Tuesday, 26 July 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.





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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