The hearing was co-chaired by Senator Lois Wolk and Senator Fran Pavley. Senator Pavley opened the hearing by noting that this was the third in a series of hearings held this year on the Bay Delta Conservation Plan (BDCP), with the purpose of today’s hearing being to gain more insight into the governance and financing of the BDCP. “This hearing is all about assurances,” she said. “We want to make sure this is implemented according to the law, and we need to know the proper and appropriate oversight.”
On today’s agenda, the Secretary of Natural Resources John Laird and the Director of Fish and Wildlife give an overview of the governance of the BDCP, with Director Bonham being quite frank in his views on what is important to consider with the BDCP’s governance. Next, Anton Favorini-Csorba from the Legislative Analyst’s Office gave a perspective on issues the legislature should be considering. Wrapping it up, Dr. David Sunding and Dr. Jeffrey Michael discuss the benefits and costs of the BDCP and possible alternatives.
PANEL 1: OVERVIEW OF GOVERNANCE AND FINANCING
John Laird, Secretary of Natural Resources, California Natural Resources Agency
Secretary John Laird kicked off the hearing, starting with a reprise of some of the tenets of the 2009 water package for those legislators who were not around during its development. “In that broad compromise, basically it said there should be a project and it gave a direction. It established dual coequal goals of ecosystem health and water reliability and launched a process to develop a project that is very consistent with those goals and that’s why we were here, that’s why we are doing this,” said Mr. Laird
“When the Administration came into office, we inherited a process that probably was not as transparent as we would have liked, so we really committed ourselves to transparency in the process so that everything is public to everybody at the same time,” he said. “Not some special group of stakeholders or not if you are tied to the payment of the project, it is at the same time. “
The documents that have been released are drafts, which seems to be creating some confusion: “The confusion that has resulted as people think all those decisions or whatever was in the draft was final, it absolutely isn’t. It was put out there to negotiate and to flesh out some of the issues,” he explained. “It’s about a project that hasn’t been totally finalized yet.” He noted that the documents were the administration’s best attempt to look at the financing from where the process is at this point, and they are working to resolve issues. There still is the comment period coming up once the final Plan document is released in October: “We are working with the stakeholders to address many of the issues that have been raised in the draft EIR … we will resolve or address many of those issues that haven’t been yet, but at the same time, we expect that people will raise issues and there will be things to be addressed during the comment period.”
“If you look back for 40 years of 50 years, the original California water project was built before any major environmental law that we take for granted now was in place, and so in many ways we’ve spent 40 years retroactively mitigating what was constructed without CEQA, or NEPA or the ESA or other laws being in place,” reminded Mr. Laird. “The dual goals really help us for the first time say the biological goals and objectives are part of the project and that we will deal with water reliability in relation to those biological goals and objectives and that is the nature of the dual goals is making those work off of each other. It makes it hard, but because we’re committed to transparency, because we’re committed to the dual goals, because we’re trying to be responsive to the direction that was given to us by the legislature.”
Chuck Bonham, Director of the Department of Fish and Wildlife
Chuck Bonham began by saying that his department cannot be pre-decisional because at some point, the Department of Fish and Wildlife will receive the permit application from the Department of Water Resources and they’ll have to make a permitting decision. “So my description of information is that; it’s informational and it’s stopping short of me telling you our department’s decision on any one piece because we haven’t received that application yet.”
Today, Mr. Bonham said he would be focusing on governance and the first step in discussing governance is to review the principles of adaptive management. “Adaptive management is based on the perspective that policy choices should be treated as large-scale experiments,” Mr. Bonham explained. “You’re going to do something large, often bold, and then you’re going to monitor, judge performance, and make changes over time as necessary,” noting that adaptive management is discussed in Chapter 3.6 of the Plan documents.
Adaptive management has been tried in the management of fisheries for awhile, said Mr. Bonham, referencing an article by Carl Walters that was published in 2007 in the Journal of Human Environment entitled, Is Adaptive Management Helping to Solve Fisheries Problems?” He explained that Carl Walters took a look at 100 case studies and found three common problems in adaptive management programs: “The first problem is there’s no subsequent follow through when you’re implementing, so you create something but you don’t follow through. There’s no commensurate funding to do the monitoring of the implementation, so a lot of conversation happens on construction, restoration, flows, less on how you fund the monitoring, so you need to ensure that’s available,” he said.
The second problem: “Decision makers are unwilling to admit that some of their decisions are uncertain, but to embrace the true spirit of adaptive management, you need to go into it knowing that some of your decisions have uncertainty to them because you’ll be managing that uncertainty through the science during the implementation,” said Mr. Bonham.
“And the last thing is that it fails if there isn’t individual leadership to see implementation through,” said Mr. Bonham. “You need individual leadership committed to stay the course because typically implementation is a longer time frame than the negotiation to create a solution,” noting that the workload of 50 years of implementation will be far more challenging than the workload of the project to date.
“It’s likely that we may run across an event in the future where we may need to adjust a conservation measure or change a biological objective,” he explained. “It seems prudent to say that we won’t know 25 years from now something that relates to an objective or a measure and we’ll need to potentially change it, and how you manage that decision making is how I segue to governance.”
[pullquote align=”left|center|right” textalign=”left|center|right” width=”30%”]“Politics can be a process whereby divergent voices reach a collaborative decision that’s binding, but in my mind, governance is what happens after the binding decision. How do you manage yourself in decision making after the binding decision has occurred.” –Chuck Bonham[/pullquote]
“At the end of the day, governance, in my mind, is process-driven and I think there’s a distinction between governance and government or politics,” he said. “Politics can be a process whereby divergent voices reach a collaborative decision that’s binding, but in my mind, governance is what happens after the binding decision. How do you manage yourself in decision making after the binding decision has occurred.”
Based on Mr. Bonham’s experience working on large-scale projects, he had some thoughts to relate on what makes for successful governance. “You have to have defined roles. You have to be able to look at the implementation at the beginning and see who is doing what and how,” he said. “I think you need clear instructions, and I think you need a division of labor, because any large-scale effort, no single entity can carry the implementation load.”
“I think you need decision rules,” he continued. “You need to know how you’ll be making decisions. Is it majority? Is it consensus? If it’s consensus, do you run the risk of giving the outlier the veto? Conversely, is there a way to incentivize a consensus decision rule that requires the objector at any given moment to proffer a counter, so you incentivize a counteroffer as a way to narrow the dispute? Do you allow the opportunity for a minority opinion or a dissenting view on any important final decision?” He added that you also have to have the right expertise in the right roles and you have the capacity.
The foundational premise for the BDCP in his mind is that there will be some entities receiving regulatory authorizations and that they are accountable to the entities that are granting them, said Mr. Bonham.
There are 5 levels to the governance structure, he said. The first is the implementation office. “This is the doer. Some of the tasks you might see in an implementation office are the annual work plan and budgets, contracting for services, the transactions relating to a large-scale effort, the securing and holding of matching funds, and potentially the acquisition of lands for restoration on a willing seller, willing buyer basis,” he said. “You typically need an entity managing endowment funds; you’ll need an entity that is keeping track, almost the air traffic controller if you will, coordinating dialog, you could see the implementation office managing lands, doing public outreach, so in my mind the implementation office is a doer of typical implementation tasks. It will have a project manager.”
The next entity, the Authorized Entity Group, goes back to his foundational premise about some of the government entities are providing authorizations to other governmental entities, said Mr. Bonham. “We know that the Authorized Entity Group includes the director of Department of Water Resources, and the regional director of the Bureau of Reclamation. They operate the state and federal projects; they’ll be applicants and permittees in some sense. What the agency and Department of Water Resource materials say is that the contractors may be members of the Authorized Entity Group, may not. It’s unresolved as of now. … that entity provides program oversight, general guidance, and it is an entity that likely pulls some of the levers because they have that authority already as to the operation.”
The third entity, the Permit Oversight Group, is the collection of state and federal entities that are authorizing an action, explained Mr. Bonham, noting that it would include the Director of Department of Fish and Wildlife, the regional director of the US Fish and Wildlife, and the functional equivalent of the same with the National Marine Fisheries Service. “It’s important to note that the Permit Oversight Group would be the entity that’s presiding over potential changes – conservation measures, biological objectives,” he said.
The Adaptive Management Team will have a much broader sweep of agency scientists, much like the Interagency Ecological Program, said Mr. Bonham. “They are charged with the adaptive management program I described; there would be a science manager.”
Lastly, the Stakeholder Council is the broadest of the five groups, he said. “It would need to include representation from all the affected communities … it would be a Council that’s deliberating, discussing, and funneling input into those other entities. I believe it’s a Council that would definitely need the right to lodge dissenting opinions, so that the Permit Oversight Group would know the flavor of both the debate and the outcomes within our broadest stakeholder component of governance.”
“Governance is a work in progress,” said Mr. Bonham. “Many of the values I just described to you are currently being still negotiated. I don’t see a lot of the discussion the same as my counterpart Director Cowin, we’re having hard conversations on governance. We know that the outcome on governance will affect every stakeholder’s ability to trust the implementation. We know that it’s particularly important for the five counties that are involved.”
“Governance matters very much to conservation and environmental community because it speaks to the concern around trust and adaptive changes in the future, and it matters to those who receive water from the state and federal projects,” concluded Mr. Bonham. “It’s a negotiation underway.”
Senator Pavley asked who are or what is the entity under an adaptive management approach, that decides how much water flows through the Delta and how much water flows through the tunnels to serve agricultural and urban water users?
“My answer to your question has two parts,” replied Mr. Bonham. “The first part is that the question of instream flows in the first instance isn’t about governance.” Referencing the decision tree, “I think the plan and the proposal will provide some specificity on the question of flows … science and adaptive management will further fine tune potentially, and we know from other large-scale HCPs and NCCPs that you may need to further adjust operations during implementation, which could require a greater commitment of water or finances. Could. And in that regard, the Permit Oversight Group, which is comprised of the fish agencies, must have clear decision lines and decision authority,” he said, noting that the topic is still being discussed and negotiated.
Senator Pavley asked about the State Water Board’s role in the governance structure.
“Here’s my thinking, having been a former practitioner in front of the State Water Board in my last life,” he replied. “First, in my mind, water in California is much broader that any given governmental entity on the state’s side, and water as a topic when it comes to management, both for supply and ecosystem, is much bigger than the BDCP, so there’s a lot going on in the state around water. Within that, you have smaller and smaller circles within that broad overlay. We have groundwater issues, we have recycling issues, we have conservation and efficiency issues, we have conjunctive use issues and discussion, we have all kinds of both water right and quantity and quality topics in play across multiple agencies.”
“When it comes to the BDCP governance structure, I personally don’t think that the State Water Resources Control Board or the federal Environmental Protection Agency are a permitting entity in the context of the BDCP,” he said. “The BDCP is contemplated to be a federal HCP under the federal ESA. EPA on the federal front doesn’t have the statutory permitting authority for a section 10 HCP. And to draw the state analogy, the BDCP is contemplated to be an NCCP, in the NCCP Act, the SWRCB is not given statutory authority. A fundamental premise of administrative law is that an administrative agency is only able to do the things from which the statutory authority flows. But, is there a role for the SWRCB? You betcha. … I would imagine in the broader stakeholder council, in the adaptive management effort … I don’t see it in a technical sense, a member of the POG, but I certainly see it as a necessary partner and collaborator for success.”
Senator Pavley asked about the role of the Delta Stewardship Council and the Delta Watermaster are in regards to the BDCP.
“As a reformed water lawyer, I care very much about the watermaster position,” he replied. “If one takes literally the part of California water law that is driven by prior appropriation and that doctrine, first in time, first in right, and ensuring your use is consistent with the boundaries of your right, all require an ability to both report and understand water use and watermasters are a functional tool to achieve that. Until just now, candidly, Senator, I hadn’t thought about how the watermaster may be involved. It seems to me that’s a conversation worth exploring.”
The Delta Stewardship Council was established by the 2009 legislation as an appellate body, which is unique, Mr. Bonham explained. “As you know, our department in the role of permitting entity will need to make findings under the NCCP Act, and our findings would be the basis upon which we would issue a permit. The DSC has a clear role to review our departmental findings and decisions and they can conclude we got it wrong. To my knowledge that is not a role any other state entity has ever been given with respect to our department’s NCCP findings, so they have that role.”
Mr. Bonham said he saw a role for the Delta Science Program. “We know the DSC Science Program is doing great work as a convener, and a collaborator … it’s slightly above and able to see across the broader scientific playing field. I think our adaptive management and science effort through implementation would benefit very much from their specific involvement.”
“We’re still discussing in governance who has a final decision on whether to amend and how, but I will tell you governance now expects the idea of an amendment should be coming up through the science team work because that’s the scientists who should be judging what’s happening in the future, and if the Delta Stewardship Council has a appointed position within the science effort, they are at least involved in funneling up what should be amended,” he said.
Senator Monning asked about the dispute resolution mechanism and the appeals process.
“Here’s my personal view on a decision rule based on my experience, said Mr. Bonham. “I am committed to the concept of consensus. Here’s why. These issues matter to all of us. Consensus is a way to motivate as full engagement as possible in a given problem or dispute. But I’ve also found that you can work in perpetuity and sometimes still run across a dispute that can be fully resolved to the satisfaction of everyone, so I also think you therefore need to have an opportunity for a minority or dissenting view to be expressed in the body of the decision making, and you have to require those who object to do more than just object and sit on their hands. There has to be an offer-counteroffer structure. It’s a topic still under discussion what to do with the final appeal idea.”
“Balance is very important,” continued Mr. Bonham, “because while all of these components of this conservation plan really matter, it may be the case the unresolved issues on governance matter the most because they are the indicator for this community’s trust in the subsequent process … the value of governance and the importance of getting it right is not lost the secretary or I and is why we’re still discussing it.”
Senator Wolk asked about who specifically had the power to change the decisions and what Mr. Bonham meant when he said that issues about authority and who decides are ‘currently being negotiated.’
“I would just say in my mind, governance is not easily characterized just as who decides. Rather, it’s who decides which decisions because some of the decisions in a conservation plan and its implementation, my department may not need to deal with, such as payroll, for any administrative staff that are managing an implementation office,” he responded, “so to me, it’s both figuring out what are the decisions then who should be deciding that set.”
“A lot of the conversation between the federal and state agencies has been about what decisions might fall under the purview of the Permit Oversight Group only, what decisions might be some shared dialog between them and the Authorized Entities Group, and how might that relate to the Adaptive Management Team,” Mr. Bonham continued. “I use the phrase conversation to mean the state and federal agencies are negotiating how they see some of that working, but also acknowledge success on governance would require making sure the final product has input from the other clearly affected potential constituents like the local counties. … the agency and our department would benefit from assistance with better dialog with those five counties around governance.”
Senator Wolk noted that the Authorized Entity Group has a lot of power, and that the contractors were listed as being members. “Why contractors? Has that been decided?”
“I don’t think it has,” replied Mr. Bonham, and referencing the plan documents: “I’m quoting: “the Authorized Entity Group will consist of the director of Department of Water Resources, the regional director for the U.S. Bureau of Reclamation, and representatives of the participating state and federal contractors, if they are issued permits pursuant to the BDCP. If they are issued permits is a topic under discussion, so I think it’s premature to say today unequivocally that they are a member of the Authorized Entity Group. Some would like them to be; others would like them not to be.”
Senator Wolk asked what role Mr. Bonham envisioned for the Delta counties.
“I would say that this is a question more for the agency or DWR,” he replied, “but I know I personally am struggling sometimes to understand the best form for the five counties …”
“We’ve had an outstanding invitation for four months to the Counties to sit down and actually talk about this, and I think my sense is that there are differing interests between the counties and that makes it hard for them to have a unified position and that’s made it difficult for that meeting to go ahead,” added Mr. Laird. “I think the release of this and laying out the potential structure will force that issue in many different ways. I’ve sort of reiterated that invitation in public and private settings recently. And that might be a role for the Pro Tem of the speaker or others to work with us on that. That’s our desire within a proposed structure is to flesh out that issue and see how they see themselves fitting in and see if there’s a place we can get to, because we’re interested in that.”
PANEL 2: ISSUES FOR LEGISLATIVE CONSIDERATION
Anton Favorini–Csorba, Legislative Analyst’s Office
Next, Anton Favorini-Csorba from the Legislative Analyst’s Office weighed in on the governance and finance issues of the Bay Delta Conservation Plan. He began by pointing out that the creation of the Delta Stewardship Council by the 2009 legislation was intended to remedy some of the governance issues that had slowed progress during the CalFed days. “You have the Delta Stewardship Council that is supposed to oversee and coordinate activities; it is also developing a legally enforceable Delta Plan, and then BDCP is supposed to be incorporated into that plan if it meets the requirements of a Natural Communities Conservation Plan.”
“On the Authorized Entity Group, I think one of the key things to keep in mind here is that they, together with the Permit Oversight Group, are supposed to be responsible for approving the changes to conservation measures,” said Mr. Favorini-Csorba. “The Permit Oversight Group has the authority to monitor compliance with the permits and in the case that the conditions of the permit are violated, they theoretically could revoke that which has implications for governance.”
In regards to the Implementation Office, Mr. Favorini-Csorba noted that the implementation office doesn’t exist anywhere in statute. “It’s just a creation of BDCP and what that means is that it doesn’t necessary have the authority to tell some of these other state agencies or federal agencies how to carry out the activities. They are charged with a fair amount of responsibility in terms of ensuring that BDCP is carried out; it’s not clear that they have that authority. It’s actually not even clear whether or not that’s going to be housed in a state agency or some other separate quasi-governmental group.”
He noted that the Adaptive Management Team is in charge of proposing changes to the conservation members, and with the wide variety of members in the group that could potentially disagree, it could slow some of the decision making processes. He also noted that decisions that are not elevated to a higher level are decided by the agency with direct authority over that particular decision.
Mr. Favorini-Csorba referenced the CalFed days when it was an authority without authority, and noted, “to the extent the implementation office doesn’t have statutory authority to direct the activities you could see some of the same issues arising there.” He also said that integration with other Delta processes is important for being sure efforts aren’t being duplicated.
“Another open question is once the DSC decides to incorporate BDCP into the Delta Plan, what authority does it have to independently propose changes to conservation measures? Are we just taking BDCP as given and everything else moves around it, or is there some back and forth there?” Another potential issue is if it is difficult to make decisions, it can slow things down considerably.
“The governance structure has some implications for how the coequal goals are balanced and at this point I think there’s a bit of a lack of clarity on how this is going to shake out,” said Mr. Favorini-Csorba. “One the one hand, it seems like there is significant authority given to the authorized entities which are the representatives of the water supply agencies, the fishery agencies, but it’s not clear to what extent they will be involved in decisions on water operations; then again they have the ultimate authority to revoke the permit if they think the species are not recovering. So the willingness of wildlife agencies to exercise authority versus the authority laid out for the authorized entities in BDCP as still an open question.”
The BDCP doesn’t lay out much role for the legislature, Mr. Favorini-Csorba pointed out. There isn’t a legislative representative included in the stakeholder council, and the program manager is not subject to confirmation. “It may be difficult for the legislature to hold BDCP accountable,” he said. Mr. Favorini-Csorba suggested the legislature could address this by specifying some of the details about the governance structure, such as establishing the implementation office in statute and giving it some authority or transferring some of those responsibilities over to the existing Delta Stewardship Council which is already charged with coordinating activities, or you could also have a process where the Delta Stewardship Council can independently propose changes to BDCP and maybe require some consideration of those.
Regarding the cost estimates, “What we’re looking at is roughly a $25 billion project; roughly 2/3rds of that can be attributed to the construction and operation of the tunnels,” he said. “One key point here is that that doesn’t include financing costs; however the number we’ve given here is the undiscounted costs so there is some balancing that will occur.”
[pullquote align=”left|center|right” textalign=”left|center|right” width=”30%”]“You’re looking at benefit cost ratio of somewhere between 1.35 and 1.4, and that’s good but it’s a little bit fragile, so if you see the costs going up or some of the benefits not being as high as anticipated, that net benefit could get eroded rather quickly.” –Anton Favorini-Csorba[/pullquote]
“When we look at the numbers in BDCP we find that the costs assumptions that they’ve used to come up with the estimates are generally reasonable,” said Mr. Favorini-Csorba, but he did note that there are a couple of areas where improvements can be made. “You could see land costs be significantly higher than what BDCP is describing,” he said. “They used historical values, but when you’re looking at purchasing at roughly 1/6th of the land in the Delta for habitat restoration, with that increase in demand, you might also see an increase in cost.”
There is also the potential for cost overruns, he pointed out. “Any time you have a complex large infrastructure project like this, the final costs are going to differ from what the estimates are, no matter how good those estimates are, and what we see according to some studies is that … you see costs being about one-third greater than estimated,” he said, noting that the projects looked at were mostly transportation projects, and there’s some indication that water projects don’t experience the same level of cost overruns.
It would also be helpful if the BDCP would use more of a range of costs rather than a single number for its cost estimates because the costs will affect whether the project actually has net benefits for the contractors who are funding it, he said. “You’re looking at benefit cost ratio of somewhere between 1.35 and 1.4, and that’s good but it’s a little bit fragile, so if you see the costs going up or some of the benefits not being as high as anticipated, that net benefit could get eroded rather quickly.”
Currently, the vast majority of the costs of the State Water Project are paid for by the contractors and there are certain provisions in the contracts that assure that; however Mr. Favorini-Csorba noted that these contracts were currently being renegotiated with no guarantee that these provisions will be maintained in the future contracts.
“Some of the funding sources on the ecosystem restoration side are uncertain, particularly when you start to look at some of the state funding sources,” said Mr. Favorini-Csorba. “The water bond scheduled for 2014 in November has been moved twice already; that’s one of the potential sources identified here. And so it’s not clear that this bond funding will be available to support the ecosystem restoration measures. This is particularly important because the decision tree that was referenced before about how much water you’re going to export relies in part on the performance of some of these earlier habitat restoration projects that are planned to put into place, and so that leaves open some questions about if we can’t get those into place, how do we move forward on the rest of it.”
Mr. Favorini-Csorba also noted that the funding needs for ecosystem restoration could be higher than planned. “There is the larger question of there are a lot of things affecting the Delta – diversions north of the Delta, discharges of pollutants, and a variety of other stressors,” he said. “To the degree that those go uncontrolled, they could have negative effects on the species and under certain federal regulatory guidelines. If we see some of these species declining and even if the state has done everything that’s described in BDCP, under the ESA, you can’t really let those species go extinct. What has happened in the past is that any necessary restoration actions beyond that which is specified in BDCP might fall to the public.”
“At a minimum the legislature is going to be asked to appropriate funding for ecosystem restoration going forward, but the legislature also has the opportunity to go a bit further and to add an additional certainty that the ecosystem restoration measures might be funded, and one way of doing that might be to designate other entities as backstop in case the state or federal funding doesn’t come through,” he said.
“In addition, there are these other stressors that are outside the Delta. The 2009 water package had some policies that started to address those; the legislature could expand on those, perhaps adjusting the water conservation targets or taking other action on groundwater management that affects the demand for pumping or other aspects of the Delta,” concluded Mr. Favorini-Csorba.
Senator Wolk asked Mr. Favorini-Csorba to clarify what he meant by his suggestion that the legislature could designate other entities as a backstop.
“I think it goes to the definition of beneficiary pays and polluter pays, and what you see causing some of the or the source of the problems in the Delta and the beneficiaries of some of these activities,” he said. “There are these other stressors outside of the Delta that are affecting the species there. Just as an example, one of the things that has come up is how much is ammonia resulting from wastewater treatment plant discharges affecting the Delta. So to the extent that some of these activities in BDCP are intended to offset some of those effects, and because there are all those factors coming together, you might want to look to other sources there such as ratepayers for the Sacramento water treatment facility. On the other hand, if you think the primary beneficiaries of the project are the ratepayers of Southern California, and also the certain parts of the Bay Area and agriculture throughout the state, you might want to look there as a potential backstop to fill in to make sure that these activities are fully carried out.”
Click here for the report from the Legislative Analyst’s Office.
PANEL 3: BENEFITS AND COSTS OF ALTERNATIVES
Dr. David Sunding, UC Berkeley and the Brattle Group
Dr. Sunding said that he would be discussing the analysis in Chapter 9 of the Bay Delta Conservation Plan specifically. “Chapter 9 is the analysis of what are called take alternatives – that’s ESA-speak for alternatives to the proposed project; ‘Take’ is a particular term of art in the ESA having to do with harm to listed species,” began Dr. Sunding. “The analysis that’s in Chapter 9 of the BDCP is extremely important because it essentially tells the story of why the proposed project looks the way it does. … As Secretary Laird said earlier, the take alternatives were not alternatives that we economists developed; they were alternatives that were developed and approved ultimately by DWR but also by the biological consultants working for DWR,” he said, noting that the alternatives are based on the alternatives in the EIR, but not exactly the same ones.
“The take alternatives analysis that is done here has an economic component to it, but it is not principally an economic analysis,” he said. “Economics is part of it; it’s used to assess in this instance the financial feasibility of the proposed action and the various take alternatives, but there are a number of other tests that are applied to evaluate whether or not an alternative to the proposed project works from a take alternatives point of view.”
The analysis in Chapter 9 looks at other factors such as logistics, technological feasibility, and whether or not a take alternative works from the perspective of listed species, he explained, noting that there is both an economic layer and a biological layer to the analysis. “In a cost benefit analysis, alternatives are compared to each other, and then projects are selected based on a net benefit or a benefit cost ratio, something of this nature, but that kind of analysis is explicitly not permitted when selecting take alternatives,” he said.
“Take alternatives are compared to a single standard, so all take alternatives have to be compared to a standard of what’s called cost practicability, all take alternatives have to be compared to a standards related to listed species, and technological feasibility, and operational feasibility; they are not compared to each other but instead, they are each compared to the same standards,” he said. “A take alternative is allowed to be considered preferred to the proposed action only if it works on all of those grounds.”
“That is fundamentally different from a cost-benefit analysis,” he said. “There has been some discussion about why didn’t you use the principles and guidelines or the DWR guidelines for economic analysis, and the simple reason is that’s not how Habitat Conservation Plans can be developed. The kind of tradeoffs that are envisioned in a cost benefit analysis particularly between ‘this alternative is a little worse for species but it’s a lot better for the applicants’ we do that in economics in all the time, but that is not permissible in a take alternatives analysis. You can’t make those kind of trade-offs.”
[pullquote align=”left|center|right” textalign=”left|center|right” width=”30%”]” … what I think the conclusions this points to is that the deal can’t get much worse for the contractors and still have it make sense, even under the assumptions that we’ve made about existing conveyance. It’s a pretty close call by some perspectives to begin with.” –Dr. David Sunding[/pullquote]
Table 9-1 lists the take alternatives that were considered. The BDCP proposed action is based on EIR Altenrative 4. Three of the alternatives incorporate a 15,000 cfs facility, one is an above-ground canal with a western alignment, one is a through-Delta conveyance, another is the proposed BDCP with tighter environmental criteria, and two look at smaller conveyance facilities; some of the alternatives involve more or less restoration, said Dr. Sunding.
There are three major components to the project, explained Dr. Sunding. “The nature of the conveyance facility, the amount and location and type of the habitat restoration, and then the operating rules that are put on it; each of these take alternatives varies one of those dimensions one at a time, so there is a take alternative that has same habitat, same operating criteria, but larger conveyance. You keep two the same and vary one, so we are analyzing with all of these take alternatives together the entire package but then each element of the package separately, and they are each considered to be a different take alternative.”
To do the cost practicability or financial feasibility analysis, economists must develop a state of the world without BDCP, he said. “What we’re measuring here are the extra costs that are borne by the contractors as a result of implementing BDCP as compared to what are the extra benefits that they get, and if the benefits exceed the costs, then that take alternative is considered to be financially feasible.”
“The BDCP incorporates a decision tree framework and you can think of the bookends of the decision tree as being the high outflow and low outflow scenarios,” he said, explaining that the high outflow scenario is the low water supply and the low outflow scenario is high water supply, “just proving that nothing with BDCP can be simple.”
“The high outflow scenario incorporates continued operation of the south Delta facilities, south Delta operating restrictions as described in Scenario 6, it incorporates fall X2 and enhanced spring outflow, implementation of some floodplain restoration in the Yolo Bypass, installation of one nonphysical barrier, and the annual project deliveries that result from this existing conveyance scenario are right around 3.5 MAF which is substantially below where deliveries have been in the recent past,” he said. “The low outflow scenario is the same as the high outflow scenario except there’s no fall X2, no enhanced spring outflow, and then the resulting annual average project deliveries in the early long-term are right around 3.9 MAF. So for the existing conveyance non BDCP scenarios we are looking at high and low outflow cases. We also evaluate the BDCP under exactly those same high and low outflow cases … future regulations are somewhat uncertain at the moment so we dealt with it the way analysts deal with it and looked at a range.“
Dr. Sunding said that three categories of benefits to water contractors were considered: water supply reliability relative to the existing conveyance scenario, water quality improvements, and then reductions in seismic risk. He reminded that this is not a broader analysis of statewide impacts, but a very focused analysis on financial feasibility.
“Both the high and low outflow cases relative to the existing conveyance counterparts have gross benefits of $18 to $19 billion, relative to costs of around 13.3 billion,” he said, noting that the costs for things that need to be done anyway – like contractor obligations for habitat restoration – have been netted out, and everything is expressed in present value using a 3% real discount rate.
“Looking at benefits and costs together in this take alternatives analysis, the first conclusion that emerges in that the BDCP does pass the benefit cost test given all the assumptions that have gone into this, but I think the previous speaker from the analyst’s office made some very perceptive comments about this,” said Dr. Sunding. “This is definitely a positive cost benefit ratio, but it’s not wonderful for a project with this much uncertainty attached to it. There’s uncertainty about costs, there’s uncertainty about the benefits because this type of a project fundamentally rests on assumptions about future regulations – that’s the whole point of doing an Habitat Conservation Plan and it’s just impossible to nail that down with 100% certainty at the moment. So a benefit cost ratio of 1.35 or 1.4 is in the game but it’s not an overwhelming one. I’m not sure I’d characterize it as fragile, but I think the underlying point that I completely agree with.”
“One of the questions that I think the federal agencies are going to be asking about this as well, can’t you take your proposed project and leave more water in the environment – reduce take that way,” he said, “and what I think the conclusions this points to is that the deal can’t get much worse for the contractors and still have it make sense, even under the assumptions that we’ve made about existing conveyance. It’s a pretty close call by some perspectives to begin with.”
Dr. Jeffrey Michael, University of the Pacific
“A successful planning process in all sorts of venues really needs to integrate economic and financial considerations right from the beginning,” began Dr. Michael. “The BDCP process has been going on for seven years now. It was only last year I believe it began to include any serious economic or financial analysis when Dr. Sunding came on board, and his analysis has been very insightful, but as a result of the way it was conducted in the past, BDCP is stuck with a set of alternatives that were developed with little regard for economic or financial reality, and that’s the hand that Dave’s been dealt. It isn’t necessarily fair for me to criticize him for the alternatives that he’s been given. I will criticize BDCP though – what we should be doing now is using the insights from this analysis – and I would argue for a radical redesign of the BDCP. I would suggest there are better paths to take.”
[pullquote align=”left|center|right” textalign=”left|center|right” width=”30%”]“I point out that a valid Habitat Conservation Plan and complying with the ESA in the Delta does not require the tunnels. … I think it’s very important that we develop more alternatives that do not include the tunnels.” –Dr. Jeffrey Michael[/pullquote]
There are plenty of less costly but effective alternatives to the twin tunnels, said Dr. Michael. “The strengths of the BDCP economic analysis is that it uses a consistent measure of water demand across all alternatives and it shows us the value of water supplied through the Delta. It correctly shows that the key to the economics of the tunnels is water supply, and that the tunnels can only be justified if they result in significant increases in water supplies relative to the no BDCP alternative. Water quality is a secondary but important consideration for the contractors, and the value of the seismic risk reduction provided by the tunnels is relatively low … I hope that Dr. Sunding’s study will put to rest that the main economic reason to build these tunnels is protection from an earthquake.”
Dr. Michael also sees some problems with Dr. Sunding’s analysis. “The BDCP is presenting a rather aggressive forecast of future water demand in this valuation … For example, this BDCP analysis uses a future population forecast for the MWD service area that’s about 5 million people higher than the current Department of Finance projections,” he said. “It makes pessimistic assumptions about water supply alternatives, development of future technologies, and uses a pretty low discount rate, so the fact that report projects that urban water demand will grow faster in the future than it has in recent decades, and I don’t believe that’s a likely result … so I would encourage Dr. Sunding and BDCP as they revise this analysis to consider some lower growth scenarios also to sort of bracket that value of water. We don’t want to start building $15 billion infrastructure based on some optimistic growth projections that don’t come true.”
“I point out that a valid Habitat Conservation Plan and complying with the ESA in the Delta does not require the tunnels,” said Dr. Michael. “I think it’s very important that we develop more alternatives that do not include the tunnels.”
“Alternatives are the key for both environmental and economic analysis of the tunnel as the economic numbers can only be interpreted relative to an alternative, so it’s real important to get them right and to maintain consistency across the alternatives,” said Dr. Michael. “The most basic alternative that has to be defined is the no action alternative or what happens without the BDCP … This estimates water exports of 4.7 MAF at the opening of the tunnels with gradual declines over time due to sea level rise. Compared to that, BDCP generates an incremental water yield of 0 to 0.7 MAF per year, according to the draft EIR.”
Dr. Michael did his own benefit cost analysis last summer that compared the twin tunnels to the EIR no action alternative and determined that the net benefit of the tunnels was about negative $7 billion and the benefit cost ration was 0.4. “If the BDCP economic analysis used the EIR baseline, they would get a similar result today. I think Dave confirmed this at the Metropolitan Water District board meeting when one of the board members asked him if the project would be cost effective if he used the EIR baseline, he responded no, and then defended the other baseline. So, in other words, spending $15 billion would be worse than the status quo of the current biops, even from the perspective of the water contractors. I think it’s important to establish that result.”
“So how does BDCP generate the conclusions that the tunnels are a good investment? That’s because this summer, they introduced a new no action alternative, this existing conveyance scenario that assumes another 20 – 25% reduction of exports in the future if we don’t move ahead with BDCP. So just like that, you change the assumption, you get over 1 million acre-feet of new water supply out of the analysis and $10 billion in benefits and we have a positive benefit cost ratio. So the question is, is that a reasonable change? I wonder if BDCP itself believes it’s a reasonable change since the analysis says that it’s only for the purposes of chapter 9 and it isn’t going to be used in the EIR or anywhere else.”
Dr. Michael pointed out that the Department of Water Resources is currently litigating the biops, arguing that they are too restrictive. “Yet, in the BDCP, the Department of Water Resources and the same experts they’ve used in these federal court cases seem to be arguing that the biops are certain to get much tougher in the future because they aren’t sufficient to recover the species,” he said, “so I am confused by this seemingly contradictory stance.”
“It’s true that numerous bills have been introduced in Congress to weaken the biops and increase pumping as well as generally weaken the ESA,” said Dr. Michael. “On the other hand, I’m aware of no similar bills or proposals to cut water exports as they are assumed in this new alternative. So I ask you, is it appropriate to justify a risky $25 billion project to ratepayers and taxpayers on a speculative assumption that directly counters the current direction of state policy and legal action? Moreover, I would argue that BDCP economic analysis baseline assumption is incorrect because it doesn’t account for the environmental benefits that would result from this stricter no action scenario.”
[pullquote align=”left|center|right” textalign=”left|center|right” width=”30%”]“There’s no shortage of creative thoughts here and I think that there are less costly alternatives that are better for all parties that BDCP should be looking at.” –Dr. Jeffrey Michael[/pullquote]
Dr. Michael said there were positive insights he gleaned from this analysis that indicate how the BDCP can be improved. “We have established that BDCP is a bad investment compared to the current biops and a good investment compared to a more restrictive assumption. That begs the question, what’s the break even point? For what no action baseline would the net benefits of the BDCP be zero?” Dr. Michael did some calculations yesterday and determined that a no-tunnel alternative with exports ranging from 3.85 MAF and 4.45 MAF on average would be economically equivalent to the tunnels for the contractors using Dr. Sunding’s baseline. “What I would suggest if we bumped exports up a little bit from that level to say a range of 4 to 4.5 MAF in a no tunnel scenario, it would be better for the contractors than the tunnels, better for the fish than the current biops, and certainly better for Delta stakeholders. To me it looks like a win-win-win so my conclusion from the economic anlaysis is that BDCP should develop a no tunnel alternative that removes the tunnels, maintains the other 19 conservation measures, and stabilizes exports somewhere in the low 4s.”
The economic analysis also supports other known tunnel options. “What about the portfolio proposal? The BDCP analysis rates a 3000 cfs tunnel poorly, but the backers of the portfolio approach have correctly pointed out that it’s significantly different from their proposal. First the BDCP cost estimate is at least $3 billion more than the portfolio proposal and it’s unclear why the cost estimate is so high. I’ve heard people say that it’s looking at two tunnels instead of one tunnel, it has a pumping plant that isn’t necessary, or that there are other issues with it, so I would say that the cost estimate for that 3000 cfs is under dispute and if it’s lower, the results could change … I wouldn’t rule it out based on his results. I think it merits further study.”
“Another cost effective alternative that should be examined looks at directly at investments in the levee system and seismic levee upgrades as proposed in the DPC Economic Sustainability Plan that I led,” said Dr. Michael. “Seismic levee upgrades actually provide more earthquake protection for water exports than the twin tunnels, but the reason to do it is that they provide a lot more than that, they provide public safety benefits, they protect transportation and energy infrastructure, they protect Delta farms and property, and they cost less.”
Those are just some of the alternatives that could be considered and I could keep going, said Dr. Michael. “There’s no shortage of creative thoughts here and I think that there are less costly alternatives that are better for all parties that BDCP should be looking at.”
Click here for Dr. Jeffrey Michael’s written comments submitted to the Committees.
Senator Frazier said that the alternative method that Dr. Michael proposed doesn’t seem like it’s been vetted in the BDCP. What can we do … ?
Dr. Sunding said that the thru-Delta conveyance, known as Alternative F, didn’t work in the take alternatives analysis for biological reasons, not economic reasons. “In the unambiguous opinion of the biologists, it didn’t meet the coequal goals so the problems are not on the economic side of the ledger; it’s essentially just a perpetuation of the same, a natural environment that exists in the Delta currently. Again that was not an economic call, it’s a biological call.”
“I’m not necessarily advocating this project as an alternative,” said Dr. Michael. “I only started talking about it once I saw David’s analysis and thought, hey this looks pretty good, and I boned up on it since then, but the point is this – there hasn’t been a lot of work into the development of this alternative, and David’s analysis shows that it has some extremely attractive features and performs well in certain ways. I think a lot of these no tunnel alternatives, if they were to receive just a fraction of the developmental attention that the tunnels have, many of these problems would be resolved.”
Senator Wolk asked how the analysis would change if some of the contractors decide it’s not worth it?
“Senator, that’s almost imponderable at this point,” said Dr. Sunding. “There is an assumption that’s embedded here that the contractors would be responsible for about 68% of total project costs – the conveyance facility, some habitat, and then some operations, but beyond that, all the analysis is done at an aggregate level. When you start to get individual groups or subgroups of contractors peeling off – I’m not even sure what it would mean to opt-out of the BDCP or not participate from a cost point of view. Again, I don’t think that’s been developed enough to offer an opinion on that.”
I think we can conclude that the assumption that all the contractors would pay equal amount per unit of water received is not going to hold, said Dr. Michael. “There is going to have to be some differences amongst the beneficiaries, and urban water users are going to have to pay more per unit of water they receive than agricultural users. I don’t think there’s any doubt about that in order for the financing to work.”
Senator Wolk asked about long-term demand management.
“Demand management, yes, absolutely is going to be necessary,” said Dr. Sunding. “One clear thing that emerges from our analysis is that BDCP is not going to solve all the problems of the urban water agencies, and even if BDCP is implemented, there is still going to be a huge need to invest in water supply alternatives, including demand side management, stormwater capture, recycling, desalination … these agencies are going to need it all, even with BDCP.”
“Every one of these is alternative is a portfolio alternative, but budget constraints are real,” said Dr. Sunding, “and the idea behind the portfolio alternative of spending less of your resources in the Delta allows the agencies to spend more resources on these alternatives. The cost of this project is large enough that these agencies will see their resources constrained, and they are already starting to hear from their ratepayers. The more expensive the BDCP project is, the less ability they have to implement other options in the portfolio.”
Senator Wolk asked if storage was part of the analysis.
“The analysis is really sticking within the four corners of the BDCP, and because new storage is not part of the BDCP, the assumption we made was relative to the existing storage,” said Dr. Sunding. “Relative to the existing conveyance scenarios, the water supplies that are provided or preserved by BDCP all occur in average to wet years, so BDCP does have higher levels deliveries but they are shifted more towards wet years. It’s quite different than what we are experiencing at present; what that means is that while storage is not part of BDCP, it’s highly complementary to BDCP and some investments might even result in higher level of benefits than what we’re estimating here. It’s just again, for purposes of this analysis, we stuck to what’s in the plan.”
“When you keep doing that, it bothers me and I’ll tell you why,” said Senator Wolk, “because it’s extraordinarily expensive what ratepayers and the state are asked to invest for the next 50 years … I understand why you’re doing that, I understand assumptions, but it makes me very nervous … “
“I understand and again, we’re trying to present analysis here that’s tailored to the plan,” said Dr. Sunding. “You raise a very good point and as an economist I agree with it. There are other investments that could be made in the state’s infrastructure that might change the results here that would ultimately work for the benefit of ratepayers. … as a ratepayer, I would want to know about, if that‘s realistically part of the public response to the BDCP, I think it’s worth modeling.”
“There’s concern with the sticker shock of the BDCP that there will be less ability for local water agencies to invest in more local regional solutions which might be frankly in the long term more sustainable and in the best interest of the rate payers,” said Senator Pavley, asking if Dr. Sunding would expound on that point.
“The ratepayer perspective is exactly the one that we used in this analysis. Most water utilities are non profit so they don’t show up in economic analysis like this; the benefits and costs that were measuring are all of the perspective of people who consume water provided by these agencies, so this is basically about ratepayers,” said Dr. Sunding. “When you compare an investment in BDCP to an investment in water supply alternatives, and that’s a relevant comparison … the implicit costs of the BDCP is about $300 to $400 per acre-foot, that’s out of the Delta, so depending on where your conveying it to and treating it, the costs are higher than that. But that’s still quite a bit lower than virtually all available water supply alternatives, and quite a bit lower than conservation, so in other words, fixing a system that already exists is quite a bit cheaper than building a brand new water supply or investing in further conservation. That’s why the BDCP looks good from a ratepayer point of view, because it is a relatively attractive investment given what else is available.”
“I’ve heard the $300 to $400 acre-foot a few times and I haven’t been able to replicate that figure,” said Dr. Michael. “Nevertheless it depends on the alternative assumption that you‘re going to have really low water supplies in the future. If you compare it to the current biops and you start talking about lower water yields, that figure quickly goes into the thousands of dollars. If it’s no water at all under one scenario of high outflows relative to the biops and you’re dividing by 0, the cost goes way up from there, so I think this $300 to $400 figure for comparison is deceptive and shouldn’t be used at this point.”