic analysis uses a no-tunnel alternative that is an environmental activists dream, it is very likely to be more beneficial to the fish than the BDCP plan.  The BDCP statewide economic impact analysis makes an assumption to boost water supplies to increase water supply benefits, but does not account for the environmental cost on the other side of the ledger.

Valuing the environment is a sticky and controversial issue, but it is an issue that must be addressed.  You can't just waive your hands and ignore the economic value of recovering fish populations like this recent BDCP economic report.  In this context, I think the best approach is to define alternatives that are expected to deliver roughly equivalent environmental benefits.  Fortunately, this is possible to do for the tunnels, since the BDCP EIR analysis basically says that the tunnels alone provide no net benefit for fish relative to the current biological opinions.  In other words, ignoring the environmental effects could be justified if the current biological opinions are used as the baseline for comparison, as they are in the EIR.  Following the structure of the EIR is also highly desirable to maintain consistency across the various reports.  That is the approach that I took in the benefit-cost white paper I put out last summer.  The bottom line is that if the BDCP is going to use a baseline alternative that is more protective of fish than the tunnels, it is imperative that the value of those fisheries is explicitly included when they weigh benefits and costs.


  1. Hi Jeff - my background is in water resource economics, and I found your blog after seeing you question the current BDCP economic analysis.

    I have some questions - I thought that chapter 9 of the BDCP plan (Sunding's chapter) did compare the benefits of the tunnels to the costs of the tunnels without commingling the other parts of the BDCP.

    Sunding's analysis concludes that the BDCP proposed action will (on average) additionally provide 1.2-1.7 MAF (section 9.A.2.4.4) compared to the existing conveyance HO/LO scenarios. Are you saying that these numbers are too large by 25%? Or that they rely on the High Outflow scenario as the baseline even though the other is justified?

    Thanks for your work on this topic - it needs more economic debate.

  2. Damian,

    Good questions.

    This post is about the statewide economic impact report released this week, and that is full of co-mingling. Chapter 9 did look specifically at the tunnels and evaluate that project from the point of view of the contractors. So no co-mingling in that one, just a narrow perspective. If I were posting about chapter 9, I would replace the first point with stating that the report is narrowly focused on the contractors' benefits and costs and thus is not a statewide analysis.

    This economic impact report purports to be a substitute for a comprehensive statewide benefit-cost analysis and it is not.

    As for the scenarios, I am saying that the water supplies in the "existing conveyance HO/LO scenarios" are too low, and thus the incremental water supplies provided by the tunnels are too high. I recommend you compare this existing conveyance scenario to the no-action scenario for water supply in the EIR (incremental water supply in that is 0 to 0.7 maf). The EIR found the tunnels did not provide a net benefit for fish at those operations, thus this more restrictive scenario (which BDCP just unveiled this summer exclusively for the purposes of chapter 9) is likely to be better for the fish than the tunnels. That's what I have been told by several in the environmental community and it would seem to be common sense, I am not aware of BDCP producing any biological assessments with chapter 9 to contract it.

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