Dr. Thornberg tells MWD Bay Delta Committee on the BDCP: “Stop hitting the panic button … This project is worth it, it’s as simple as that.”

MWDBoardtalkMarch2014_Page_01At the March 25th meeting of the Metropolitan Water District’s Special Committee on the Bay-Delta, Dr. Chris Thornberg from Beacon Economics returned as a follow-up to his December presentation covered on the Notebook blog here: Maven’s Minutes: Evaluating the economics of the BDCP: Dr. Thornberg reviews all the economic analyses for Metropolitan and says “From my perspective, this is a no-brainer.”

Dr. Thornberg began by reminding the Committee members that he was brought in to deal with the economic confusion surrounding the Bay Delta Conservation Plan due to the multiple conflicting economic analyses that have been done to date.  “I was brought in as kind of a neutral party to take a look through these numbers and see whose real and whose not, who’s on firm ground and who’s maybe not so much on firm ground,” he said.  “What we’ve been doing over the last few months is trying to dig through the underlying dynamics of this debate and figure out where the truth lies, if you will.  If you can figure that out – because at some level, we’ll never fully know the truth until we actually dig the things.”

MWDBoardtalkMarch2014_Page_02He then gave a brief review of the context of the project.  The biological opinions determined that southern access points were creating difficult environmental situation, particularly for the Delta smelt and the salmon, as a result of that there was a reduction exports from the Delta area from 6MAF down to about 4.7 MAF, on average, he said, noting that things can be highly variable, such as the present day situation shows.  “With the understanding that the southern access point seems to be a problem, the Bay Delta Conservation Plan was created with really two things in mind: how do we secure that water, how do we restore the water supply that was lost as a result of the biological opinions, and then of course how can we help the overall environment be improved up there,” he said.

The Bay Delta Conservation Plan really has those two things in mind,” he said.  “The first part is an ecosystem restoration and preservation project; billions of dollars spent on simply cleaning up the environment for the some of the distressed species and getting rid of invasive species, reducing poaching, helping hatchery practices, and creating about 150,000 acres of new habitat restoration.  The second part is the water conveyance system – the 30 miles of tunnels that would take water from the northern access point rather than the southern access point, pump them underneath the Delta to the southern access point, by which they would then be put into the canals to be shipped down to the Central Valley and to Southern California.”

He noted that he’s been brought into to talk primarily about the conveyance system, but it’s important to keep in mind that the overall BDCP is a function of both of these aspects.

MWDBoardtalkMarch2014_Page_03So in terms of an economic cost benefit analysis, how does one determine whether a project is worth building?  We have to determine the Net Present Value (NPV), and to do that, we have to understand what the costs are and what the benefits are, and then we have to get it all into what we call current value terms, he said.  Future costs would be the direct costs and construction and maintenance of those tunnels, and the indirect costs would be the decline in agricultural output that might occur as a result of both the short term disruptions, as well as the long term loss of some agricultural land due to construction disruptions, he said.

Next, we have to estimate the value of future benefits, which would be the restoration of the water supplies, improved water quality, and the overall value of environmental improvements, he said.  “There’s also an option value to deal with uncertainty having to do with reduction of supply risk, particularly in the case of some sort of seismic activity, and of course there’s the also the increased usage value of other assets such as reservoirs in our system that a lot of money’s been invested in since the early 90s drought,” he said.

What you have then is a time series of all of these costs and benefits,” he said.  “We then use some sort of discount rate because the future is uncertain and therefore we have to undervalue the future more than current years.  Because the future is so uncertain, you have some sort of discount rate to get it all collapsed down into present value terms.  You take one, subtract the other, and if you’re greater than zero, away you go.”

Over the last few months, I’ve been very much getting engaged in this debate at many levels, and it’s been interesting,” he said.  “The degree of hysteria and paranoia out there regarding this particular project is really off the charts.”

What I want to talk about here is both point of view of what’s relevant and what’s not relevant, and I want to say up front that I really truly come into this conversation with an open mind.  I’m trying to take into account all sides of the debate,” he said.  “What I think is most frustrating to me in this entire debate is what I would call the absolute lack of transparency.  The conversations we have to have about this tunnel have to go above and beyond myth, rumor, and talking to echo chambers.  We need to come together and have some real conversations about what’s relevant here and what’s not relevant.”

First of all, it’s not about right and wrong,” said Dr. Thornberg.  “It’s not our water, it’s not your water, it’s not this is a terrible thing to do just because – and it’s not about people in Southern California shouldn’t have lawns,” and he recalled how someone from the Bay Area recently said on the radio that people in  Southern California shouldn’t have lawns.  “You can sit there and make value judgments all you want, but the reality is we live in a world of scarce resources and we have to find ways of allocating scarce resources to their best use.  It’s not about what you think should happen or what you think shouldn’t happen.  If someone in Southern California wants a lawn and they are willing to pay the true cost of the water needed to grow that lawn, that’s their option.  You’re not allowed to make what I would call these moral judgments about these situations; it’s not how the world works.”

It is the same as when I go to the checkout line and I see People Magazine sitting there, full of stories I think are completely irrelevant to humanity at every level,” he said.  “I think everybody should be reading The Economist.  But you know what, The Economist doesn’t make nearly as much money as People Magazine does, and that’s because People Magazine is what people want to read more so than The Economist, and that’s that.  I have no right to sit here and say that that paper shouldn’t be used for something called People Magazine.  People make their own decisions on what they want to do.  We just have to make sure that when people make those decisions, that there are no externalities involved at that particular level.”

It’s the aggregate Net Present Value that is important here, he said.  “When I go through these numbers today, I talk about the costs, I talk about the benefits, realize that I’m looking at the entire system.”

MWDBoardtalkMarch2014_Page_04There will be debates, such as how much agricultural contractors will pay or if one water agency is going to pay more than the other, but that’s irrelevant to me, he said.  “Not to say that it isn’t irrelevant for the project; there have been situations where there are many positive Net Present Value of projects that have not occurred in the world because of in-fighting between the folks that would all benefit from it,” he said.  “This is what we call a tragedy of commons in economic parlance.”

I’m here to talk about the overall value,” he said.  “As for getting the various parties lined up and allocating costs and benefits accordingly, that’s an internal issue, and by the way, if this project turns out to have a positive Net Present Value, it behooves everybody to make sure that it happens, one way or the other, because again there is value there.  Don’t let internal squabbles ruin it, so to speak.”

Dr. Thornberg said that there has been some debate about environmental mitigation issues.  “The original report by Dr. Sunding threw in about $35 billion worth of environmental improvements.  Some have pointed out that that’s not a function of the tunnels, and at some level that is true.  There are billions of dollars that are going to be spent on habitat restoration and recreational value that is occurring completely separate of the tunnels, and as such, probably shouldn’t be in the Net Present Value of the tunnels themselves.”  He pointed out that both parts – ecosystem and conveyance – are being put forth as one particular project.  “With that in mind, it isn’t to say that all environmental values should be forgotten about, as Dr. Michael has suggested; rather the truth is probably somewhere in between.”

Focus on reasonable options – don’t let the perfect interfere with the good,” he said.  “Obviously there are probably bigger, better ways of allocating the scarce resource we call water in this state … I think its ultimately the case that we’re probably not going to see in our lifetime the opening of a functionally fully liquid water market in this state.  Don’t let the perfect get in the way of the good; let’s keep within what I call the range of reasonable options that are ahead of us at this particular point in time.”

Last thing to keep in mind is that it’s not that easy,” said Dr. Thornberg.  “When you think about doing these kinds of a scenario analyses, and we talk about this earlier, every time you turn around you flip another rock over on this particular issue, you find a whole other set of stuff underneath.  And ultimately there’s always going to be noise, there’s always going to be potential of variability in outcomes, both in the better and the worse.  You’re never going to have the right answer because nobody knows that.”

There are so many things that could happen, both positive and negative, to this type of project in the future,” said Dr. Thornberg.  “So what you want to do is to consider a range of reasonable options and roughly say, ‘what are my overall expectations of what’s going to occur here.’  If it’s far enough into the positive territory that I think that the risk of this actually being negative is pretty small – there’s always some risk that this is going to lose money, but if that risk is 5%, the risk is 10%, that’s a go – that’s a big thumbs up.  We live in a society that’s constantly dealing with risk.  Every time you invest in new company, every time you put your money into a stock, you’re taking risk.  As long as the expected value is great enough over zero that it accounts for that potential risk, it’s okay that in some scenarios, it might now turn out to be as rosy as you might like.  It’s just part of the thing.  There’s no one number here.  You just have to tweak your model constantly, see what’s going on out there.”

MWDBoardtalkMarch2014_Page_05Three analyses have been done to date: Dr. David Sunding, Dr. Jeff Michael, and Dr. Rodney Smith out of San Diego, who really hasn’t done any kind of analysis, but he’s made a couple of interesting points that we’ll talk about here,” he said.  “Dr. Sunding has done multiple reports.  There was an initial release, a second internal release, and then the public release, and each one’s a little bit different.  There are things that have been included or not included; there has been some tweaking of some of the underlying parameters, changes in costs, things like that, but in general, pretty much all his reports have come down to the same conclusion: this thing has a positive Net Present Value.”

Dr. Michael didn’t really do what I would call his own sustained substantial analysis; rather he largely relied on some of the underlying concepts that Dr. Sunding put on the table, he used a lot of his numbers as a matter of fact,” he said.  “Here or there he tweaked things – he has a higher cost for the increase in salinity for water being used by the Delta agriculture, he dismisses completely the environmental benefits, and he also completely dismisses the potential future value of water that would occur in the event of further cutbacks from the current level.   But he more or less takes Sunding’s numbers and tweaks them and comes up with a negative number.”

Dr. Smith doesn’t have his own complete Net Present Value of any level, but he does talk about the potential for cost overruns, he thinks the discount rate is too low, and he makes some comments about the risk of tunnel water compared to other potential water sources,” said Dr. Thornberg.  “Candidly I think he’s throwing noise.  He’s sort of turning stones over to create what I could call more uncertainty about the situation.  I don’t think there’s a lot of substantial value in the comments, but I will address a couple of things he has to say for himself.”

MWDBoardtalkMarch2014_Page_06He then presented a slide with summaries of the studies to date.  He noted that the numbers on the slide are from the preliminary Sunding analysis, the initial one, and not the public release; he said that the public release has slightly higher costs by about a half billion or so but doesn’t substantially change anything.  “The original Sunding analysis had the environmental value put in, something on the order of $35 billion positive NPV, but if you get rid of the environmental values as he did in his later on analyses, he still comes up with a net present value of about $4.7 to $5.4 billion.  He says this thing’s positive, you should do it; it’s enough over zero you shouldn’t worry about it.”

“The Michael report says, no, forget about it, it has a negative NPV $7 billion, and therefore, by definition, don’t do it,” he said.

The big swing item here really has to do with the value of avoiding future reductions,” he said.  He explained that currently, the expected allocation is about 4.7MAF per year from the Delta to both ag and urban uses, of which a portion comes to the MWD and goes to the various member agencies.  “One of the big questions is will that 4.7 MAF be reduced further in the future?  Michael says no, it will be 4.7 MAF from here on out, whereas Dr. Sunding assumes that it will be cut further.  My understanding is that he assumes that over the next 50 years it will be cut from something on the order of 4.7MAF to 3.2 MAF per year.  It’s a big source of contention between these two folks.  That’s probably the single largest issue there that kind of explains this difference.  Otherwise most of the numbers are more or less the same.”

Now mind you, I’m not even sure that even I completely believe Dr. Sunding’s numbers,” said Dr. Thornberg.  “He has his internal models; he’s a smart guy and he’s done some really interesting stuff, but for me, I like to get into a model and see what’s going on.  Unfortunately, a lot of his models are a little bit black box if you will.  So what I’ve endeavored to do at some level is to kind of go through these numbers and set up the question yet again in a better way that maybe helps you understand what the underlying details are, and that may give you some sense of what’s going on.”

MWDBoardtalkMarch2014_Page_07The big question is the value of tunnel water, and there are two issues here:  what is the quantity of the restored water supply and what is the value of the water supply. he said.  “At some level, these are not independent,” he said.  “As it turns out, the less water that you get, transferred down to ag uses, transferred down to urban uses, the more valuable that water becomes, so in a very real sense, if you restore less water, that water becomes more valuable because there’s less of it, and that’s a critical offset, if you will.  And indeed, you’ll find that even with a high or a low [outflow] scenario, you’ll end up getting close to the same place simply because of that trade-off that’s going on there.”

We’ll start this off as a value debate, said Dr. Thornberg:  What is an acre-foot of Delta water worth when you’re going to bring it down to Southern California? “There are two ways of thinking about it.  One way is the opportunity cost measure: if we didn’t get that acre-foot of water from the Delta watershed, where would we get it from? We might go to some alternative supply – groundwater reclamation, desalination, some sort of storm water retrieval and clean-up system, as the case may be.”

Now Dr. Sunding doesn’t really look at this, indeed, he already says there’s already going to be a bunch of new water supplies coming online,” he said, noting that Dr. Sunding’s analysis includes population growth of 10 million new people who will increase demand above and beyond existing water supplies.  “He’s saying, look, there are already other water supplies coming online and ultimately you can’t expand it anymore, it’s just too expensive – you just have to cutback.  That water supply that you don’t get from the Delta is simply not going to be available.  And so he does what’s called a demand price elasticity analysis where he assumes simply reduced consumption and then he determines the value loss of that reduced consumption.  And that imposes real economic costs on ratepayers, whether its agricultural, industrial or residential.”

There are true economic costs here, said Dr. Thornberg.  “If a farmer loses his water supply, maybe he has to rip up crops, maybe he has to grow a different kind of crop, and he suffers some real economic losses as a result of that; he has reduced profits,” he said.  “If an industrial person suddenly doesn’t have water, and if you’re a beer company, you produce less beer, right?  Again there are real economic costs there.  If you tell a consumer that they can’t have their lawn that – by the way, they’re willing to pay the water costs for, that is also just as much of a real economic cost.  Maybe it’s not tangible, maybe you can’t see it on a balance sheet, but nevertheless there is a true economic cost involved there.  You can’t pretend that that doesn’t exist.”

MWDBoardtalkMarch2014_Page_08One of the critical issues here is what’s the future demand going to be with these 10 million more people moving into Southern California?  So opportunity costs and then this demand price elasticity analysis  – that’s the Sunding move,” he said.  “I’ll start first with the opportunity costs. … Sunding says any loss in water supply from the Delta is simply lost water supply, period.  He talks about the fact that we’re already moving towards different kinds of water supply.”

He then presented a slide showing Metropolitan’s water supplies over time, pointing out the Metropolitan has reduced their use of imported water from 60% back in 1990 to about 42% presently, with plans to reduce imported water use to 36% by 2035.  “So we’re already investing in other forms of water supply.  That’s already sort of built into the model.”

MWDBoardtalkMarch2014_Page_09Other potential replacement sources are expensive, he said, presenting a slide showing the range of potential costs for stormwater, groundwater, recycled water, and desalination against the projected cost of MWD Tier 1 water with the BDCP.  “This is expensive water.  Always bear that in mind.  It’s not just simple to say go out and do it.  …  Depending on how much water you restore, whether you’re restoring 1 MAF a year or restoring 2.5 MAF per year over the next 50 years, you’re talking about this project costing about $275 to $425 per acre foot.  That’s building the tunnels, getting the water through the tunnels and getting it down here to Southern California including the pumping costs, that’s pretty good.  That’s low priced water.  Compare that to other forms of water, say stormwater recovery, at $1600-$3500 an acre-foot, or groundwater recovery at $600 to $2600 an acre-foot.  Desalination is running $2000 an acre-foot for the new desalination plant in San Diego at this particular point in time.”

Dr. Thornberg said that it’s really a question whether there is an opportunity to expand these alternative supplies.  “Think how long it is taking to get that desalination plant online and 50,000 AF per year is all it can produce,” he said, noting that there are environmental impacts on other secondary issues as well as public pushback.  “We know there are certain types of water recovery that some folks don’t want to hear about.  We’ve all heard some of the terms out there today, so whether it’s realistic to think that it can expand to million AF per year or 2 million AF per year?  I think that’s very difficult to assume, and again, will people be happy with those kinds of new water.

There’s also this idea that some new technology is just around the corner, such as new kinds of desalination that will be cheaper and have less environmental impacts, he said.  “We’ve been 20 years from fusion power for the last 60 years, so bear in mind that sometimes it’s not as easy as you might think.”

I tend to agree with Sunding that most losses of water supply from the Delta supply will probably have to be absorbed through reduced consumption, and so we really have to think about this from what I would call the elasticity effect,” he said. “What is the value of water for the ultimate consumer out there today?

MWDBoardtalkMarch2014_Page_10The second issue is the quantity of water which goes back to one of the big debates between Dr. Sunding and Dr. Michael, he said.  “According to Sunding, there will be further restrictions enacted.  He assumes that exports will go from 4.7 MAF to 3.2 MAF without that tunnel being put into place, and that the overall southern access point is having such a bad environmental effect that we’ve slowed it down some, and it hasn’t’ improved things much, they are almost certainly going to slow it down just a bit more.  Dr. Michael said no, that’s not the case.  He assumes that there will be no further reductions, that Southern California both urban and ag, will be able to continue to access 4.7 MAF per year.”

Big swing issue here – who’s correct?

“I am really not qualified to weigh in on this at some level – I’m not an environmental engineer, I’m not a regulator in Washington DC or in Sacramento,” said Dr. Thornberg.  “However, it’s pretty clear that cutting the water supply from 6 to 4.7 MAF per year hasn’t turned the situation around by any stretch of the imagination, and if you look around at what’s going on today, the new court rulings that are coming into place … we’re living more and more in a world where there’s increased variability to the overall supply.  And what that means there may be points of time in the year where suddenly there’s a huge rainstorm, and for one week or two weeks, we have the ability to access water, but if for some reason, you can’t turn on those southern pumps, the fish are down there or something like that, you could lose that opportunity.  So just the increased variability of potential supplies would tend to indicate that, but for some other access to the Delta watershed water, there’s going to be some reduction in the ability to access that water over time.”

The other big question and one I don’t feel really qualified to answer is, are the environmental issues being caused with the fish due to the location of the pumps,” he said, ” or is it just the fact that you’re pulling water out of the Delta, period.  And these are huge questions, there’s no doubt about it.”

“If it really is about the location of where the water is drawn from, south versus north, then it makes it pretty much a no-brainer – you build a second access point to the north, you build the tunnels underneath,” he said.  “If it’s a total flow issue, that doesn’t necessarily mean you get rid of the tunnels.  Keep this in mind: The southern exports are taking a little less than one-sixth of the water coming through that watershed in any particular year.  Half of it flows out to the ocean, the other two thirds is being used by folks upstream.  If it’s the total flow coming through the Delta issue, it’s something that needs to be addressed, but not just by the Central Valley ag folks and Southern California urban users.  It’s not our problem; it’s everyone’s problem and should be dealt with on that front, and as such, the tunnels would not really be a function of that particular decision.”

“It also assumes that the northern access point will not have the same impact environmentally on the fish that the southern one does, and this probably is the most controversial part,” he said.  “Are the northern access points less environmentally harmful to the fish stocks as the southern access point?  I can’t answer that, but Department of Fish and Wildlife’s Carl Wilcox said this: ‘From the Department’s perspective, the Department has maintained the position since the 60s that the current diversions in the south Delta are probably the worst thing you could be doing for managing water within the Delta and exporting it.’  So he says it’s about the south access point, not about accessing the water, period.  That’s their opinion and that’s the best one that I can think of that seems to be somebody who’s relatively an expert in this particular field.”

MWDBoardtalkMarch2014_Page_11As to Dr. Smith’s critique that other sources of water, such as groundwater recovery or desalination, are much better because the Delta water is so variable – if  you have a drought, you can’t get any of that water, and if you don’t have a drought, you gets lots of it – it’s way too variable, where these other sources are less variable so therefore are better sources of water,” said Dr. Thornberg.  “He even goes on to say that because of that, you can’t just directly compare the costs of desalination to the costs of building these tunnels in terms of water supply, and my answer is that’s ridiculous.  The whole point of building all these reservoirs is to deal with the uncertainty on a year to year basis.  It’s the Bible folks, right?  If you have a lot of water, you grab what you can, you throw it in a reservoir, and when you don’t, you use your reservoirs.  This is why we’re in year 3 of the drought and we’re just now hearing about it whereas in the 90s you heard about it year 1 because we’ve invested in these things called reservoirs.  So I don’t buy that particular critique.”

Dr. Thornberg said he would quickly run through the elasticity analysis.  “The value of water can be estimated using price elasticity, and the argument here is that if people are going to be consuming less water, how much do you have to raise the price in order to get them to consume less of it?  So for example, the rough price elasticity of water is about negative .25, and that says if you want to get people to reduce their consumption by 10%, you would need to increase the price by 40%.  Now once you do that, you have a sense of how much you have to jack the price up to get them to consume less, then you have end points, a low value and a high value, and you take the average, and that gives you a rough approximation for how much that water they aren’t consuming was valuable to them and how much you had to charge them to not consume it, as the case may be.”

Dr. Thornberg pointed out that you don’t have to actually raise the price to experience the impacts.  “If I said to you that you have to consume 10% less water and you reduced it, the same losses would be there,” he said.  “Just a function that you’re eliminating this water, looking at price  elasticity gives you some sense of what the consumer value is.”

MWDBoardtalkMarch2014_Page_12Demand grows over time, and if you look at the Sunding’s analysis, he has a very complicated model that takes into account household size, housing density, and incomes and all this sort of stuff,” he said.  “I am doing a very simple example here; my model’s a little more transparent which is why I pulled this together.  Here’s a very simple example.  Let’s assume the urban elasticity is negative .3 and the current urban price is about $1300; the average reduction without the tunnels is going to be 7% to15% of urban consumption in Southern California, and of course if you add average water reduction with tunnels but with low flow, let’s us say … it’d be 4% to 7%.  What this suggests is that you would have to increase the hypothetical price something on the order of 16% to 60% to keep water consumption within the context of that existing supply.”

Now you take that price increase attached to that $1300 level, get your end points, and the middle number represents the value of that lost water.  Subtract the cost of the water – what I use here for my model is about $1100 per AF which would include the conveyance costs as well as the tunnels themselves, the main costs of the tunnels, the electricity of getting to Southern California, the treatment, getting it to the member agencies, and getting it to the tap, so that’s $1100 across the board for all the variable costs there, and I’m assuming of course that half the water ends up going to agricultural uses at about $150 per acre foot.”

The parameters I’m using in this example are deliberately skewed against the tunnels,” he said.   “I tweaked this model like nobody’s business to make it look bad.  I used numbers that were on the outside of what I would call probably more reasonable numbers.  The elasticity number, the costs of getting it there, a lot of numbers that I’ve used.  So what does it mean?

MWDBoardtalkMarch2014_Page_13He then presented a slide with two graphs.  “Left hand side, I have a bunch of acre-feet, and what does is show how much water will be consumed in Southern California under these different scenarios.  Top line is build the tunnels and you get full allocation and maintain about 4.7 MAF per year, with half of that coming to urban sources,” he explained.  “ The next line down is if we built the tunnels but only got half the flow under the Michael scenario, that’s to say that we maintain at the current level, at the lower level.  You drop down a little bit more and you can see a lower number there, that’s if there’s no tunnel under Michael would maintain a current 4.7, and then there’s two other lines, the red line and the blue line, these are Sunding analyses where he assumes reduced consumption over time.  That is to say we get less and less water because of other restrictions even with the tunnels being in place.”

The net result over there is on the right hand side is what this turns into in terms of those percentages.  The overall percent reduction in urban consumption necessary to keep the system in balance as the case may be, and that of course will give us our ability to create what we call the implied price increases necessary,” said Dr. Thornberg.

MWDBoardtalkMarch2014_Page_14Dr. Thornberg then presented another slide with a graph showing the real undiscounted net value of lost urban water consumption. “The next line here gives you some sense of that value of lost water under the Sunding and Michael’s analysis.  For Michael, the water runs anywhere from $400-$500 per acre-foot all the way into the future; for Sunding, because of ongoing potential limitations in the future without building the tunnels, the water becomes more and more valuable.  You add it all up and what it says here, and this probably the key point:  Under the Sunding analysis, this thing’s worth $21 billion dollars if we got the full allotment … If we got less than that, it’s about $8 billion.  Compare this to the $12 to $12.5 billion to build the tunnels.  Under the Michael scenario, $10 to $4.2 billion, so only in this one scenario does this project come out to be a positive net present value, but of course we haven’t gotten all the benefits in place just yet.”

MWDBoardtalkMarch2014_Page_15First of all, there are the benefits from water quality, carbon emissions, and such.  “Sunding says these other values are $1.3 to $2.1 billion; Michael says $.4 to $1.2 billion.  I’m just going to use their numbers, I’m not even going to worry about it,” said Dr. Thornberg.  “Will the ability to get water from the north actually improve the environmental situation?  The answer there is of course, at some level, yes.  If the fish are in the south, you can use the north.  If the fish are in the north, you can use the south.  Clearly having two access points is better than one, at some level it will help us get more, and yes, it will probably have some value in terms of improving the overall environment.  How much?  I don’t know, but I’ll tell you, remember, the initial indication from Dr. Sunding is that the improved environmental values like $50 billion.  I’ll take a tiny portion of that – a couple of percent, and I’ll throw in $1.5 billion for helping the overall fish stock as a result of having these two access points.”

There are seismic benefits as well, he said.  “You have an earthquake, the levees collapse, and  for three years there is no water,” he said.  “Let’s do some basic analysis there.  Let’s say there’s a 2% probability per year of having an earthquake, and as a result of the earthquake, half of the water deliveries lost for three years due to this seismic event.  In the case of no tunnels, which is about right.  If you had the tunnels, you wouldn’t lose that much water. This is a real mid-level scenario, but what it says the earthquake protection is worth another $1.6 billion to $2.2 billion.”

By the way, there’s been some conversations about spending $4 billion in levee repair,” added Dr. Thornberg.  “Forget about it.  So you build the levees, then what.  The levees start subsiding yet again, and ultimately, it doesn’t matter how much you bullet proof those levees, there’s a big earthquake up there, it’s not going to help the situation.”

Adding it up with sum total of other effects, Sunding says $4.4 to $6 billion, Michael says $3.5 to $5.1 billion, you throw those numbers in, and guess what,” he said.  “Under the low effects, the secondary effects scenario, 3 of the 4 scenarios turn out to have a positive net present value.  In the high scenario, same sort of picture.  All of these have very high present value.  So what this is saying is you tweak it, you put some analysis in, even if you’re using what I would call some measures that are tilted towards being anti-tunnel, you still end up with this thing restoring water that is ultimately very valuable.  People want this water, they want use it for their homes, they want to use it for their businesses, they want use it for agriculture, and yes, the costs of this water, including the environmental stuff, including the cost of construction, the changes in terms of the water quality, it still comes out positive.”

This project is worth it, it’s a simple as that,” said Dr. Thornberg.

MWDBoardtalkMarch2014_Page_16The idea here is very simple, he said.  “The tunnel restores some supplies and increases reliability.  The restoration will occur along with the other parts of the BDCP which will help the overall ecology of the Delta and make the place nicer.  It’s a big project – $20 – $25 billion when you include all the other stuff in terms of the environmental clean up, but what’s that, about one-third the cost of the silly train we’re trying to build out there in the Central Valley?  It’s not that big of a project, and of course it’s not THE solution to water in California at all.  Look, 10 million more people in Southern California.  We got a lot of work to do above and beyond the tunnels.  It’s simply one part of the puzzle.”

Stop hitting the panic button,” he said.  “It’s amazing to me how much hysteria over this.  You’re going to dry up the Delta! You’re stealing all our water! Nobody’s talking about anything except for restoring some of the water supplies that were taken away because of these biological opinions.  Southern California and the Central Valley used to get 6 MAF a year.  There’s no scenario here that imagines restoring that up to 6 MAF per year, simple as that.  So this idea that this is some massive change in how things have worked over the last 40 years is just not correct. “

MWDBoardtalkMarch2014_Page_17Keep something in mind,” said Dr. Thornberg.  “Eventually, to fight the salination, to help the species, we may need to let more water flow out then just the 48% that goes out on an average annual basis now, but again that’s a global decision.  It’s not for the MWD and the other Delta export users to deal with by themselves.  Overall, all those folks on the upstream side need to have a conversation about this issue.  It should not be lumped just on our backs, as the case may be.”

So summing up, I think it’s clear that the Net Present Value is greater than zero, except under some really extreme circumstances that we’ll never see anymore reductions in water supply from the southern access point – that’s the only way this thing turns out to be negative Net Present Value,” he said.  “That’s the fundamental question:  If you truly believe that we’re going to maintain 4.7 MAF per year from the southern access point, then you probably believe we shouldn’t build the tunnels.  I don’t think that’s a reasonable assumption.  Adding in the option value of two access points adds to the bottom line with potential environmental benefits there, again, this idea yet again that global issues need to be dealt with globally.”

MWDBoardtalkMarch2014_Page_18There’s been a point made that you have to compare this across a range of solutions,” he said.  “Actually Dr. Sunding did that.  He’s looked at different size tunnels, and came up with different NPVs under different scenarios and the 9000 cfs seemed to be the right system.”

There’s more to figure out, he said.  “I’m just trying to build this thing around helping people better understand what’s going inside these models and better understand what the numbers are,” he said.  “Are my assumptions correct? Is there more tweaking that needs to be done?  Are the costs really a thousand dollars, $1100 to get the water all the way to the tap?  I think that might be a little extreme.  Has population growth been fully integrated? 10 million people.  Seems to me there ought to be even bigger increases in the value of water with all those new people moving down here.  And of course, some questions outside of my analysis.  Probably the most important is what is the true ecological impact of that northern access point.  Not something for me to talk about but I think some of the experts have answered that question to my knowledge.

Last but not least, there are many scenarios outside the realm of estimation but don’t let the this kind of hysterical, kind of crazy to one hundred of one percent things dictate these things,” he said.  “There’s always a range of potential outcomes.  You want to stay kind of in the relative area, you want to look for that bell curve and it seems pretty clear to me that when you think about the potential range of potential outcomes, this thing makes sense.”

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4 Responses

  1. Robert Pyke

    Chris Thornberg is an entertaining guy, but if you believe all this I have a bridge you might like to buy. The MWD board should be panicking. Their staff and consultants can’t even produce an effects analysis that works and passes muster with an external review panel that was appointed at the request of the BDCP itself.

    For more good questions about the BDCP, go to http://fixcawater.com/questions.html

    Robert Pyke Ph.D., G.E.

    Reply
  2. Jeff Michael

    Maybe the MWD board should invite me to speak to them and explain my analysis correctly rather than hiring an “independent” 3rd party to present a distorted picture of it.

    Dr. Thornberg is correct that the main difference is the no-tunnel water yield assumption, I have presented that fact on many occasions. But he is wrong that I am dismissing the environmental benefits, my environmental analysis follows the BDCP EIR’s findings.

    Dr. Thornberg, on the other hand, is inventing environmental benefits that do not exist according to the BDCP EIR and ignoring environmental benefits that would be created by this hypothetical increase in future regulations. The environmental benefits from the increased flexibility of the northern intake is what creates the restored water supply. So the value of the restored water supply is the economic realization of the environmental benefits from the tunnels. That’s it, there is nothing more according to the BDCP’s own analysis. The EIR considers an increase in water exports over the 4.7 maf baseline with the tunnels, and concludes that the there is no benefit to the endangered and threatened fish from the tunnels. And it is worth pointing out that independent scientific reviews have said the EIR is too optimistic about fish benefits. The point is that once you have valued the “restored” water exports, you can not attribute any environmental values to the tunnels over and above that. Dr. Thornberg does – without substantiating the claim – so I would call that double-counting the environmental benefits.

    Then he adds a positive value for avoiding future regulatory costs to the agencies without an analysis or accounting for the environmental and other benefits that would result from the regulation. While I can acknowledge that such a regulation would be very costly for the water agencies and it could occur in the future, in a cost-benefit analysis, you must account for both the costs and the benefits of the regulatory change. You can’t include it in a cost-benefit analysis unless you have an environmental assessment that compares the tunnels to this increased regulatory scenario, and consider how the environment and upstream water users would benefit from this increased regulatory scenario compared to the BDCP scenario.

    He also has some questionable statements about growth in water demand, technology, and levees and ventures off into some issues that have to do with the water rights system not the tunnels.

    I like Chris Thornberg’s work on a lot of issues, and this presentation is much better than his previous ones since he admits that the conclusions could be different if he is wrong on the science or environmental effects. It’s smart that he left that door open, because he will need to use it if he stays in this debate.

    Reply
  3. jeffconklin

    Dr. Thornberg’s analysis seems to be quite balanced, as far as it goes. But like the other economists in this debate, he accepts the binary framing of the debate: either the twin tunnels are a good idea (NPV > 0) or they’re a bad idea (NPV < 0). Given the immensity of what’s at stake, if reasonable people can disagree about whether the NPV is positive or negative, then clearly economics isn't going to settle the issue of how to optimize California’s water system.

    The real puzzle here is how to break our addiction to polarized thinking. Is it inevitable that immensely complex issues be reduced to an either/or binary decision. As Dr. Thornberg’s last slide says, “Are there alternative ‘Delta’ plans that have similar net benefits?”. The BDCP “planning experts” have huddled for a few years and emerged with a single mega-project solution, saying “Trust us. We did the analysis and this is the right answer. Take it or leave it.” Dr. Thornberg’s own conclusion: “This project is worth it, it’s as simple as that.” Yet there are several serious and thoughtful alternative proposals in circulation and no public discussion of their merits. Let’s find out what economists have to say about them. Perhaps another approach yields a much a larger – and more certain – NPV!

    Jeff Conklin, Ph.D.

    Reply
    • Robert Pyke

      Absolutely! Go to http://fixcawater.com for the details of one alternative and a table that compares four alternatives to the BDCP – all of which come out ahead. And you are right about the polarization: rich cry-babies on one side and at least some self-important do-gooders on the other, in addition to many rational people – but the real puzzle is why the rich cry-babies are “anchored” (technical term used in connection with expert opinions) on a single solution that does not appear to work. The answer is probably that this is more about power than water.

      Reply

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