Wednesday, August 26, 2015

An Encouraging Story for Downtown Stockton

One should never read too much into a single, relatively small event, but Roger Philips' story today about a San Francisco furniture designer moving from the Mission District to downtown Stockton is worth reading.

Everybody is so impressed with Silicon Valley that far-fetched hopes for the tech industry often dominate economic development talk.  But the best assets of Stockton, proximity to Bay Area markets with relatively low real estate costs, are not that important to tech industries who aren't sensitive to rents and sell to a global market.  The tech industry has moved up the peninsula to even more expensive San Francisco.  Much of the attraction is the art and cultural attractions of the City, and there is much concern in SF that the tech workers are damaging the City's cultural fabric as they drive rents into the stratosphere.

I have long thought Stockton should focus its economic development on artists (broadly defined to include craftspeople, musicians, etc.), since they are more likely to be attracted to what the city has to offer.  They are sensitive to rents, and value access to the Bay Area market but do not necessarily have to live and work there every day.  Stockton's history, diversity, and urban environment can also be a plus.

These type of moves don't bring the number of jobs or millions in investment of the big corporate projects typically targeted.  But they can make positive changes to the culture and identity of the city, and that will help attract higher-paying, higher-skill employers and workers down the road.

So are these designers the start of a wave or just a small blip?  I don't know, but Stockton's economic developers should do what they can to promote this scenario and build some momentum.

Monday, August 24, 2015

"Troglodytes" Defend the Governor's Delta Tunnels

Governor Brown has become an international leader on taking action to combat climate change, repeatedly calling business-funded opponents of such action "troglodytes."  Thus, I found it surprising that the chief sponsor and promoter of the most broadly ridiculed and discredited report opposing California's climate change policies was the author of the rebuttal of my recent op-ed criticizing the economic rationale of the tunnels.

The Small Business Association's infamous climate-change report predicted that implementing AB 32 would create an economic doomsday that would permanently erase 1.1 million jobs, and cause a 26% decline in discretionary spending by California households among other ridiculous findings.  The report is a prime example of why Governor Brown calls his climate change opponents "troglodytes", and it was universally and very publically blasted by academic experts, and even the LAO.

In this pro-tunnels Sac Bee op-ed, Ms. Toccoli, the long-serving President of the California Small Business Association, once again shows an inability to interpret an economic report, a lack of understanding of environmental projects/policies, and a taste for bogus, doomsday economic scenarios.

Here is a look at the 4 "facts" she uses to support the tunnels.

First, she dismisses the importance of the 50-year regulatory assurance from an ESA section 10 permit that is no longer in the plan.  Never mind the permit, she says without the tunnels we face
"a guaranteed future of diminishing water supplies if we fail to act. According to economist David Sunding, without a new conveyance system, if wildlife agencies impose continued or even greater flow restrictions to protect fish, we could lose more than 1 million acre-feet of water supply a year."

Read more here:
Wrong.  Dr. Sunding's scenario was intended to capture the benefit to water exporters of the regulatory assurance from the BDCP's proposed 50-year permit that was the hoped for result of the combined conveyance and habitat restoration plan.  It does not stem from building the tunnels as she claims.  It's irrelevant now, because the revised Water Fix plan does not include this element.  The water exporters have no regulatory protection from an increase to flows that may be needed to protect fish, even if they build the tunnels.  It is well known that they are extremely concerned about this important change that Ms. Toccoli dismisses.

Second, and most importantly, she wildly overstates the earthquake risks and consequences, misrepresenting the protection offered by the tunnels a 100 times with some numbers taken out of context from an old report.  She concludes, 
"The total cost of disruption to our water system would cost the economy $30 billion to $40 billion over five years – more than twice the total construction costs of the pipelines."

Read more here:
Wrong on multiple levels.  First, I will point out that the report she authoritatively cites in her first argument, estimated the cumulative avoided costs of the earthquake scenario at $400 million over 50 years, 1% of the value Ms. Toccoli uses.  And unlike regulatory assurance, the amount of earthquake protection is something that is unchanged between the 2013 BDCP proposal and the 2015 Water Fix.  That means Sunding's report is a current source for valuing earthquake protection, but outdated on water yield and regulatory protection.

Here is the source she is using to support her claim of $30-40 billion in costs.

Ms. Toccoli's $30-40 billion comes from the far right (72 month disruption) corner of the figure.  Unfortunately, she isn't alone in inaccurately throwing around outrageously inflated cost figures for the doomsday earthquake scenario. Specifically,
  • She assumes a ridiculous 6 year disruption.  Even DWR says it would be "weeks or months" which is the far left corner of this graph where the costs in billions are low single-digits and hard to distinguish from zero in some cases.
  • She assumes the tunnels protect from all of these costs.  In fact, DWR's documents show exports would still decline by about 50% with the tunnels in place, so the tunnels only protect against about half of these costs.
  • She uses the top-line economic impacts, when the lower bottom set of lines, economic costs, are the appropriate measure to use for comparing to the cost of the tunnels.
  • Her 68% probability of a catastrophic 20+ island flood over the next 25 years is inflated too, although it is often cited as the probability of a large quake in the Bay Area that could damage delta levees.
Rather than plucking numbers out of context from obscure reports that she does not appear to understand, I recommend using a common sense comparison to other water surface-water shortages.  In the unlikely event of a Delta-destroying earthquake flood, the tunnels would protect 50% of Delta exports for a period of weeks or months according to DWR.  That's a shortage of about 1 maf of surface water supplies, a significant shortage, but one that the state already has plenty of experience managing.  In fact, it's only about 10% of the loss of surface water supplies in the current drought, and the economy still grows robustly.  The disaster talk to water supplies sounds much scarier than the reality.  We should be more focused on water shortages from an extended drought (a scenario where the tunnels do little to help), and less afraid of water shortages from a Delta earthquake.

And like most tunnel proponents, Ms. Toccoli callously ignores the death and destruction in the Delta itself from the disaster scenario she is hyping for water exporters.  Seismic levee upgrades would actually offer more protection for water exports than the tunnels, and would save lives and other vital transportation, energy and water infrastructure that benefit her small business supporters.  Why keep pushing expensive and divisive tunnels instead of a lower-cost, win-win alternative?

Third, she makes a claim about wet year water exports that is mostly a repackaged version of the invalid first argument.  The wet year yields described in the EIR/EIS are not as large as she claims.  It is just a repeat of the argument that the tunnels benefit water exporters because they are hoped to stave off more environmentally-protective operating rules in the future.  As I have pointed out previously, this line of argument directly contradicts the EIR/EIS. 

Fourth, she makes an inaccurate comparison to the costs of alternatives.
A comparison of various alternatives shows the relative affordability of California WaterFix. The cost of water will be approximately $1,000 per acre-foot for Southern California and less than $500 per acre-foot for Central Valley farms. A recent recycled water project in San Francisco came in at more than $8,000 per acre-foot, while the Poseidon desalination plant in San Diego comes to more than $2,200 per acre-foot.

Read more here:
Wrong again.  A consistent and correct comparison focuses on the incremental or marginal costs of alternative projects.  Ms. Toccoli's figure averages the cost of the tunnels across all 4.9 maf of expected exports after the tunnels are built, including spreading the costs over the roughly 4.7 maf that water exporters would receive anyway.

The San Diego desalination plant is 100% new water supply to the system, all 56,000 af of yield is an incremental new supply.  A valid comparison to the tunnels, only looks at the new incremental water yield that results, which is a little over 250,000 acre feet according to the EIR/EIS.  Veteran water economist Rodney Smith published a handy table that shows the cost of water from the tunnels under various assumptions of incremental water yield.  At the yields in the latest EIR, the tunnels water supplies are over $3,000 per acre foot.  Not only are the tunnels more expensive than desalination, their water supply is less reliable, lower quality, and hundreds of miles away from where it would be used.  Of course, the choice isn't really tunnels vs desal, but tunnels versus myriad alternatives including fixing leaking pipes, recycling, stormwater capture, groundwater clean-up, and conservation that the state has not come close to fully developing.  Desalination is the most expensive alternative, and used for comparison only to highlight the tunnels' extreme cost.

The article wraps up with the $5 per month ($60 per year) cost which it describes as "a pittance." That will only pay for Metropolitan Water District's 25% share, and is hardly a pittance to many households.  The tunnels will cost some irrigation districts hundreds of millions of dollars each year, and there are individual farming operations that could be on the hook for a million or more each year. The word pittance best describes the tunnels' contribution to the State's water supply, and its cost is best described as by far the most expensive and risky water supply investment in the State's history.

Ms. Toccoli is a savvy political player with a lengthy history of political advocacy which includes passing out coveted business endorsements to Democrats.  I don't know about her positions on other issues, and perhaps she is a positive factor in other discussions.  But her inaccurate forays into economic analysis of environmental issues have distorted serious policy debates, and are ultimately unhelpful to the small business interests her organization represents.

Tuesday, August 11, 2015

DWR Director contradicts the Environmental Impact Report that he just released, and other observations on the Sac Bee's article questioning whether farmers can/will pay for the delta tunnels

The Sunday Sacramento Bee had a front page story by Dale Kasler and Ryan Sabalow titled "Delta Tunnels: Farms weigh project risks."  It contained a lot of interesting quotes from farm leaders who receive water from the Delta and public officials.  In my view, the most important one was this from Department of Water Resources Director Mark Cowin:
"It's not a question of 'Do I want 5.2 (million acre feet) or 4.9?" Cowin said.  "It's a question of 'Do I want 4.9 or 3.5 or 3, or shut down the facilities altogether over time?'"
Really?  You just released the official Environmental Impact Statement that clearly describes the question as a choice of 4.7 - 5.3 million acre feet with the tunnels, and 4.7 million acre feet without the tunnels.  According to the EIS, the average expected water yield (increase to exports) with the tunnels is only 257,000 acre feet, and it is clear that the $15+ billion investment offers a terrible return on investment to water exporters in that case.

Cutting exports to 3.5 or 3 is the proposal of the most intense environmental activists, the "Responsible Exports Scenario" that they have been demanding be analyzed in the EIS/EIR and the Delta Plan for years.  The State has ignored them, and yet the DWR Director is making public statements that this is in fact the outcome if the Tunnels are not built - never mind what it says in their EIR/EIS.  Not even the most extreme environmentalists are asking to shut-down the facilities all together, and yet the DWR Director suggests it will happen if we don't build the tunnels.

Back when the Bay Delta Conservation Plan was seeking 50-year regulatory assurance, there was some justification for using an alternative no-tunnel baseline when evaluating the project's return on investment to water exporters (but not for statewide benefit-cost analysis as the regulatory assurance was not risk-reduction, it was risk-shifting from exporters to upstream users, taxpayers and the environment).  With the regulatory assurance now eliminated from the project, how can Cowin keep making this argument to the exporters?  As the article notes, many of them are unconvinced by the increasingly hard-to-believe sales pitch.

Director Cowin is in a bind.  The State must use a different no-tunnel scenario for its economic case than its environmental case, but it is this constantly changing story that causes immense distrust in both the agricultural and environmental community.  It is also going to cause major problems for the project when the EIR/EIS is litigated.  I suppose he has no other choice, as long as the Governor is still strongly pushing the delta tunnels.

The tunnels are simply a bad project.  A good project can get a passing grade using the same no-project baseline scenario for both environmental and economic analysis.  The dramatically shifting no-tunnel baseline violates basic principles of objective scientific and economic analysis, and contradicts the statements that the project is governed by the "best available science".  

The rest of the Sac Bee article features quotes from the reporters' tour of the Central Valley asking various farm leaders about their willingness to pay for the tunnels.  Kasler and Sabelow summarize the responses as "The answer, so far, is a very qualified "yes."  That is an accurate description of their public statements, but there are good reasons to believe that their assessments and their statements are a lot more negative when there are no reporters in the room.  The reporters should stay on this story and dig deeper.

Finally, I was moved by this quote form Jim Beck, general manager of the Kern County Water Agency.
"Think about the magnitude of that decision for these farmers and their families.  It's the most significant decision most will make in their careers."
I honestly feel for these farmers.  They want action and have historically supported big water infrastructure.  But they have never had to finance anything close to this magnitude, and they are now under tremendous political pressure to support a project that is bad for them economically and will especially harm their kids and the next generation that is stuck with the bill.  

Like many others, I believe that the footprint of Central Valley agriculture will shrink by 10% or more in the coming decades due to dwindling supplies of ground and surface water.  But I am also optimistic, and think Valley agriculture will continue to grow more profitable overall even as it uses less land and water.  The tunnels will make Valley agriculture less profitable in a desperate attempt to stave-off a loss of acres.

At the EIR/EIS water yields, the tunnels will keep 60,000 marginal acres in production in the long-run. Is that worth $10 billion (the ag share of the tunnel bill)?  That's $160,000 an acre.  It doesn't make sense - even with $4 almonds.  Even if you use DWR's poorly justified, high-water yield scenarios, it is $30,000 an acre, and farmers are still better off fallowing the most marginal land.