Wednesday, 5 June 2013

New BDCP Documents Say Taxpayers May Subsidize the Delta Tunnels Due to Uncertainty Over Tunnel Impacts

The newly released BDCP documents contain the following passage labeled as a “Note to Readers”.  (chapter 8, page 80).  (6/7 note:  Some readers are having a hard time deciphering this language and its significance.  This is all new language to the BDCP cost documents, and shows that the BDCP wants to change its financing assumptions to increase public subsidy of the water contractors and shift costs from agricultural to urban water users if they can get approval.  None of it shows up on the glossy BDCP handouts for the media.  Emphasis below added by me.)

Note to reader: Details of the financing and repayment described in this section from the Authorized Entities and other sources are still being determined through on‐going discussion between the state and federal governments and between the government, the state and federal water contractors and other interests. Issues still under discussion include aligning the financing and repayment responsibilities with the “beneficiary pays” principle, among other related issues.
The decision tree process that is part of the of the new north Delta water conveyance facility (CM1) will determine the level of fall and spring outflow provided by BDCP for delta smelt and longfin smelt, respectively, at initial operations. The decision tree process is designed to address the scientific uncertainty surrounding these parameters. Because each branch of the decision tree has different water supply implications, there is uncertainty in the water supply provided by BDCP. To offset this uncertainty, the state and federal governments may consider additional investments in BDCP consistent with the “beneficiary pays” principle. As is typical of projects of this nature and scope, the final financial arrangements may require appropriate approvals, contractual arrangements, and additional legislative authority. If adopted, these additional investments will be incorporated into the public draft BDCP and may modify the funding assumptions presented here.

It is difficult to interpret this language, but two things are clear.  First, the water contractors want the government to pick up more of the BDCP cost that is currently allocated to them, and are trying to use uncertainty as a justification.  Second, the costs of the tunnels may not be allocated among contractors proportional to the water received, directly contradicting the public statements of the Metropolitan Water District and opening the door to the urban subsidy of agricultural water.  This would be a major change, but is not unexpected to me or anyone else who long ago realized that the tunnel financing assumptions simply wouldn’t work. 

The notion that the decision tree construct requires a public subsidy to the water contractors is ridiculous.  The decision tree does not reduce water supply over what would be approved without it.  As I recall, the decision tree concept, which creates a structure to postpone water supply decisions to the future, was created last year because environmental concerns about BDCP were resulting in water supplies that were too low for the contractors.  It is hoped that the decision tree structure will be acceptable to environmental regulators today, and postpone water supply decisions to a later date when water contractors hope for a better outcome.  I don’t know that there is a scientific reason to expect a better outcome, but the framework certainly gives the water contractors a lot of leverage to apply political pressure on regulators to approve higher water supplies in the future. In other words, the decision tree itself is a creation to benefit the water contractors, and it is a poor justification for a public subsidy.  The decision tree creates the possibility of higher water supplies in the future, postpones the tough environmental decisions to the future, and puts enormous pressure on future environmental regulators to approve higher water supplies after the tunnels have been built and tens of billions of dollars have been spent and borrowed.

In the interest of transparency, it seems the government officials should disclose exactly what has been proposed and is being considered.  Without this information, it is fair to speculate.  I fear that the subsidy funds will not be appropriated in the near term since budgets are tight, and thus the subsidy funds will be triggered in some way if the decision tree leads to a low water supply outcome.  A budget trigger like that is enormously effective in applying political pressure to a regulatory decision.  The incentives in the decision tree framework are bad enough as it is, we don’t need to make it worse.

June 6 Note:  I also found it interesting that this new subsidy language is inserted in a document that also purports to demonstrate that the tunnels create great economic benefits (don’t believe it).  A few pages after this note about new subsidies, BDCP says tunnel financing isn’t a concern because the total costs are low relative total personal income in the region.  If the tunnels are such a great deal for the water agencies, why the call for a subsidy?

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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