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

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Project Costs

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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: $14.1 billion (2012$)

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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

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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

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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

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Water Bond Funding

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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

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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

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BDCP Water Supply Reliability

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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

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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

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Will There Be Buyers for BDCP Water?

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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)

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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

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Do Benefits of BDCP Exceed Costs for Water Contractors?

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Economic Costs of Water Shortages

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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

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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)

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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

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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

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Wrap Up on BDCP Analysis

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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

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Predictions

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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

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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

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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

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