Tuesday, July 26, 2016

Some thoughts for Bruce Babbitt

In the 1990s, I was a graduate student writing a dissertation on the economics of the Endangered Species Act, and Bruce Babbitt was Secretary of the Interior actively utilizing habitat conservation plans as tools to negotiate agreements to more effectively implement the Endangered Species Act.  I used to quote him in some of my presentations at the time, so I was fascinated and a bit encouraged to hear the news that Governor Brown has hired him to help with the delta tunnels (aka WaterFix) proposal.  However, the quotes in this article in the Sac Bee make me a little concerned. 

I trust that Secretary Babbitt will eventually be venturing out beyond the his state DWR office to get some alternative information and perspectives.  Maybe he will even venture onto this blog?  I offer these 5 thoughts to help Secretary Babbitt consider solutions to the Delta problem.

The Tunnels Do Not Have a Strong Enough Value Proposition to Support a Negotiated Deal.

According to the article, Secretary Babbitt's state office is stocked with 40,000 pages of documents produced by DWR to support the project, but nowhere in those volumes has the state put forward an economic feasibility analysis.  

The cost of the project is disproportionate to even the most optimistic assessment of potential benefits, and many interests that would pay for the tunnels are openly questioning whether they are worth the investment, despite the risk of antagonizing a Governor who strongly supports it.  When economic merit of the project is this questionable to its beneficiaries, there is no basis to negotiate a credible deal between them and opponents.

Electricity and the Remarkable Phase-Out of Nuclear Power Can Be a Model

The state's electricity and energy system has made remarkable transformation in its supply portfolio over 15 years.  Electricity is even more important to the state's economy than water, and its relative importance is increasing.  During this time, the electricity system also endured a reliability crisis in the early 2000s that was more economically damaging than the recent drought.  The transformation of the state's electricity grid is much more significant and economically challenging than what would be required to truly reduce reliance on the delta for water.

A decade ago, nuclear power was 15% of California's electricity portfolio, and water exported from the Delta through the State Water Project and Central Valley Project were about 15% of California's water portfolio.  In addition to being a similar percentage of the statewide portfolio for their critical infrastructure system, both nuclear and the SWP/CVP represent 1960s visions of technology and modern infrastructure, and both can be made obsolete by new technology and improved conservation.

Nuclear power is now about 7% of California's electricity power and with the closure of Diablo Canyon will bring it down to 0% in a decade.  The SWP/CVP are still about 12-13% of California's current proposal, and the WaterFix hopes to keep it at that level indefinitely.  When it comes to water, not even the most extreme environmental proposals say we should completely shut-down Delta pumping the way the state has phased out nuclear.  Instead, the most extreme proposals are to cut from 5 million acre feet to 3 million acre feet of exports per year over an extended time.  That is a shift of 5% of California's water portfolio over time.  In other words, even the most extreme environmental proposal for the Delta would be a much smaller change to the state's water portfolio that we have achieved in replacing nuclear with alternative technologies.

The state has taken a much more innovative and aggressive approach to its energy policy (nuclear is just one example).  Read PGE's statement on closing Diablo Canyon and think about the divergence between California's energy and water policies.
Underpinning the agreement is the recognition that California's new energy policies will significantly reduce the need for Diablo Canyon's electricity output. There are several contributing factors, including the increase of the Renewable Portfolio Standard to 50 percent by 2030, doubling of energy efficiency goals under SB 350, the challenge of managing overgeneration and intermittency conditions under a resource portfolio increasingly influenced by solar and wind production, the growth rate of distributed energy resources, and the potential increases in the departure of PG&E's retail load customers to Community Choice Aggregation.
The Joint Proposal would replace power produced by two nuclear reactors at the Diablo Canyon Power Plant (DCPP) with a cost-effective, greenhouse gas free portfolio of energy efficiency, renewables and energy storage...
"California's energy landscape is changing dramatically with energy efficiency, renewables and storage being central to the state's energy policy. As we make this transition, Diablo Canyon's full output will no longer be required. As a result, we will not seek to relicense the facility beyond 2025 pending approval of the joint energy proposal. Importantly, this proposal recognizes the value of GHG-free nuclear power as an important bridge strategy to help ensure that power remains affordable and reliable and that we do not increase the use of fossil fuels while supporting California's vision for the future," said PG&E Corporation Chairman, CEO and President Tony Earley.
Only twenty years ago, people in the energy industry laughed off suggestions that we would ever see this kind of announcement and phase out nuclear without devastating economic effects.  Water agency leaders today sound a lot like energy executives from the last generation.

Don't Believe the Apocalyptic Talk, and Do Not Engage In It 

Tunnel proponents make many outlandish claims of economic disaster that would ensue if water exports were disrupted or reduced.  Unfortunately, Governor Brown himself often makes these unsubstantiated claims and the media laps up the disaster scenarios.  There is no credible basis for these apocalyptic claims, even the worst case scenario of completely cutting off Delta exports would have costs in the single-digit billions in a $2.5 trillion state economy.

As discussed above, the 5 million acre feet of water exported from the Delta is 12-13% of the state's water portfolio.  In the past two years, the state has dealt with a surface water supply reduction of 11 million acre feet (more than double the amount of surface water exported from the Delta in a typical year) and the overall economy has boomed.  Losses from water shortages across all economic sectors were a few billion dollars.  Even in the very unlikely case that all Delta water exports were shut-down, we have ample evidence to show that the state's economy could continue to grow.  This not to say that there would not be economic costs, and that they could be acute in some communities, but the apocalyptic talk is irresponsible and unwarranted.
 In fact, the delta earthquake argument is not only economically wrong, it is immoral.  The state's own study of this scenario shows that only 20% of the billions in economic costs is due to water exports, and the tunnels would protect 0% of the hundreds of lives the state's report says would be lost in such an event.  The real devastation would be in the Delta region itself.  While I agree that sea-level rise and earthquakes are real risks, solutions should be considered in a comprehensive fashion rather than pursue multi-billion dollar individual solutions for water, transportation, public safety, etc.

Consider a No-Tunnel Habitat Conservation Plan

As Secretary of the Interior, Mr. Babbitt greatly expanded the use of HCP's.  Thus, he should understand the argument that in the BDCP, the habitat conservation plan created more valuable for water exporters than the physical infrastructure of the tunnels.  When the administration abandoned the BDCP, they ditched the HCP and kept the tunnels, the wrong approach.  An HCP in the Delta does not require the tunnels, and I believe there is potential for a long-term deal to stabilize the regulatory environment and improve habitat for endangered species once the tunnels are off the table.

There are a lot of other alternatives too, and they are not mutually exclusive.  However, Secretary Babbitt is uniquely qualified to restart the HCP process and perhaps salvage something useful from the BDCP process.  If nothing else, I think that process illustrated the value of an HCP to all parties, and the science program is increasing knowledge of the efficacy of various habitat improvements.  A No-tunnel HCP need not be limited to the Delta itself, but could support actions to improve spawning habitat, get fish around some of the rim dams, increase Delta outflows, and more.

Consider Institutional Incentives and Structural Changes to Agencies

Returning to the electric utility comparison, it is worth noting that electric utilities have diverse power portfolios and sell power at both the retail and wholesale level.  If Southern Cal Edison or PGE were wholesalers that only owned a nuclear power plant, they would not have agreed to shut-down their nuclear power plants.

The main water agencies pushing the tunnels, DWR's state water project and Metropolitan, are wholesalers and basically the only product they sell is water imported from hundreds of miles away.  Under their current structure, they have an interest in preserving the status quo.  How can we change their incentives and their business models?  Should they be required to develop a more diverse water supply portfolio of their own?   I have not thought deeply enough about this to make specific proposals, but I am increasingly convinced that some institutional restructuring is needed to create new business models and incentives that encourage water agencies to invest in new technologies, diversify their portfolios, and invest in research and development of new technologies.

While this list is by no means a comprehensive survey of all the options that are superior to the tunnels, I hope it can spark some new ways of thinking and reduce the tunnel vision so prevalent in the state bureaucracy.

Monday, July 25, 2016

Jason Peltier is still making sense on delta tunnel economics: A look back 4 years shows the WaterFix is an even worse financial deal than the BDCP.

Jason Peltier was quoted on tunnel economics in the Sunday Sacramento Bee,
“How can we go to farmers and urban customers and say, ‘We’re going to pay our portion of this $15 billion project and we’re going to get the same amount of water or less?’ It doesn’t compute,” said Jason Peltier of the San Luis & Delta-Mendota Water Authority, which delivers Delta water to much of the west side of the San Joaquin Valley. “It’s totally inconsistent with the goals we started with, which are ‘we need to restore our water supplies.’ 

Read more here: http://www.sacbee.com/news/state/california/water-and-drought/delta/article91502652.html#storylink=cpy
Jason is correct, just as he was in June 2012, when the Department of Water Resources was first rolling out its economic rationale for the tunnels in the BDCP.  That rationale relied critically on the regulatory assurance embodied in the habitat conservation plan - the part of the plan that was jettisoned in the change from BDCP to WaterFix.

Below I have republished a post I wrote in June 2012 with a few current notes added in [Bold italics].  It is one of the most read posts ever on this blog, and many people have told me it helped them better understand the economic debate.  It's still very relevant today.

June 23, 2012

Is BDCP a good deal for water agencies? Jason Peltier and David Sunding disagree

In the first part of the BDCP meeting on Wednesday, Jason Peltier of Westlands Water District, the water agency that may have the most at stake in the BDCP, said,
"[The BDCP is] a crappy path for us. This is a crapshoot. Unacceptable... We can't finance it.”
However, in the closing presentation of the meeting, Dr. David Sunding, an economist and principal at the Brattle Group hired by the state Resources Agency, said,
"I think it's really beyond serious debate at this point that the benefits of BDCP to the agencies ... exceed the cost," 
Now that is a disagreement.  It's natural to suspect Mr. Peltier is posturing to negotiate a better deal, and there may be some of that, but I think he is right.

Dr. Sunding went through a presentation that had sophisticated analysis of the usual categories of benefits attributed to the tunnels, a)water supply, b) water quality, and c)seismic risk reduction.  All together, these three added up to about 50 cents of benefits for every $1 in costs to the agencies (using the realistic seismic risk scenario, not the worst case).  [This benefit is even lower now, as projected water exports for the WaterFix have decreased.] So how did he figure that the benefits exceeded the costs for the agencies?

It came from a new category of benefit that was not in his original scope of work with DWR: the value of eliminating regulatory uncertainty.  He put forward a scenario where regulatory assurance was more valuable than all the rest of the benefits combined. $11 billion in one scenario. And he argued that regulatory assurance was the main objective of the agencies in the BDCP process, and a normal component of HCPs under the ESA.  He is right about that.  But environmental lawyers tell me that there are significant limits on the legal assurances in HCPs, and there are serious doubts about whether the BDCP can deliver much regulatory assurance at all due, in part, to enormous uncertainty about the environmental effects of the tunnels.  [This whole debate about the extent of regulatory assurance is now moot, since the WaterFix proposal is no longer an HCP.]

Thus,Dr. Sunding's conclusion should have been worded "It's beyond serious debate at this point that strong regulatory assurances are required for the benefits of the BDCP to the water agencies to exceed the cost to the water agencies." If he said that, I would agree, and that is very important information for the people negotiating BDCP.  It isn't just posturing, the water agencies really need the assurance in order to seriously consider a $13 billion investment in infrastructure.

With words like "crapshoot", Mr. Peltier is clearly not very impressed with the regulatory assurance in the BDCP.   Apparantly, not many other people are either. I asked a small sample of objective scientists, lawyers, and environmentalists outside the Delta if strong regulatory assurances would or could be part of the BDCP. The responses were "Not a chance", "No way", and "Sunding analyzed a project that is rejected by the regulatory agencies." [These predictions look pretty good today.  BDCP was rejected, and the HCP is gone.]  Maybe there are experts who disagree, but it is clear that Sunding touched on a very controversial topic in the BDCP.  I am pretty sure that any project that might offer some level of regulatory assurance will have lower exports, and thus lower water supply values, than the scenarios he modeled.

I look forward to further debate of the concept of regulatory uncertainty, how much can be provided, and how it should be valued (I'm not buying the $11 billion estimate, more on that later).  But it is important to realize that regulatory assurance isn't very important for statewide benefit-cost analysis.  The regulatory assurance isn't a statewide benefit, it is shifting risk from the exporting water agencies to the environment and everyone else who will have to pay if the tunnels don't work for fish.

The good news is we finally have a rational discussion and debate about economics, and some reliable numbers out in public.  It's about time.  While I disagree with a few parts (mostly with the scenarios he has been given to evaluate), for the most part, I think Dr. Sunding's quantitative estimates are very reliable, and they inform the planning process. [Unfortunately, the subsequent analysis went off the rails.  Primarily because he stopped including the value of the HCP regulatory assurance as a separate component, and embedded it inside the water supply benefit by changing the no-tunnel water supply baseline to something inconsistent and much lower than in the Environmental Impact Report.]  Benefit-cost isn't just a pass/fail test at the end of the process. BDCP would have been much better off if they had hired him years ago.