The Economic Case for a Bay Delta Conservation Plan Without the Twin Tunnels

http://www.sacbee.com/2013/10/06/5795961/viewpoints-the-economic-case-for.html Special to The Bee

Published: Sunday, Oct. 6, 2013

By Jeffrey Michael

[See also C-WIN's Twin Tunnels Campaign.]

The $25 billion Bay Delta Conservation Plan is on the brink of failure. Its proponents have been unable to show that the plan meets environmental requirements, and they have failed to develop a viable financial plan for its massive water-conveyance tunnels.

The BDCP can be saved, but only if the state drops its tunnel vision and seriously considers no-tunnel options. The plan contains 21 parts, including the water-conveyance tunnels, 19 habitat and conservation elements, and long-term operating guidelines for water exports.

Even without the tunnels, it would be a plan of historic significance. More important, the cost would decrease by $20 billion, while the vast majority of its benefits would be preserved. Most of the benefits in the current plan are not due to the physical characteristics of the tunnels, but result from the long-term regulatory stability the plan would create.

The draft economic study the state released this summer claims that the tunnel-based Bay Delta Conservation Plan would provide California $4 billion more in benefits than costs, at a benefit-cost ratio of 1.4. This conclusion is no surprise. There was never any doubt that BDCP would only release a consultant report that validates the plan.

The report contained a lot of valuable information, but the consultants made an extreme water-supply assumption to justify the massive investment. The consultants found that the tunnels would provide some water quality and seismic protection benefits to water agencies, but these benefits offset only 15 to 20 percent of the tunnels’ cost. And state officials admit the tunnels would not significantly increase water exports from their current restricted levels, especially in dry years.

So why would water agencies spend more than $15 billion building the tunnels when they would yield, in the best-case scenario, only a modest increase in water supply during the wet years, when it is needed the least?

To justify the tunnels, the plan’s consultants constructed a no-tunnel scenario that predicted a regulatory nightmare for the water agencies, an environmentalist’s dream of substantial increases in freshwater flows through the Delta estuary.

And presto, with a surprise switch to the no-tunnel assumption, the consultants magically created more than 1 million acre-feet in water yield and more than $10 billion in water-supply benefits. The tunnels “more than pencil out,” California Resources Secretary John Laird declared while praising the new report.

I have yet to find anyone in the water world who agrees with this dire prediction of no-tunnel water shortages, and it even contradicts the plan’s own environmental impact report. Not only does the economic study assume future water exports without the tunnels are 25 percent lower than the EIR, it ignores the environmental benefits that would result from such a large reduction in water exports. When asked at a public meeting if the tunnels would pencil out if he used the EIR no-tunnel assumption, the consultant answered, “No.”

But there isn’t much point in arguing over a hypothetical assumption. The focus should be on best utilizing the valuable information provided by the study on the cost of water shortages. If state officials look at the results with an open mind, the numbers clearly point toward a no-tunnel Bay Delta Conservation Plan.

How is that?

The study concludes that paying for the tunnels is a marginally better deal for water agencies than a 25 percent cut in water exports to a range between 3.4 million and 3.9 million acre-feet per year. This conclusion begs a rather obvious question: Where is the break-even point? How much could water exports be reduced to benefit the environment and still be less costly to water ratepayers than the gigantic tunnels?

I made some simple calculations with the report and found that the “break-even” point is a range from 3.85 million to 4.45 million acre-feet of annual exports, about an 18 percent cut below current regulations. In other words, the results show that water agencies would be better off accepting any long-term operating agreement at or above this range than paying the mammoth debt service of a tunnel-based plan.

A plan with no tunnels would combine many habitat elements of the current plan with long-term water exports of about 4 million acre-feet per year. The plan would increase the physical reliability of water exports if it were to include investments in seismic levee improvements that are needed anyway to protect public safety and billions of dollars in transportation, energy and other infrastructure in the Delta.

Without the debt burden of the tunnels, water agencies could afford to invest more in alternative water supplies and storage, increasing the reliability of their water portfolios and freeing up Delta water for agriculture and the environment.

A plan with no tunnels and with substantial levee improvements would cost about $5 billion, 80 percent less than the current proposal. It could be financed with a slimmed-down water bond and reasonable assessments on various stakeholders. And without the opposition to the tunnels, a water bond would have a better chance of passing.

The tunnel-focused plan does not make financial sense, creates new environmental risks and has negative impacts on Delta communities. Fortunately, a no-tunnel Bay Delta Conservation Plan is a viable option to enhance endangered species, while bringing valuable regulatory stability to water agencies at an affordable cost.

Jeffrey Michael, an economist, is director of the Business Forecasting Center at University of the Pacific. In 2012, he wrote a benefit-cost analysis of the tunnels that found $2.50 in costs for every $1 in benefits. In 2011, he worked as the principal consultant who developed the Economic Sustainability Plan for the Delta Protection Commission.