August 24, 2016 8:29am
• Tunnels’ costs are four times larger than benefits
• “The results clearly show that the ‘WaterFix’ is not economically justified”
The tunnels scheme, promoted by Gov. Edmund Brown Jr. as one of his legacies to the people of California, would be the most costly water proposal in California history, the report says.
But the new independent research, released Wednesday, shows that the tunnels’ costs are four times larger than its benefits, “and thus the project is not is not economically justified.”
The report, authored by economist Jeffrey Michael, is the first comprehensive benefit-cost analysis of the California “WaterFix,” the current marketing name for the project.
To date, the California Department of Water Resources has not followed its own planning guidelines and issued a benefit-cost analysis of the proposal. It has said it would cost $16 billion to dig the tunnels. But adding in the amount of interest that would have to be paid on borrowed money plus operating costs pushes the price tag to about $68 billion, tunnel opponents have estimated.
Mr. Michael says his benefit-cost analysis presented in the Pacific report fills a critical information gap so that the public and decision-makers can better assess the merits of the “WaterFix” proposal.
The analysis is based on data and assumptions in the revised environmental documents produced by DWR to support the proposal’s environmental review.
The analysis does not include a pessimistic scenario, and thus does not consider the possibility of cost overruns or the risk of harm to endangered species, Mr. Michael says. “In addition, this analysis does not include financing costs of the bond debt that is expected to be used to pay construction costs.”
“Although the study includes assumptions favorable to the ‘WaterFix,’ the results clearly show that the ‘WaterFix’ is not economically justified under both the base and optimistic scenarios,” says the report. “The base scenario finds a net present value of -$10.2 billion, and a benefit-cost ratio of 0.23. That means the ‘WaterFix’ is estimated to provide only 23 cents of benefits for each dollar of cost. In the optimistic scenario, the net present value is -$7.8 billion and the benefit-cost ratio is 0.39. Thus, even under optimistic assumptions, costs are still more than 2.5 times larger than benefits.”
If built, Mr. Brown’s tunnels, each 40 feet in diameter, would suck fresh water out of the Sacramento River along a five-mile stretch near Courtland before the water could flow into the California Delta.
It would be piped about 35 miles to the head ends of the massive irrigation systems known as the State Water Project and the federal Central Valley Project.
The tunnels would have far greater capacity than the announced amount of water diversion. And that’s raised more than a few eyebrows.
“The ‘WaterFix’ has the physical capacity to increase water exports more than the constrained operations assumed in the current proposal, and many project opponents fear that the economic demands created by project financing could result in much higher exports that harm the environment and other water users,” Mr. Michael writes. “This report shows the concern of project opponents is well justified, and raises questions as to why state and federal water agencies are seeking environmental approval for the ‘WaterFix’ without a benefit-cost and financial feasibility analysis consistent with the operating assumptions it is using to obtain regulatory approval.”
Mr. Brown’s tunnels would be, essentially, an underground version of his ill-fated Peripheral Canal scheme that voters rejected in 1982. The tunnels, however, will not come before voters.
About the report
The Center for Business and Policy Research, of which Mr. Michael is the executive director, is located at Pacific’s Sacramento and Stockton campuses. The Center’s mission is to perform independent research and analysis of economic issues and trends in the state and region. The Center has extensive experience analyzing the economic impact of water issues including reports on policy choices related to the Delta and droughts. The Delta Counties Coalition made a $10,000 grant to the Center for Business and Policy Research to support the development of this report.