Is the Bay Delta Conservation Plan a Doable Deal? - Rodney T. Smith - Sept. 12, 2013
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Is the Bay Delta Conservation Plan a Doable Deal? - Rodney T. Smith - Sept. 12, 2013

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Is the Bay Delta Conservation Plan a Doable Deal? - Rodney T. Smith - Sept. 12, 2013 Is the Bay Delta Conservation Plan a Doable Deal? - Rodney T. Smith - Sept. 12, 2013 Presentation Transcript

  • Rodney T. Smith, Ph.D President Is Bay Delta Conservation Plan a Doable Deal? Special Imported Water Committee Meeting Bay Delta Conservation Plan, Economic Analysis San Diego County Water Authority September 12, 2013
  • Stratecon’s Independent Perspective  Looked at BDCP from perspective of due diligence on DWR Team “pitching their deal”  Discuss costs, pricing, funding, supply reliability, economic benefits and politics  Environmental consequences are vital (but not my gig)  Presentation based on eight-series BDCP posts on www.hydrowonk.com/blog  Conclude with predictions about BDCP’s future 2
  • Project Costs 3
  •  Present value of capital costs estimated in 2012 ($12.7 billion)  Construction starts in 2015 and continues for 10 years  Historic Record  Bureau of Reclamation Indices: 3.7% annual increase  Consumer Price Index: 2.6% annual increase Costs in 2015: $14.1 billion (2012$) 4 Construction Costs Underestimated
  • Project Capital Costs $14.7 billion to $14.9 billion (2012$) 5 Item Amount (billion) DWR Estimate $12.710 Increased Real Costs $1.375 Sub-Total $14.087 Mid-Year Adjustment $0.308 Sub-Total $14.385 Net Cost of Debt Reserve $0.260 ($0.521) Total $14.645 ($14.906)
  • Cost of BDCP Water 6
  • Timing Matters  Firm capital commitments made at the start of construction $14.7 billion to $14.9 billion  A decade later, the payoff (water deliveries) start  Capital commitments: contractual  Water deliveries: computer projections  Amortized capital costs (2012$) Low Delta Outflow: $492/AF to $645/AF High Delta Outflow: $697/AF to $914/AF 7
  • From Capital Costs to Water Rates  Capital Costs: $570/AF to $800/AF (average of delta outflow scenarios)  Plus O&M and Mitigation: $625/AF to $890/AF  Debt Coverage:  1.25x (DWR): water rates $765/AF to $1,190/AF  2x (market conditions): $1,125/AF to $1,602/AF  No finance plan to tell us where the extra money is parked 8
  • Water Bond Funding 9
  • Water Bonds and Headwinds  BDCP plans to partly fund $7.93 billion of environmental spending by two water bonds  $1.514 billion from 2014 water bond  $1.9 billion from a second water bond  First bond before construction on BDCP conveyance facility starts  Second bond “on the come”  DWR argues that voters broadly support water bonds 10
  • Voting History and the 2014 Water Bond  Voter support of water bonds falls with increases in state debt burden  Forecast of 2014 Water Bond ($11.4 billion)  Expected Vote Share: 42.4%  Probability of Passage: 12.2%  Odds Against Passage: 7/1  Smaller bonds do better ($2 billion)  Expected Vote Share: 46.4%  Probability of Passage: 27.4%  Odds Against Passage: 3/1 11
  • BDCP Water Supply Reliability 12
  • BDCP Water Supply Not Reliable  Reliability means supply subject to a low risk of a material interruption  Extra yield of BDCP mostly in normal or wet years  Without storage, BDCP simply a junior priority water resource  The maximum “remaining” projected urban water shortage (critical years) unaffected by BDCP  BDCP does trim the magnitude of shortages in less extreme hydrologic conditions 13
  • New “Normal” in California?  BDCP does avoid urban water shortages  DWR does not share the probability of shortages  Implied probability of annual shortages in range of 40% to 70%  DWR projects regular water shortages in CA even with the BDCP  Is projected growth in CA viable? Delta Outlflow Scenario Expected Annual Shortage Maximum Annual Shortage High 250,000 AF 850,000 AF Low 350,000 AF 1,000,000 AF 14
  • Will There Be Buyers for BDCP Water? 15
  • DWR’s Narrative on BDCP Water Severe Case of Oversell  Is BDCP’s Water $200/AF to $300/AF? No  BDCP capital costs understated by $2 billion  DWR calculation ignores the difference between timing of capital commitment (2015) and start of water deliveries (2026)  Inadequate consideration of project risks  BDCP water inferior to stated alternatives: non-firm supplies versus reliable water supplies, location (Northern California versus in water user’s system), and project risk (operational experience versus computer modeling) 16
  • Find Committed Buyers  DWR put together contracts and see who signs up  Market mechanisms to address controversy  Define project rights: BDCP unit as a supplemental project to existing State Water Project  Apportion share of project yield and project costs  Allow subsequent trading in BDCP units  A parallel process should be used with member agencies of SWP contractors 17
  • Do Benefits of BDCP Exceed Costs for Water Contractors? 18
  • Economic Costs of Water Shortages 19 5% 10% 15% 20% 25% Marginal Loss $812 $1,072 $1,414 $1,874 $2,504 Average Loss $708 $822 $960 $1,128 $1,337 $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 2013$PerAcreFootofWaterShortage Magnitude of Water Shortages Economic Cost of Municipal Water Supply Shortages Marginal Loss Average Loss 5% 10% 15% 20% 25% 30% 35% 40% 50% Marginal Loss $115 $126 $139 $153 $170 $189 $212 $239 $312 Average Loss $110 $115 $121 $127 $134 $142 $150 $159 $182 $0 $50 $100 $150 $200 $250 $300 $350 2013$PerAcreFootofWaterShortage Magnitude of Water Shortages Economic Loss of Agricultural Water Supply Shortages Marginal Loss Average Loss
  •  Agricultural water users expected benefits less than $100/AF  Municipal water users expected benefit from $400/AF to $700/AF  If agricultural water users in BDCP, municipal users must fund significant subsidies  Without subsidies, BDCP must be a supplemental project for municipal water users Expected Annual Benefits/AF Probability Shortage Expected Benefit (Annual) Municipal Agricultural 40% $400/AF $60 50% $500/AF $75 60% $600/AF $90 70% $700/AF $105 20 Cost Allocation Pressures
  • BDCP Project Underwater for Water Contractors Item High Delta Outflow Low Delta Outflow DWR Benefits $18.011 billion $18.795 billion Cost $13.328 billion $13.343 billion Net Benefits $4.683 billion $5.452 billion Hydrowonk Benefits (adjust for timing) $13.402 billion $13.985 billion Cost (adjust for capital costs) $15.328 billion $15.343 billion Net Benefits ($1.926 billion) ($1.358 billion) 21
  • Statewide Economic Impact 22
  • BDCP Impact on Statewide Income  BDCP estimated to increase state income by $83.5 billion (present value)  Economic benefit of avoiding water shortages accounts for more than 90%  Annual value over 50 years of operation $3.25 billion (2012$)  Trend growth in inflation adjusted real personal income (3.27%)  BDCP generates a one-time, permanent increase in income of 0.18%  About one month of trend income growth 23
  • BDCP Impact on State Employment  DWR estimates BDCP generates 1.1 million full-time equivalent jobs  Overstatement of estimated job creation (1 permanent job counted 50 times)  Actual job creation about 25,000 full- time equivalent jobs per year  Economic benefits of avoiding shortages is the job creator  Long-term annual growth in CA employment 1.55%  BDCP generates a permanent, one-time increase of jobs of 0.15%  About one month of trend growth 24
  • Wrap Up on BDCP Analysis 25
  • Hydrowonk Opinion  No finance plan  Capital investment: understated by billions  Project risks: not transparently addressed/ignored  Cost of water: severely unstated (cost at least triple stated amount)  Prospect for water bond funding of environmental activities: remote  Supply reliability: nope  Prospect of buyer agreements: not promising (overcome by getting LOI’s)  Importance to state economy: minuscule  What is wrong with the BDCP narrative? absence of storage  Stratecon’s hypothetical client: passes on the BDCP opportunity and is looking for storage opportunities south of the Delta 26
  • Predictions 27
  • Key Questions About BDCP’s Future Question Hydrowonk’s Prediction Will agriculture walk from BDCP, when? 90% chance, no later than June 30, 2014 Will DWR treat BDCP as a supplemental SWP project? 10% chance through June 30, 2014, 60% thereafter Can BDCP proceed with only municipal water users? 25% chance proposition without storage 65% chance with viable storage Will DWR include storage in BDCP, when? 25% chance, no action until after 2014 election Will DWR use market mechanisms for contracting? 10% chance through June 30, 2014, 75% thereafter Will voters approve current water bond? 3.9% chance Will an alternative bond replace the current one, what size and when 75% chance, $2.5 billion by July 1 2014 Will voters pass alternative bond? 35% chance 28
  •  Don’t take Hydrowonk’s word about BDCP’s future  Use the wisdom of the water industry and your perspective in prediction markets  Look for rollout October 1 of our developmental site that will address BDCP questions and a multitude of others on western water www.hydrowonk.com/stratecon-marketplace  For more information on prediction markets and the water industry, www.hydrowonk.com/prediction-markets  Also follow www.hydrowonk.com/blog for continued analysis 29
  •  Look for rollout November 1 of specialized information service tracking Bay Delta and Colorado River Basin, Stratecon Media’s Journal of Water powered by Stratecon analytics and  Chris “Maven” Austin, creator and former publisher of Aquafornia, now publishing Mavens Notebook joining Stratecon Media to provide a premier information service www.journalofwater.com  Stratecon Media also rolling out Southern California Water Briefing Service  Complete our survey at http://tinyurl.com/StrateconSurvey to help us define our service to meet the information needs of Southern California water decision-makers 30