Wednesday, September 14, 2016

How can a $6.5 billion farm subsidy to Central Valley farmers provide no benefit to Valley farms and the Valley economy? When it is used to subsidize the delta tunnels.

For my detailed comments on last fall's Brattle analysis,  reported by the AP todaysee the memo I wrote that is posted on Restore the Delta's website.  Restore the Delta surprised me late last week by sending me a copy of this report and related emails from their PRA request and asked for my thoughts.  I wrote the comments memo over the weekend, and gave them permission to distribute it with the report.

If you have followed this blog over the years, it should be obvious that I was not at all surprised by the findings that the tunnels' are a bad deal for farmers - even if there is a enormous federal subsidy for costs allocated to the Central Valley Project.  The benefit-cost report I published last month statedIf only the benefits and costs to water exporters who would pay for the tunnels are considered the costs still exceed benefits by more than $7 billion in the most optimistic scenario.”  

The big surprise to me in the Brattle report, was that it explicitly stated the need for federal subsidies, and then openly advocated for additional state subsidies. Coming from a state consultant, that is very newsworthy, especially given 10 years of public denials that there would be any public subsidies.  In addition to the draft report RTD released today, I saw several similar drafts in the PRA documents that went back and forth between the consultants and the state last fall.  The only substantive difference I detected in these drafts was the section with the weak rationalization of state taxpayer subsidies expanded in later drafts.  So it seems pretty obvious to me that the state sponsors were pushing the consultant to find a solid argument for state taxpayer subsidies.  However, the consultant was unable to develop a compelling case despite their best efforts, because there simply isn't one.

It is important to realize that even if there is a combined $6.5 billion in federal and state taxpayer subsidies for agriculture's costs of the tunnels, the net benefit to farmers who would receive water from the tunnels is still zero.  Add in the negative impacts on Delta farmers, and some risks for other farmers upstream from the Delta, and the tunnels are clearly a bad deal for the overall Valley economy.  Why no net benefit?  The subsidy would not pay all of agriculture's cost share for the tunnels - they are still responsible for $3-4 billion in direct payments for the tunnels even if the subsidy is $6.5 billion.  Thus, the billions in costs that they would still pay consumes all of any water benefits they would get from the tunnels.

The Valley economy has many, many needs.  It breaks my heart to think that anyone in government would contemplate a $6.5 billion subsidy to Valley agriculture that provides no net benefit to the Valley economy.  If such a subsidy were to happen, it would be a tragic example of ineffective and wasteful government.  If the government feels compelled to spend billions in industry subsidies in the Valley, I would suggest spending a much smaller amount to entice some other industries that would diversify the economy and create good paying jobs.  If a subsidy proposal is ever formalized, every mayor in the Valley should oppose it and offer up an alternative economic development package that is much cheaper and does more for their constituents.

Three additional comments that occurred to me this evening as I read the AP report and some reactions to it.

1.  Why did I say $6.5 billion in subsidy, when the AP and report only quotes $3.9 billion from the study?  Two reasons:  First, the $3.9 billion figure in the report is a discounted present value, so I have converted it to a $4.6 billion undiscounted value that is comparable to the estimated $16 billion construction cost.  The other $1.9 billion is the amount of additional subsidy that would be needed to get the tunnels break even for farmers, and it is the reason for the extended discussion of additional subsidies for the project.  So while the report does not assume a specific amount for state subsidies, the minimum amount of state subsidy the consultant is trying to justify is pretty clear.  The AP reporter is just being careful to quote exactly what the report said about a federal subsidy, and she also notes that agriculture still comes up short.

2.  Does Californians For Water Security have a secret financial plan for the tunnels?  CWS's response reminds me a little of Donald Trump's secret plan to defeat ISIS.  They said, the draft report "doesn't account for the latest thinking on financing the project."  So, what exactly is the latest thinking?  Please inform everyone.  What exactly is the plan?

If there was an actual finance plan for the tunnels, this "outdated report" wouldn't be so newsworthy. Tunnel advocates have no one to blame but themselves for not putting out a financial plan after 10 years.  An information vacuum will be filled, and this is the best information available.

3.  Doug Obegi's comments on the report are well worth reading.  He highlights some additional points that I didn't discuss, and explains some other points in a different way that may be more understandable to some people.

Friday, September 9, 2016

I wonder if all Modesto residents are really opposed to a regional airport?

Through the Center of Business and Policy Research, I have been involved in studies of the North San Joaquin Valley which have identified opportunities for regional cooperation to improve economic development.  One of the opportunities for regional cooperation is regional transportation infrastructure, such as regional efforts to improve air service - perhaps by combining resources through a regional airport - as well as regional efforts to improve rail transportation, transit and more.

Thus, this article from Jeff Jardine in the Modesto Bee, http://www.modbee.com/news/local/news-columns-blogs/jeff-jardine/article97264652.html, a few weeks ago disapointed me.  It quotes a number of folks in the Modesto area who dislike the concept of a regional airport and shows how hard it will be to really get people in the North San Joaquin Valley to see the benefits of greater regional cooperation and identity.

The article rejects the idea of regional cooperation on an airport, and stokes unproductive regional rivalry by suggesting that people like me who suggest the concept of a regional airport are just trying to help Stockton to Modesto's detriment.  It ignores the impact of subsidizing an airport on the city of Modesto's budget, and whether such ventures are better handled at the County level or through multi-jurisdictional JPAs.  It defies location theory by suggesting locations in Merced or Modesto a few miles from highway 99 is a better location for a regional airport than adjacent to I-5 and 99 south of Stockton, arguing that it is more important to be far away from competitors than it is to be close and convenient for potential customers.

Honestly, I don't think explicit cooperation or support from the rest of the North San Joaquin Valley is necessary for the Stockton airport to develop into a regional service center.  If it stays on its current course of expanding service, I think consumers across the NSJV region will vote with their feet and wallets over time.

In the long-run, I think the regional concept around the airport could work not just because of economies of scale and efficiency, but it could also be valuable in trying to develop a name that doesn't include the words Stockton and Modesto and use it as the basis for a new regional brand with fewer negative associations to outsiders than San Joaquin Valley, Stockton, etc.. I am not a branding guy, but I know enough that a regional brand is most likely to stick if it is authentic and connected to an actual thing like an airport.  So, why not a regional airport in the NSJV that is not called Stockton-Modesto Regional but something like "NorCal Crossroads Airport" or "NorCal Gateway Airport"  or "Zinfandel Airport" or many much better ideas that real marketing and branding experts can come up with.  Now that is probably pushing an unpopular idea way too far, but it is a thought I have had.

Thursday, September 1, 2016

Farm Revenue Drops as Labor Costs Rise: Is the Era of Record Farm Profits Over?

Two interesting news stories about California agriculture this week.  First, initial estimates for 2015 farm revenue show revenues dropped sharply by $9 billion in 2015 compared to 2014.  Second, a bill that would align overtime regulations for farm laborers with all other workers passed the legislature and is on its way to Governor Brown.  If the Governor signs it, this will increase costs for farmers and comes just after the state approved large increases to the minimum wage that will likely have even bigger impacts on farm costs.

A couple of graphs help put the news in perspective.  The first shows total revenue and the net income of farms in California over the past 20 years according to the USDA data series released this week.  The data is adjusted for inflation, all values in 2009 dollars.  As the graph shows, farm revenue has increased sharply since 2011, and profits (net income) for the period of 2011-14 were at all time highs.  While the 2015 results are down sharply from the previous year, they still look very good from this historical perspective.  Expectations are for another decline in 2016, despite much less fallowing from drought.  If the 2016 drop isn't too large, it may just be that farming revenue is returning back to trend growth after an anomalous 2011-14 period were prices were unsustainably high, and that nut prices finally came down in response to a decade of massive increases in production. 


The next graph only goes until 2014, and shows labor costs and net income as a percentage of total farm revenue.  In 2014, labor costs (the sum of farm employees and contract labor costs) was about 32% of California farm revenue, making it the largest cost category for California agriculture.  This percentage varies significantly from crop to crop, with the highest labor costs for vegetables and fruits and the lowest for field crops.

Historically, profit margins have been about 25% and labor costs about 35% but there are big fluctuations as farm revenue can be volatile.  What will big changes in labor costs due to minimum wage and overtime regulations do to this picture.  If nothing else changes (meaning farmers did not adjust their labor usage, crop choice, and technology as labor costs grow), the minimum wage increase and overtime regulation would likely push the labor share up to nearly 50% of revenue, and profit margins would drop to about 15%. 

Both numbers would be at or near records. That's a major shift, certainly enough to drive substantial changes in agricultural practices.  There is going to be a lot of interest in labor-saving or productivity enhancing capital and technology investments in the agriculture sector over the next decade.  That will reduce jobs, but should lead to better, higher-paying jobs. 


These are big changes for the Valley economy, and I think the changes will be mostly positive.  However, I am concerned that the changes will be too much, too fast for Valley agriculture - especially as revenue seems to be coming back to normal.

So what should Governor Brown do?  I am very sympathetic to the overtime rule and aligning labor standards across industry.  I don't see how the current rules can be seen as anything but discriminatory, so my views are the same as they were in this 2010 post when the legislature sent a similar bill to Governor Schwarzenneger.

Having said that, I was alarmed that the minimum wage increase passed this fall did not allow for regional variation in the state like was done in Oregon.  In my view, $15 per hour is too high for places like Fresno and Redding even though it may make sense in the Bay Area.  There is a chance that the legislature could revisit this issue before the largest increases hit, and I would encourage them to make the $1 annual increases that begin in two years, 50 cent increases in inland regions so that the final phased in minimum wage is $12.50 not $15 in the Valley. 

I am not an expert in the political process and how negotiation between the Governor and the legislature work.  I do know the outcome I would eventually like to see:  a) minimum wage increase for the Valley adjusted from $15 to $12.50, and b) farmworker overtime regulations normalized to be aligned with other industries.





Thursday, August 25, 2016

It Is Strange To Be Accused of Bias By WaterFix Supporters for Following The Information in Their Own Documents and Applications for Project Approval

The response from opponents to the benefit-cost report is both predictable and a little bit strange.

Someone from the Department of Water Resources criticizes it for not using the "declining baseline" of water exports, and the pro-tunnels group "Californians for Water Security" says that we "fail to acknowledge economic losses of future water cutbacks without project."

This criticism stems from the fact that I followed their documents.  In essence, they are saying that a good analysis would make stuff up that is completely inconsistent with the official documents the WaterFix has created to support its applications for regulatory approval.

It seems that in the opinion of Californians for Water Security, and Department of Water Resources' spokespeople, an unbiased benefit-cost analysis would make the following unsupportable and speculative assumptions.

  • Future environmental restrictions on water exports can only affect the no-tunnel scenario, and that the WaterFix is somehow immune.
  • If future environmental restrictions were to reduce water exports, it would have no environmental benefit to society, only costs to water exporters.    
Both of these are false, and addressed in the report.  Any reasonable argument to support the first assumption went away with the change in the proposal from BDCP to WaterFix.  Water operations could decreae in the future in response to environmental conditions and regulations with and without the WaterFix.  The benefit-cost analysis correctly focuses on the incremental change in water supply with and without the tunnels.  There is no reason to believe the incremental supply with and without would be any different even if future regulations are tighter.

The second assumption that these potential environmental regulations would only have costs but not offsetting environmental benefits is simply false.       

But this is a silly debate with media spokespeople.  There is only one reasonable response for project proponents.  Follow your own guidelines and repeated promises, and complete your own benefit-cost analysis of the WaterFix that is integrated and consistent with the environmental documents.

In fact, one of the goals of doing this report is to put some pressure on the state and project proponents to put their benefit-cost analysis on the table like they promised to do last year.  Then we could compare the assumptions, the points of consistency and inconsistency with the environmental documents, and have a real informed discussion about the merits of the WaterFix proposal.  


Wednesday, August 24, 2016

Benefit-Cost Analysis of the WaterFix

Earlier today, the Center released a benefit-cost analysis of the California Water Fix.  Last year, state officials said they would release their own benefit-cost analysis in August 2015, but it is now a year later and nothing has been forthcoming.  In this analysis, I would describe the "optimistic" scenario as my best estimate of what I think DWR's benefit-cost analysis would look - based on previous work done by their consultants for the tunnels when they were part of the BDCP.  The "base" scenario reflects what I believe are more realistic values, and in both cases the WaterFix has benefits that are far less than costs.

Since the benefit-cost ratio for the optimistic scenario is so low, it did not seem necessary to consider a pessimistic scenario which would consider possibilities of higher costs or that the tunnels created greater environmental damage than predicted in the proponents' documents.  While 23 cents of benefit per dollar of cost is bad, the reality could be even worse.

A link to the full report and a summary table of results is below.   

http://www.pacific.edu/Documents/school-business/BFC/WaterFix%20benefit%20cost.pdf
 

Present Value of Benefits and Costs of the California WaterFix. 

2014 dollars, 3.5% real discount rate, 15 years of construction, and 100 years of operation. 

 
Base scenario
Optimistic Scenario
Benefits
 
 
Export Water Supply
$1,319,521,208
$2,822,409,124
Export Water Quality
$1,677,361,307
$1,677,361,307
Earthquake Risk Reduction
$0
$435,796,554
Total Benefits
$2,996,882,515
$4,935,566,984
 
 
 
Costs
 
 
Construction and Mitigation
$11,676,474,531
$11,676,474,531
Operation and Maintenance
$591,658,075
$591,658,075
Ecosystem
$0
$0
In-Delta Municipal
$111,279,332
$37,093,107
In-Delta Agriculture
$682,807,143
$293,953,421
In-Delta Transportation
$132,205,755
$132,205,755
Total Costs
$13,194,424,836
$12,731,384,889
 
 
 
Net Benefit
($10,197,542,281)
($7,795,817,905)
Benefit/Cost ratio
0.23
0.39

Tuesday, July 26, 2016

Some thoughts for Bruce Babbitt

In the 1990s, I was a graduate student writing a dissertation on the economics of the Endangered Species Act, and Bruce Babbitt was Secretary of the Interior actively utilizing habitat conservation plans as tools to negotiate agreements to more effectively implement the Endangered Species Act.  I used to quote him in some of my presentations at the time, so I was fascinated and a bit encouraged to hear the news that Governor Brown has hired him to help with the delta tunnels (aka WaterFix) proposal.  However, the quotes in this article in the Sac Bee make me a little concerned. 

I trust that Secretary Babbitt will eventually be venturing out beyond the his state DWR office to get some alternative information and perspectives.  Maybe he will even venture onto this blog?  I offer these 5 thoughts to help Secretary Babbitt consider solutions to the Delta problem.

The Tunnels Do Not Have a Strong Enough Value Proposition to Support a Negotiated Deal.

According to the article, Secretary Babbitt's state office is stocked with 40,000 pages of documents produced by DWR to support the project, but nowhere in those volumes has the state put forward an economic feasibility analysis.  

The cost of the project is disproportionate to even the most optimistic assessment of potential benefits, and many interests that would pay for the tunnels are openly questioning whether they are worth the investment, despite the risk of antagonizing a Governor who strongly supports it.  When economic merit of the project is this questionable to its beneficiaries, there is no basis to negotiate a credible deal between them and opponents.

Electricity and the Remarkable Phase-Out of Nuclear Power Can Be a Model

The state's electricity and energy system has made remarkable transformation in its supply portfolio over 15 years.  Electricity is even more important to the state's economy than water, and its relative importance is increasing.  During this time, the electricity system also endured a reliability crisis in the early 2000s that was more economically damaging than the recent drought.  The transformation of the state's electricity grid is much more significant and economically challenging than what would be required to truly reduce reliance on the delta for water.

A decade ago, nuclear power was 15% of California's electricity portfolio, and water exported from the Delta through the State Water Project and Central Valley Project were about 15% of California's water portfolio.  In addition to being a similar percentage of the statewide portfolio for their critical infrastructure system, both nuclear and the SWP/CVP represent 1960s visions of technology and modern infrastructure, and both can be made obsolete by new technology and improved conservation.

Nuclear power is now about 7% of California's electricity power and with the closure of Diablo Canyon will bring it down to 0% in a decade.  The SWP/CVP are still about 12-13% of California's current proposal, and the WaterFix hopes to keep it at that level indefinitely.  When it comes to water, not even the most extreme environmental proposals say we should completely shut-down Delta pumping the way the state has phased out nuclear.  Instead, the most extreme proposals are to cut from 5 million acre feet to 3 million acre feet of exports per year over an extended time.  That is a shift of 5% of California's water portfolio over time.  In other words, even the most extreme environmental proposal for the Delta would be a much smaller change to the state's water portfolio that we have achieved in replacing nuclear with alternative technologies.

The state has taken a much more innovative and aggressive approach to its energy policy (nuclear is just one example).  Read PGE's statement on closing Diablo Canyon and think about the divergence between California's energy and water policies.
Underpinning the agreement is the recognition that California's new energy policies will significantly reduce the need for Diablo Canyon's electricity output. There are several contributing factors, including the increase of the Renewable Portfolio Standard to 50 percent by 2030, doubling of energy efficiency goals under SB 350, the challenge of managing overgeneration and intermittency conditions under a resource portfolio increasingly influenced by solar and wind production, the growth rate of distributed energy resources, and the potential increases in the departure of PG&E's retail load customers to Community Choice Aggregation.
The Joint Proposal would replace power produced by two nuclear reactors at the Diablo Canyon Power Plant (DCPP) with a cost-effective, greenhouse gas free portfolio of energy efficiency, renewables and energy storage...
"California's energy landscape is changing dramatically with energy efficiency, renewables and storage being central to the state's energy policy. As we make this transition, Diablo Canyon's full output will no longer be required. As a result, we will not seek to relicense the facility beyond 2025 pending approval of the joint energy proposal. Importantly, this proposal recognizes the value of GHG-free nuclear power as an important bridge strategy to help ensure that power remains affordable and reliable and that we do not increase the use of fossil fuels while supporting California's vision for the future," said PG&E Corporation Chairman, CEO and President Tony Earley.
Only twenty years ago, people in the energy industry laughed off suggestions that we would ever see this kind of announcement and phase out nuclear without devastating economic effects.  Water agency leaders today sound a lot like energy executives from the last generation.

Don't Believe the Apocalyptic Talk, and Do Not Engage In It 

Tunnel proponents make many outlandish claims of economic disaster that would ensue if water exports were disrupted or reduced.  Unfortunately, Governor Brown himself often makes these unsubstantiated claims and the media laps up the disaster scenarios.  There is no credible basis for these apocalyptic claims, even the worst case scenario of completely cutting off Delta exports would have costs in the single-digit billions in a $2.5 trillion state economy.

As discussed above, the 5 million acre feet of water exported from the Delta is 12-13% of the state's water portfolio.  In the past two years, the state has dealt with a surface water supply reduction of 11 million acre feet (more than double the amount of surface water exported from the Delta in a typical year) and the overall economy has boomed.  Losses from water shortages across all economic sectors were a few billion dollars.  Even in the very unlikely case that all Delta water exports were shut-down, we have ample evidence to show that the state's economy could continue to grow.  This not to say that there would not be economic costs, and that they could be acute in some communities, but the apocalyptic talk is irresponsible and unwarranted.
   
 In fact, the delta earthquake argument is not only economically wrong, it is immoral.  The state's own study of this scenario shows that only 20% of the billions in economic costs is due to water exports, and the tunnels would protect 0% of the hundreds of lives the state's report says would be lost in such an event.  The real devastation would be in the Delta region itself.  While I agree that sea-level rise and earthquakes are real risks, solutions should be considered in a comprehensive fashion rather than pursue multi-billion dollar individual solutions for water, transportation, public safety, etc.

Consider a No-Tunnel Habitat Conservation Plan

As Secretary of the Interior, Mr. Babbitt greatly expanded the use of HCP's.  Thus, he should understand the argument that in the BDCP, the habitat conservation plan created more valuable for water exporters than the physical infrastructure of the tunnels.  When the administration abandoned the BDCP, they ditched the HCP and kept the tunnels, the wrong approach.  An HCP in the Delta does not require the tunnels, and I believe there is potential for a long-term deal to stabilize the regulatory environment and improve habitat for endangered species once the tunnels are off the table.

There are a lot of other alternatives too, and they are not mutually exclusive.  However, Secretary Babbitt is uniquely qualified to restart the HCP process and perhaps salvage something useful from the BDCP process.  If nothing else, I think that process illustrated the value of an HCP to all parties, and the science program is increasing knowledge of the efficacy of various habitat improvements.  A No-tunnel HCP need not be limited to the Delta itself, but could support actions to improve spawning habitat, get fish around some of the rim dams, increase Delta outflows, and more.

Consider Institutional Incentives and Structural Changes to Agencies

Returning to the electric utility comparison, it is worth noting that electric utilities have diverse power portfolios and sell power at both the retail and wholesale level.  If Southern Cal Edison or PGE were wholesalers that only owned a nuclear power plant, they would not have agreed to shut-down their nuclear power plants.

The main water agencies pushing the tunnels, DWR's state water project and Metropolitan, are wholesalers and basically the only product they sell is water imported from hundreds of miles away.  Under their current structure, they have an interest in preserving the status quo.  How can we change their incentives and their business models?  Should they be required to develop a more diverse water supply portfolio of their own?   I have not thought deeply enough about this to make specific proposals, but I am increasingly convinced that some institutional restructuring is needed to create new business models and incentives that encourage water agencies to invest in new technologies, diversify their portfolios, and invest in research and development of new technologies.

While this list is by no means a comprehensive survey of all the options that are superior to the tunnels, I hope it can spark some new ways of thinking and reduce the tunnel vision so prevalent in the state bureaucracy.





Monday, July 25, 2016

Jason Peltier is still making sense on delta tunnel economics: A look back 4 years shows the WaterFix is an even worse financial deal than the BDCP.

Jason Peltier was quoted on tunnel economics in the Sunday Sacramento Bee,
“How can we go to farmers and urban customers and say, ‘We’re going to pay our portion of this $15 billion project and we’re going to get the same amount of water or less?’ It doesn’t compute,” said Jason Peltier of the San Luis & Delta-Mendota Water Authority, which delivers Delta water to much of the west side of the San Joaquin Valley. “It’s totally inconsistent with the goals we started with, which are ‘we need to restore our water supplies.’ 

Read more here: http://www.sacbee.com/news/state/california/water-and-drought/delta/article91502652.html#storylink=cpy
Jason is correct, just as he was in June 2012, when the Department of Water Resources was first rolling out its economic rationale for the tunnels in the BDCP.  That rationale relied critically on the regulatory assurance embodied in the habitat conservation plan - the part of the plan that was jettisoned in the change from BDCP to WaterFix.

Below I have republished a post I wrote in June 2012 with a few current notes added in [Bold italics].  It is one of the most read posts ever on this blog, and many people have told me it helped them better understand the economic debate.  It's still very relevant today.

June 23, 2012

Is BDCP a good deal for water agencies? Jason Peltier and David Sunding disagree

In the first part of the BDCP meeting on Wednesday, Jason Peltier of Westlands Water District, the water agency that may have the most at stake in the BDCP, said,
"[The BDCP is] a crappy path for us. This is a crapshoot. Unacceptable... We can't finance it.”
However, in the closing presentation of the meeting, Dr. David Sunding, an economist and principal at the Brattle Group hired by the state Resources Agency, said,
"I think it's really beyond serious debate at this point that the benefits of BDCP to the agencies ... exceed the cost," 
Now that is a disagreement.  It's natural to suspect Mr. Peltier is posturing to negotiate a better deal, and there may be some of that, but I think he is right.

Dr. Sunding went through a presentation that had sophisticated analysis of the usual categories of benefits attributed to the tunnels, a)water supply, b) water quality, and c)seismic risk reduction.  All together, these three added up to about 50 cents of benefits for every $1 in costs to the agencies (using the realistic seismic risk scenario, not the worst case).  [This benefit is even lower now, as projected water exports for the WaterFix have decreased.] So how did he figure that the benefits exceeded the costs for the agencies?

It came from a new category of benefit that was not in his original scope of work with DWR: the value of eliminating regulatory uncertainty.  He put forward a scenario where regulatory assurance was more valuable than all the rest of the benefits combined. $11 billion in one scenario. And he argued that regulatory assurance was the main objective of the agencies in the BDCP process, and a normal component of HCPs under the ESA.  He is right about that.  But environmental lawyers tell me that there are significant limits on the legal assurances in HCPs, and there are serious doubts about whether the BDCP can deliver much regulatory assurance at all due, in part, to enormous uncertainty about the environmental effects of the tunnels.  [This whole debate about the extent of regulatory assurance is now moot, since the WaterFix proposal is no longer an HCP.]

Thus,Dr. Sunding's conclusion should have been worded "It's beyond serious debate at this point that strong regulatory assurances are required for the benefits of the BDCP to the water agencies to exceed the cost to the water agencies." If he said that, I would agree, and that is very important information for the people negotiating BDCP.  It isn't just posturing, the water agencies really need the assurance in order to seriously consider a $13 billion investment in infrastructure.

With words like "crapshoot", Mr. Peltier is clearly not very impressed with the regulatory assurance in the BDCP.   Apparantly, not many other people are either. I asked a small sample of objective scientists, lawyers, and environmentalists outside the Delta if strong regulatory assurances would or could be part of the BDCP. The responses were "Not a chance", "No way", and "Sunding analyzed a project that is rejected by the regulatory agencies." [These predictions look pretty good today.  BDCP was rejected, and the HCP is gone.]  Maybe there are experts who disagree, but it is clear that Sunding touched on a very controversial topic in the BDCP.  I am pretty sure that any project that might offer some level of regulatory assurance will have lower exports, and thus lower water supply values, than the scenarios he modeled.

I look forward to further debate of the concept of regulatory uncertainty, how much can be provided, and how it should be valued (I'm not buying the $11 billion estimate, more on that later).  But it is important to realize that regulatory assurance isn't very important for statewide benefit-cost analysis.  The regulatory assurance isn't a statewide benefit, it is shifting risk from the exporting water agencies to the environment and everyone else who will have to pay if the tunnels don't work for fish.

The good news is we finally have a rational discussion and debate about economics, and some reliable numbers out in public.  It's about time.  While I disagree with a few parts (mostly with the scenarios he has been given to evaluate), for the most part, I think Dr. Sunding's quantitative estimates are very reliable, and they inform the planning process. [Unfortunately, the subsequent analysis went off the rails.  Primarily because he stopped including the value of the HCP regulatory assurance as a separate component, and embedded it inside the water supply benefit by changing the no-tunnel water supply baseline to something inconsistent and much lower than in the Environmental Impact Report.]  Benefit-cost isn't just a pass/fail test at the end of the process. BDCP would have been much better off if they had hired him years ago.

Friday, June 17, 2016

Job Growth For Large California Metro Areas

The table shows the largest California metro areas ranked by percentage growth in nonfarm payrolls over the past 12 months, and the past 10 years.

San Francisco and San Jose obviously stand out.  It's interesting that the East Bay's job growth has been quite a bit slower.  East Bay has always been a little bit of a bedroom/commuter area to San Francisco and San Jose, but it seems to becoming even more so.

Given that it was the epicenter of the foreclosure crisis, and the bottom of these charts not long ago, the recent job recovery in the Stockton-Lodi area is very noteworthy.

Sacramento is noticeably lagging behind.  In the decade from 1996 to 2006, Sacramento nonfarm payrolls grew by 32%, but only 1.6% growth in the past decade.


AREATITLE 1 year growth
San Francisco-Redwood City-South San Francisco Metro Div 4.4%
Stockton-Lodi MSA 4.4%
San Jose-Sunnyvale-Santa Clara MSA 4.0%
Anaheim-Santa Ana-Irvine Metro Div 3.5%
Riverside-San Bernardino-Ontario MSA 3.4%
Fresno MSA 3.0%
Oakland-Hayward-Berkeley Metro Div 2.5%
San Diego-Carlsbad MSA 2.4%
Los Angeles-Long Beach-Glendale Metro Div 2.3%
Bakersfield MSA 2.1%
Sacramento--Roseville--Arden-Arcade MSA 1.9%
AREATITLE 10 year growth
San Francisco-Redwood City-South San Francisco Metro Div 23.0%
San Jose-Sunnyvale-Santa Clara MSA 19.8%
Bakersfield MSA 11.4%
San Diego-Carlsbad MSA 7.7%
Riverside-San Bernardino-Ontario MSA 7.6%
Fresno MSA 6.7%
Stockton-Lodi MSA 6.6%
Oakland-Hayward-Berkeley Metro Div 5.3%
Anaheim-Santa Ana-Irvine Metro Div 3.9%
Los Angeles-Long Beach-Glendale Metro Div 3.4%
Sacramento--Roseville--Arden-Arcade MSA 1.6%




Wednesday, June 8, 2016

San Joaquin County in top 10% of U.S. Counties in both job growth and wage growth in 4th quarter of 2015 as the number of warehousing jobs doubles.

New data showing the strength of the economic recovery in the Stockton-Lodi MSA continue to come in.  Today's release of the Quarterly Census of Employment and Wages for the 4th quarter of 2015 may be the strongest sign yet that this area that was the epicenter of the foreclosure crisis is on the rebound.

Over the 12-month period ending in December 2015, San Joaquin County had 4.2% gain in employment (27th best of 343 large U.S. counties), and a 7.1% gain in the average weekly wage (28th best of 343 large U.S. counties).  While many California counties were in the top 10% of one of these categories, San Joaquin County was the only one in the top decile of both.  Other California counties in the top decile of job growth were Placer, Riverside, Stanislaus, and San Francisco.  Other California counties in the top decile for wage growth were Santa Clara and San Luis Obispo.

In the table below, I show the 5 sectors that added at least 1,000 jobs in San Joaquin County over the past year.

Sector Dec 2015 jobs 12 month change % ch jobs  Avg weekly wage % ch wage
Construction  10,454 1,485 16.60% $1,162 7.80%
Ag. & Nat. Res. 13,402 1,893 16.40% $673 4.20%
Warehousing 10,645 5,594
110.75%
$932
-14.57%
Local Govt. 31,658 1,684 5.60% $1,094 9.30%
State Govt. 6,435 2,423 60.40% $1,029 -0.60%

Warehousing is the sector that jumps off the page, as the Amazon driven expansion has more than doubled warehousing jobs in the County.  And just recently, Amazon announced another 1 million square foot expansion in Tracy so the number of warehousing jobs will only rise from here.  However, these new warehousing jobs in fullfillment centers do not pay as well as the traditional warehouse jobs.  Average weekly wage in the sector fell by nearly 15%, and it isn't clear whether this is due to more part-time jobs, lower hourly wages or a combination of both.  From the data, it appears the new warehousing/fulfillment jobs average less than $800 per week - which is closer to traditional retail jobs than warehouse jobs - and it is the retail jobs that the fulfillment centers are displacing.  Despite the drop in average wages in warehousing, overall average wages in San Joaquin County increased as most sectors reported strong wage gains.
 
It is important to note that the 12 month data shown in this report fits in between California minimum wage hikes to $9 on July 1, 2014 and $10 on January 1, 2016.  Thus, there should be little direct effect from the minimum wage increase although some employers may have boosted wages in anticipation of the mandated change.  However, much of the average wage increase can also be attributed to significant increases to employment in higher-paying sectors such as construction and government.
 

Friday, April 15, 2016

Is Metropolitan's purchase of 20,000 acres in the Delta a subsidy for agricultural water contractors?

For years, I have explained why agricultural water contractors will be unable or unwilling to pay for their proportional share of the delta tunnels (i.e. California WaterFix) and have predicted that urban ratepayers will be stuck with most if not all of the tunnels' cost.  Last week, the Metropolitan Water District (MWD) approved the $175 million purchase of approximately 20,000 acres of Delta land, much of it strategically located to support the construction of the delta tunnels.  Throughout last summer and fall there were multiple news reports that MWD was having discussions with agricultural water contractors like Westlands and Kern County Water Agency about jointly purchasing the Delta Wetlands property.  However, the agricultural agencies decided not to particpate, so MWD decided to go ahead and buy the property all by themselves.  Is this a harbinger for how the delta tunnels will be financed?  After all, this is likely the largest land acquisition that will be made to directly support tunnel construction.

MWD says it has not yet determined how it would specifically use the land.  In addition, to supporting tunnel construction, MWD points out that the land could indirectly help water supply reliability through habitat restoration to benefit endangered species that limit delta water exports, and that the parcels were strategically located to facillitate construction of a freshwater path through the delta if a massive levee failure and flood threatened exports.  MWD is hoping that uncertainty argument will be sufficient for it to prevail against a CEQA lawsuit, but it doesn't explain the financial rationale for MWD moving ahead without any funds from the agricultural contractors.

For all of these potential uses, the benefits would accrue to all of the water contractors who export water from the Delta, not just MWD, and the vast majority of water exported from the Delta that would benefit from these actions is received by farmers.  

Thus, it seems clear that this purchase is not consistent with the assurances MWD has repeatedly made to its ratepayers that it will not subsidize agricultural contractors share of the tunnels' cost.  It also seems like it could be inconsistent with Proposition 218, which requires water rates to be tied to specific benefits received by its ratepayers and that ratepayers only pay the proportional costs of providing those benefits.  The fact that MWD initially pursued a joint purchase is strong evidence that MWD believes that its ratepayers are not the exclusive beneficiaries of the $175 million purchase that is now going to be 100% paid for by MWD ratepayers.

Is this a preview of how the tunnels themselves will be financed?  If the agricultural users back out of paying for the WaterFix as many expect, will urban contractors like MWD move ahead and try to finance the entire estimated $16 billion in WaterFix construction costs by themselves.  Even if MWD wants to do it alone, will they be able to?  This proposed purchase makes it even more clear why the WaterFix needs to issue a detailed finance plan as soon as possible.

Friday, March 25, 2016

In 24 hours, two Bay Area firms announce significant manufacturing expansions in the Central Valley

Big announcements for Lodi and Elk Grove on consecutive days.  Could it be a harbinger of things to come for the Northern California Mega-region?

NEC seems likely to build a significant manufacturing facility near the Elk Grove "ghost mall".
Sac Bee story... Elk Grove officials have signed a tentative deal with a Bay Area tech company to bring 2,500 manufacturing jobs to the city. Mayor Gary Davis said the possible deal is with NRC Manufacturing, a circuit board maker in Fremont that has worked with Apple.

Sac Business Journal story... The deal could establish Elk Grove as an affordable place for technology companies to scale up manufacturing that has been developed in Silicon Valley, said Barry Broome, CEO of the Greater Sacramento Area Economic Council. He helped get the deal rolling by meeting with NRC officials in Fremont to pitch Elk Grove as a location. With Apple's nearby plant, which recently began an expansion, "now you have a situation where you start to create a trend," Broome said. Elk Grove has 165,000 residents and only 45,000 jobs, Davis noted. The recruitment is especially significant for a city known for years as a bedroom community that also bore a disproportionate hit during the 2008 mortgage crisis. NRC Manufacturing employs just 18 people in Fremont, where it operates in a 12,000-square-foot site. But the company plans to shift from manufacturing prototypes to a full-scale manufacturing operation.

And a Sunnyvale based biotech firm investing and expanding in Lodi
Cepheid, a Sunnyvale-based producer of medical diagnostic products, is expanding its Lodi manufacturing operation, looking to grow to about 500 employees in two to three years from the current 230 workers, the company and area business officials said.
 
With its existing facility at 225 N. Guild Ave., Cepheid purchased two buildings to the south on Guild Avenue that have been vacant since 2008 when Blue Shield left to occupy its new facility in south Lodi.
Those include a 40,000-square-foot building to be used for manufacturing, essentially an extension of production now done in Sunnyvale, and a 32,000-square-foot building to be used for administrative offices, meetings and training.

Monday, March 21, 2016

Can Modesto and Stockton help each other improve?

Kevin Valine's recent column in the Modesto Bee highlighted a few issues that got me thinking about Modesto and Stockton.  First, in yet another dubious ranking,* Valine reports that U.S. News ranked Stockton and Modesto 98th and 99th respectively in their ranking of the best places to live among the 100 biggest "U.S. cities" (actually metro areas).  Second, he discusses a city financed consultant report studying the feasibility of reestablishing passenger service to the Modesto airport.

How can the cities of the North San Joaquin Valley improve their economies and quality of life?  There is no silver bullet strategy, but one approach that we have been advocating in the Center for Business and Policy Research is more cooperative action on a regional level in 3 areas: marketing, infrastructure, and education/workforce development. The struggles of the Modesto airport highlights one example of where a regional approach to infrastructure could make sense.

Cities in the region are struggling financially, Stockton has just left bankruptcy and Modesto is also dealing with serious fiscal issues and cutting basic services.  The Modesto airport is owned by the city and is losing money for a City with serious budget problems that has resulted in cuts to police staffing and other services.  There are several airports within a 30 minute drive of Modesto with longer runways and better freeway access that are also working to reestablish hub passenger service (most notably Stockton airport, which is owned by San Joaquin County, which has been successfully adding discount passenger service and recent expansions in cargo).  It seems to me that it would be more productive for the cities and counties in the region to work together towards the goal of regional air service.

While the Modesto has long enjoyed some passenger air service, it may be time for them to start thinking out of the box.  Perhaps they should evaluate alternative uses for the airport property that would make a fiscal contribution to the City and explore partnerships with other Counties and Cities in the region to develop convenient passenger air service. 

This is just one opportunity for regional action.  Economic development entities in the 3 counties have recently engaged in some cost sharing for joint marketing activities in the Bay Area.  The proposed expansion of ACE rail to Modesto and Merced is another important regional transportation infrastructure project.  I expect we will see more regional action in the future.

*The only place ranked below Modesto was San Juan, Puerto Rico.  Of course, it is easy to complain about the methodology of a best places to live ranking that does not include climate data.  While I think Modesto and Stockton have more to offer than these rankings suggest, there is no arguing that there are problems here.

Tuesday, March 15, 2016

What does Westlands SEC penalty mean for the delta tunnels plan(aka WaterFix)?

Last week, the SEC found Westlands Water District was misleading bond investors, making Westlands only the second municipal bond issuer to ever pay a penalty to the SEC.  Bond rating agencies immediately placed Westlands' bonds a negative outlook.

The announcement puts a spotlight on an issue that I have been talking about since 2012: the agricultural water districts can not and will not pay for their proportional share of the $16 billion delta tunnels. In 2013, I said the financial hole in the delta tunnels plan was comparable to the hole in the high speed rail business plan:
In both cases, the "hole" in the capital financing for the project is an unrealistic projection of funds provided from a key source.  In the case of high-speed rail, the hole comes from federal government appropriations that are unlikely to materialize.  In the case of the tunnels, the hole comes from the unrealistic expectation that farms will pay the majority of the costs since the majority of the water is for irrigation.
I am hardly the only one to come to this conclusion.  Even WaterFix supporters openly acknowledge that the agricultural contractors might not be able to pay, even as they keep telling urban households that the tunnels will cost them $5 per month, a calculation that depends on the assumption that farmers pay the majority of the tunnels' cost.  If the farmers drop out of the plan, these household costs are likely to triple. 

While I have been continuously skeptical of agricultural districts ability to pay, I was surprised by the SEC fine.  It shows the situation was even worse than I thought.  Even for a relatively small amount of bond debt, Westlands had to resort to "Enron accounting" to boost their revenue in a drought.

So what now?  It should be clear now that a proportional cost allocation isn't going to work.  The Central Valley Project (mostly farmers) may even have to drop out completely, leaving the State Water Project (mostly urban agencies) to attempt financing the tunnels themselves. 

The Metropolitan Water District has discussed a "subscribed capacity" model as a potential solution to the cost allocation problem.  In this approach, individual water agencies would choose how much of the tunnels' capacity they want to pay for - allowing some districts to opt out entirely and others to pay a larger share in return for a larger share of the tunnels' benefits.  Although the details are unclear, I foresee a lot of problems with this approach, starting with the critical issue of defining the tunnels' capacity in a way that has enough capacity to pay the $16 billion tab and does not harm the water users who opt out.  I will leave that analysis for a future post.

For now, the Westlands/SEC situation shows why the WaterFix plan must stop dragging their feet and put forward a detailed financial plan and cost allocation now.  It is critically important for that plan to demonstrate how the bond requirements will be satisfied in periods of drought when water agencies experience their greatest financial challenges, and that financing the tunnels will not jeopardize other investments in the California Water Action Plan.  Paying the tunnel bonds' in a drought when water sales revenue is low will be a challenging even for wealthy urban agencies like Metropolitan and Santa Clara and it will be even more difficult if these urban districts have to stand behind the agricultural contractors who would be likely to miss payments in a drought.  Environmental approvals for the WaterFix depend on the project maintaining its promise not to export more water in a drought, and various regulatory entities must require the WaterFix to demonstrate that its proposed operations are financially feasible during a drought.

Thursday, March 3, 2016

The Delta Tunnels "Tracking" Website Misleads Public About Water Yields

In January, the WaterFix website added a "tracking" page, concurrent with several news stories and commentaries that touted how much more water could have been exported and stored this winter if we only had the delta tunnels. 

Rather than track the change in water exports for the entire year, including negative times, to give a full picture of the tunnels' impact, they turned it on in January when conditions were extremely favorable for the tunnels. It will surely go away when the numbers are unfavorable later this year, and I doubt we will see any retroactive tracking to the drought. Using the WaterFix's technical documents that the tracking site references (see page 605), I made this simple table to show how they estimate water exports would vary over the course of a typical year with and without the Tunnels. (all values in acre feet, converted from cubic feet per second in original source, and show the difference in water exports with and without the tunnels).

Oct            (70,141)
Nov            (59,966)
Dec               64,116
Jan               52,867
Feb            110,079
Mar               73,214
Apr                 3,867
May                 1,906
Jun            108,450
Jul               55,141
Aug               12,909
Sep          (127,011)
Total            225,432

The tables show that the tunnels can result in less water exported during certain times and the typical annual total is only 225,432 acre feet - less than half the amount the tracking tool shows during the current favorable conditions this winter.

The tracking tool also makes a deceptive comparison to make it sound like a lot of water.  They say enough water could have been stored this winter to serve 3.5 million people for a year.  This is highly deceptive on two levels.  First, they shouldn't make an annual water use comparison unless they are going to show the performance of the tracker over a full year - rather than just a few good months.  Second, most of the water is exported to farms - not cities.  Here is a more relevant comparison.  The annual average yield of 225,000 acre feet is enough to irrigate 75,000 acres of California farmland.  Yes, the main economic value of WaterFix to California is about 75,000 acres of south San Joaquin Valley farmland that would lose irrigation water.  Using the average rental value of irrigated land in California, $400, or a typical agricultural water value of $100-150 per acre foot, that's about $30 million in annual water supply value.  That isn't much compared to the tunnels enormous price tag.

It appears that I am not the only one to notice this deceptive presentation, because I just noticed that WaterFix added the following disclaimer to their tracking website since I last visited about a week ago.
We could have gained nearly an additional half a million acre-feet of water this winter under California WaterFix, but the project on average over time is not expected to provide a significant increase in water deliveries from the Delta. The comparison of a single winter to a long-term average does not take into account the extreme variability of California’s hydrology and how California WaterFix operational rules would reduce pumping at dry times. The purpose of the project is to capture more water during winter storms when runoff is high and reduce pumping when inflow is low...

Unbelievable. They create a website full of deceptive numbers with eye-catching graphics and giant bold numbers saying it will increase water diversions and storage, and then buried in a complex paragraph at the bottom of the page you find a sentence that says that the tunnels don't actually increase water supplies.

This is what water ratepayers and future generations can expect from the state when it is time to pay back tens of billions of dollars for this boondoggle.  "Despite our advertising that the tunnels increase water supply and storage, the fine print disclosed that the tunnels do not significantly increase water supply."

Update 3/7:  I forgot to link these comments by Doug Obegi about the tracking website in my original post.  I focus on misleading ratepayers and farmers who will be stuck with the tab, but as Doug points out, this presentation is misleading environmentalists as well.