Impacts of Isolated Conveyance on Delta Agriculture: Update

I have been too busy to follow much of anything for a few days, but a concern has been raised to me that the $200 million agriculture loss from isolated conveyance reported in the post below and a newspaper article is an exagerration because it reflects a heavy pumping scenario, not what is actually proposed in the current BDCP.  This is a good point, and I agree that a "would" should have been a "could" or presented as a range and I take responsibility for that slip.  It will be corrected in presentations later this week, similar to what is written below. 

If forced to use a single number, I am using an estimated impact of agricultural revenue losses of $50 million.  How is it supported?  The models that have been developed for the report estimate annual losses ranging from $27m under current south Delta salinity standards (0.7 EC) to $64m under proposed  (1.0 EC) salinity standards currently under consideration by the SWRCB (I note that these numbers are revised modeling results with lower numbers than I was provided to include in the 1st draft).  In addition, the footprint of the tunnel conveyance is 8,000 acres which will be primarily farmland in a zone that currently averages $2,075 per acre.  Assuming some of it takes out non-farmland, a reasonable estimate is another $8m to $16m from the footprint.  That gives you a reasonable estimate of revenue losses of isolated conveyance to Delta agriculture (assuming it is operated as proposed in the draft BDCP) of $35m to $80m.  Thus, I am comfortable using $50m as a discussion number, and have rewritten the summary of this results as:

"If operated as proposed in the draft BDCP, isolated conveyance would decrease Delta agricultural production by about $50 million, and would have a negative impact on tourism development and the rural quality of life.  If a large isolated conveyance were operated to maximize water supplies, south Delta salinity could triple and agricultural production losses could increase to $200 million.  The higher scenario illustrates the risk of a large capacity conveyance to the Delta since there will be financial and political pressure to increase exports to high levels."

I also emphasize that it is a draft, results continue to be refined, but that the impacts are in fact very consistent with those Prof. Howitt estimated in 2007; $70m loss, up to $200m in high scenarios. Not much difference in this number, but the adjectives we use and our overall view of the situation is very different.

I don't intend to post every little update and revision to this report as it progresses through drafts, but felt this clarification was needed now given a concern that has been raised.

Update:  There was a typo in the original post, the upper level of salinity loss is $64m but was originally reported as $54m. 

First Administrative Draft of the Economic Sustainability Plan for the Delta

[Update Note: This is a description of preliminary results from a first, incomplete draft.  For up to date information on the most recent complete drafts of the plan, visit the Delta Protection Commission website.  I also deleted a paragraph that listed key contributors, because several of the sub-contractors have been bothered by people associated with the BDCP for their names appearing on this blog that makes critical comments about the BDCP.  In hindsight, I shouldn't have deleted the paragraph, but I can't recover it now.]

As some ValleyEcon readers know, I am the PI on the Delta Protection Commission's Economic Sustainability Plan (phase 2).  The first administrative draft of the ESP report was posted this afternoon in preparation for a DPC workshop at the Port of Stockton on June 23.  This contract was only awarded in March, and a stellar research team has been working hard to get us to this point in under 3 months.  It is work in progress, and some portions are incomplete.

...
The initial list of key findings is below:

·         Delta agriculture supports 13,700 jobs, $1.1 billion in value-added, and nearly $2.8 billion in economic output in the five Delta counties.  In addition, Delta agriculture supports nearly 23,000 jobs, over $1.9 billion in value-added, and over $4.6 billion in economic output in the state of California. (chapter 7)

·         Delta recreation and tourism supports 2,700 jobs, $152 million in value-added, and nearly $284 million in economic output in the five Delta counties.  In addition, Delta recreation and tourism generates over 4,900 jobs, $324 million in value-added, and $600 million in economic output in the state of California.  (chapter 8) 

·         Delta agriculture supports 5 times more jobs, and 7 times more value-added (income) than Delta recreation and tourism.  While recreation is an important supporting economic sector and adds to the Delta’s unique quality of life, it is unrealistic to expect that recreation and tourism could replace agriculture as the Delta’s economic driver.  (chapters 7 and 8)

·         All available indicators for Delta recreation suggest Delta tourism has been flat for one to two decades before the onset of the recession.  Regional population growth is an opportunity, but does not by itself guarantee growth in Delta recreation and tourism.  Delta boating and fishing increased rapidly in the 1980s and previous decades, but has slowed since.  Improved water quality and new investment in recreation facilities and hospitality enterprises are frequently cited as being essential to growing recreation and tourism in the Delta. (chapter 8)

·         Improving the visibility and recognition of the Delta as a place will benefit Delta tourism and agriculture.  The Delta Protection Commission should complete its feasibility assessment of National Heritage Area designation. (chapter 8)

·         Delta levees are critical to economic sustainability.  The Delta levee system protects critical water, energy, and transportation infrastructure for the state and regional economy, and supports all aspects of the Delta economy.   (chapter 4)

·         Delta levees are in better condition than often portrayed, but still need investment.  As opposed to frequent reports that cite over a thousand miles of “fragile” levees in need of billions in repairs, there are actually about 370 miles of Delta levees that need roughly $500 million in investment to reach appropriate standards.  This goal could be reached with strategic use of existing bond funds. (chapter 4)

  

·         Population trends in the primary zone are relatively flat, but uneven across regions.  North Delta population increased over the past decade, whereas South and East areas of the primary zone declined in population.  In contrast, the secondary zone population increased 25% between 2000 and 2010.  (chapter 2)

·         The current capacity of Delta tourism infrastructure and enterprises is insufficient to capture significant income from increased visitation.  If the goal of the Delta Plan is to increase Delta tourism, there needs to be greater incentives for investment in tourism businesses, not increased regulation of “covered actions” in the Delta that discourage these investments. (chapter 8)

·         Implementing the November/December 2010 draft of the Bay Delta Conservation Plan would be devastating to the Delta economy.  It would cause a 30-50% decline in Delta agriculture, and could decrease Delta recreation and tourism.  (chapters 7 and 8)

·         Large, isolated conveyance would decrease Delta agricultural production by nearly $200 million, and negatively impact Delta tourism.  Increased South Delta salinity would cause large decreases in the production of high-value truck crops, and also negatively impact high-value vineyards.  Increased salinity would also negatively impact boating, and the large scale industrialization of the Sacramento River with five large new pumping plants and intakes near historic Legacy Communities would have negative impacts on tourism development and the rural quality of life.  (chapters 7 and 8)

·         The BDCP proposal to create 65,000 acres of tidal marsh habitat would reduce annual agricultural production by a minimum of $84 million, and generate little if any compensating tourist spending.  The $84 million annual loss in agricultural production assumes targeted land acquisition to minimize impacts, and annual losses could exceed $100 million if agricultural encroachment is not minimized.  (chapter 7)

·         Several influential studies of Delta issues have significant errors in economic analysis.  The most notable problems are various PPIC reports that have misled decision makers about the Delta economy and inaccurately portray the economics of the peripheral canal and investment decisions in Delta levees.  (chapter 5)

DRMS Phase 2 report released

Interestingly, I just discovered the Department of Water Resources released the Delta Risk Management Strategy (DRMS) Phase 2 report on Monday when searching for a tidbit of information from DRMS Phase 1.

June 13, 2011 - The Department of Water Resources has released the Delta Risk Management Strategy Phase 2 Report and Executive Summary. The Delta Risk Management Strategy (DRMS) Phase 2 report builds on the knowledge gained from the DRMS Phase 1 assessment to evaluate scenarios which could reduce the risks to our State economy. The methods include a selection of improvement strategies considered at the time of the study in 2009; however, today, there are more options in play. The information in the report provides insight to methods that may be used by the Department and others to manage risk.

Among the obvious signs that the study is from 2009 are that it uses a $4.9 billion cost estimate for a peripheral canal that is dated from 2007.  The results, and I have not reviewed to see how reliable the calculations are, show that improved levee strategies and isolated conveyance rank very close, and anyone who would interpret the results as saying isolated conveyance is best should realize that any net benefit advantage from isolated conveyance completely disapears if one uses more current cost estimates.

There are many other curious aspects of the report, such as its combining conveyance scenarios with putting highways on piers and armored infrastructure corridors that confuse the issues.  At this point, the phase 2 report will probably have little impact on the debate.  However, it is hard to use the DRMS Phase 2 results to justify a peripheral canal over upgrading levees in the way that many spun Phase 1.

The timing and low profile of this release is probably the most interesting aspect of it.  Very odd.  I would be interested in hearing more about that if anyone knows and is willing to share.

Water and Jobs in the San Joaquin Valley, again...

Since Devin Nunes introduced H.R. 1837, I don't think a day has gone by when someone hasn't asked me to write a letter, op-ed, blog, press release, t.v. show, speak at a meeting/hearing, etc.  I've even had people try to make it easy for me by sending ghost-written letters and op-eds for me to approve complete with folksy quotes and flattering self-references (sorry, but I write my own stuff). 

I did have an intern call his office a few times to get a source on the 25,000 to 30,000 jobs created claim in the bills press release and promotional materials, but we never got a call back.  I think I saw the fisherman respond by pulling their own billion dollar propaganda back out, and it makes me feel as if the debate has taken a few steps backwards to a place I thought we left behind.

I typed up a FAQ style handout for a meeting earlier today, and posted it to our website here.  Not much new information, but hopefully this format is useful to the folks asking for something new.

So, what do I think of the bill anyway?  I have been interested in all the comments about how Nunes is undermining the BDCP, suggesting that his bill is bad for his own constituents.  Yes, he is undermining BDCP, but BDCP isn't shaping up to be a great deal for South Valley agriculture anyway.  The costs are much higher and the additional water is much lower than they thought it would be when the originally signed on to look at it.  I think South Valley ag. is better off under the current biops (less water than they want, but at least most of it is cheap) than under an unsubsidized BDCP (a little more water, but all the water is a lot more expensive).  If that's the case, then the best strategy for them is to try to change the pump operations through legal and political channels.

Unemployment Friday: CA down to 11.9%, but other states dropping faster

In today's report, some people are trying to make something positive of dropping below the 12% unemployment threshold to 11.9%.  They shouldn't get too excited.

What would be exciting is if we were seeing the kind of declines seen in places like Michigan and Nevada.  Unemployment used to be higher in Michigan than in California, but it is down to 10.2% there from a peak in the 14s, and Nevada is down to 12.5%, dropping 0.7% in a single month and it also peaked in the 14s.  If these trends continue, Nevada may drop below California and leave California with the highest unemployment rate in the U.S.  And then we will see a new wave of stories on California's downfall.

However, unemployment rate movement is being driven more by labor force changes than employment growth.  Michigan and the auto industry is rebounding, but it's labor force is also shrinking, down 6% over 4 years.  So, it is recovering a little better than California, but not as much as the unemployment rate would lead you to believe.

And Nevada.  The labor force there has declined by 4% over the past year, and that is what has driven the unemployment rate from 14.9% to 12.5% in a year, although tourism and the casino's are slowly picking up, employment is still down.

So when California's unemployment rate becomes tops in the nation later this year, it is an indicator that our economy stinks and recovery is lackluster.  But it also means that people aren't giving up on California's job market (whether by moving or leaving the workforce) at the same pace as Nevada or Michigan.

Within California, some of the big inland areas like Sacramento and Riverside are showing large labor force declines too, but only about half that seen in Nevada.  This month's job report mostly reflects the same patterns.  Silicon Valley, Disneyland and Hollywood are recovering.  The housing market continues to keep inland areas down; although there continues to be signs in the Valley of solid growth in agriculture, transportation/logistics, and food manufacturing; just not enough to overcome the housing and local government crash.

Squatter's Rent/Stimulus

A J.P. Morgan Chase analyst estimates that the value of "squatter's rent" will total $50 billion in the U.S.  That's a significant sum, about 0.4% of total U.S. personal income.  (Note: Squatters rent refers to the value of free "rent" enjoyed by those living in homes in foreclosure or seriously delinquent on a mortgage.)

Last spring, I made a similar estimate for San Joaquin County although I called it "squatter stimulus."  At that time, I estimated the squatter stimulus was equal to roughly 3% of the County's personal income, based on the 20% of serious delinquency rate on San Joaquin County mortgages at the time, and the estimated rental value of a typical house in the foreclosure process. 

In a bit of good news, the serious delinquency rate in San Joaquin County has declined to 15% according to the lastest data I saw.  This suggests that the total of households leaving delinquency due to a completed foreclosure, short sale, or mortgage modification is greater than new delinquencies.  Before getting too excited about the decline in delinquencies, it is important to realize that a typical historic delinquency rates on mortgages is about 2% (and a lot more of these delinquent mortgages were successfully resolved without foreclosure since a lot of these owners had equity in the homes creating a strong incentive to sell or get current).  So we are likely past the peak, but there is still a long, long way to go.

Declining delinquencies also reduce the amount of squatter stimulus in the County, and I suspect it is now about 2% of personal income.  Obviously, squatter stimulus is not a sustainable or desirable basis for consumer spending, but it is a factor to note when considering how local consumer spending will evolve in the recovery.

From the San Francisco Chronicle on squatter's rent:

"Squatter's rent," or the increase to income from withheld mortgage payments, will be an estimated $50 billion this year, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. The extra cash could represent a boost to spending that's equal to about half the estimated savings generated by cuts to payroll withholding in December's bipartisan tax plan.

"We've had a lot of government transfers to the household sector; this is a transfer from the business sector to households," Feroli said. "It's a shock absorber that has helped the consumer ride out the storm."

Delta Tourism article in Sac Bee

Overall, this is a good article and I generally agree with the main points in the article in the report.  Public access to the water in the Delta could/should be greatly improved, and there is a lot of growth potential for recreation in the Delta.

But there is an incorrect number in the article that could be misintepreted.  The Sac Bee article states.

Mandated by 2009 water reform legislation, the report says visitor spending in the Delta generates $784 million annually and supports 15,000 jobs. There is potential for much more if only there were more trails, campsites and waterfront access.

Here is what the report actually says.

Economic Activity in the Delta. The purchase of equipment and supplies for day outings helps support local economies.

Visitor spending in the Delta and Suisun Marsh counties’ recreation, art, and entertainment sectors is about $784 million annually, generating almost $388.7 million in earnings and supporting over 15,000 jobs.

Did you notice the subtle difference?   It's easy to see how this was misinterpreted by the reporter.  I think it would be by most people.

I have no idea why this number is even in the State Parks report.  The numbers are correct, but have little to do with the Delta.  It is the total of arts, entertainment, and recreation in the 5 counties that include the Delta.  I checked the numbers, and about 20% of the total is the Sacramento Kings NBA team.  The arena in Natomas may be in a flood zone, but it isn't in the Delta.  The next biggest things are 6 Flags amusement park in Vallejo, and scores of golf courses, fitness clubs, bowling centers, and arts related organizations.  Marinas are the biggest Delta-related piece of this and employ about 300 people in the 5 counties, mostly in the Delta. 

The impact of tourism and recreation in the Delta is a very hard thing to measure, and it will be important to get the number right for some of the current and upcoming policy discussions surrounding the Delta.  I am part of a group that is developing a more reliable estimate, and will share that once we have it.  A very rough ballpark would be $250 to $500 million, and the largest and fastest growing component of that spending is gasoline. 

Even defining Delta tourism and recreation is tougher than you might think.  "Sesame Street Live: Elmo's Healthy Heroes" is coming to the Stockton Arena this month and is in the legal Delta.  Would you count it?

Scranton, PA is America's Least Miserable City

Given all the local commotion about the Forbes miserable city list, I assigned a student intern to compile the data Forbes used and reverse engineer the list. Recall that Stockton topped the list that is reviled in the Valley with and Modesto, Sacramento and Merced also rating in the top 5 of Forbes misery.

Forbes didn't publish the full ratings or data, just the cities at the top of the misery chart.  We wanted to see the other end of the list, the least miserable places.  Our intern, Jesse Neumann, was successful in replicating 8 of the 10 indicators - we couldn't figure out how they measured losing sports teams and political corruption - but we were still able to match the ranking very well.  We found the full ranking to be entertaining and insightful, and my friend in university PR thought it was interesting enough to put together a news release (see below). 

Click through the link at the bottom if you want to see the full rankings in Jesse's report and see where your hometown ranks.  (Note to Sacramentans:  Sacramento actually fared a little better, down to 8th most miserable in our version, primarily because we didn't have the sports indicator so the Kings steady losing wasn't dragging you down.)

America’s Least Miserable Cities: Scranton, Pennsylvania is America’s least miserable city according to a replication of the Forbes magazine misery index (May 5, 2011) -

Earlier this year, Stockton was named the most miserable city in the United States by Forbes Magazine and was followed closely behind by Sacramento and Modesto. But what is the least miserable city in the United States according to Forbes?

Well, it's Scranton, Pa., according to a replication of the Forbes magazine miserable cities rating done by the University of the Pacific's Business Forecasting Center.

Forbes has rated Stockton, California America's most miserable city 2 of the past 3 years, but did not publish the full rankings of metropolitan statistical areas (MSAs). For the 100 largest MSAs in the U.S., the Business Forecasting Center compiled the data for 8 of the 10 indicators used by Forbes, and was able to closely match the published Forbes misery rankings.

"We were interested in what cities were on the other end of the list," said Jeff Michael, director of the Business Forecasting Center (BFC).

"I'm graduating soon, and I wanted to know where I should go to escape my misery," added BFC student researcher Jesse Neumann.

Scranton, the setting of the hit television series "The Office," was a surprise to the BFC researchers. Scranton stood out in the misery rankings for having the smallest decrease in home values, and exceptionally low foreclosure rates. "With home prices in Scranton so low for so long, who needs a mortgage?" Michael said.

Despite being the most and least miserable cities, the BFC researchers observed that Scranton and Stockton had some things in common. Both metro areas began the decade with nearly identical populations. The 2000 Census recorded the Scranton MSA population at 560,625 and the Stockton MSA at 563,598. Over the next ten years, Scranton added 3,006 people, a 0.5% growth rate. In contrast, Stockton grew by 121,708 people, a 21.6% rate.

"It seems that people are attracted to misery as Forbes defines it," Neumann observed.

After working with the data, it became apparent to the researchers that Forbes was missing a few obvious indicators. "Surprisingly, the Forbes ranking did not use a single indicator of income or wealth, or any measure of people moving out of the area," Michael said.

As an experiment, the researchers replaced four of the most problematic Forbes indicators. Specifically, they removed: 1) political corruption, 2) sports team records, 3) sales tax rate, and 4) 3-year change in home values. They replaced these indicators with 1) net domestic migration, 2) median household income, 3) property taxes, 4) housing affordability index. "Sales taxes are often used by cities to shift the misery of taxes on visitors, whereas the misery of property taxes falls entirely on residents," Michael said. The unemployment rate, foreclosure rate, crime rate, average commute time, weather, and income taxes were kept in the revised index.

In the experimental misery index, Miami was most miserable, followed by Detroit. Stockton was third, followed by Chicago, Los Angeles, and Memphis. Three of the four least miserable cities in the experimental index were in Utah.

According to the Business Forecasting Center researchers, the exercise confirmed the arbitrary and meaningless nature of these types of magazine rankings.

"Unfortunately, the Forbes ranking is causing real harm to these so-called miserable cities," Michael said. "They should publish the full ranking and data so people can better make their own judgment about the reliability of the misery rating. Until that happens, we will continue to replicate their full rankings as closely as possible."

Forbes ranked the 200 largest MSAs, whereas the BFC only compiled data for the 100 largest MSAs. Thus, smaller areas on the Forbes list such as Merced, Calif., do not appear in the replicated rankings. In addition, the BFC team was unable to replicate two indicators in the original Forbes ranking due to missing data or an unclear methodology: political corruption and winning sports teams.

The full report is available at: http://forecast.pacific.edu/articles/BFCForbesRevisit.pdf

Water Won't Wash Away Valley's Recession: Two Years Later

Two years ago, on May 1, 2009, the Sacramento Bee published an op-ed I wrote titled "Water Won't Wash Away Valley's Recession."  The Fresno Bee reprinted it a few days later.  Today, water supplies are very high and unemployment rates throughout the Valley are higher than they were in 2009, suggesting that the title of the piece was correct.

I have never received such a strong reaction to something I have written.  The reaction (mostly positive but occasionaly ugly) changed the economics of water issues from being what I considered a hobby to an ever growing part of my real job.

The article was my response to the Latino Water Coaliton march of April 2009, and the scores of articles in the media at that time which were misrepresenting the facts and distracting our leaders from a much larger economic crisis.  [On a non-water note.  Wouldn't it have been nice if Valley Congressional leaders banded together to demand stronger foreclosure prevention programs from the Obama administration back in Jan-Apr 2009 when they finalized their economic recovery plan.  Foreclosures were supposed to be the third "prong" of their recovery program, and we got relatvely strong programs to support the other two areas, 1) banks, and 2) stimulus; and weak, underfunded, ineffective foreclosure prevention programs.  Too bad the foreclosure prevention component didn't have stronger advocates back then.]

I have reposted the original op-ed below.  I think it is interesting to read again after everything that has happened over the past 2 years, and the points are still relevant.  It is the first part that received most of the attention, but I have always been equally if not more concerned about the last part. 

Water Won't Wash Away Valley Recession 

(originally pubished, May 1, 2009 in Sacramento Bee)

What is causing unemployment in the San Joaquin Valley? According to water contractors and their political supporters, a "regulatory drought" has eliminated water-dependent farm jobs, and they point to high unemployment rates in farming communities as proof. Their solution is to suspend the Endangered Species Act and build a multibillion-dollar peripheral canal around the Delta.

However, the facts don't support the water contractors' view. The latest payroll data through March finds that farm jobs have grown faster than any other sector of the economy in the past 12 months, even outpacing health care. In fact, farm jobs have been growing throughout the three-year drought. Compared with 2006, farm jobs have increased 5 percent in California, while private nonfarm jobs have decreased 5 percent.

The same is true in Fresno County, home to communities such as Mendota that have been the focus of water exporters' news releases.

In Fresno County, farm payrolls increased 3.2 percent in the past 12 months, compared with a 3.4 percent decrease in private, nonfarm payrolls.

Since the drought began three years ago, Fresno County farm payrolls have increased by 12 percent, while nonfarm employment has crashed, led by a loss of more than 7,000 construction jobs.

In light of these statistics, how can water exporters, politicians and others claim that rising unemployment in the Valley is a result of water shortages for farms rather than the broader recession? The foreclosure crisis is at the heart of the recession, and the Central Valley has the highest foreclosure rates in the United States. Homebuilding has shut down, and service sectors have cratered, costing many former farmworkers their higher paying, nonseasonal jobs.

Water contractors point to 40 percent unemployment in Mendota as evidence of the water crisis. These unemployment estimates for towns aren't a current survey, but are crude extrapolations from the 2000 Census, the last time any real data were compiled for these areas.

The 2000 census gives a good picture of the prosperity that increased water pumping would bring to Mendota's hard-working residents. Delta water exports were above average in 2000, and local farm employment was at a nine-year peak. Despite this, the 2000 census found unemployment in Mendota exceeded 32 percent, highest of the state's 494 towns.

Per-capita income was below $8,000, the lowest level in the state, nearly 20 percent lower than Mexico and many developing nations in Africa, Eastern Europe and South America. Not surprisingly, water contractors don't issue news releases about unemployment when they have water.

In fact, growers have been complaining about shortages in recent years, even as Mendota's unemployment estimate was 25 to 30 percent.

There will be substantially fewer seasonal farm jobs this year as thousands of acres are idled, and this will further increase the pain of the recession in farming areas south of the Delta water pumps. As these impacts appear, it is important to consider them over the entire three-year span of the drought, rather than treat agriculture's recent unsustainable peak as normal.

In the early years of the drought, agriculture expanded in response to a commodity bubble that more than doubled crop prices, farm profits, and farmland values in a span of a few years. Much of the increase is attributed to permanent crops in desert regions with interruptible junior water rights. Between 2006 and 2008, more than 50,000 acres of new almond orchards were planted, mostly south of the Delta pumps, while a nut glut led to a price collapse for all growers. Similarly, California's enormous dairy industry expanded rapidly, and now taxpayers are spending millions to buy surplus milk and prop up prices in an oversupplied market.

Taxpayers are the forgotten stakeholders in the various Delta planning processes. With no one protecting taxpayer interests, it's no surprise that Delta Vision recommended the most costly options to the governor. The Bay Delta Conservation Plan does not plan to make a cost estimate of their plan until after it is complete.

Recent state tax increases are hurting families, businesses and private sector job creation, while California has the lowest bond rating of any state. Water contractors think the state should borrow billions for their cause, crowding out investments in education, energy, transportation and other critical areas that will support the high-paying jobs of the future.

Their plan would also have adverse impacts on Delta agriculture, recreation and tourism, commercial fishing and the jobs supported by these industries.

Delta Vision, water contractors and now the Bay Delta Conservation Plan are primarily making economic arguments for their plans. While spending millions on engineering studies and public relations, the state is not sponsoring any serious research to comprehensively evaluate economic effects of the water plan.

California's overburdened taxpayers deserve better.

New Metropolitan Water District Presentation on Delta Costs

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. 

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.

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.
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.

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.

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.

Depressing (deceptive?) Fact of the Day

From today's Sac Bee article on folks lining up to work for McDonalds. 

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."

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.

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.