CALIFORNIA WATER FIX: Dr. David Sunding defends economic benefits of the tunnels to the San Diego County Water Authority

San Diego Skyline Wikimedia SliderboxDr. Sunding says California Water Fix is ‘essentially like an insurance policy’ to prevent erosion of existing water supplies

san diego county water authority logoAt the October meeting of the Imported Water Committee of the San Diego County Water Authority, Dr. David Sunding, Professor at the Department of Agriculture and Resource Economics at UC Berkeley and perhaps more importantly, an economic consultant for the state who has produced economic analyses for the Natural Resources Agency on the California Water Fix.  In light of the release of a draft economic analysis report a few months ago by the tunnel opposition group, Restore the Delta, Dr. Sunding was requested to speak before the Committee.

Amy Chen, Metropolitan Water District Program Manager, began the meeting by outlining the San Diego County Water Authority’s position on the Bay-Delta, pointing out that because a portion of the Water Authority’s water supply comes from the Delta, amy-slide-58this board has always taken an interest in an active role on the Bay Delta activities and has had a long history of supporting a sustainable Bay Delta solution.  San Diego legislators were instrumental in getting the 2009 Delta Reform Act passed, the Board adopted Delta policy principles in 2012, and an intensive 18-month multi-disciplinary staff team review of the Bay Delta Conservation Plan, she noted.

The Board ultimately did not take a position because some of the key information was missing, mainly how much supply the Water Authority would receive from this project and at what price,” she said.

Since 1990, the San Diego County Water Authority has reduced its dependence on Metropolitan (and therefore the Bay Delta) from almost 673,000 acre-feet to just 187,000 acre-feet in 2016, a reduction of 72%.  “In 2035, we are projecting that we’ll take less than 100,000 acre-feet, so representing about 13% of what we took from Metropolitan in 1990,” she said.

amy-slide-60At the same time, a number of things are occurring that could potentially impact the supply benefit of California Water Fix, such as the abandonment of the habitat conservation plan approach (Section 10) and instead, utilizing a Section 7 approach.  “What that means is the permitting requirement would be similar to those that would be operating under the existing State Water Project,” said Ms. Chen.  “It’s a specie-by-specie approach, so if a potential listing comes up, the permitting scheme may be changed.  And this causes the supply reliability to be less dependable.”

Other events that could potentially impact Cal Water Fix supplies are the invalidation of the Delta Stewardship Council’s Delta Plan and the proceedings on the permit applications at the State Water Resources Control Board.

There have also been economic analyses prepared.  “In August 2016, the Center for Business and Policy Research, University of Pacific, Dr. Jeff Michael, did a benefit-cost analysis and in his analysis,” she said.  “He basically found that Water Fix benefit at .23 to .39 for every dollar spent.  Last month, an AP news report, disclosed a draft economic analysis prepared for the Natural Resources Agency that placed a potential need for about $4 billion of federal funding in order the project to make sense for agricultural contractors.”

The difference between the two reports, I think it’s critical to understand, it’s the assumption of the baseline,” she said.  “But nonetheless, the analysis prepared for the Natural Resources Agency identified a need for federal subsidies and the issue with that is the water code actually requires water contractors to pay for the conveyance facilities.  So there’s the conflict – if that doesn’t make sense for some of the ag contractors, how would the difference be made up.”

The California Water Fix faces audits of planning costs, both from the state and the federal government.  “This board would recall, our delegates were very concerned about Met’s willingness to front costs of without securing other beneficiaries’ financial commitments, including their recent purchase of the Delta Wetlands of almost $200 million by Metropolitan itself,” she said.

So in conclusion, the Water Authority’s delegates have been advocating to Metropolitan that basically we have no interest in speculative water ventures,” Ms. Chen said.  “Water costs in Metropolitan’s 2015 IRP, it talked about water costs could create opportunities for new markets and partnerships, and the Water Authority is not interested in those types of ventures.  Again, this Board is well aware of the Water Fix’s cost allocation, and how the costs will be applied to member agencies is a great concern with us.”

DAVID SUNDING, Professor at the Department of Agriculture and Resource Economics at UC Berkeley

Dr. David Sunding began by summarizing what he would be saying in his presentation.

As you know, California Water Fix is an evolving planning process that has yet to produce a final project and a final cost allocation mechanism that I or any other economist could approach with a formal cost benefit analysis,” he said.  “This presentation along with previous presentations and drafts represent a snapshot in time based on information that’s available currently.”

After looking at this over many years, what seems clear to me now is that there’s a very substantial benefit of investing in this project as compared to the status quo, which would lead to continued deterioration in water supply reliability over time. The information and environmental analysis that I’ve been provided to date suggests an improvement in water supply reliability for the State Water Project and Central Valley Project from Water Fix in the range of 1 MAF per year; the comparison with and without Water Fix would be in range of 1 MAF per year.  A further decline in reliability without investment in Water Fix appears to be foreseeable given how both projects are under a formal re-consultation under the Endangered Species Act.

From either an urban or agricultural perspective, California Water Fix will cost approximately $400 per acre-foot of improved water supply,” he said.  “From an urban water supply perspective, this is dramatically lower than the cost of an array of local alternatives available to Southern California and the Bay Area — even when taking into account the costs of conveyance and water treatment. For agriculture in the San Joaquin Valley, there is no water supply alternative such as desalination. The valley will be acutely impacted by the imposition of groundwater management in the future, and I believe this is certain to decrease groundwater yields and increase the importance and the value of reliable surface water supplies.”

Valuing California Water Fix for agriculture remains a subject of intense and important discussion,” he said.  “I would suggest though that an important piece of data to inform this discussion is the rapidly rising value of farmland in the San Joaquin Valley — even after eight years of drought in the past decade. These property values represent a current expectation of a net income in the range of approximately $900 per acre on average. This is significant amount of net income, yet so is the cost of water also significant.  If the property value and water cost trends continue, given the agricultural productivity of the San Joaquin Valley, California Water Fix will be quite positive for agriculture.”

I did not value climate change in the draft analysis that we are about to walk through, but it is noteworthy and important to consider,” he said.  “Sea level rise and its impact will only enhance the economic value of California Water Fix. Our current water system is not at present remotely prepared to cope with the effects of climate change. California Water Fix effectively mitigates the effects of climate change on the state’s water supply. It is not easy to attach a cost/benefit value to climate change at present because the timing and severity are subject to considerable uncertainty. But it is an increasingly important factor that as directors with an eye towards to long-term, I would suggest that you should play extremely close attention to.”

Your staff report includes an attachment of an early draft analysis that I prepared for the Resources Agency. Up front, I would like to address an assumption in that analysis of a potential federal contribution toward the capital cost of California Water Fix. That was an assumption, a conjecture that I made in a draft document rather than an economic imperative as California Water Fix has evolved, so let’s make sure we are clear about what that is. The state, and Director Cowin up at Metropolitan last week said definitively that there is no federal contribution needed to move Water Fix forward.”

Understanding more about the precise cost allocation method is important to provide a formal analysis,” Dr. Sunding said.  “An outside contribution by the state or federal governments does not appear to be an economic imperative. There certainly is a strong economic and political argument to have a public contribution to pay for the modest portion of the overall project for the public wildlife refuges in the San Joaquin Valley. But that is a narrow issue that I’m sure will be addressed over time.”

As we go through this presentation, the bottom line is that the difference in water supply reliability between investing in this project and risking billions of dollars in public investment is significant. This difference appears to be overwhelmingly likely to increase over time. And this will only increase the prudence of investing in California Water Fix from both an urban and agricultural perspective.”

With that said, Dr. Sunding then turned to his power point presentation, noting that the goal of the draft economic analysis prepared for the Resources Agency was to quantify the benefits and the costs of the project to the South of Delta contractors.  “It’s looking at CVP contractors south of the Delta and the State Water Project contractors; excluded from the analysis are some other groups that get water from the Delta, namely the Exchange Contractors, the Friant system, and then the federal wildlife refuges, who all told, they get between 25 and 30% of the water that comes out of the Delta.  That was outside the frame of reference of the study that we’re going to go through today.”

The approach used by economists to do a cost benefit comparison for a large capital project like this is to compare water supplies with and without the project, he said.  “You’re comparing some state of the world to the status quo – what are water supplies with investment versus without.  The reason you do that is to get an apples-to-apples comparison of what are you paying versus what are you getting for it.  Sometimes we call that an incremental analysis; we’re looking at incremental costs of the water versus incremental benefits because it’s based on a comparison.”

This is water, so everything has to get complicated,” Dr. Sunding said.  “Water Fix is a long-term project, so the baseline is dynamic, it’s not static.  We can’t just look at conditions today because the project will last a long time; we have to look out into the future and think about what might the world look like with and without the Water Fix in place.  After a lot of thought and a lot of empirical analysis, I settled on what is sometimes called the ‘eroding baseline’ to isolate the effects of the tunnels and to incorporate the potential or likely outcome of future re-consultations under the current project.”

In particular, what I did was I looked at operating criteria for the Water Fix and used those same operating criteria to calculate yields under the current infrastructure.  What that does is it isolates the effects of having the tunnels, so it tells you what is going to be the incremental benefit of having the tunnels.  This is a very important assumption.”

This is wherein the disagreement with Dr. Jeffrey Michael’s analysis lies.  “Believe it or not, Dr. Jeff Michael and I actually agree on more things than we disagree on.  He’s a very good economist; I’ve known him for a long time.  This is an issue that we don’t agree on.  He prefers to look at the status quo; my argument is that if the status quo were guaranteed going forward, we wouldn’t be having this conversation now.  This whole project is about protecting against future declines.”

sunding-ppt_page_04At present, about 4.7 MAF is exported from the state and federal projects combined; modeling suggests post Water Fix yields would go up to 4.9 MAF.  “Where Dr. Jeff Michael and some opponents of the project come from is that they say, ‘you are only getting 200,000 acre-feet out of a $15 billion investment, that doesn’t seem reasonable,’ and that’s where they get the .25 benefit cost ratio,” Dr. Sunding explained.

My perspective on this is that if you incorporate the likely effects of future regulations and the outcome of future reconsultations, then yields are actually likely to decline to the neighborhood of 3.9 MAF.  This is different than the EIR-EIS No Action Alternative, but the EIR EIS No Action Alternative is not meant to be used in a benefit cost analysis.  The restrictions about how that alternative is put together that I think make it not very useful for this particular purpose, when we’re trying to evaluate the benefits from an investment.”

Dr. Sunding noted that the 3.9 MAF No Tunnel eroding baseline incorporates the effects of future regulations.  “The nice thing about it from an analytical perspective is that it isolates the impacts of investments in new conveyance.  So all of this together implies in my view that Water Fix results in incremental yields in the neighborhood of 1 MAF, just a little less than a 1 MAF in an average year.  It’s important to recognize most of this is supply preserved and not new supply created, so it’s essentially like an insurance policy rather than all being new water coming on to the system.”

On the issue of climate change and California Water Fix, Dr. Sunding said there’s been hydrologic modeling done of how the system performs under existing conveyance and under the Water Fix, incorporating the effects of sea level rise.  “I’ve made reference in my study to modeling assuming 140 centimeters of sea level rise, which used to be on the high end of all the likely future outcomes; now it’s kind of at the midpoint.  It’s about 3 feet of sea level rise.  Under those conditions, State Water Project yields are with the tunnels about 2.5 MAF, very close to current levels; without the tunnels they decline by almost half to 1.3 MAF and the reason is that the pumps in the Delta are very close to sea level, and with a little bit of sea level rise, they get inundated more frequently.”

So as climate change evolves over the coming decades, without some new conveyance in the Delta, the state is at risk of losing just under half of all the supplies coming out of the State Water Project,” he said.  “The tunnels envisioned in Water Fix essentially eliminate this risk completely and keep yields at roughly their current levels.  Because of the uncertainty of the magnitude of sea level rise and the exact timing of it, I didn’t monetize this in the economic analysis, so the climate mitigation benefits are incremental to anything that I’ve monetized.”

Dr. Sunding said the engineering cost estimates he was presented with had a present value cost of $13.9 billion, including construction, design, planning, mitigation, land, and ongoing operations and maintenance.  He explained why the numbers for cost are sometimes different:  “There are different ways of talking about cost that makes sense in different settings.  For an investment analysis or for an economic cost benefit analysis, the way we do this is to compare the present value of the costs to the present value of the benefits because you have both costs and benefits occurring as streams over time.  So to make those things comparable in an apples-to-apples sense, we pull it all back to a present value and then compare on that basis.  And I think on that point, there’s really no disagreement among any economists that I’m aware of; this is not some technique I made up for this study, this is how economists look at investments.”

Of the $13.9 billion in present value costs, about $10 billion under a proportional allocation would be assigned to the south of Delta contractors, he said, explaining that this was the assumption made in the draft analysis.  “The remaining $3.9 billion are assigned to these other groups that are outside the scope of the analysis: Friant, the Exchange Contractors, and the wildlife refuges,” he said.

sunding-ppt_page_07Dr. Sunding then explained how he derived the cost of $400 per acre-foot for California Water Fix, clarifying that the $400 figure is for water at the Delta, before conveyance and before treatment.  “Let’s start with the present value cost of the south of the Delta contractors of $10 billion, and let’s assume that the project produces in the neighborhood of 1 MAF of improvement in water supply.  That implies a present value cost of right around $11,000 per acre-foot, because I’m dividing by something that’s a little less than a million.  So present value cost of $11,000, I’m going to assume a 3% real rate of interest that’s recommended by the federal government for analysis of projects like this.  The question is what is the annual payment that will produce a present value of $11,000 at a 3% real rate of interest, and the answer is $400.  And so it’s a very convenient way of comparing costs, because it presents them on a levelized incremental basis.”

Another analysis one might want to do is to look at what other alternatives could be build besides Water Fix to make up for supplies lost over time, he said.  “To do that, you have to take that $400 that’s untreated at the Delta, and you have to add costs of conveyance and treatment to put it on an apples-to-apples basis with desalination or recycling,” he said.  “That means Water Fix incremental costs vary by agency.  If you’re closer to the Delta like Santa Clara is, or in the ag areas like Westlands or even Kern, conveyance costs are less and farmers don’t need treated water, so the incremental cost to the agency varies depending on where the agency is located and what quality of water they need.”

sunding-ppt_page_09Dr. Sunding pointed out that the yield assumptions are very important in this analysis.  He presented a chart and said, “This is a simple mathematical analysis where I looked at the incremental cost of Water Fix varying the amount of yield it produces,” he said.  “In my base case analysis, Water Fix preserves about 1 MAF per year.  There’s uncertainty about what that number ultimately is.  Suppose it’s only 500,000.  What this chart tells you is that if Water Fix only produces an incremental 500,000 acre-feet, then the cost is more like $750 at the Delta.  If Water Fix produces 1 MAF, we know the cost is about $400; if the number goes to $1.2, then the number goes down a little bit.”

This is important, because the project has moved from Section 10 of the ESA to Section 7, and that introduces some uncertainty about what the yields will actually be in the future, and that’s something that has to be considered in an investment analysis,” he said.

Turning to urban benefits, Dr. Sunding said he did a numerically intensive computer based economic analysis based on Cal Sim II modeling runs and that’s is the hydrologic inputs that go into the model, and I calculated the value of what the shortages that result from investment in Water Fix.  “What the analysis shows is that the value of shortages that are avoided by implementing Water Fix for all urban agencies together that get water from the State Water Project is about a little more than $1400 per acre-foot, so that’s the benefit side,” he said.  “That compares favorably in my view to the incremental cost of Water Fix, even factoring in costs of conveyance and treatment; I’d add that $1400 per acre-foot also compares quite favorably to the cost of most water supply alternatives.  I don’t see a lot of projects out there anymore that have a produced water cost of less than $1400.”

sunding-ppt_page_12It’s a much closer call for agriculture, Dr. Sunding said.  “I did this analysis using a very complicated computer modeling framework that is used commonly by the Bureau of Reclamation and other agencies, but rather than go through that, I want to walk you through a numerical exercise.  Let’s assume a land price of $18,000 per acre, which is pretty close to an average over the area of the valley which gets water from the Delta.  Using a 5% capitalization rate, that implies an annual net income of about $900 per acre.  Now assuming an average water use of about 2.5 acre-feet per acre provides an annual value of water of about $360, so $900 divided by 2.5 is $360; it’s about an average value of water in agriculture, and that number compares pretty favorably with what you see on water markets across wet and dry years.  Prices can be much higher than that in dry years, but they can be lower in wet years.”

Now that’s a value measured at the place of use, so if we want to construct a value at the Delta like we’ve been doing, you have to back out the cost of conveyance, so let’s say the value at the Delta is around $300 on average in this example.  Well, that’s less than our $400 of incremental cost of Water Fix.”

What I think this very simple analysis summarizes is the results of some much more sophisticated modeling that suggest that trade-off in agriculture is really between investing in Water Fix and maintaining the land base,” Dr. Sunding said.  “The only real alternative that I see out there in the future for agriculture if Water Fix doesn’t occur and the pattern of yields evolves the way I think it will, is that there’s just a lot less agriculture in the San Joaquin Valley then there is at present.  That has impacts for farmers, for farm owners, it also has community impacts of farm workers, and all sorts of businesses that transact with agriculture.”

Dr. Sunding then turned to costs and benefits.  In an aggregate analysis that includes urban and ag, State Water Project and Central Valley Project – all the south of Delta contractors, he found the benefits in the range of $16 billion and costs in the range of $10 billion.  “In my view, based on the information I had last fall, Cal Water Fix in aggregate passes a cost benefit test.”

sunding-ppt_page_14Digging in a little deeper to see how things compare for different groups, Dr. Sunding then split the contractors into three groups:  State Water Project agricultural contractors, Central Valley Project agricultural contractors, and State Water Project urban contractors.  “The pattern I found here was striking and to be honest, somewhat concerning,” he said.  “For State Water Project ag, the benefit cost comparison I came up with, assuming just a simple proportional cost allocation was negative $600 million in present value; for Central Valley Project ag, it was a little bit worse, negative $1 billion, where for State Water Project urban users, the benefits were in excess of the costs by about $7.6 billion, so you have quite a dramatic pattern here.”

As I understand it, this is part of what the State Water Projects contractors have in mind as they work through potential cost allocation plans,” Dr. Sunding said.  “Once they complete that process and a cost allocation and financing plan is complete, then I could go back and recalculate all of these benefits and costs for different groups, and see what we come up with once we have a final project defined.”

I will leave it here; I’m happy to take any questions.


“You mentioned Section 10 and Section 7 and going from a 50-year fixed reliability on the environmental to a year by year, species by species, and that kind of gets me back to your Slide 9, the graph,” said Committee Chair Mark Watton.  “You also mention sea level rise on your slide 5, which seems to have a dramatic effect.  So what time period are you thinking that that 3 feet, or incrementally, that’s going to go up.  What is the effect of that and how does that interact back with your slide 9?”

The connection you made between Section 10 and Section 7, and the graph that I showed with the different costs, that was the connection that I wanted you to make – that uncertainty about the supplies is, other things equal, not something that favors investment,” Dr. Sunding replied.  “The more uncertainty there is in this deal, the harder it is to make a positive decision on it.  It’s been decided now that an advantage of the Section 10 approach is that it does provide some degree of regulatory assurance.  Going forward, there’s not a lock down guarantee, there’s not ironclad sideboards, but there is an overall framework about how the project would be adjusted going forward, but that was not something that the state was able to permit, so they are now looking at Section 7.  The only thing I would say about that is the uncertainty about the level of deliveries that you have under Section 7 is something that I would recommend you take into consideration.  I am not an environmental attorney, so there are certainly others that you would want to hear from on this, but it is something that as an economist, I say should be kept in mind.”

The other question was about sea level rise,” continued Dr. Sunding.  “For sea level rise, the modeling that we used was actually based on 2100 conditions, but there is a feeling that 140 centimeters of sea level rise might be occurring faster than that.  The increase already is happening somewhat outside the bounds of what scientists thought possible even a decade ago.  So I can’t give you an exact answer about when this is likely to occur, except to say that I think there is pretty much consensus that these levels of sea level rise are possible, but exactly when it would happen, I don’t know.  And that’s why I didn’t monetize it in the analysis because the benefits are very sensitive to the timing, so this is something that we continue to look at, but as of last fall and even as of right now, I don’t have a monetary value of this.  But I do think it’s significant to note that the State Water Project might lose half of its supplies if this occurs.”

“There is the State Board conversation right now on river flow minimums, again they are looking at flow out through the Golden Gate,” said Mr. Watton.  “It would be interesting to know if you would do an update, or is someone going to be commissioned to do an update with the Section 7, will the sea water rise within the scope of this project affect it, and if the State Board puts these river flow regulations in, how does that work?”

You raised a third issue there which is very important, the flow criteria on the San Joaquin and Sacramento Rivers,” said Dr. Sunding.  “What I understand about that through the lens of Water Fix is that say more flow on the San Joaquin River increases both the with and without project yields, so the increment is relatively unaffected, because they both go out, so the difference is the same, approximately.”

Committee member Jim Madaffer asks Dr. Sunding about the draft report in the board packet.  Is this the latest one?

The one that’s in your board packet I believe is November, 2015,” replied Dr. Sunding.  “There were at least four or five drafts after that.  There was a draft as late as this July.  About 5, 6, 7 drafts of this report have been done.”

“Are you making these changes or is somebody directing you to make these changes?,” asked Mr. Madaffer.

I make all these changes,” responded Dr. Sunding.

“With climate change, the Sierra mountains have become not as reliable of a water storage source as they once were,” said Mr. Madaffer.  “Have you done an analysis to forecast out 25 years from now as to whether or not this is a reliable expenditure compared to let’s say, we built 15 desal plants and came up with better conveyance to get the water into the system?  It seems to me if we can build a desal plant for less than a billion dollars here that produces a reliable every single day of the year water supply compared to this thing, which is unreliable, based on the Sierra mountains.  Have you done any analysis there?”

A couple of points in there that I’d like to address,” responded Dr. Sunding.  “First the question about climate change and the underlying reliability of the CVP and the State project.  The modeling that I went through today with the 140 cm of sea level rise; that also includes assumptions about the change in the rain/snow mix, and again the target date for that study was 2100.  Those effects are real, and they’ve been modeled by us and a number of other people.  They are included in the numbers that you see there, and that’s part of what causes the almost 50% decline in State Water Project yields, but again, with the Water Fix in place, what the hydrologic modeling suggests that those declines would not occur, but the current level of deliveries on the state system could be maintained.”

“Has an analysis been done comparing this to perhaps something more reliable, such as a desalination plant or a series of plants that could be located that would serve both ag and the needs of the State Water Project?,” asks Mr. Madaffer.

I agree completely that when you are comparing a desal project to an investment in something like Water Fix that doesn’t have a certain yield every year, you have to make an adjustment for reliability,” said Dr. Sunding.  “That’s something that I’ve written about as an academic and something that I’ve worked with a number of agencies in Southern California on how to develop methodologies to do that.  The analysis that I did for Water Fix does incorporate reliability criteria, and all things equal, if you have two investments with the same expected amount of water delivery, one is reliable, one is not, you are going to go for the reliable one.  Cal Water Fix is not as reliable, but there’s also a lot of storage on the system, so the operation of storage both in the state system and terminal reservoirs in Southern California – that all figured into the benefits analysis that I did.”

“The Water Fix addresses the reverse flow problems, we know that it does that, but the conversation that we’ve been hearing recently a lot about, particularly from the State Board, is on the outflow issue,” said Committee member Fern Steiner.  “In 2016, additional summer outflow was required by the fish agency the federal one, and then the resiliency plan that we’ve had some presentations on also has additional outflow requirements, so looking at your analysis, is that already taken into account, that there might be additional flow required?”

No it’s not,” said Dr. Sunding.  “One of the essentially a frustration of doing an analysis like this over such a long period of time is things keep changing.  When a lot of this numerical work was done a year or two ago, the State Board was not as far along on the hearings for the San Joaquin and Sacramento River, so that is not included in here.  But what I’ve done in the last few months is gone back and talked to the hydrologic modelers about if those things did occur in the way the State Board is envisioning, what would be the impacts on Water Fix, would it fundamentally change the economic analysis?  And the answer I got back was that the increment, which I think is important to focus on from an investment point of view the difference in yields with and without Water Fix in place would be relatively unaffected by the outcome of those proceedings, because it would change both the with and without project condition in roughly the same way.”

“Recently, DWR Director Cowin told the MWD board that the Water Fix is a no-brainer for urban agencies, but it was a tougher call for agricultural contractors because of the commodity prices,” asked Director Michael Hogan.  “When I’m looking at the slides regarding urban and ag benefits … does the project pencil out only if the urban contractors pay four times more than the ag contractors pay?  Does it pencil out?”

I made a number of assumptions to get to the disaggregated analysis,” said Dr. Sunding.  “The assumption I made and a reasonable one at the time was that every unit of water coming out of the Delta pays the same rate, so no one is subsidizing anyone.  What I concluded was under that very simple cost allocation on average for the State Project ag contractors and CVP ag contractors is that it did not pencil out.  Now there are a lot of ways that could be resolved.  One way would be to reallocate costs differently; I’m not sure in the urban areas of California that there is much appetite for that.  I think there are some other proposals to say if an agency is willing to pay less for reliability, and agencies do have different levels of willingness to pay for reliability, then they would get less reliability out of the project, so the water would get reallocated along with the costs.  That’s a possibility too.  There are a lot of other possibilities, and those are discussions that are happening now among the contractors.  Once they come up with a plan, then we can all take a look and see at a disaggregated level how benefits and costs compare.”

“If you were advising the ag contractors based on these numbers, what kind of advice as an economist would you give them?,” asked Mr. Hogan.

Let me say first, and I have talked quite a bit to Kern, Westlands, and others, particularly the State Water Project ag contractors, that it’s important to remember too that agriculture is not a monolith,” said Dr. Sunding.  “There are some farmers that are out there right now on the water market out-competing any city I know of.  They are making a lot of net income growing highly valued specialty crops with very highly capitalized operations.  That’s one end of the scale.  Then at another end of the scale, there are still come cotton growers or farmers growing hay or other grain crops, much lower on the value scale, so there’s not a one-size fits all answer for the ag contractors.  On average, this is how the numbers came out, but the message that I would convey to them is really largely the same is what I’ve conveyed here today: There are certain costs, there’s a profile of benefits, you need to take a look at your own operations and see if this makes sense or not, but the prospect of a 1 MAF at $400 an acre-foot from a statewide view is pretty enticing.”

“On an earlier report, you mentioned the fact that $3.9 billion was needed by federal subsidies for it to pencil out for the ag contractors, and I looked at your analysis and power point and tried to figure out where that comes in,” said Board Chair Mark Muir.  “I noticed you had a slide up there for Friant and the refuges for $3.9 billion.  Is that the same number or is that a coincidence?  Who is that group and have they agreed to the costs?”

That is the same number, the $3.9 billion,” replied Dr. Sunding.  “The assumption I made is that every unit of water coming out of the Delta pays the same cost for Water Fix, so by most definitions, that’s a no subsidy environment, every unit pays the same.  What I was looking at in this study was costs and benefits from the perspective of the state and federal contractors, but then there’s this other group.  The exchange contractors, Friant, and then the wildlife refuges which uses water coming out of the Delta, so those three groups have a benefit profile that is different than what I’ve analyzed here, and it’s not something that I monetized.  I assigned a $3.9 billion cost share to them because that’s their proportional costs, but then the benefits to them are outside the scope of this analysis.  As far as I know, they have not agreed to pay $3.9 billion, I don’t think anybody’s agreed to pay anything for Water Fix, but that’s outside the scope of what I’ve done. … That’s a separate analysis that’s going to have to be done at some point, and if they ultimately conclude that is not something they want to pay for, then the costs will have to get reconsidered.  So this is part of the overall picture that has to come into focus before I think we really know what we have here.”

There was an emphasis on various disasters, and scenarios such as earthquakes as interruptions to the Delta supply, and I think I read somewhere, those benefits don’t really exist because of the amount of time it would take to restore the water, the deliveries wouldn’t justify the cost of the twin tunnels,” said Mr. Muir.

The number I have in here for seismic risk reduction benefits that factors into that $16 billion is actually pretty modest, right around $500 million,” replied Dr. Sunding.  “That’s the average of a whole range of scenarios that I looked at.  It is worth noting that, this is another question that is complex.  If you have an outage of some given duration, to figure out the impact of it, you also have to know what kind of water environment you are working in.  A six month outage in a wet year might not be something you’d even notice at the end of the system.  A six month outage in a year like 1991 when storage is already depleted, that would be painful, so what I did in the analysis is I looked at how wet year, dry year hydrologic conditions interact with different outage durations.  For the purposes of the benefits analysis, I settled in on a number of $500 million, which was a mean figure and not a large part of the overall $16 billion, but there are conditions under which the benefits could be much greater.”

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