Monday, January 14, 2019

"$7 an acre foot? No way, it's worth more than $200 to you." If California is going to adopt voluntary agreements over the regulation of Delta water, the fish need a real negotiator.

Recently, the California Department of Fish and Wildlife (CA DFW) and the CA Department of Water Resources announced a voluntary agreement, negotiated in secret, as a proposed substitute to new regulations in the Bay-Delta Water Quality Control Plan that would limit water diversions from the environmentally troubled Delta.

While the negotiations were secret, I recently obtained a training video that CA DFW leaders used to prepare for the high-stakes negotiations with delta water diverters.  (The yellow convertible represents the revised Bay-Delta plan that has been under development for nearly a decade.)       

O.K., that's a joke - but it isn't far off from the giveaway of the water quality control plan in this proposed deal, especially when it comes to the projects diverting from the south Delta (the CVP and SWP).  It does not appear that the CVP/SWP have offered any water or habitat projects that are not already required by existing regulations or plans, and it proposes an $800 million subsidy from state taxpayers to the deal by redirecting water bond funds.  As far as I can tell, the only new requirement on the CVP/SWP is some modest funding in the form of a $5 per acre foot fee to compensate upstream water diverters who may lose water supply in other components of the deal, and an additional $2 per AF for a science program they would control.

There has been confusion about whether the CVP/SWP contractors are actually giving up any water in this deal. For example, this Fresno Bee op-ed by two CVP executives, describes the CVP/SWP contractors as voluntarily giving up 300,000 AF for fish.  However, many environmentalists dispute this characterization and argue that they could actually get more water under this deal than under the current, decade-old biological opinions that are supposed to regulate delta pumping.  In comments to the Metropolitan Water District (MWD) board earlier this week, MWD staff seemed to confirm the environmental argument that the 300,000 AF is nothing more than compliance with existing regulations according to this account in Maven's Notebook.
In the settlement that was produced for the December 12 briefing, [the parties] put forth a proposal that had ... a commitment on the CVP and SWP of 300,000 acre-feet, largely met by incidental flows that are met through export constraints that are in the current biological opinions, so basically committing to those dedicated flows that are in the biological opinions, said Mr. Arakawa.
Considering that this agreement is proposed to substitute for a new Bay Delta water quality control plan that would likely require the CVP/SWP give up 1.3 million acre feet of current average annual diversions to allow more Delta outflows for environmental benefits, this is an enormous amount of regulatory relief for the bargain price of $7 per acre foot (about $30-35 million in a typical year).

Thankfully, the State Water Resource Control Board (SWRCB) did not accept the proposed agreement, but it did encourage further negotiation to complete the deal.  The environment and the fishing community deserve a stronger negotiator in the future.  How would a better negotiator respond?

"$7 an acre foot, are you kidding me?  You have told others that protecting this water supply from the new water quality control plan was worth $200/AF to you."

Why do I say that the water agencies value this protected water supply at 30+ times what they have offered?  Because they have been pushing the $20 billion Delta tunnels (aka WaterFix) that would provide a very similar benefit after this 15-year agreement would expire.  Water agencies have argued that the point of WaterFix is to protect 1.3 million acre feet of water supply from future regulatory actions like the water quality control plan.  And they* say they are willing to pay $1+ billion in annual debt service to protect this water supply.  Averaged across the roughly 5 million acre feet of water they hope to divert from the Delta in the future, this would be a $200 per acre foot charge on their diverted water.  WaterFix would provide a few additional benefits to these water agencies, but this voluntary agreement would generate about 80% of the benefits that WaterFix would, according to the water agencies' previous economic analysis of WaterFix.  Thus, the proposed voluntary agreement would provide about 80% of the annual benefits of WaterFix to SWP/CVP contractors for only 3-4% of the annual cost of the WaterFix.  What a deal!

I am not opposed to a negotiated agreement, and have actually recommended a settlement with these elements in the past.  In an October 2013 op-ed in the Sacramento Bee, I argued that the State's economic analysis of the tunnels-oriented Bay Delta Conservation Plan supported the value of a negotiated habitat conservation plan, but not the Delta tunnels themselves.  I argued that the State's own analysis showed that a habitat conservation plan with Delta exports in the low 4 million AF range with water agencies paying for the habitat measures was a better deal for all parties than the BDCP tunnels (now renamed the WaterFix).

Governor Newsom supported the concept of a negotiated agreement as Governor-elect.  If he continues this approach as Governor, he needs to install a much tougher negotiating team on behalf of the environment.  Based on the WaterFix proposal, my suggested counter-offer is something like a 20-40% reduction from the proposed water quality control plan regulations, and a charge of $50-75 per acre foot of diverted water to pay for all of the costs of the non-flow habitat measures (no taxpayer bond funding would be required).  Any funds collected in excess of the requirements to pay for the habitat restoration would be given to an independent third party to make grants for alternative water supply projects that would reduce demand for Delta water in the areas served by Delta exports.

If the SWP/CVP water agencies want better terms, such as a lower fees, then the environmental negotiators should ask them to drop the twin tunnels/WaterFix plan.  If they are unwilling to do this, then that is very revealing about their expectations for the tunnels.  It shows the water agencies aren't actually willing to pay costs on the order of the WaterFix project just to "protect" their existing levels of Delta water diversions.  If they will only pay at these levels to "protect" the water supply with tunnels, it suggests these agencies do not expect they will have to follow the constrained operations of the tunnels described in their voluminous EIR.  Thus, it confirms the fears of environmentalists that the tunnels' large capacity would be used to increase diversions after they are built - regardless of any current promises not to do so.

Not all environmentalists would be on board with a negotiation like this, as it does represent a concession on the environmental side relative to the Water Board's proposed regulations.  In fact, some of my environmental friends criticized me back when I wrote that 2013 op-ed proposing a no-tunnel BDCP since it included some substitution of non-flow measures for flow measures.  That is a scientific matter on which I have no expertise, but if there are no substitutes for flow at any level - then there probably is no point in negotiating at all.

The bottom line is that if we are going to have negotiated agreements, the fish need a much stronger negotiator.  If Governor Newsom wants to continue supporting an attempt at a negotiated deal, he must install better negotiators for the environment. 

* Yes, I know the CVP contractors have not said they are not willing to spend that much on WaterFix at this time.  But MWD approved financing the CVP share with expectation of being reimbursed by CVP in the future.  Thus, they have collectively approved spending at this level to protect delta exports from this regulatory cut.

Monday, January 7, 2019

The CVP "No Harm" deal for the Delta Tunnels does a lot of harm to MWD's business case for their $12+ billion investment.

Why did the Central Valley Project want a "Do No Harm" agreement about the delta tunnels?

Last year, Central Valley Project (CVP) contractors made a rational and predictable decision not to pay their share of the WaterFix.  To save the project, Metropolitan Water District (MWD) staff convinced their board to add a multi-billion dollar blank check to fill the enormous financial hole.  To do so, MWD staff argued that the extra funding would allow them to receive the benefits that the CVP would have gotten from their investment.  MWD staff did this with a highly speculative estimate of future water supply benefits from financing the second of the twin tunnels, the so-called "unsubscribed capacity".   Last June, I wrote...
"when MWD staff is using this speculative no-tunnel baseline assumption to define the additional water supply benefits they will receive for the extra investment, the additional water supply is water that goes to the CVP under current regulations.  Thus, in this unsubscribed capacity scheme, MWD staff is using this speculative future baseline to argue that financing the full WaterFix will give them control of water supply that CVP currently diverts from the south Delta...  MWD board members should be very, very skeptical that it will actually work that way."
In testimony before the State Water Resource Control Board this summer, I presented the following estimates of average annual water deliveries (in acre feet) derived directly from the information MWD staff presented to their board in order to persuade them to commit additional billions from their ratepayers.  The second line is the MWD staff scenario where CVP pays MWD to use all the 33% "unsubscribed capacity" and the 3rd line is the MWD staff scenario where CVP doesn't pay and the 33% capacity is utilized by MWD.

No Action Alternative
CWF (67% SWP/33% CVP)
CWF (67% SWP/33% MWD)

The second line shows no water supply benefit for CVP compared to No Action.  Comparing the first line to the last line where MWD pays for the CVP share shows that according to MWD staff, the primary effect of implementing WaterFix is to redistribute 450,000 acre feet of water from the CVP to MWD.  The incentive of the CVP to participate in WaterFix is to avoid this potential harm.  Thus, it's not hard to see why the CVP would want a "no harm" agreement regarding the future effects of California WaterFix (CWF).

MWD staff would argue that a "no harm" agreement doesn't change their water supply benefit because under the agreement, they only have to compensate CVP for impacts that are attributable to the WaterFix.  They would argue that the decreased CVP water supply is due to regulations on south Delta pumping that they argue are equally likely with or without the WaterFix, thus there is no problem.  Are they right? 

To answer this, you should look at the official WaterFix documents, and ignore the sales pitch from MWD staff and other WaterFix proponents.  That is certainly what a court will do.  The "No Harm" agreement states that the WaterFix is described by the Final WaterFix EIR/EIS, and that document clearly states that the new OMR regulations and other more restrictive operating criteria are part of the WaterFix project itself, and are included as a response to expected environmental changes caused by operating the tunnels and the new north Delta intakes.  As an example, here is a quote from the Final EIR/EIS
“These newly proposed OMR criteria (and associated head of Old River gate operations) are in response to expected changes under the PA, and only applicable after the proposed north Delta diversion becomes operational." (note: PA stands for "proposed action" which is the WaterFix)
Thus, it seems pretty clear to me that the "No Harm" means the CVP can't lose any water supply as a result of these new regulations that are clearly defined in the EIR/EIS as an integral part of the WaterFix project.  The agreement is not specific about how the CVP would be compensated, but it seems likely that they will have to receive water delivered through tunnels without paying for the tunnels.  Thus, the water supply benefits to MWD will be significantly less than the MWD board was told when approving the extra billions.

The "no harm" agreement also reduces the already remote chance that MWD will ever be reimbursed by the CVP for its investment in the second tunnel.  The argument pushed by MWD and DWR that farmers/CVP would pay them back for the 2nd tunnel has always been as laughable as President Trump's claims that Mexico will reimburse the cost of his border wall, and this "no harm" agreement makes it even more clear.

In addition to this "no harm" agreement, the new coordinating operating agreement between the SWP and CVP could also greatly affect the water supply benefits of the WaterFix to MWD.  Nine months ago, MWD staff described a "Master Agreement" with DWR that defined MWD's use and control of the 2nd tunnel, but that agreement still has not been made public despite MWD staff promises.  MWD staff description of this "Master Agreement" was key to the MWD board's funding vote, but it seems to conflict with this new "Do No Harm" agreement with the CVP.

The bottom line is that these new agreements appear to substantially reduce promised water supply benefits to MWD ratepayers while increasing their share of the costs.  In order for the MWD board to fulfill their fiduciary duty to their ratepayers, they need to fully review the effects of these significant new agreements on the WaterFix return on investment and potentially reconsider their previous funding commitments.

Wednesday, January 2, 2019

California population growth rate drops to all-time low: housing growth rate now exceeds population growth

Recent estimates from the U.S. Census Bureau show California population growth has dropped to an all-time low of 0.4% in 2018.  The U.S. population growth rate declined slightly to an 80-year low of 0.64% according to the Bureau.  California's pace of population growth is tied with Iowa, one spot below Indiana and one place above Wisconsin - state's that are rarely compared to California when it comes to demographics or economics.  This is the 3rd straight year California population growth has been slower than the U.S. even as job growth continue to exceed the U.S. average. 

As the housing crisis has worsened, it has become common for analysts, including me, to say that California is not building enough housing to keep up with population growth.  That is no longer true thanks to the combination of decreasing population growth and slow, steady growth in new permits.

Between 2017 and 2018, California's population grew by 158,000 people, and the state is on a pace for issuing permits for nearly 120,000 new residential units in 2018.  Even with the devastating number of homes lost to fire this year, that is still enough to keep up with population growth. 

This is contributing to the flattening out of home values and rents that is currently underway.  Of course, this doesn't mean that the housing crisis is solved - the exodus is largely driven by the pain endured by Californian's dealing with the housing crisis.  California still needs to prioritize efforts to expand supply and reduce housing costs.