Water Export Disruption is only 20% of the Economic Cost of a Big Delta Earthquake according to Department of Water Resources' DRMS studies

I doubt any of the presenters at the event Metropolitan Water District is hosting tomorrow on the risk of an earthquake to water supplies plan to mention the numbers in the headline, most probably aren't even aware.  I didn't make it up, it comes directly from the Department of Water Resources' DRMS reports.  I had noticed in the phase 1 report that it looked like most of the cost was in-Delta rather than water exports, but it wasn't until DRMS phase 2 was released that it became obvious.  Below is a table from DRMS phase 2 that breaks out some of the costs due to a big seismic event that would flood multiple islands. 

"Statewide costs" are defined as the cost of water export disruptions and costs due to damage to the 3 state highways crossing the Delta.  Even in the big earthquake scenarios that flood 10+ islands, only 3/8 of total costs are statewide, and the majority, 5/8 are in-Delta costs (i.e. losses to property, infrastructure, farm production, local water supplies and transportation, etc.) even if you don't count any state highway related losses as in-Delta losses.  51.5% of 38% is actually 19.57% of total costs from water exports, so I had to round up to get the 20% figure in the headline.

This finding that came out of the DRMS studies (and it was actually in phase 1 too) really makes one wonder why the Department of Water Resources is so focused on isolated conveyance as the answer to the seismic risk in the Delta.  DWR is pushing plans to spend $13 billion on an isolated conveyance that protects 20% of the costs of the big earthquake, and does nothing for the other 80%. 

Wouldn't any rational person staring at these numbers wonder why that risk reduction strategies are so focused on 20% of the cost, and virtually ignore the other 80%.  If it makes sense to spend $13 billion protecting 1/5 of the cost, doesn't it make sense to at least consider what benefit might result from spending $13 billion (or even $2-4 billion) on seismically-resistant levee upgrades that would protect 100% of the costs, not to mention all the potential loss of lives from the big earthquake flood scenario. 

That is what the Delta Protection Commission's Economic Sustainability Plan's levee recommendations say, the best risk reduction strategy is to spend a few billion dollars improving levees beyond PL 84-99 to be seismically resistant.  Even if the DPC ESP has understated the cost as some have claimed,* the DRMS risk numbers suggest it would still be worthwhile to invest enormously in the levees.

I could write about 20 posts on the interesting things one can glean from DRMS phase 2, and I may eventually get around to it.  (another thing that is obvious when you start to deconstruct the results is that improving Delta levees to PL 84-99 with improved emergency response clearly offers the most risk reduction bang for the buck according to DRMS phase 2 tables). 

If it actually used better scenarios, the updated tunnel conveyance and cost instead of the surface canal, and analyzed the "building blocks" individually, DRMS Phase 2 would be by far the most useful Delta study of all.  It is, after all, a cost-benefit analysis.  The Stewardship Council's ISB should do a peer review of Phase 2 like they did Phase 1, as the panel would probably call for analysis of better scenarios.

* regarding levee upgrade costs, the DPC ESP estimates a seismically-resistant upgrade of most Delta levees would be $1-2 billion above the PL 84-99 upgrade cost (which is estimated to be under a billion).  I have received some informal comments that it could be as much as double this, but even if that were the case, it doesn't change the basic argument.

New Ways of Thinking About the Delta

I am unable to attend the Delta Conservancy/Water Education Foundation/Water Contractor sponsored "Changing Our Perspective" Event today.

With no disrespect intended to "Dialogue Mapping," I will suggest (again) that the obvious missing perspective from all the Delta discussions is Cost-Benefit Analysis. 

More data on economic recovery in the 2 Californias

Although the data lags 6 months, the BLS County Employment and Wages report is one of my favorites because it is real, full population level data from tax records, as opposed to sample based estimates like in the monthly job reports that can be volatile and unreliable for counties and smaller geographies.

The latest release of data from March 2011 detailing tax filings from the 322 largest counties in the U.S., the release states,

Employment declined in 53 of the large counties from March 2010 to
March 2011. Sacramento, Calif., had the largest over-the-year
percentage decrease in employment (-1.6 percent)... Montgomery, Ala., and
Atlantic, N.J., tied for the second largest employment decrease,
followed by San Joaquin, Calif.,

On the other end of the spectrum, Santa Clara County (Silicon Valley) has been posting double digit gains in average wages for the past year.  In this report, Santa Clara had the 2nd highest wage growth of 322 counties at 12.4% (the past few reports they have been number 1, so I guess they are slacking off).

Overall, job growth in Silicon Valley has been strong but not growing anything like the income/wage data, and local unemployment is still above the national average.  There is an enormous boom going on in technology and information, but so far it doesn't seem to be spilling over much into hospitality, construction, retail, and the lower paying, lower skilled service areas - even in the hottest local economy in the state.

Does Water Efficiency Create More Jobs Than Conveyance?

From Tranforming Water: Water Efficiency as Stimulus and Long-Term Investment, a report done by David Mitchell at M.Cubed (with co-authors) who has done consulting work with David Sunding and the water contractors in the past.

Our consultant team modeled a wide range of water/energy efficiency program possibilities, across all water‐using sectors and involving indoor, outdoor, and water system efficiencies. This modeling clearly confirms that economic stimulus benefits could be broadly distributed throughout the national economy:

1. The economic output benefits range between $2.5 and $2.8 million per million dollars of direct investment.

2. GDP benefits range between $1.3 and $1.5 million per million dollars of direct investment.

3. Employment potential ranges between 15 and 22 jobs per million dollars of direct investment.

Thus, direct investment on the order of $10 billion in water/energy efficiency programs can boost U.S. GDP by $13 to $15 billion and employment by 150,000 to 220,000 jobs and could save between 6.5 and 10 trillion gallons of water, with resulting energy reductions as well.

Yesterday, David Sunding presented the employment effects of conveyance, about 10 jobs per $1 million invested, and estimated operations and maintenance of conveyance would create about 7 jobs per million spent.

Comparing 15-22 jobs per million dollars from efficiency investments to 7-10 jobs per million invested in conveyance, it looks like efficiency delivers double the job stimulus bang per buck as new conveyance.  

Whether it is building canals, low flow shower heads, schools, stadiums or anything; the problem with the one-sided job creation stimulus studies is that there is always an alternative use of the dollar, a cost to getting the dollar from someone else's pocket, and they are almost always presented without proper context.  It is something of an occupational hazard as an applied economist, we are all guilty of it to various extents.

On a positive, somewhat tangential note, I was very pleased to hear Jerry Meral announce at yesterday's BDCP meeting (in response to questions) that David Sunding is going to be working on more comprehensive analysis of BDCP effects.  Previously, I had heard that the contractors weren't interested in any real economics, so this is an interesting development and we will see if we get the real cost-benefit analysis that is desperately needed. 

Hopefully, he is allowed to properly define the alternative scenarios, rather than letting the water contractors frame the questions.  Nobody knows all the aspects of California water economics better than David, and he is generally pretty careful with the numbers even when the contractors are paying the bills.  To improve and create trust in the final product, Dr. Meral ought to form an advisory group (or another workgroup) to help ensure that David can frame the analysis correctly, define the alternatives fairly, and that the results are released no matter how it turns out.

BDCP Planning Creates 3,550 jobs in California

Understandably, lot's of people asked me what I thought of David Sunding's surprise (to me) presentation at yesterday's BDCP meeting on the employment impacts of building conveyance.

Obviously, I thought he was overly conservative.  He should also count the $250 million the water contractors will have spent on consultants and planning.  I pumped this spending through the IMPLAN model today, and it calculated the creation of 3,550 mostly high-paying jobs in California.  (I should say job-years, since the new way of reporting results in these booster studies is to report a single job that lasts 5 years as 5 jobs.  High-speed rail is especially bad about this.)  And that isn't even counting all the millions spent on lawsuits that will be on the way creating even more jobs.  Even if BDCP fails to build anything, it has been a consulting jobs bonanza for the Sacramento area.  More plans, more lawsuits, more jobs! 

Despite the sarcasm, I don't actually have a problem with the content of this presentation.  The "conveyance will create thousands of jobs" study was inevitable, and I would rather see it from him than another source that would blow it out of proportion and not properly point out the limitations and caveats.

I suppose I need to get busy calculating all the jobs created from building levees now...

Which of the PPIC Delta alternatives is most like the Economic Sustainability Plan?

Critics are calling the Economic Sustainability Plan a status quo plan.  That isn't right, but I understand how it can be misperceived since it is starting with the Delta economy and it's goal is to determine the best future for the Delta (that is consistent with the state's "co-equal goals" of water supply reliability and ecosystem restoration).

For California water wonks, it might be easier to see the ESP's recommendation through the familiar framework developed by the PPIC.  I recommend everyone go back and read chapter 8, Evaluating Delta Alternatives, of the 2007 Envisioning Futures PPIC report on the Delta.  Before reading further in this post, open up chapter 8 in another window, and go to Table 8-2, pages 166-167.

Make 2 adjustments to Table 8-2 for things that have changed since 2007.  First, go to alternatives 4 and 5, cross out costs of $2-3 billion and replace it with $12-15 billion since the estimated costs of isolated conveyance alternatives has gone way up since 2007.  Second, due to the co-equal goals being state law, you can rule out alternatives 7 and 8, because the water supply is way too unreliable for current law.

With those 2 adjustments, any reasonable person viewing the Delta problem and accepting this framework has to go back and take a much harder look at alternative 2: Fortress Delta (Dutch Standard), as well as alternative 6.

The recommendation in the ESP is not status quo (that is alternative 1).  It is most similar to alternative 2 with some significant environmental enhancements that should total less than an additional $1b (think BDCP with less tidal marsh and some compromise solutions on flood/fish bypasses). 

When you go to Table 8-3, you see alternative 2 was primarily rejected due to "great expense."  We are arguing that you could get an environmentally improved version of alternative 2 for an economically feasible $5b or less, as opposed to the current focus on an infeasible $15b isolated conveyance plan with really risky outcomes for both the Delta and the environment.

You could also argue that the 2009 Delta Reform Act also requires you to add a column to the PPIC framework for the Delta as a place/economy.  That additional adjustment further strengthens our case.

No Bananas in the Delta? MC Hammer shows DWR experts are wrong

MC Hammer, the rap-pop icon, is among the biggest celebrities of the over half million people that live in the Delta.  He lives on a few acres near Tracy, and he sometimes blogs and tweets about his beloved banana plants.  On the A&E reality show "Hammer Time", you can see his bananas, and he also takes his dad and kids fishing in the Delta.

I mention this because I have been working my way through lots of correspondence on the DPC Economic Sustainability Plan.  The Department of Water Resources wins the detail prize with 58 pages of single spaced comments.

In one surprisingly lengthy section of comments, DWR staff makes a very big deal out of the fact that we have included bananas in our appendix list of the 80 different crops in the Delta recorded in our database in an apparant attempt to discredit us and make us look silly.  They are unaware of bananas in the Delta and say they have been studying the area for years.  So, I had our analyst track down and confirm our less than 1 acre "crop" of bananas, and he tracked it to a location off 205 near Tracy.  It isn't MC Hammer, but apparantly we have some very small scale commercial growing of banana plants, perhaps to serve hobbyists like MC Hammer, or perhaps someone is trying to appeal to the growing number of locavores who crave tropical fruit.  All we know is someone is making pesticide filings for very small amounts of bananas, that it has no bearing on our results at all, and our crop data is more detailed than DWR.

But thanks to DWR picking through all the fine print, I now have learned some new Delta trivia and have the opportunity to be inspired to write this post by MC Hammer's own banana blogging (hat tip to VQ).

I love these trees (plants)...they multiply themselves continously. Each of these groups started off as one plant. The more you cut them back, the taller and stronger they grow....

In life, it is the moments that we are cut back, that we should look forward to new growth in our lives. Bigger, better, stronger and multiplying ourselves by sharing what we have learned with others....

--Hammertime

Update on the Economic Sustainability Plan for the Delta

A 15 page draft executive summary of the Economic Sustainability Plan is now available as part of the August 9 draft.  The previous drafts did not have an executive summary because the draft was too incomplete and preliminary.

The August 9 draft makes some adjustments to the recommendations in the second draft, all of which are included in the executive summary.  The individual chapters can be downloaded here, including chapter 4 on levees and flood risk that is getting the most current attention.  There are four public meetings around the Delta over the next two weeks if you want to hear more and make comments.

There are a few elements of the plan that are still under development for the September/final draft.  The most significant adjustment will be in the Legacy Community chapter which is getting reorganized with new content including better graphical illustration of concepts.  We are also fine tuning some parts of the data analysis in the agriculture chapter and developing a visual concept of what the recreation strategy could mean for a detailed area in the Delta.  None of these will change the broad recommendations in the plan, but will add detail and support. 

Should the Government Sell REOs in bulk?

The Obama administration seems to be coming up with a plan to accelerate that trend by packaging foreclosed properties together and selling them off in bulk to investment groups who will rent them out. 

I don't completely understand the logic behind the plan, and in defense of the administration, it is an RFI (Request for Information) which suggests they are still figuring out the details themselves.  It is supposed to help make rents more affordable, and although it might help speed properties into the rental market a little faster, I don't think it will do anything to help rents in the long run.  I think it is mostly about trying to help the GSEs unload their REO property, and my cynical side fears that it is a plan pushed by big private equity investors to get them access to the nice returns that can be had picking up foreclosure properties around here as rentals.  Will this be good for taxpayers by cutting the losses for Fannie/Freddie/FHA on their foreclosures?  Maybe.  I can't see how bulk sales will bring higher prices for the homes for the GSEs, but it may cut their transaction and holding costs on the properties so they net more in the end.  That's a big if. 

My first impression is that this is a bad idea for hard hit areas like the Valley.  Lots of these homes are going to the rental market anyway, some by local investors and we also have out of towners with local agents buying investment property for them.  Others are selling to local families that are buying affordable foreclosure homes, and that is the silver lining in this whole mess.  Why would we want to reduce that opportunity for locals and pass it on to some hedge fund in New York just because there is a chance that Fannie/Freddie can cut their loss by a whisker.  In the long-run we end up with even more out of town landlords.

I might be a little more supportive of it if the investors who acquired property in this advantageous way were required to include a reasonable and fair, lease-to-own option for the tenants. 

And of course, we shouldn't give up on more effective loan modification plans.  For the few folks I know who have been successful with this, the modification effectively turn the homeowners into renters of their current homes but without the damage and displacement of the foreclosure process on families or neighborhoods.

These are just my initial thoughts and it will be interesting to see the feedback to the RFI and the eventual plan.  I doubt this will be the last post on this topic.

July 2011 California and Metro Forecast

With the weekend, I forgot to post that we released our July 2011 California and Metro Forecast last Friday.  It was interpreted as gloomy, which it is, but it is actually moderately optimistic compared to some of the other forecasts for the Central Valley, particularly Sacramento, and the deepening pessimism about the national economy.  Click here to see the summary.

I remember last fall being amazed that the 10-year U.S. treasury bond was yielding a mere 2.5% during a supposed recovery, and what that said about the general lack of confidence in the recovery.  That didn't last long, and the yield has been a still low 3-3.5% for most of the year.  Today, it closed at 2.4%.  I'm not ready to predict another recession, but it is a safe bet that the October 2011 forecast will be lower.

Economic Sustainability Plan Update

The latest version of the Economic Sustainability Plan was posted last Thursday afternoon, and will be presented to the Delta Protection Commission (DPC) this Thursday in Stockton.  I am the principal, but have had a lot of help.  A few notes:

This is the first complete draft.  It includes actions, strategies, and recommendations in the final chapter which is posted on the DPC website.  All the chapters can be downloaded individually.  The recommendations are only a few pages, but too long to repost here. 

At this point, it is important to remember that the conclusions and recommendations have not been approved by the DPC.  They are consultant recommendations based on our research, interpretation of the evidence, and mandate to develop a plan that enhances and ensures economic sustainability for the Delta while also being consistent with the co-equal goals of the Stewardship Council's Delta Plan.  Since the document currently stands at 244 pages (despite moving a lot of material to appendices that will be posted soon), the last two chapters will ultimately be revised into a summary version of the Economic Sustainability Plan.

ACWA misses "de" quote

Delete the "de" from modest and the result is most. 

A recent ACWA report about the draft Economic Sustainability Plan from the Delta Protection Commission had the following incorrect quote.  "Most agricultural impacts could be offset by recreation economy gains."  The concluding chapter of the draft plan actually states,  "Modest agricultural impacts could be offset by recreation economy gains." 

Those two letters changes the meaning of the sentence quite a bit.  Maybe it is my turn to write a scathing letter to John Laird.

(The last sentence is a joke.  If you knew the pain I have endured this month for a would/could mistake that was quickly corrected, you might find it funny.)

Stockton water-technology start up moves to Milwaukee

From the inbox.  It is rare that an obscure article in the Milwaukee Business Journal touches so many different issues important to my job and this blog.  Check it out while I scream in frustration.

Water technology company plans Milwaukee plant

A California water-technology company is planning to establish a manufacturing facility and offices in Milwaukee that could create up to 300 jobs.

American Micro Detection Systems Inc., Stockton, Calif., is looking for a Milwaukee site for a $7.5-million, 2,000-square-foot manufacturing, testing, assembly and shipping facility, said Robert Keville, chairman, president and CEO...

The company, established in 2003, manufactures equipment that tests water, oil and other fluids for impurities and heavy metals...

Keville said he has not chosen a site. He said he wants the building to be near one of the two places where the University of Wisconsin-Milwaukee is establishing its School of Freshwater Sciences...

Keville said the city of Milwaukee has offered forgivable loans to the project and the state of Wisconsin is offering tax credits...

Keville said Milwaukee is attractive because its local companies can supply the services AMDS needs and because of the efforts to brand that area as a worldwide hub of companies whose products involve water.

“It’s in its infancy,” Keville said, “but it is only going to grow. Lake Michigan isn’t going to get any cleaner by itself.”

Meeusen said AMDS’s planned move to Milwaukee is further proof for skeptics that Milwaukee can become a international seat of water technology companies.

“If we were located on Lake Superior, we would call it Lake Pretty Good,” he said. “We just never believe that we are anything, and I find that very frustrating. The fact of the matter is Milwaukee is a water hub.”

Rental Housing in San Joaquin County

The Business Forecasting Center recently published a brief report on the rental housing market in San Joaquin County.  Despite the collapse in home prices that has made purchasing homes very affordable, we found rental housing in the area is still quite expensive and hard to find.

I am pleased that the report has sparked a local discussion of an important issue that isn't getting enough attention in this crazy housing market.  See these articles from the Stockton Record Sunday and today.

Reed Fuji:  High Rents Tied to Building Choices

Michael Fitzgerald: More Could, Should be Done to Revive S.J. Rental Sector.

The 4th of July and Delta Levees

[Youtube video of Delta fireworks removed for faster blog loading.]

Should Delta levees be upgraded and then repaired if they fail? Should significant areas of open-water caused by permanently flooded islands be part of the Delta’s future? It is a reasonable question and as one who believes in the value of cost/benefit analysis, I like the set-up of the levee decision analysis paper from Suddeth, Mount and Lund of UC-Davis. Unfortunately, their conclusion that the majority of Delta levees aren’t worth the investment or recovery is way too strong given the relatively low assumed values of land, infrastructure and the variety of things that they have not measured, including recreation impacts. Luckily, the editor of the SF Estuary journal appears to have forced them to include more sensitivity analysis results before publishing their paper, a result I consider better than outright rejection in this case since we can see more scenario results from a paper that was already influential.

This picture from their paper emerged from a scenario with better land and infrastructure values, and is enough to move the conversation forward.  The key result is the 6 central Delta islands that would be converted to open water over time.

Jeff Mount, a member of the Stewardship Council’s independent science board, apparently agrees, since he put the same map forward in a letter to the Stewardship Council. In my view, their earlier analysis did establish something useful: the discussion of do not resuscitate lists can be narrowed down to these six islands, plus maybe 2 or 3 very small islands scattered around the Delta like Deadhorse or Fay. (Note: If they considered the new Stockton Water Supply project, Empire Tract (#16) would be removed and it would be a five island open water area.)

In the Economic Sustainability Plan, I directed our team to take a serious look at this future open water configuration.  Given the absence of key infrastructure in this area, few residents, and low-value agriculture, these islands certainly rank the highest on the candidate list of places we might allow to be converted to open water.  On the downside, there are concerns about the impacts on levees on surrounding islands, water quality concerns related to increasing organic material for municipal and industrial water intakes. 

I thought recreation would be the wild card, and have been a little surprised at the almost universally negative response from recreationists, owners of recreation related businesses in the Delta, and recreation experts who have been studying the area for years. 

One of the first things I heard was, “It will ruin the 4th of July.” I am usually out of town on the 4th, and didn't know Barron Hilton has been hosting a large fireworks show off Mandeville Tip since 1958 near his duck club on Venice Island.  This location is directly in the middle of this open water scenario.  It is the biggest weekend of the year for Delta recreation.

The next thing I learned is that this area is the most popular area for boating, and that about half of Delta marinas surround the immediate area and in most cases would be potentially negatively impacted by the loss of wind/wave protection and the necessary levee improvements on adjacent islands. I didn’t go to all the recreation focus groups, but my understanding is that it got a very negative reaction from boaters and marina owners who anticipated high waves and winds would drive them elsewhere, possibly out of the Delta all together. Since this is the most popular area for boating and boating is by far the most important recreational activity to the Delta economy, it seems this plan could have harmful negative economic effects that aren’t considered in the Suddeth et. al. models. Few people seemed to think that sailing or other recreational opportunities would fill the void.

The last thing I learned is that it could be bad for hunting. I spoke with one farmer who grew low-value crops in this area, and I asked why he didn’t grow different crops. He explained that corn prices have in fact made growing corn high value, but the real answer was that in the Delta there are farmers, farmers who also hunt, and avid hunters who do some farming when it isn’t duck season.  He considered himself in the latter category, and insisted he would grow corn if it were 10 cents a bushel, always has, because it leads to good duck hunting and that is the top priority.  It seems there is more underlying the value of land than just the value of crops.

So, how much is all that worth? I don’t know for sure, but it is a potentially big deal, especially if it really is as negative for boating as our initial feedback suggests. We have learned that levees that protect low value agriculture may be supporting high-value recreation.

Personally, I would like there to be less talk about Delta recreation/tourism as a driver of income and jobs, and more talk about it just being unique and fun. That’s worth something, but it isn’t anywhere in the computer models about Delta levee decisions. Perhaps it should be.

Have a safe and happy 4th everyone!

[Youtube video of crazy Delta jet skier removed for faster blog loading.]