I was looking for recent MWD cost analysis on a canal, and found this Powerpoint presentation from a MWD committee meeting that was today. At the risk of reading too much into a Powerpoint without hearing the presentation, I found several parts very interesting compared to what I saw from MWD last year.
1. I have not seen any water contractors talking about incremental (marginal) costs of Delta conveyance before (see slide 36). That is a very positive development. Note that the incremental, capital only costs of a tunnel are a whopping $518/af. Based on the other slides, it is reasonable to add another 10-15% on top of that for operating and mitigation costs, and $250-$300 per af (according to the slide) to move the water from the pumps. That puts the incremental cost of the water provided by the Delta conveyance to MWD at $800-$900 per af. They may be willing to pay that, but it is definitely pushing the limits, and they won't be able to pitch in more money for habitat or cross-subsidize ag. users at those levels.
2. MWD is only allocating proportional costs to itself, thus these would be the same costs that would apply to agricultural contractors. It's hard to see how ag could pay these costs.
3. The presentation makes the small tunnels look pretty bad, especially the cut and fill idea. As a non-engineer, I wonder why 2 tunnels are necessary for 3,000 or 6,000 cfs? That would be a question I would ask if I were sitting in the room instead of reading Powerpoint on the internet, as I have heard conflicting information on this.
4. Will the BDCP backtrack to the original East surface canal because of the tunnel costs? I would expect that question to be on the mind of any MWD board members watching this presentation, especially when they start seeing the costs displayed in incremental/marginal terms instead of average costs.
Update 4:10 P.M.:
I have gotten a half dozen email comments from smart people today on this post. Use the comments, don't send me email. That way everyone can benefit from your wisdom.
Wednesday, April 27, 2011
Sunday, April 24, 2011
Cost-Benefit Analysis, Rep. McClintock, and the PPIC
Some readers have asked for elaboration on the McClintock/PPIC comparison in the last post. Tom McClintock wrote this in a recent article in the Sacramento Bee.
So why does McClintock have me thinking about the influential PPIC water reports?
There are two key analysis by the PPIC/Davis group, both originally published in the 2008 Comparing Futures report. In the one analysis, they evaluate whether a peripheral canal should be built around the Delta, a project long desired by water exporters. In the other analysis, they evaluate whether Delta levees should be upgraded or repaired after a flood, investments strongly supported by Delta interests.
The PPIC/Davis team does not apply a uniform approach to evaluating these investment decisions.
When it comes to Delta levee investments, they use the correct present value framework and even account for the lack of benefits during the construction period. I have no problem with the framework they utilize here. They conclude that in most cases, investing in and repairing levees is not economically efficient. Their conclusions depend on the values they assign to benefits, costs, and flood probabilities, and those have values have been challenged by many, but that is outside this discussion of the framework.
When it comes to evaluating the peripheral canal, the PPIC/Davis group uses the incorrect, McClintock style approach that amortizes costs forward to the future for comparison to future benefits. It is a much easier standard. The approach ignores a 10-25 year build period when costs are incurred and no benefits are received. And then, they choose a very distant future year to evaluate benefits (they say 2050, but their 2050 water demand looks more like 2080 or 2100) when benefits of a canal are estimated to be very high, ignoring the fact that benefits will be much smaller at first.
I can forgive Congressman McClintock and staff for not knowing the difference. After all, ordinary voters are familiar with amortization, not discounted present value; and he is talking about a concept and not making calculations. But the PPIC group certainly should know the difference, are making influential calculations, should apply a uniform approach. Instead, they set up an inconsistent framework to evaluate these two investment alternatives, and thereby severely biased their analysis in favor of a peripheral canal before they even input a single number into the models.
Is this splitting hairs? Is it a big deal quantitatively?
Consider a simple example, based on current cost estimates for alternative conveyance, and benefits of a conveyance as calculated in the 2008 PPIC report.
Assumptions: 50 year analysis period, 5% real interest rate, peripheral conveyance costs $15 billion and takes 15 years to build so $1 billion in costs in years 1-15, operating costs $200 million annually from years 16-50, benefits of the conveyance are $2 billion 50 years from now, increasing by $50 million per year to reflect the growing demand and growing risk of through-delta water supply interuptions from flood. In other words, I set the benefits at $350 million in year 16, and increased them in a linear fashion to $2 billion 50 years from now.
Results:
Incorrect PPIC/McClintock analysis: Amortized capital costs are $817 million + $200 million operating costs = $1.017 billion in costs in year 50. Benefits in year 50 are $2 billion. Costs are about 50% of benefits. Build it.
Correct Cost-Benefit analysis (present discount value): Present value of costs = $12.937 billion. Present value of benefits = $7.402 billion. Costs are about 175% of benefits. Do not build.
That is a very large difference, and it shows the substantial bias introduced by the PPIC/Davis team's incorrect approach. Of course, you can legitimately argue about the assumed numbers in the example, the point is to show that the error is potentially very important quantitatively in addition to showing bias.
In summary, the PPIC's analysis of a peripheral canal uses an incorrect framework that is heavily biased towards supporting a peripheral canal. Importantly, the framework is inconsistent with the much tougher standard they framework they use for evaluating Delta levee investments. The inconsistency demonstrates substantial bias towards the agenda of Delta water exporters and against in-Delta interests.
Postscript: Several other posts on this blog demonstrate the PPIC bias in other ways, most notably in the parameters selected for their model (water recycling costs 3x too high, desalination costs 2x too high, vastly understating conservation gains and overstating population growth, etc.) In this post from over a year ago, I stated
as chairman of the House Subcommittee on Water and Power I have announced that all projects – including the Auburn dam – will first be evaluated under a uniform cost-benefit analysis that establishes the amortized cost of construction, and annual operations and maintenance balanced against the value of water, hydroelectricity, recreational leases and flood control protection afforded by these projects.I like that McClintock is focused on cost-benefit analysis, and I especially like that he is emphasizing the importance of a uniform approach to it. However, his description of cost-benefit analysis is not correct. Cost-benefit analysis does not amortize costs into the future and compare them to future benefits. This approach ignores the time to build, and is problematic when benefits are not smooth. The correct way to do cost-benefit analysis is to estimate the full path of costs and benefits and discount them back to a single present value. This is fundamental. Consult any textbook, government guideline for confirmation. Even Wikipedia has it right,
Benefits and costs are often expressed in money terms, and are adjusted for the time value of money, so that all flows of benefits and flows of project costs over time (which tend to occur at different points in time) are expressed on a common basis in terms of their “present value.”If a project has a short build time and a smooth time series of costs and benefits, it isn't a big difference mathematically. However, if it is a big project with a long build time before benefits appear and those benefits aren't smooth over time (i.e. dams, peripheral canal around the Delta), the error heavily biases the analysis towards making the investment.
So why does McClintock have me thinking about the influential PPIC water reports?
There are two key analysis by the PPIC/Davis group, both originally published in the 2008 Comparing Futures report. In the one analysis, they evaluate whether a peripheral canal should be built around the Delta, a project long desired by water exporters. In the other analysis, they evaluate whether Delta levees should be upgraded or repaired after a flood, investments strongly supported by Delta interests.
The PPIC/Davis team does not apply a uniform approach to evaluating these investment decisions.
When it comes to Delta levee investments, they use the correct present value framework and even account for the lack of benefits during the construction period. I have no problem with the framework they utilize here. They conclude that in most cases, investing in and repairing levees is not economically efficient. Their conclusions depend on the values they assign to benefits, costs, and flood probabilities, and those have values have been challenged by many, but that is outside this discussion of the framework.
When it comes to evaluating the peripheral canal, the PPIC/Davis group uses the incorrect, McClintock style approach that amortizes costs forward to the future for comparison to future benefits. It is a much easier standard. The approach ignores a 10-25 year build period when costs are incurred and no benefits are received. And then, they choose a very distant future year to evaluate benefits (they say 2050, but their 2050 water demand looks more like 2080 or 2100) when benefits of a canal are estimated to be very high, ignoring the fact that benefits will be much smaller at first.
I can forgive Congressman McClintock and staff for not knowing the difference. After all, ordinary voters are familiar with amortization, not discounted present value; and he is talking about a concept and not making calculations. But the PPIC group certainly should know the difference, are making influential calculations, should apply a uniform approach. Instead, they set up an inconsistent framework to evaluate these two investment alternatives, and thereby severely biased their analysis in favor of a peripheral canal before they even input a single number into the models.
Is this splitting hairs? Is it a big deal quantitatively?
Consider a simple example, based on current cost estimates for alternative conveyance, and benefits of a conveyance as calculated in the 2008 PPIC report.
Assumptions: 50 year analysis period, 5% real interest rate, peripheral conveyance costs $15 billion and takes 15 years to build so $1 billion in costs in years 1-15, operating costs $200 million annually from years 16-50, benefits of the conveyance are $2 billion 50 years from now, increasing by $50 million per year to reflect the growing demand and growing risk of through-delta water supply interuptions from flood. In other words, I set the benefits at $350 million in year 16, and increased them in a linear fashion to $2 billion 50 years from now.
Results:
Incorrect PPIC/McClintock analysis: Amortized capital costs are $817 million + $200 million operating costs = $1.017 billion in costs in year 50. Benefits in year 50 are $2 billion. Costs are about 50% of benefits. Build it.
Correct Cost-Benefit analysis (present discount value): Present value of costs = $12.937 billion. Present value of benefits = $7.402 billion. Costs are about 175% of benefits. Do not build.
That is a very large difference, and it shows the substantial bias introduced by the PPIC/Davis team's incorrect approach. Of course, you can legitimately argue about the assumed numbers in the example, the point is to show that the error is potentially very important quantitatively in addition to showing bias.
In summary, the PPIC's analysis of a peripheral canal uses an incorrect framework that is heavily biased towards supporting a peripheral canal. Importantly, the framework is inconsistent with the much tougher standard they framework they use for evaluating Delta levee investments. The inconsistency demonstrates substantial bias towards the agenda of Delta water exporters and against in-Delta interests.
Postscript: Several other posts on this blog demonstrate the PPIC bias in other ways, most notably in the parameters selected for their model (water recycling costs 3x too high, desalination costs 2x too high, vastly understating conservation gains and overstating population growth, etc.) In this post from over a year ago, I stated
The economic analysis in Comparing Futures suffers from 3 fatal flaws.The post went on to talk about the first 2 flaws, but left an explanation of the last flaw for a future post. This post finally gets around to it, 15 months late. I thank Rep. McClintock for providing the inspiration.
1. Grossly overstates future urban water demand and the cost of alternative water supplies.
2. Does not value environmental services or even the market values of recreation and fishing.
3. Ignores established scientific methods for evaluating investments over time which skews their analysis to favor big capital projects like canals.
Wednesday, April 20, 2011
Some Observations on Water
It's been over a month since I posted anything significant on water. Time has been short. There is plenty to blog about so here are a few quick observations.
1. Tom McClintock keeps talking about benefit-cost analysis. It's interesting to compare McClintock's approach to BCA to the PPIC/Davis way of evaluating investments in conveyance vs. levees. They are both wrong, but at least McClintock is consistent.
2. The hearing in Fresno was actually not as one sided as I expected (perhaps my expectations have just gotten so low). There were lots of references to our jobs reports, and it is always nice to see people using the information.
3. Westlands is now saying the 2009 water shortage impacts on Valley agriculture were equal to or smaller than estimates I have made. Yes, it's true. I saw it in comments from Tom Birmingham and two declarations they submitted to Judge Wanger in the salmon case before they decided to drop their request for an injunction against the salmon biop since the issue is moot at the moment. Maybe they should hire me for some consulting.
4. The good, bad, and confusing in the Stewardship Council draft plans deserve comment. But they issue a new draft plan before I can finish reading the last one.
5. I have been learning about Delta levees. I have been quiet on this subject since I am not an engineer. But if Jay Lund can do economics, maybe I can talk about levees.
One example of what I have learned can be seen by comparing Figure 12 in the executive summary of the DRMS report to DWR's Flood Safe maps from 2008. This is important because that bright red island seen near Stockton in DRMS Figure 12 (>7% annual flood probability) is the same island outside the 200-year flood protection according to DWR's Flood Safe Assessment. For those of you not from Stockton, that island is known as Brookside, was developed 20 years ago, has the most modern levees in the Delta, and is where most of the million dollar homes are in the city. It looks like this one mistake skews the DRMS cost assessment by over a billion dollars (they are assuming an island with billions in real estate and business sales floods every 10-15 years).
6. I'm trying to control an overwhelming urge to scream/blog every time Tom Philp posts something. I got over it with Michael Boccadero and Mike Wade comments, so let's hope it works for Philp too.
7. I wonder what the Pacific Legal Foundation (PLF) thinks about Delta lawyers winning "takings" cases against the Department of Water Resources.
1. Tom McClintock keeps talking about benefit-cost analysis. It's interesting to compare McClintock's approach to BCA to the PPIC/Davis way of evaluating investments in conveyance vs. levees. They are both wrong, but at least McClintock is consistent.
2. The hearing in Fresno was actually not as one sided as I expected (perhaps my expectations have just gotten so low). There were lots of references to our jobs reports, and it is always nice to see people using the information.
3. Westlands is now saying the 2009 water shortage impacts on Valley agriculture were equal to or smaller than estimates I have made. Yes, it's true. I saw it in comments from Tom Birmingham and two declarations they submitted to Judge Wanger in the salmon case before they decided to drop their request for an injunction against the salmon biop since the issue is moot at the moment. Maybe they should hire me for some consulting.
4. The good, bad, and confusing in the Stewardship Council draft plans deserve comment. But they issue a new draft plan before I can finish reading the last one.
5. I have been learning about Delta levees. I have been quiet on this subject since I am not an engineer. But if Jay Lund can do economics, maybe I can talk about levees.
One example of what I have learned can be seen by comparing Figure 12 in the executive summary of the DRMS report to DWR's Flood Safe maps from 2008. This is important because that bright red island seen near Stockton in DRMS Figure 12 (>7% annual flood probability) is the same island outside the 200-year flood protection according to DWR's Flood Safe Assessment. For those of you not from Stockton, that island is known as Brookside, was developed 20 years ago, has the most modern levees in the Delta, and is where most of the million dollar homes are in the city. It looks like this one mistake skews the DRMS cost assessment by over a billion dollars (they are assuming an island with billions in real estate and business sales floods every 10-15 years).
6. I'm trying to control an overwhelming urge to scream/blog every time Tom Philp posts something. I got over it with Michael Boccadero and Mike Wade comments, so let's hope it works for Philp too.
7. I wonder what the Pacific Legal Foundation (PLF) thinks about Delta lawyers winning "takings" cases against the Department of Water Resources.
Depressing (deceptive?) Fact of the Day
From today's Sac Bee article on folks lining up to work for McDonalds.
An optimistic view of this is that perhaps fast food jobs have gotten better, higher pay and benefits, and are therefore retaining workers. But, I took a quick look at the data and saw no evidence that relative fast food wages had grown.
So, I am inclined to think that the pessimistic angle in the article is right, it's a sign of a lousy economy. Look of the picture of the 59 year old man interviewing for a job at McDonalds after a "long ride in auto sales."
McDonald's and other fast-food chains, once a first job for teenagers, appear to be turning into an employer of more adults: The average age of a fast-food worker is 29.5, up from 22 in 2000, according to the U.S. Census Bureau.
An optimistic view of this is that perhaps fast food jobs have gotten better, higher pay and benefits, and are therefore retaining workers. But, I took a quick look at the data and saw no evidence that relative fast food wages had grown.
So, I am inclined to think that the pessimistic angle in the article is right, it's a sign of a lousy economy. Look of the picture of the 59 year old man interviewing for a job at McDonalds after a "long ride in auto sales."
Tuesday, April 19, 2011
New California and Metro Forecast Released
The quarterly update to our 5 year state and northern California metro forecast has been released. The short-term forecast for the state and most metro areas besides Sacramento has slightly improved, but the longer range forecast is little changed.
* California recovers pre-recession job levels in 2015
* double digit unemployment through the end of 2013
* Bay area leading recovery, while Sacramento is at the end.
For more details, see the forecast webpage.
* California recovers pre-recession job levels in 2015
* double digit unemployment through the end of 2013
* Bay area leading recovery, while Sacramento is at the end.
For more details, see the forecast webpage.
Tuesday, April 5, 2011
Mendota High Wins State Chess Championship
Congratulations to Mendota High students for this tremendous achievement.
http://www.fresnobee.com/2011/04/04/2337255/mendota-high-students-win-state.html#
It isn't just chess players with achievement, as the Mendota school district has boosted it's API score by about 100 points since 2006.
2010 Census data show a population of 11,019 in Mendota City, a 39.6% increase over the 2000 Census, and four times faster than the 10% growth in the state of California, and more than double the 16.4% growth rate of Fresno County. Mendota's housing vacancy rate was 5.2% in the 2010 Census, less than the 8.3% vacancy rate in Fresno County and the 8.0% vacancy rate in California.
These are all very remarkable achievements and surprising statistics given the economic challenges Mendota has been facing and the multitude of press reports that have suggested that this town has dried up and blown away because of the Delta Smelt.
http://www.fresnobee.com/2011/04/04/2337255/mendota-high-students-win-state.html#
It isn't just chess players with achievement, as the Mendota school district has boosted it's API score by about 100 points since 2006.
2010 Census data show a population of 11,019 in Mendota City, a 39.6% increase over the 2000 Census, and four times faster than the 10% growth in the state of California, and more than double the 16.4% growth rate of Fresno County. Mendota's housing vacancy rate was 5.2% in the 2010 Census, less than the 8.3% vacancy rate in Fresno County and the 8.0% vacancy rate in California.
These are all very remarkable achievements and surprising statistics given the economic challenges Mendota has been facing and the multitude of press reports that have suggested that this town has dried up and blown away because of the Delta Smelt.
Tuesday, March 29, 2011
Sacramento has biggest job loss of 327 largest U.S. counties in 2010 Q3
Could the employment situation in Sacramento be even worse than we thought? The 3rd quarter 2010 data from the QCEW (Quarterly Census of Employment and Wages, source: unemployment insurance filings) says yes. A quote from today's news release from the BLS.
The bottom line is that the Sacramento metro lost over 23,000 jobs from Sept 09 to Sept 10 according to the QCEW, more than double the 11,000 decline in the reported by California EDD over the same period. Unlike EDD, the QCEW actually shows significant state government employment declines in Sacramento, in addition to large drops in the financial sector and local governments. The QCEW data is not sample based and considered more reliable than the EDD monthly reports (but it comes out 6 months later).
As noted in the quote, San Joaquin County was the 2nd worst over this period, but the reported losses were similar to those reported in the EDD reports so it wasn't a surprise and isn't worse than we thought.
To summarize, this new data reaffirms the story that we have been telling for over a year, Sacramento has the worst performing economy in the state, and it may be even worse than originally estimated.
Employment declined in 149 of the large counties from September 2009 to September 2010. Sacramento, Calif., had the largest over-the-year percentage decrease in employment (-3.7 percent) in the nation... San Joaquin, Calif., experienced the second largest employment decrease, followed by Marion, Fla., East Baton Rouge, La., and Pinellas,FlaThings don't get much better when adding in the other 3 counties in the Sacramento Metro area, as Yolo and El Dorado also posted job losses that were greater than a slight gain in Placer.
The bottom line is that the Sacramento metro lost over 23,000 jobs from Sept 09 to Sept 10 according to the QCEW, more than double the 11,000 decline in the reported by California EDD over the same period. Unlike EDD, the QCEW actually shows significant state government employment declines in Sacramento, in addition to large drops in the financial sector and local governments. The QCEW data is not sample based and considered more reliable than the EDD monthly reports (but it comes out 6 months later).
As noted in the quote, San Joaquin County was the 2nd worst over this period, but the reported losses were similar to those reported in the EDD reports so it wasn't a surprise and isn't worse than we thought.
To summarize, this new data reaffirms the story that we have been telling for over a year, Sacramento has the worst performing economy in the state, and it may be even worse than originally estimated.
Friday, March 25, 2011
Employment Friday?
It may be time to finally change the title of this monthly post from "Unemployment Friday" to "Employment Friday"....unless you live in the Sacramento Area.
Statewide, non-farm payrolls boomed by 96,500 in February following a flat reading for January. The surprisingly strong performance means non-farm payrolls have surpassed the 14 million mark for the first time since June 2009 and have gained an impressive total of 208,000 jobs in the 5 months since bottoming out in September 2010.
I am unconvinced that this is a sustainable pace as the sizable gains in construction and information will likely receed in coming months. In addition, the household survey (used to calculate the unemployment rate) shows much weaker employment growth. Employment in the household survey is only up 40,000 off the bottom and slight decrease in the statewide unemployment rate has as much or more to do with the decreasing labor force than significant gains in employment.
Nevertheless, there is enough good news in this report to confidently declare that the entire state is out of the recession with the notable exception of Sacramento. Yes, even Northern San Joaquin Valley areas such as Stockton and Modesto; and the Inland Empire are showing signs of recovery in the private sector even as they are being battered by local government cuts.
Our next state and metro forecast update will be in April.
Statewide, non-farm payrolls boomed by 96,500 in February following a flat reading for January. The surprisingly strong performance means non-farm payrolls have surpassed the 14 million mark for the first time since June 2009 and have gained an impressive total of 208,000 jobs in the 5 months since bottoming out in September 2010.
I am unconvinced that this is a sustainable pace as the sizable gains in construction and information will likely receed in coming months. In addition, the household survey (used to calculate the unemployment rate) shows much weaker employment growth. Employment in the household survey is only up 40,000 off the bottom and slight decrease in the statewide unemployment rate has as much or more to do with the decreasing labor force than significant gains in employment.
Nevertheless, there is enough good news in this report to confidently declare that the entire state is out of the recession with the notable exception of Sacramento. Yes, even Northern San Joaquin Valley areas such as Stockton and Modesto; and the Inland Empire are showing signs of recovery in the private sector even as they are being battered by local government cuts.
Our next state and metro forecast update will be in April.
Thursday, March 10, 2011
Will Tom Philp use the Bay Bridge - Delta Conveyance analogy for financing conveyance?
Tom Philp, executive strategist for the Metropolitan Water District, compares the Bay Bridge replacement to Delta Conveyance when discussing the sizing of Delta conveyance. I think it is a much more interesting and relevant analogy for the issue of finance, but I doubt we will see the Bay Bridge toll analogy from MWD when it comes to finance.
First, here is information on Bay Area Bridget tolls from the Bay Area Toll Authority.
It looks like at least 25% of the bridge toll revenues go to subsidize non-bridge transit, and the bridge tolls also cover 100% of the construction, maintenance of the bridges and their seismic retrofits.
Motorists clearly value the services of the bridge enough to fully pay it's cost + a whole bunch of congestion and pollution reducing mitigation projects (it looks like about 50 cents for every $1 they spend on the bridges). Compare that to Delta conveyance where there are serious questions as to whether the water project customers are willing to pay the construction and operations costs of Delta conveyance, let alone mitigation.
Since Philp is interested in sizing, it is worth noting that the toll revenue is sufficient to pay for a bridge with even more lanes, yet they decided it was better to pay for fewer lanes and subsidize transit. If we were to think about sizing/finance of Delta conveyance similar to the Bay Bridge we would be talking about charging MWD's customers enough to pay for 2 tunnels; but only build one tunnel and use the rest of the money to subsidize urban water conservation, water recycling plants, storm water capture, etc.
Here is Philp's analogy on sizing projects (in fairness, he admits it isn't the best analogy, but for other reasons).
First, here is information on Bay Area Bridget tolls from the Bay Area Toll Authority.
In fiscal year 2009-10, approximately 123 million vehicles crossed the seven state-owned toll bridges in the Bay Area, generating approximately $466 million in total toll revenues — including $130 million in base toll revenues, $112 million in Regional Measure 2 revenues and $224 million in seismic retrofit surcharge revenues.
The base toll revenues are used first to cover the ongoing operations, toll facilities maintenance and administration of the bridges. Remaining toll revenues fund debt service on Regional Measure 1 project financing and various transit and traffic-relieving capital projects that serve the bridge corridors.
Regional Measure 2 funds are used to fund the Regional Measure 2 projects. (blogger note: Measure 2 projects are almost all transit subsidies)
The seismic surcharge toll revenues are used to fund a multibillion-dollar seismic retrofit program to strengthen and reinforce bridge structures and roadways on all of the seven state-owned Bay Area bridges, including replacing the eastern span of the San Francisco-Oakland Bay Bridge.
It looks like at least 25% of the bridge toll revenues go to subsidize non-bridge transit, and the bridge tolls also cover 100% of the construction, maintenance of the bridges and their seismic retrofits.
Motorists clearly value the services of the bridge enough to fully pay it's cost + a whole bunch of congestion and pollution reducing mitigation projects (it looks like about 50 cents for every $1 they spend on the bridges). Compare that to Delta conveyance where there are serious questions as to whether the water project customers are willing to pay the construction and operations costs of Delta conveyance, let alone mitigation.
Since Philp is interested in sizing, it is worth noting that the toll revenue is sufficient to pay for a bridge with even more lanes, yet they decided it was better to pay for fewer lanes and subsidize transit. If we were to think about sizing/finance of Delta conveyance similar to the Bay Bridge we would be talking about charging MWD's customers enough to pay for 2 tunnels; but only build one tunnel and use the rest of the money to subsidize urban water conservation, water recycling plants, storm water capture, etc.
Here is Philp's analogy on sizing projects (in fairness, he admits it isn't the best analogy, but for other reasons).
When Caltrans decided that the eastern span of the Bay Bridge needed replacing because of earthquake concerns, there was no debate about how big to build it. The old bridge was five lanes. The new bridge will be five lanes. There was no discussion about intentionally constricting it to, say, promote carpools or public transit or to save on construction costs. Size/capacity was never an issue.The facts on Bay Bridge finance seem to show that Philp is wrong. They could have made the bridge bigger, but they didn't and are using bridge tolls to promote public transit.
Thursday, March 3, 2011
ACWA and Tom McClintock Call for Cost-Benefit Analysis of Water Projects
I don't think I've seen two public calls for cost-benefit analysis of water projects all year. While browsing Aquafornia tonight, I see 2 posts asking for cost-benefit analysis in a single day. Even more amazing, it is coming from sources that I usually criticize: ACWA and Rep. Tom McClintock. Tremendous.
I have given ACWA a hard time in many posts on this blog, especially for their PR efforts like their "National Geographic" magazine, and when they staged their own water=jobs march on Sacramento back in 2009.
Back to the point. I was delighted by this excerpt in ACWA Executive Director Tim Quinn's comment letter to the Delta Stewardship Council.
On to Tom McClintock. This paragraph in Rep McClintock's opening statement for the HouseWater and Power Subcommittee meeting was a surprisingly rational departure from the over-the-top political rhetoric.
I have given ACWA a hard time in many posts on this blog, especially for their PR efforts like their "National Geographic" magazine, and when they staged their own water=jobs march on Sacramento back in 2009.
The Delta Plan needs to include an assessment of the fiscal costs and economic impacts of the proposed actions...To the extent possible, the Plan and EIR should also disclose potential impacts (favorable and unfavorable) of each alternative on local, regional, and statewide economic stability. The plan should promote actions that, to the greatest degree feasible, encourage local and regional solutions.Tim Quinn has a background in Economics and I think he knows what this means. He certainly has incentives to be careful to keep his member agencies out of financial trouble and reasons to be concerned. Maybe he can orchestrate an ACWA march to the next Stewardship Council with signs that say Cost-Benefit analysis now! I would grab a sign. Jokes aside, this is encouraging. It's time for more economics and less PR.
On to Tom McClintock. This paragraph in Rep McClintock's opening statement for the HouseWater and Power Subcommittee meeting was a surprisingly rational departure from the over-the-top political rhetoric.
We will seek to inventory all of our potential water and power resources, establish and apply a uniform cost-benefit analysis to prioritize financing for those projects that produce the greatest benefits at the lowest costs, and to restore the “beneficiary pays” doctrine that assures those who benefit from these projects pay for these projects, protecting general taxpayers of one community from being plundered for projects that exclusively benefit another.Wow, I completely agree with an entire paragraph from a Tom McClintock speech. Unlike Tim Quinn and ACWA, I wonder if Rep. McClintock really knows/wants what he is asking for here. Real cost-benefit analysis of water projects could favor efficiency (aka "scarcity" mentality) over dams and the "abundance" agenda he is promoting.
Wednesday, March 2, 2011
Importing Poverty: Immigration and the Changing Face of Rural America by Philip Martin
I strongly recommend Philip Martin's book, Importing Poverty: Immigration and the Changing Face of Rural America, (2009, Yale University Press). I just finished reading it, and believe it has a lot to say about the path to more sustainable and prosperous future for the Valley Economy. Martin takes a dynamic approach to the issue of farm labor, and discusses the challenges of integration and how the farm labor treadmill creates long-term economic development challenges for the economy of the Central Valley.
Martin discusses the potential and the need for greater mechanization to keep American agriculture competitive and raise wages in the agriculture sector. He is critical of past attempts at immigration reform and much of the agriculture industry's arguments for legalizing the status quo of a revolving door of cheap, foreign, unskilled labor. In the final chapter, he discusses AgJobs, the controversial immigration reform proposal endorsed by the agriculture industry and farm workers.
The AgJobs proposal would provide a path to legalization (green card) for immigrants who worked in agriculture for five years, fulfilling the desire of farmworker advocates for a path to legalization and the agriculture industry's desire for a low-cost foreign workforce by continuously replenishing the 1.4 million guest farm workers holding "blue cards". In a sense, it legalizes the current farm labor treadmill. In previous posts, I have criticized the deceptive way the agriculture industry has promoted the bill, but stopped short of completely opposing it.
Martin proposes an improvement to the AgJobs proposal to "regularize and rationalize" the farm labor market. Employers would pay a payroll tax on the wages of "blue card" holders with the funds dedicated to two purposes: 1) mechanization research and development and 2) bonus payments for guest workers who choose to return to their home country at the end of five years instead of receiving a U.S. green card. This would smooth the transition of the agriculture industry to a more capital and less labor-intensive future, reduce the flow, and resulting integration problem, of new low-skilled immigrants to rural communities, and should improve the situation of hard-working immigrant farm workers. It is more costly for farmers than the current AgJobs proposal (especially in the short-run), but it is more fair and less costly on taxpayer and rural communities in the long-run.
Martin is an agricultural economics professor at UC-Davis, and I wish his ideas and research were receiving more discussion in the Valley. I believe labor (not water) is the most crucial long-run agricultural issue in the Valley economy, and I would like to see more UC agricultural economists dedicate more resources to researching and searching for solutions in this area.
Martin discusses the potential and the need for greater mechanization to keep American agriculture competitive and raise wages in the agriculture sector. He is critical of past attempts at immigration reform and much of the agriculture industry's arguments for legalizing the status quo of a revolving door of cheap, foreign, unskilled labor. In the final chapter, he discusses AgJobs, the controversial immigration reform proposal endorsed by the agriculture industry and farm workers.
The AgJobs proposal would provide a path to legalization (green card) for immigrants who worked in agriculture for five years, fulfilling the desire of farmworker advocates for a path to legalization and the agriculture industry's desire for a low-cost foreign workforce by continuously replenishing the 1.4 million guest farm workers holding "blue cards". In a sense, it legalizes the current farm labor treadmill. In previous posts, I have criticized the deceptive way the agriculture industry has promoted the bill, but stopped short of completely opposing it.
Martin proposes an improvement to the AgJobs proposal to "regularize and rationalize" the farm labor market. Employers would pay a payroll tax on the wages of "blue card" holders with the funds dedicated to two purposes: 1) mechanization research and development and 2) bonus payments for guest workers who choose to return to their home country at the end of five years instead of receiving a U.S. green card. This would smooth the transition of the agriculture industry to a more capital and less labor-intensive future, reduce the flow, and resulting integration problem, of new low-skilled immigrants to rural communities, and should improve the situation of hard-working immigrant farm workers. It is more costly for farmers than the current AgJobs proposal (especially in the short-run), but it is more fair and less costly on taxpayer and rural communities in the long-run.
Martin is an agricultural economics professor at UC-Davis, and I wish his ideas and research were receiving more discussion in the Valley. I believe labor (not water) is the most crucial long-run agricultural issue in the Valley economy, and I would like to see more UC agricultural economists dedicate more resources to researching and searching for solutions in this area.
Thursday, February 24, 2011
Are PPIC water reports improving?
Two reporters called me yesterday on the eve of the release of yet another PPIC report on California water. I had not seen the new report, but did make some critical comments about the economics in their previous work. If any of those comments make it in the papers, it might raise some questions about what I meant.
First, the new report was released last night, and I have now had a chance to briefly review the executive summary, and it looks significantly better on initial impression. There isn't a lot of economics, although it calls for public funding for a number of initiatives with fees, but has no analysis of cost-effectiveness or how high those fees might have to be. The comments about realigning state agencies and "triage" for endangered species will probably get the most attention. Notably, the 16 page executive summary doesn't contain their usual statement that a peripheral canal is the best solution for the Delta and emphasizes urban conservation much more than usual. [Update 8 AM: I have now read 2 news reports with quotes from the press briefing and I may have been premature with this quick positive reaction.]
Let's hope they are improving, because the PPIC team has already done enough damage, and should think about some "reconciliation" of their own work. As I have discussed elsewhere, PPIC badly botched the economics in their 2008 analysis of the peripheral canal, and are largely responsible for establishing unrealistic expectations for the financial viability of a canal and a BDCP type plan. The financing stalemate plaguing BDCP and the Stewardship Council is not just interest groups maneuvering for the most favorable terms, but is caused by real questions of whether the isolated conveyance projects fundamentally provide enough value to beneficiaries to justify their construction costs.
Members of the PPIC also contributed to the water/jobs hysteria, although they have made some efforts to correct those mistakes. Finally, their previous reports have had a pro-exporter and anti-Delta bias (especially the Water Myths report that incredibly argued that CVP farmers were not subsidized, and conspicuously left Delta interests out of their "no villians" section), but this seems better.
As a final note, this quote from the executive summary amused me:
As I get around to reading the details of the report, I will try to post more detailed comments. My impression could change for the better or worse.
First, the new report was released last night, and I have now had a chance to briefly review the executive summary, and it looks significantly better on initial impression. There isn't a lot of economics, although it calls for public funding for a number of initiatives with fees, but has no analysis of cost-effectiveness or how high those fees might have to be. The comments about realigning state agencies and "triage" for endangered species will probably get the most attention. Notably, the 16 page executive summary doesn't contain their usual statement that a peripheral canal is the best solution for the Delta and emphasizes urban conservation much more than usual. [Update 8 AM: I have now read 2 news reports with quotes from the press briefing and I may have been premature with this quick positive reaction.]
Let's hope they are improving, because the PPIC team has already done enough damage, and should think about some "reconciliation" of their own work. As I have discussed elsewhere, PPIC badly botched the economics in their 2008 analysis of the peripheral canal, and are largely responsible for establishing unrealistic expectations for the financial viability of a canal and a BDCP type plan. The financing stalemate plaguing BDCP and the Stewardship Council is not just interest groups maneuvering for the most favorable terms, but is caused by real questions of whether the isolated conveyance projects fundamentally provide enough value to beneficiaries to justify their construction costs.
Members of the PPIC also contributed to the water/jobs hysteria, although they have made some efforts to correct those mistakes. Finally, their previous reports have had a pro-exporter and anti-Delta bias (especially the Water Myths report that incredibly argued that CVP farmers were not subsidized, and conspicuously left Delta interests out of their "no villians" section), but this seems better.
As a final note, this quote from the executive summary amused me:
The lack of a strong state technical and scientific programFirst, who says state funded isn't advocacy-funded. Second, hasn't the PPIC owned "center stage" among researchers in this debate. Do you know any other researchers that routinely hold press briefings and media events when they release a paper? Is their work less advocacy-funded and less combative than others. What are they complaining about?
is allowing advocacy-funded “combat science” to take center stage
As I get around to reading the details of the report, I will try to post more detailed comments. My impression could change for the better or worse.
Wednesday, February 23, 2011
Do Foreclosure Rates Measure Urban Misery?
With Forbes adding foreclosure rates to their misery index this year, I have taken a look at this list. There has been plenty of attention to the top of the foreclosure lists (Central Valley, Vegas, Florida always rank high), but not much to the bottom.
If ranking high in foreclosures is an indicator of misery, then I guess ranking low in foreclosures must be a measure of healthy, vibrant metro areas. Take a look at the metro areas with the lowest foreclosure rates in this ranking of foreclosure rates from Realty Trac. Among the best performers are such dynamic metro areas as: Fayetteville, NC; El Paso, TX; Huntington, WV; and Utica-Rome NY.
If ranking high in foreclosures is an indicator of misery, then I guess ranking low in foreclosures must be a measure of healthy, vibrant metro areas. Take a look at the metro areas with the lowest foreclosure rates in this ranking of foreclosure rates from Realty Trac. Among the best performers are such dynamic metro areas as: Fayetteville, NC; El Paso, TX; Huntington, WV; and Utica-Rome NY.
Wednesday, February 16, 2011
Joe Grindstaff misquotes the Draft Delta Plan 3 out of 4 times
I thought the Draft Delta Plan was a snooze until someone pointed me to Joe Grindstaff's cover memo. I guess Joe thought the plan was a snooze too and he needed to liven it up some, since 3 of the 4 key findings he quoted from the draft plan were not actual quotes from the plan.
Perhaps I am nit picking here, but quotation marks are serious business, especially when you are the official voice summarizing a critical 51 page policy document to the press and general public.
Unlike most people, I read the draft plan first, and Grindstaff's memo later. I didn't think the memo reflected the content of the draft that accurately, and went back to the draft to see how I could have missed the emphasis on these key findings. Here is the summary in Grindstaff's cover memo, and if you search the draft plan document, only his third quote actually appears in the draft plan.
There must have been 20 or more findings in the draft which were presented without any ordering or emphasis, so choosing 4 findings for the cover memo (which is all many people will read) already risks introducing personal bias, and needs to be done carefully. Even if I ignore the misquotes, Grindstaff's selections seem to have some bias. First, the draft report has findings in 4 chapters, and the only chapter Grindstaff ignored is the one that describes the importance of Delta as a place, whereas water supply issues get two spots (and are the most misrepresented).
It is interesting that the only ecosystem finding he quotes is the one that is intended to dampen expectations for ecosystem restoration and was the last finding in the list in this section. No mention of Delta flow requirements. At least he quoted this one accurately.
The first two regarding water supply aren't actually in the draft report. The words "oversubscribed" and "volatile" do not actually appear anywhere in the document. The commentary shows bias too, suggesting that reducing Delta exports won't do any good because it will just increase ground water overdraft. I might point out that the opposite wasn't exactly true either, building the water projects and increasing delta pumping didn't stop groundwater overdraft. He could have pointed out that reduced Delta exports in recent years did lead to much more urban water conservation than people expected with little cost to the urban economy, and that it also stimulated increased agriculture to agriculture water transfers and increased efficiencies. But these would be good results from reducing exports, and he is just emphasizing the negative (although he didn't mention field fallowing which is a negative too).
When it comes to the Delta, Grindstaff chooses to emphasize that it is a disaster in the making while ignoring that the fact that it is a place as emphasized in the water legislation. He even throws in a New Orleans comparison, even though you won't find the word "New Orleans" anywhere in the draft plan either.
Grindstaff's cover memo would be just fine if it were a blog post like this commenting on the plan, but it is a summary coming from an official spokesman, the Council's executive officer. He has a lot of control over the information that the Delta Stewardship Council members receive (not to mention the press and the public), and they need to be able to rely on him to represent it accurately.
As the Delta plan progresses to detail important and controversial measures such as the details of any proposed conveyance and financing plans, it will be important for Grindstaff and the Stewardship Council to be more careful and accurate if they want to maintain trust and credibility.
[Update: Joe Grindstaff left a comment with an explanation. Click through to the comments to see it.]
[Update 2, 2/23: I am surprised, but this is by far the most viewed post in the history of this blog. I am also a bit sad since this is less substantive than most posts. I guess the blog would be more popular if I talked less about economics and more about individuals and media spin.]
Perhaps I am nit picking here, but quotation marks are serious business, especially when you are the official voice summarizing a critical 51 page policy document to the press and general public.
Unlike most people, I read the draft plan first, and Grindstaff's memo later. I didn't think the memo reflected the content of the draft that accurately, and went back to the draft to see how I could have missed the emphasis on these key findings. Here is the summary in Grindstaff's cover memo, and if you search the draft plan document, only his third quote actually appears in the draft plan.
I want to point out four key preliminary staff draft findings in this document:Sure enough, Grindstaff's quotes that aren't quotes were reprinted verbatim in many press accounts as the key findings in the draft plan.
1. “California’s total water supply is oversubscribed. California regularly uses more water annually than is provided by nature.” This reality makes the management of our limited surface water supplies and the Delta even more critical. When water exports from the Delta are reduced, the unintended consequence is increased demand on an already overused and unsustainable groundwater system.
2. “California’s water supply is increasingly volatile.” Precipitation and runoff patterns are changing, increasing uncertainty for water supply and quality, flood management, and ecosystem functions.” We must adapt our management practices in order to protect ourselves against present and future risk and if we are to achieve the coequal goals.
3. “Even with substantial ecosystem restoration efforts, some native species may not survive.” Best available science indicates that some stressors are beyond our control and the system may have already changed so much that some species may never be able to recover.
4. “There is no comprehensive state or regional emergency response plan for the Delta.” In spite of all the analysis that says that we have greater risk than New Orleans, all we have at the state and regional level are plans to develop plans.
There must have been 20 or more findings in the draft which were presented without any ordering or emphasis, so choosing 4 findings for the cover memo (which is all many people will read) already risks introducing personal bias, and needs to be done carefully. Even if I ignore the misquotes, Grindstaff's selections seem to have some bias. First, the draft report has findings in 4 chapters, and the only chapter Grindstaff ignored is the one that describes the importance of Delta as a place, whereas water supply issues get two spots (and are the most misrepresented).
It is interesting that the only ecosystem finding he quotes is the one that is intended to dampen expectations for ecosystem restoration and was the last finding in the list in this section. No mention of Delta flow requirements. At least he quoted this one accurately.
The first two regarding water supply aren't actually in the draft report. The words "oversubscribed" and "volatile" do not actually appear anywhere in the document. The commentary shows bias too, suggesting that reducing Delta exports won't do any good because it will just increase ground water overdraft. I might point out that the opposite wasn't exactly true either, building the water projects and increasing delta pumping didn't stop groundwater overdraft. He could have pointed out that reduced Delta exports in recent years did lead to much more urban water conservation than people expected with little cost to the urban economy, and that it also stimulated increased agriculture to agriculture water transfers and increased efficiencies. But these would be good results from reducing exports, and he is just emphasizing the negative (although he didn't mention field fallowing which is a negative too).
When it comes to the Delta, Grindstaff chooses to emphasize that it is a disaster in the making while ignoring that the fact that it is a place as emphasized in the water legislation. He even throws in a New Orleans comparison, even though you won't find the word "New Orleans" anywhere in the draft plan either.
Grindstaff's cover memo would be just fine if it were a blog post like this commenting on the plan, but it is a summary coming from an official spokesman, the Council's executive officer. He has a lot of control over the information that the Delta Stewardship Council members receive (not to mention the press and the public), and they need to be able to rely on him to represent it accurately.
As the Delta plan progresses to detail important and controversial measures such as the details of any proposed conveyance and financing plans, it will be important for Grindstaff and the Stewardship Council to be more careful and accurate if they want to maintain trust and credibility.
[Update: Joe Grindstaff left a comment with an explanation. Click through to the comments to see it.]
[Update 2, 2/23: I am surprised, but this is by far the most viewed post in the history of this blog. I am also a bit sad since this is less substantive than most posts. I guess the blog would be more popular if I talked less about economics and more about individuals and media spin.]
Thursday, February 10, 2011
A new term for subsidy
The latest Sac Bee op-ed promoting a peripheral canal (written by an infrastructure construction firm) contains a remarkable sentence.
I also think they missed the mark on this statement.
If this project cost one or two billion it would be built, and we could afford to operate it in the environmentally friendly way that has been so alluring to many environmentalists. If that was the case, I would support it.
But it costs a heck of a lot more than that ($15 billion is the latest I have heard), and there are very good reasons to question whether the benefits (both private and public) exceed the costs. There may be more cost-effective ways to cope with the risks, and those who would benefit from these projects have been known to exagerrate the calamities that could result, while ignoring the very real calamities that will result from redirecting billions of public dollars in this direction. Despite hundreds of millions on research and consultants, the one obvious research project you don't see is a cost-benefit analysis on the proposed conveyance. Why not?
All the evidence I have seen suggests that paying for this tunnel is going to require forgetting about one of the co-equal goals, the environment, an enormous taxpayer subsidy, and very likely both taxpayer subsidies and relaxed environmental protections.
Recent events have shown taxpayers are pretty disgusted with "bailouts." So, policy makers should be sure that any incentives in the form of public financing have terms at least as stringent as those given to Wall Street and GM, including reasonable interest rates and payback periods, and a taxpayer equity stake in the enterprises.
(minor edits Thursday at 10 P.M.)
At a time when public dollars are at a premium, all funding options should be on the table, including incentives for encouraging private investment.Huh? Public dollars are at a premium...so we need "incentives". That doesn't sound like it will cost taxpayers any money does it, but I haven't seen too many incentives that aren't taxpayer subsidies.
I also think they missed the mark on this statement.
It's safe to say the biggest roadblocks facing any potential solutions to the Delta's problems aren't related to engineering. We have the technical know-how. It's governance.The roadblock isn't governance, it's finance. The water package put in a governance structure that will easily lead to their dual conveyance solution if they can figure out a way to pay for it.
If this project cost one or two billion it would be built, and we could afford to operate it in the environmentally friendly way that has been so alluring to many environmentalists. If that was the case, I would support it.
But it costs a heck of a lot more than that ($15 billion is the latest I have heard), and there are very good reasons to question whether the benefits (both private and public) exceed the costs. There may be more cost-effective ways to cope with the risks, and those who would benefit from these projects have been known to exagerrate the calamities that could result, while ignoring the very real calamities that will result from redirecting billions of public dollars in this direction. Despite hundreds of millions on research and consultants, the one obvious research project you don't see is a cost-benefit analysis on the proposed conveyance. Why not?
All the evidence I have seen suggests that paying for this tunnel is going to require forgetting about one of the co-equal goals, the environment, an enormous taxpayer subsidy, and very likely both taxpayer subsidies and relaxed environmental protections.
Recent events have shown taxpayers are pretty disgusted with "bailouts." So, policy makers should be sure that any incentives in the form of public financing have terms at least as stringent as those given to Wall Street and GM, including reasonable interest rates and payback periods, and a taxpayer equity stake in the enterprises.
(minor edits Thursday at 10 P.M.)
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