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
$ Pe
r A
cre
Foot
of W
ater
Sho
rtag
e
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
$ Pe
r A
cre
Foot
of W
ater
Sho
rtag
e 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