Wednesday, 29 February 2012

Isolated Conveyance Tunnel Debt Service $1.1 billion annually

The BDCP finally posted chapter 8 on financing.  This is the most important sentence regarding the estimated cost of the revenue bonds the state and federal water contractors would use for the proposed tunnel (page 8-88).

The annual debt service would average approximately $1.1 billion from 2021 through 2055.
This is much higher than the working number of $670 million per year that has been out there for the past year or two.  (see this MWD presentation for an example)  Why is it higher? The capital costs haven’t gone up, they are still using $12.7 billion for a tunnel rather than the $14 billion suggested in a recent Sacramento Bee article.  The difference is they are now using more realistic financing terms.

The preliminary estimates had assumed 50 year financing at 5%.  It is very unlikely that there would be a market for a 50 year revenue bond for a risky project at those rates.  

The new estimates assume 40 year revenue bonds issued in 4 stages throughout construction.  It estimates an interest rate a little over 6%, and that 1-2 years of the initial interest would be capitalized to reduce repayment burden during the construction period.  I think that is a far more realistic financing assumption.

Given that the incremental water supply being discussed by the conveyance is 0.3 maf to 1.5 maf requested by the water contractors.  That comes out to between $3600 and $730 per acre foot of new supply - not counting operations costs - just to get the new water to the Tracy pumps.  Add a few hundred dollars more for operating costs and pumping to Los Angeles.  [I deleted a confusing sentence here from the original post and updated below.] 

Is it any wonder that south Valley agricultural interests prefer the Nunes bill to the BDCP?  Even desal sounds cheap by comparison to new BDCP water, and it is more reliable.  

There is a lot of hullabaloo about benefit-cost analysis vs. financial feasibility analysis at the moment.  The debate may be moot, because I can’t see how the conveyance can clear the financial feasibility bar with these numbers.

Update 3/1: This afternoon I am told BDCP said 5.9 maf of exports which implies more incremental supplies than my initial interpretation of the EIR above. Perhaps I misread the EIR. I will try to confirm this and update in the future.

Update 2:  I now see the 5.9 maf in the BDCP documents, and 1.2 maf in incremental supplies.  With an $84m annual cost for operations and maintenance bringing the $1.1b in debt service up to about $1.2b per year, the 1.2 maf would be about $1,000/af

However, the EIR and  BDCP discuss alternative operations with lower exports that could be required to meet environmental goals.  It looks like this would cut the level of additional water exports to an increase of .558 maf, that would be about $2,000/af. 

The different scenarios and the volume of documents may take a while to sort out definitively, so these per af costs should definitely be interpreted as a preliminary impression.

Update 3:  And to be fair, I should point out that the project will presumably continue to provide incremental new water supplies for the exporters after the 40 year bond repayment period is over.  Thus, the cost over the entire life-cycle per af would be somewhat lower.  It will be good to see more accurate, formal analysis of these issues that should be available in the coming months.

About the Author

Ethan Jacob

Author & Editor

I am Ethan Jacob Executive Director of the Center for Business and Policy Research at the University of the Pacific, where I have a joint faculty appointment in the Eberhardt School of Business and the Public Policy Program in the McGeorge School of Law..


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