Thursday, September 20, 2018

Quick Reaction to the Latest WaterFix Economic Analysis

This afternoon, the Department of Water Resources released a new report from the Brattle Group, "Economic Analysis of the WaterFix: Benefits and Costs to Project Participants."  I gave it a quick review this afternoon, and judging by my inbox, there is high demand for instant analysis - so here it is.

This report is different in several respects from previous analysis of earlier versions of WaterFix by the same consultants.  These 4 points highlight this new information.  The 1st and 4th bullet points in this list are going to cause trouble for the Metropolitan Water District (MWD) in the recent Prop 13 and Prop 26 lawsuit filed against them.
  • It assumes a massive new subsidy for agricultural users cost share from urban water users.  The agricultural subsidy is contained within a "wheeling rate" that it assumes that Metropolitan Water District (MWD) would charge the Central Valley Project (CVP) for using the tunnels' conveyance capacity.  To illustrate this, I used Table 2 and Table 6-7 in the report to calculate the % of water supply benefit and % of project costs for 3 groups, State Water Project Urban (which is mostly MWD), SWP Agricultural, and CVP (which is mostly farms).  
% of Water Yield 44% 24% 32%
% of Costs 63-69% 14-19% 18%
(The % costs is a range because it is unclear whether table 6 or 7 is comparable to the water yield estimates in table 2.  Either way the urban to agriculture subsidy is clear.)
  • The positive benefit-cost ratio depends on a dubious new benefit: the value of sea-level rise protection benefits.  The report estimates the present value of these sea-level rise benefits at a whopping $5.7 billion, a value that exceeds the study's estimated total net benefit of the WaterFix.  That means the benefit-cost ratio is negative for all user categories if this dubious new benefit is removed.  This estimated benefit has never been included in any previous study of WaterFix, and thus it is a new benefit category created for this report when the old methodology fell short of giving a postive benefit-cost ratio.  So how is it estimated?  They use a 2011 DWR report that estimates the water supply loss from maintaining Delta salinity standards under sea-level rise scenarios using the existing no-tunnel system.  Then it assumes that WaterFix eliminates 100% of that loss, which seems to assume that they won't have to meet the salinity standards if they can divert from the new intakes further upstream.  Thus, it seems that this benefit to WaterFix benefits comes at the cost of non-participants downstream from the north Delta intakes.  Those costs are not included in this analysis of benefits/costs, because it only looks at participants.  Furthermore, it is worth noting that the study from which these water supply benefits are calculated does not include any modeling of the Waterfix tunnels operation, and thus it is not clear that the WaterFix would/could prevent this loss.  Why didn't DWR model this with WaterFix?  Why use an old study and make this unjustified assumption?
  • The report, press release and webpage falsely claim that this benefit-cost analysis is consistent with DWR's Economic Analysis Guidebook.  The Economic Analysis Guidebook clearly states that "Although economic analyses can be evaluated from many different perspectives (individuals, communities, etc.), DWR conducts these analyses from a statewide perspective."  The report is clear, even in its title, that it is an analysis from the perspective of water agencies that participate in WaterFix.  It does not consider statewide impacts - which include costs to other water users or the environment - both of which are very large for this project.  This is especially true if one uses the No Tunnel baseline used in this economic study which is extremely different than the No Tunnel baseline used in the environmental impact report and other regulatory documents.
  • The single-tunnel scenario is clearly better for MWD and urban water users if one compares this study to a February 2018 analysis of single-tunnel by the same consulting firm.  While that single-tunnel report had many of the same problems as this one, it did not need to include a highly questionable estimate of over $5 billion in sea-level rise benefits to get a positive benefit-cost ratio.  Comparing these reports shows that financing the 2nd tunnel by MWD adds enormous costs for their ratepayers for little/no additional benefit.   
Serious problems with previous reports, especially the use of a deceptive no project baseline to artificially increase water supply benefits, are repeated in this report.  I have written about that extensively elsewhere and will not repeat it here.  I may amend this analysis later once I have time to review in more detail.

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