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

  1. 1. 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
  2. 2. 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
  3. 3. Project Costs 3
  4. 4.  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
  5. 5. 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)
  6. 6. Cost of BDCP Water 6
  7. 7. 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
  8. 8. 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
  9. 9. Water Bond Funding 9
  10. 10. 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
  11. 11. 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
  12. 12. BDCP Water Supply Reliability 12
  13. 13. 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
  14. 14. 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
  15. 15. Will There Be Buyers for BDCP Water? 15
  16. 16. 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
  17. 17. 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
  18. 18. Do Benefits of BDCP Exceed Costs for Water Contractors? 18
  19. 19. 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
  20. 20.  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
  21. 21. 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
  22. 22. Statewide Economic Impact 22
  23. 23. 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
  24. 24. 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
  25. 25. Wrap Up on BDCP Analysis 25
  26. 26. 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
  27. 27. Predictions 27
  28. 28. 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
  29. 29.  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
  30. 30.  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

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