Changing the Baseline: The Biggest Problem in the New BDCP Economic Rationalization of the Tunnels

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Valley Economy

Changing the Baseline: The Biggest Problem in the New BDCP Economic Rationalization of the Tunnels

By Dr. Jeffrey Michael

Originally published Tuesday, June 11th

Both environmental assessments and economic assessments of proposed major infrastructure critically depend on a baseline or no-action scenario.  This scenario defines the conditions that are expected if the project is not built and is used as the basis of comparison for the projects impacts.  The same no-action scenario should be used for environmental, economic and financial feasibility assessments.  However, the latest BDCP documents use a different baseline for the economic analysis than the environmental impact report (EIR).  When analytical consistency gets in the way of rationalizing the tunnels, BDCP just switches the baseline.

The BDCP EIR no-tunnel (i.e. no-action) scenario makes the reasonable assumption that through-Delta operations would continue under the current pumping constraints imposed by the Endangered Species Act through “biological opinions.”  The EIR no-action scenario estimates average water exports at initial operations of about 4.7 million acre feet (MAF) per year at initial operations declining to 4.4 MAF towards the end of the 50 year permit.  The EIR estimates that with the tunnels, water exports would be 4.4MAF to 5.3 MAF in the “late long term,” a change of between 0 MAF and 0.7 MAF per year.

In contrast, the economic analysis assumes that without BDCP, additional ESA regulations would bring even tougher restrictions on water exports between now and 2025 such that average water exports at initial operations would be 3.4 MAF to 3.9 MAF.  Thus, building the tunnels would increase water exports by between 1.3 MAF and 1.7 MAF per year compared to no action.  In other words, the economic analysis assumes that without the BDCP tunnel plan, ESA regulations would add another 20-25% cut to water supplies on top of current limits.  Never mind that no such plan has been proposed, and that the California Department of Water Resources (DWR) and the water contractors are trying to weaken the current restrictions in court.  Clearly, DWR has no sincere intention of implementing this more restrictive scenario, they are just conveniently adopting it for the economic analysis to rationalize building the tunnels.

This switch of the no-tunnel baseline is probably the most serious of several problems with the BDCP economic analysis, and it will create some very practical headaches for the BDCP.  The fish and wildlife agencies that have to approve BDCP will certainly ask why the financial feasibility analysis depends on assumptions that are inconsistent with the EIR, and if DWR is actually proposing such restrictive operations on exports in the absence of BDCP.  The inconsistency also gives BDCP opponents another issue to use in lawsuits, and it could even undermine the water contractors case in their existing litigation over the biological opinions.

Considering all the problems the state is creating for itself with this shift in baseline, why would they do it?  Because they can’t demonstrate financial feasibility without it.  Using the BDCP’s own estimates of costs and benefits, I demonstrated a year ago that the tunnels can not be financially or economically justified by comparing them to the no-action scenarios of the draft EIR.  The sleight of hand with the shifting baseline is simply a clever, hidden way to bring back the “value of regulatory certainty” argument the state attempted last summer (see this blog post from last July, and this  one from January where I worried that they might try this baseline shifting stunt).

The shifting baseline creates problems for the BDCP environmental approval.  Why?  If this more restrictive baseline were used for the EIR, the tunnels would almost certainly fail the EIR analysis.  The tunnels could not be justified as a Habitat Conservation Plan (HCP) under the ESA since the no-tunnel scenario would be more protective of endangered and threatened species than the proposed tunnel project.  [See Matt Weiser’s article in Sunday’s Sac Bee for a discussion of how the EIR finds the tunnels are not even anticipated to benefit endangered fish species compared to current conditions (i.e. the EIR baseline).]

In addition to the EIR, the tougher baseline assumption would create problems for a true statewide benefit-cost analysis.  The recently released economic analysis only considers the benefits and costs of the tunnels to the water contractors.  In contrast, a statewide benefit-cost analysis would include benefits and costs to the environment and to other effected parties in-Delta, upstream, and fishing.  While the baseline shift creates water supply benefits from the tunnels for the contractors, the increase in water supplies raises the tunnels’ costs to the environment and these other parties.  Thus, the change in assumption that increases the tunnel’s water supply benefits helps financial feasibility to the contractors, but would hurt the tunnels comprehensive benefit-cost justification.

I think this maneuver is a major reason why the BDCP cancelled the benefit-cost analysis and postponed the planned release of chapters 8 and 9 by a month.  It is also a sign of how the BDCP is going to increasingly desperate measures to keep their sinking project afloat.

Dr. Jeffrey Michael is Director ofEberhardt School of Business, University of the Pacific.

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