Dr. Jeffrey Michael, Restore the Delta Critique California WaterFix Benefit-Cost Analysis

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On September 20, the California Department of Water Resources (DWR) released a Benefit-Cost Analysis for the Delta Tunnels written by Dr. David Sunding of the Brattle Group claiming that the California WaterFix could bring “billions of dollars in benefits” to those who receive their water from participating State Water Project (SWP) contractors.

The benefits include “improved water quality, more reliable water supplies, enhanced disaster preparedness, and climate change resilience,” according to Sunding, a professor of natural resource economics at UC Berkeley.

In his initial response, Dr. Jeffrey Michael, the Executive Director of the Center for Business and Policy Research at the University of the Pacific, pointed out four major flaws in the analysis, including the assumption of a “massive new subsidy” for agricultural users cost share from urban water user and the dependence of the positive benefit-cost on a “dubious new benefit”: the value of sea-level rise protection benefits.

In Sunding’s report prepared for DWR, Sunding said, “The analysis described in this report demonstrates that investment in the California WaterFix results in positive net benefits for the SWP urban and agricultural contractors.”

He claims that economic analysis summarized in the report goes beyond what is legally required for WaterFix and is “consistent with methods” described in the department’s “Economic Analysis Guidebook.”

The analysis concludes that the WaterFix benefits to SWP water agencies are “substantial.” Urban agencies could see about $3.1 billion in net benefits, while WP agricultural agencies could see about $400 million in net benefits, Sunding claims.

“The report compared the benefits and costs of WaterFix in relation to what would likely occur if WaterFix were not built, including further restrictions on existing SWP and CVP operations designed to minimize harmful reverse flows and protect species,” according to Sunding.

“Without WaterFix, State Water Project contractors will see the continued deterioration of their water supply reliability,” Sunding said. “This analysis shows there is substantial benefit for both urban and agricultural water users throughout the state, and that the project will be more affordable for consumers than local alternatives such as desalination and recycling.”

He added that the analysis also indicates that “CVP south of Delta contractors would realize positive net benefits were they to utilize and pay for access to the new north Delta conveyance facilities.”

A controversial feature of the report is that it monetizes the cost of climate change impacts and the benefits of offsetting those impacts.

“WaterFix helps mitigate the impacts of climate change on the state’s water supply system,” Sunding said. “This feature of the WaterFix alone is worth several billion dollars and is an important rationale for implementing the project.”

Dr. Jeffery Michael published blog post of his initial reaction to Dr. Sunding’s work, focusing on four errors within Dr. Sunding’s analysis:

  1. “It assumes a massive new subsidy for agricultural users cost share from urban water users. The agricultural subsidy is contained within a “wheeling rate” that it assumes that Metropolitan Water District (MWD) would charge the Central Valley Project (CVP) for using the tunnels’ conveyance capacity.
  2. “The positive benefit-cost ratio depends on a dubious new benefit: the value of sea-level rise protection benefits. The report estimates the present value of these sea-level rise benefits at a whopping $5.7 billion, a value that exceeds the study’s estimated total net benefit of the WaterFix. That means the benefit-cost ratio is negative for all user categories if this dubious new benefit is removed. This estimated benefit has never been included in any previous study of WaterFix, and thus it is a new benefit category created for this report when the old methodology fell short of giving a positive benefit-cost ratio.
  3. “The report, press release and webpage falsely claim that this benefit-cost analysis is consistent with DWR’s Economic Analysis Guidebook. The Economic Analysis Guidebook clearly states that “Although economic analyses can be evaluated from many different perspectives (individuals, communities, etc.), DWR conducts these analyses from a statewide perspective.” The report is clear, even in its title, that it is an analysis from the perspective of water agencies that participate in WaterFix. It does not consider statewide impacts—which include costs to other water users or the environment – both of which are very large for this project.
  4. “The single-tunnel scenario is clearly better for MWD and urban water users if one compares this study to a February 2018 analysis of single-tunnel by the same consulting firm. While that single-tunnel report had many of the same problems as this one, it did not need to include a highly questionable estimate of over $5 billion in sea-level rise benefits to get a positive benefit-cost ratio. Comparing these reports shows that financing the 2nd tunnel by MWD adds enormous costs for their ratepayers for little/no additional benefit.”

Barbara Barrigan-Parrilla, Executive Director of Restore the Delta, also responded to Dr. Sunding’s analysis, noting, “Due to the changes in this benefit-cost analysis, Restore the Delta will need a few days to analyze the document.”

However, she noted three initial problems in the fact sheet:

  1. “The Brattle Group claims the project will see increased benefits with the pursuit of low-interest Federal WIFIA loans. As we said in a statement earlier this week, the WIFIA Letter of Interest submitted by the Design Construction Finance Authority is fraught with misstatements and inaccuracies.
  2. “The analysis argues that the project implements components of the Sustainable Groundwater Management Act (SGMA) which significantly increases the value of WaterFix to agricultural water users. Moreover, the analysis claims that the tunnels project is complementary to the state’s goal of ensuring the sustainability of groundwater reserves. However, tunnels proponents failed to do adequate groundwater analysis on communities in and around the Delta as well as Northern California at large, whom will be subjected to degraded groundwater supplies with operation of the Delta tunnels.
  3. “Dr. Sunding insists that, “Transfer of WaterFix project benefits significantly increases the overall values of the project by reallocating capacity to users with the greatest willingness to pay for water supply reliability.”

Tim Stroshane, policy analyst for Restore the Delta, also criticized the report for not addressing whether the Delta Tunnels will benefit not just the water contractors, but California or society as a whole.

“Dr. Sunding’s reports have always argued that the project’s benefits exceed the costs to the water contractors, except in the draft study Restore the Delta obtained in a PRA request in 2016,” said Stroshane. “The greater difficulty Dr. Sunding would have, and which DWR and the contractors do not wish to test, is whether the project benefits California or society as a whole. Dr. Michael has consistently shown it will not. Their refusal to include this massive detail in their analysis likely means that the contractors and DWR want all Californians to subsidize the project in one way or another.”

The California WaterFix proposal features two massive, 35-mile-long tunnels under the Delta that would divert water from the Sacramento River in the North Delta near Hood to the state and federal pumping facilities in the South Delta to facilitate the export of water to corporate agribusiness in the San Joaquin Valley and Southern California water agencies.

Opponents say the construction of the tunnels would result in the devastation of West Coast fisheries that depend on a healthy estuary to thrive. The giant public works project would hasten the extinction of the Sacramento River spring and winter run Chinook salmon, Central Valley steelhead, Delta and longfin smelt and other fish species, as well as imperil salmon and steelhead populations on the Trinity and Klamath rivers.

On September 17, Restore the Delta held a press conference to debut the organization’s new environmental justice report, “The Fate of the Delta: Impacts of Proposed Water Projects and Plans on Delta Environmental Justice Communities.” The report is available to the public on the RTD website: https://bit.ly/2D41Tsb