At the July 23rd meeting of Metropolitan’s Special Committee on the Bay-Delta, Dr. David Sunding presented the economic case for the BDCP to committee members, arguing that the benefits of the project far outweigh the costs. During his presentation, he discussed how the benefits to water contractors were calculated, addressed the differing baselines between the EIR/EIS and the analysis in BDCP’s Chapter 9, and responded to some of the comments on the analysis by interest groups that have been received so far.
Steve Arakawa, Metropolitan’s Manager for Bay-Delta Initiatives, introduced Dr. Sunding, noting that he is well recognized in the field of economic analysis. “A professor at the UC Berkeley, Dr. Sunding has been contracted with by the state of California to provide the economic analysis associated with the BDCP and has done most of the work associated with the recent released chapters on BDCP,” said Mr. Arakawa. “He’s also been overseeing and conducting the Statewide Economic Analysis which will be released next month.”
Dr. Sunding’s experience extends far beyond the classroom; Dr. Sunding noted that he is one of the leaders of the National Science Foundation center on urban water systems, and he has had a number of clients both nationally and internationally in the water sector, doing work for Metropolitan, SFPUC, US DOJ, and others, including work for states who currently have water disputes pending before the Supreme Court.
Dr. Sunding started by stating that the document that is posted on the BDCP website is the second administrative draft and not the official public draft, although a lot of public comments have been received so far. The economic analysis that he would be reviewing today is focused on the benefits to the state and federal contractors who will pay for two-thirds of the costs. However, in August, a statewide economic analysis will be released that takes a broader perspective and looks at a wide array of Delta specific issues, such as the impacts on recreation, property values, traffic patterns, air quality, greenhouse gas emissions, and carbon fluxes. Dr. Sunding pointed out that this additional analysis is not a regulatory requirement: “It’s a good faith effort of the State and the contractors to go the extra mile and lay out the economic implications of the BDCP for all kinds of groups that would be impacted by it, even if their activities aren’t covered by it or they are not paying for a portion of it,” he said.
“Compliance with the endangered species act is not voluntary; it’s a requirement, but complying with the ESA in this particular way is a voluntary activity,” he said. With a Habitat Conservation Plan, “the plan depends on financial contributions from state and federal contractors, so for the plan to be economically feasible, it has to be worth it to the groups that will pay upwards of 2/3rds of the cost. So this analysis has a very tight focus on the benefits and costs to state and federal contractors, as well as looking at the BDCP and alternative ways the BDCP could have been put together.”
The analysis looked at four categories of benefits: urban water supply reliability, agricultural water supply reliability, water quality impacts (primarily reductions in salinity), and reductions in seismic risk, he said.
One of the assumptions in Dr, Sunding’s analysis is that construction of the conveyance facility begins in 2015 with operation to begin by 2025 and extend to 2075. “That is ten years beyond the permit term,” he pointed out. “The permit term is projected to go to 2065; we went 10 years beyond that and we did that because the isolated conveyance portion of BDCP is a big durable capital project; it has a useful life of much more than 40 years. If we truncated the benefits analysis at the end of the permit term, we’d be capturing only a fraction of the overall benefits of the project.”
To measure economic benefits and costs, we need to be comparing two states of the world: with BDCP and without BDCP, he said. The low and high outflow scenarios were used to analyze BDCP operations. For the non-BDCP analysis, “what we did for that was we took the operating criteria that the fish agencies developed as part of the high and low outflow criteria, and put that on the existing conveyance facility and the existing amount of habitat in the Delta,” said Dr. Sunding, noting that all impacts are in 2012 dollars and discounted using a 3% real rate.
(Note from Maven: I was unable to obtain a copy of Dr. Sunding’s presentation to use with this post, so I am using the slides with the identical information from Dr. Sunding’s presentation at the BDCP public meeting. Click here to view Dr. Sunding’s presentation to the Metropolitan committee.)
The first two rows on the chart to the left show the benefits and costs of the BDCP proposed action under the high and low flow scenarios, and with a 9,000 cfs facility, the range of state and federal deliveries assuming implementation of BDCP would be 4.7 million acre-feet for the high outflow scenario and 5.6 million acre-feet under the low outflow scenario. “That’s an interesting range,” he said. “The 20 year average of state and federal exports from the Delta is about 5.2 million acre-feet, which is right in the middle of this. So BDCP is not a huge increase in the amount of water taken from the Delta relative to what’s happened over the last 20 years. … But with respect to the plan itself, the benefits under the high outflow case are $18 billion, costs of about $13.3 billion for net benefits of $4.7 billion, so this project is economically feasible; it passes a benefit-cost test.”
The figure of $13.3 billion for costs is different than how the costs for BDCP are stated in other parts of the plan because he is quoting the number in terms of present value, explained Dr. Sunding. “This number takes account of the time value of money using a 3% real discount rate, and it also takes account of the fact that some of the restoration that is part of BDCP is the responsibility of the contractors anyway.”
One of the major categories of benefits to water agencies are less frequent and smaller future water shortages, he said. “Shortages are obviously a negative thing to consumers so reduced frequency and magnitude of shortages is one benefit; another benefit is that there is somewhat less need to invest in water supply alternatives, which are expensive. There will still be a huge need to do so, to invest in alternatives, assuming implementation of BDCP, it’s just somewhat less. So there’s a little bit of cost savings there.”
For the modeling analysis, the impact model that was developed considered 36 urban water utilities receiving state water project supplies including all Metropolitan member agencies plus the three water agencies in the Bay Area, Santa Clara, Alameda, and Zone 7, and seven others in between, such as Castaic, Mojave, and agencies on the Central Coast. The impact model included a range of factors such as demand growth and water supply alternatives, as well as the operation of groundwater or surface water storage facilities, he said.
He then presented an exceedance curve, noting that this is really the foundation of the analysis. “What this shows on the horizontal axis is the percent of years where deliveries on the state water project are above whatever number you want to look at,” explained Dr. Sunding. “Pick a number of 3 million acre-feet, and the green line would say that under that regime, 62% of the time there is 3 million acre-feet or more being delivered on the State Water Project. So higher is better from a water supply point of view.”
There are four possibilities, high out flow and low outflow both with BDCP and without. “What we want to do here is to compare,” he said. “The black line is state project deliveries with existing conveyance, existing habitat and flow criteria that the fish agencies say they need, so you can think of that as being a representation of the future without BDCP.”
“The red line on the chart is what happens if BDCP is implemented using those same flow criteria,” he said. “The red line is above the black line, which means more water with BDCP. … If you take an average over the entire historic hydrology, the black line is about 40% lower than the red line, so what that means is that without BDCP, State Water Project deliveries would deteriorate by about 40%.”
“An analogy that I use a lot is that BDCP is like fixing the foundation of your house. It keeps your house the way it is, but that’s the point,” he said. “It prevents a disaster from occurring, so this 40% reduction in state water project deliveries is what we’re valuing.”
Dr. Sunding pointed out the difference of the black line compared to the red line here in the dry years and in the wet years. “What you notice is that the incremental water that is provided by BDCP all comes in average to wet years,” he said. “It means storage is highly complementary to BDCP. It’s not part of the plan, but clearly that’s part of the public debate about BDCP. BDCP coupled with storage is more powerful than BDCP alone.”
So using numbers instead, “in the high outflow case, BDCP increases mean state water project deliveries by 1.2 million acre-feet; you could say increase or really preserve relative to the existing conveyance high outflow case,” he said. “In the low outflow case, the difference is somewhat larger – it is 1.7 million acre-feet. So BDCP is preventing deterioration in state project deliveries of a magnitude between 1.2 and 1.7 million acre-feet.”
“With an incremental cost of $13.3 billion, the implicit water supply cost of the BDCP is between $300 and $400 per acre-foot. So why is that important? That’s important because it is fair and interesting to compare the cost of BDCP to the cost of water supply alternatives that could also be used to fill that gap or make up for the supplies that would be lost in the state system,” he said.
Recycled water can range from $1000 to $1700, and even upwards to $4500 per acre-foot and the estimated costs for desalinated water from the Carlsbad plant are currently estimated at $2000 to $2250 per acre-foot, said Dr. Sunding, noting that those numbers are significantly larger than the incremental cost of the BDCP.
“It’s often the case that conservation is somewhat less expensive than development of water supply alternatives, and that turns out to be true in this model as well,” said Dr. Sunding. “The implied cost of conservation that comes out of the model we’ve developed is in a range from $1200 to $1400 an acre-foot; there’s a somewhat larger cost of conservation in the high outflow scenario because the high outflow scenario means lower water supplies.”
“Clearly agriculture is using a lot of the water that comes out of the Delta so valuing agriculture water supplies is an important part of the analysis,” said Dr. Sunding, noting that the benefits were calculated using the SWAP model, the Statewide Agricultural Production model, which is developed out of UC Davis and is commonly used in many analyses.
Looking at the water supply benefits of BDCP, “in high outflow case you have a 9,000 cfs facility, under the proposed action, with mean deliveries of 4.7 million acre-feet per year, and the water supply benefits are $15.7 billion in present value terms,” he said, pointing out that “this is the value of preventing that 40% deterioration in state water project deliveries that occurs without the habitat conservation plan, so it’s the value of shoring up this foundational water supply.” The water supply benefits for the low outflow case are $16.6 billion.
In terms of the water supply benefits of the other alternatives studied, the NRDC’s portfolio approach with a 3,000 cfs facility yields only 4.2 million acre-feet which is about 500,000 acre-feet less, so water supply benefits are only $7.8 billion. The PPIC advocated an isolated conveyance facility with no south Delta diversions, but that system would only yield 3.4 million acre-feet, clearly not a good investment, he said.
The water quality benefits looked only at salinity as that’s the only constituent that has a suitable model, said Dr. Sunding, noting that there would also be changes in bromide, organic matter and other constituents. The benefits of reduced salinity were modeled for both urban and agricultural contractors: “The salinity benefits of the BDCP are actually significant, close to $2 billion, which is a significant share of the overall benefits – somewhere between 10 and 15%.”
Seismic risk is another very important category of benefits, said Dr. Sunding. A reference case of a one-year outage was used, but clearly it could be worse than that; for the purposes of this analysis, a 2% probability of a large seismic event occurring each year was used. “This analysis is done for the purposes of Chapter 9, and there are other analyses of seismic benefits we’ve done that are much more comprehensive than this,” said Dr. Sunding. But for the purposes of Chapter 9, “you have something on the order of a half billion of seismic risk reduction benefits that come from construction of CM1 – the 9,000 cfs conveyance facility. “
“Remember, these are just average values which to some extent mask the real story,” said Dr. Sunding. “To understand that ask yourself the question what would happen if the state system essentially went out completely … in a year like 1990 when storage was already depleted and all other water supplies are low – what would happen in that case? Well, clearly it would be horrendous. We modeled that but intuitively you know that’s a big deal, so that is masked when we look at average values, but keep that in mind.”
Considering all the benefits of the project and all of the costs that will be attributed to the state and federal contractors, “the first point to take away from this is that this is a good investment,” said Dr. Sunding. “It produces benefits that exceed costs, again when viewed just from the perspective of the ratepayers of state and federal agencies.”
“Second, the 3000 cfs alternative – the portfolio approach or the NRDC alternative – not only is it economically worse than BDCP, it’s worse than doing nothing,” he said. “It has negative net benefits in that case of over a billion dollars.” Dr. Sunding then explained that there are two reasons why the portfolio alternative doesn’t work. “First of all, there are tremendous economies of scale in building a project like this, and if you’re going to build a 3,000 cfs facility anyway, to go to 9,000 cfs only costs an extra $3 billion, so the cost of the extra 500,000 acre-feet by going to the larger facility is less than $200 an acre-foot. There’s no alternative that I’ve seen in 2013 that costs less than $200 per acre-foot.”
“Second, it’s important to keep in mind … roughly speaking, BDCP keeps yields at something like the 20 year average,” he continued. “So whatever population growth is going to occur, whatever industrial activity is going to occur, all of that new demand has got to be met with water supply alternatives so there is a huge need to develop recycling and stormwater capture, potentially desal ocean desal, for sure brackish water desal, there is a need now and always for conservation, all of this stuff has to happen – even with BDCP. But by going down to a 3,000 cfs and foregoing half a million acre feet of supplies from the Delta, it just puts that much more pressure on all of those alternatives, and in the end, it turns out to be a bad bargain.”
“A third major point I’d like you to come away with is … in an analysis such as the one in Chapter 9, things have to work from two perspectives,” he said. “It has to be economically feasible for the state and federal contractors, but it also has to work for the species, and the reason the BDCP proposed action looks the way it does is that it’s the alternative that’s in the sweet spot. It’s affordable to the contractors, ends up being a positive net benefit, and it also works for the species.”
“I view Chapter 9 as being where the consultants get to show their work,” he said. “This plan doesn’t look the way it does by accident; there was years of negotiating and planning and analysis that went into it and this tells the story. “
“Last, this more spring outflow case, which from a regulatory point of view is a very serious one – this is same facility, same cost but less water coming through it, same amount of habitat – that’s a small positive number, but that does not pass a benefit cost test,” he said. “Nobody in their right mind would spend $13.3 billion to get an expected return of $300 million. There’s no way that passes the required hurdle, so this one fails as well. … In terms of getting this HCP approved, there’s a lot in here in Chapter 9 that is very important and ultimately I think supportive of the plan.”
DR. SUNDING RESPONDS TO COMMENTS RECEIVED
Dr. Sunding than discussed some of the public comments they had received so far. “Obviously not everybody is in love with this way of looking at things, so what I’d like to do is just briefly go through some of the comments we’re getting from Restore the Delta and some of the Delta interests,” he said.
“First is that the financing plan that is in Chapter 8 assumes not only that the 2014 water bond will pass, but that the state will pass another subsequent water bond to fund the BDCP,” he said. “My view on this is that it is a 50 year plan, and I don’t think the plan is going to rise or fall based on what happens with one particular water bond in one particular year. It is in the big scheme of things very important, but a relatively small share of the overall money that is going to be spent as part of BDCP, so I wouldn’t overly emphasize whether a water bond passes or not.”
“Second comment is that the BDCP’s own economic analysis, namely this, doesn’t show that the agricultural water contractors have benefits that are proportional to the urban contractors, and financial feasibility requires that the project has benefits that exceed costs for all contractors,” he said. “That’s true, to a certain extent, and the cost allocation is still being worked out. There are working assumptions that are built into the administrative draft of Chapter 8 but this is still in progress. The plan reports essentially what is known now but this is something that clearly is going to get worked out.”
“Third, in the past year, the cost estimate for the tunnels has increased from $12.8 billion to $14.5 billion even though the water delivery capacity has gone down by 40% with the change from 15,000 to 9,000,” he said. “The engineering estimates are getting worked out. There is a proposed change or plan change in the alignment of the pipeline that hasn’t been released to the public yet but that will have the effect of driving costs down. There are other changes that are underway, so clearly these numbers are going to move around for awhile.”
They have received comments on the seismic benefits analysis, saying “the new BDCP analysis essentially demonstrates that the Governor and other proponents have exaggerated the risk of a Delta earthquake on water supplies,” said Dr. Sunding. “The analysis I’ve shown you is appropriate for the purposes of Chapter 9, but there’s another more detailed story behind it, and that’s looking at the full range of consequences of an earthquake including outage durations of more than a year. We limited the analysis to a one-year reference case, so I wouldn’t take that further than we meant it to be taken in the context of Chapter 9. A large earthquake with a one year or longer duration outage occurring in dry conditions will have impacts that are in magnitude greater than what I just showed you.”
“In early August, we are releasing the statewide economic analysis and this is going beyond just looking at state and federal contractors to looking comprehensively at all groups in the state,” he said. “We’re looking at a whole range of impacts with information taken from the EIR/EIS. We’re looking at changes in recreation, congestion, air quality, a whole range of factors; we’re also looking at the impacts to Delta agriculture as a result of changes in the salinity regime in the Delta, and have some very detailed calculations on that. We’re placing the in-Delta impacts in the context of the broader story for the whole state, a lot of which I’ve just been through, given the importance of the state and federal contractors, so we expect that in early August, followed by another public meeting on the 8th.”
DR. SUNDING EXPLAINS THE DIFFERING BASELINES
Dr.Sunding then took questions from the directors, including this question by Director Keith Lewinger about the differing baseline assumptions between the EIR and Dr. Sunding’s analysis. “The baseline assumption has a huge impact on the cost benefit, and the baseline assumption that you used is the two of them bracket about a million acre-feet lower than what is presented in the EIR/EIS; I don’t understand that,” said Director Lewinger.
Dr. Sunding answered, “You’re correct, the EIR no action alternative, which is in some sense a baseline, has state and federal combined deliveries that are quite a bit higher than what we’ve assumed here, but the EIR no action alternative is not a prediction of what will be the most likely case for future regulations. There are very strict criteria that govern how a no-action alternative is put together. And for this kind of an economic analysis, we need to develop our maximum likelihood or best guess about what would be future regulations if BDCP is not implemented. And so the approach we took to that was we didn’t define the criteria; the fish agencies said this is what we need in the Delta, these environmental flow targets are what we need in the Delta for this project to be permittable. So they defined the criteria, we took those criteria and put them on the existing conveyance.”
“What the fish agencies are saying, which is sobering but not a shock to anyone in this business, is that they expect to get more and more restrictive as time goes by,” added Metropolitan General Manager Jeff Kightlinger. “As more and more species get listed, they expect to restrictions to ratchet up, so rather than just holding the current scenario, is what the no-action alternative does, what David has done is ratchet it up. Now, we don’t agree with those criteria and we have challenged the existing ones in court, and there is no doubt that if we don’t get a cooperative approach on a 50-year approach, there very well may be new restrictions that we’ll take a look at and say those aren’t scientific justified and challenge those.”
Director Lewinger: “Dr. Sunding, is it fair to say that assumption, which essentially adds a million acre-feet to the yield, has a huge impact on your economic analysis?”
Dr. Sunding: “Yes.”
Director Lewinger: “Could you venture a guess if you used the baseline that’s in the EIR/EIS, would the project be cost effective?”
Dr. Sunding: “No. Let me elaborate. You don’t even have to do any analysis to know that’s true. The EIR no action alternative in the early long term has a yield of 4.7, which is the low end of the decision tree range. So why would you spend 13 billion to end up where you’d be anyway? But to come back to the point that Jeff made and that I made, I don’t think it’s accurate to say the EIR no action alternative is a good prediction of where things are going. I work on a lot of HCPs, this one is more important and has more issues than any other that’s ever been attempted, but they all have the same basic bargain underneath it. There are investments made in conservation measures on the part of the applicants in exchange for some degree of regulatory predictability. Not a lockdown guarantee, but some degree of regulatory predictability, and that’s what we’re trying to reflect in this analysis in as fair a way as possible.”