13 September 2010

How bad projects get built

RM sent me the "Review budget for Bay Delta Conservation Plan and Delta Habitat Conservation and Conveyance Program" [pdf] that the Metropolitan Water District of Southern California (Met) has prepared.

I was interested to see that Met assumes it will pay less than 25 percent of short- and long-term project costs.

So who's going to pay the other 75 percent? Farmers who participate in the CVP and SWP and take 75 percent (let's assume) of the water from those two projects.*

Now, I don't know about you, but I don't have many examples of farmers paying the full cost of water infrastructure.

What if they don't pay? Well, then Met will pay the difference. Does that make sense? Yes, it does to Met, since their 25 percent share of the water is worth far more than 25 percent of the value of that water in use. In other words, Met will probably end up paying a larger share of the total cost because Met gets more value from the water.**

So here's my thought: If Met's directors believe these estimates and fund this project, and the project gets going, then they will have a hard time NOT spending more money when it comes time to pay a larger-than-25 percent share. That's because it's hard to shut projects down once they get started.

If Met's Directors knew this today, they may not agree to initial funding, since the cost-benefit of a project with higher costs would be less favorable.

What would they do instead? Conserve water (via better prices and markets) and get more supplies from desalination and reclamation.

Would Met's pursuit of efficiency and self-interest be welcomed? Not by farmers counting on cross-subsidies from Met, and not by rural politicians who want urban water users to subsidize their constituents.

Bottom Line: Make sure you know all the costs before you spend the first dollar. If those costs are too high, look for alternatives. (Bumper-sticker version: Don't spend $5 for something worth $2.)
* Why are contractors paying for the Delta restoration? Because a restoration that excludes water exports would hurt them. For more on conflicting restoration choices, read my paper on the Delta [pdf].
** Water markets would make this guesswork unnecessary, but politicians and bureaucrats prefer to control water allocation.

7 comments:

  1. ".... but politicians and bureaucrats prefer to control water allocation."

    That would be first stage economic thinking by politicians and bureaucrats which in fact fits their political and bureaucratic time horizons (Thomas Sowell.

    Sowell's "first stage economic thinking" was basically proposed by Frédéric Bastiat in 1849:


    "In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.



    There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."

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  2. PS emails: "The monetary cost of ocean desal to replace 1.5 million acre feet of water lost from a collapsing Delta for MWD would be about $10 billion and would produce water at about $1,500 an acre foot. In addition the MWD distribution system which gets smaller as it approaches the Coast would have to be rebuilt. On top of that MWD would be committed to continue to repay the Revenue BOnds issues to build the State Water Project. So the cost to MWD for a Delta fix is a real bargain. The cost of recycled water is about half or desal and the amount is over projected unless folks agree to drink it straight from the tap. (not likely for some time!) Finally, the State project shuts down during peak power needs while generating hydro power at the same time - saving us from building a number of new power plants that further increase costs, not to mention green house gases. Seems like a predetermined outcome has gotten in the way of in depth THINKING about this subject!

    By the way, Kern (25% payer), Westlands (about 25%) and the Bay area folks (most of the rest) appear to be willing to pay. A fixed Delta would provide water at about the cost of water during 2008-9 when they had small deliveries upon which to spread the large fixed cost of the existing system. "

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  3. @PS -- Not exactly. You are taking demand as given and immobile.

    Have you looked into the cost of reduced demand as a means of ending shortage?

    You're also ignoring cost overruns and lawsuits. The Delta "fix" will not happen in < 10 years, if at all. Enviros want exports ENDED.

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  4. Right. The move to markets and prices would benefit one here, and in most areas of water management.

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  5. PS emails: "I probably know as much about demand reduction as any in the State. That said, even if MWD reduced their future demand by 500,000 acre feet (25% over current levels) they would not be able to refill storage after extended dry periods and would still need a working Delta connection for about 1 million acre feet. My assumption is there will not be a Delta supply unless it is fixed. The State economy then quickly goes back to a 1950's economy, massive unemployment, failed governments, armed conflict, etc. Now what kind of planning is that? We drive the remaining business out of California, shut down half of the San Joaquin farming, significantly reduce tax revenue, massive decrease in the quality of life and turn the US into a third world country. What a victory the NGO's will reap!! Explain that to their kids!!

    The Delta fix will happen when the Delta fails! It will take about two years to build. At the end of the two years most will understand the error of their ways, the unnecessary suffering, but quickly forget it. California without a reliable water supply is much like any animal without a reliable air supply. Ironically, in a major failure, it will be the folks in the Bay area that will lose supply first. What a wake-up call that will be.

    All the folks that claim to be planners but who have been blinded to reality by their feelings rather than the facts should open their eyes before they do great disservice to the people. "

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  6. @PS adds: "Enviors want to kill themselves. The point of my comment was to take issue with the article that claimed that the other contractors will not pay their share and MWD will end up paying for the whole fix , that is just BS. They will pay because the simple economics works that way. "

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  7. @PS -- (1) Fifty percent of Met's water is used for outdoor irrigation. Your apocalypse is likely to resemble dead brown lawns.

    (2) A delta diversion does NOT equal reliable. Climate or environment or lawsuits make that so.

    (3) Simple economics says that they will give campaign contributions to get others to pay for their share.

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