MWD’s WaterFix Cost Assessment is Inaccurate and Inadequate

The Metropolitan Water District of Southern California (MWD) released its final white paper on paying for the California WaterFix project yesterday. Based on my initial review, as discussed below the white paper relies on two inaccurate assumptions, which significantly bias the analysis and conclusions and provides the Board of Directors with misleading and inaccurate information.  An accurate assessment of costs and cost allocation is critical for the Board of Directors to exercise their fiduciary duty to ratepayers across Southern California, as they decide whether to commit billions of dollars over the coming decades in higher water rates and property taxes, to pay for WaterFix. MWD’s white paper provides a wholly inadequate basis for the Board of Directors to exercise that fiduciary duty. MWD’s Board of Directors should demand an external review of the memo (for instance, the Westlands Water District had Goldman Sachs provide a presentation to their Board of Directors), and more time to consider the pros and cons, before making a decision on whether to fund the tunnels. 

Inaccurate assumption #1: SWP will pay 55% of the cost for WaterFix. 

MWD’s memo claims that there will be a 55%/45% split of SWP and CVP cost allocation for WaterFix. This is almost certainly inaccurate and significantly understates the cost allocation for the State Water Project and MWD. Because the Bureau of Reclamation is not intending to opt into WaterFix (see USBR's memorandum regarding CVP contractor participation in WaterFix), two groups of CVP contractors will continue to get nearly 20% of the total average water exports from the Delta, but will not pay for WaterFix: the San Joaquin River Exchange Contractors (875taf/year), and south of Delta wildlife refuges (271taf/year). As a result, the SWP’s share of WaterFix cost allocation is likely to be at least 65-75%, generously assuming all other CVP contractors opt in, based on the SWP’s share of the remaining Delta water exports. 

This is not a new problem. In a 2015 cost-benefit analysis commissioned by the State of California, David Sunding “assume[d] that the federal government or some other entity makes a roughly $3.9 billion contribution to the capital and operating costs of WaterFix to cover the costs allocated to the exchange contractors and refuges. If these costs must be borne by the other Delta water users, then the net benefits of the project are even more negative for agricultural contractors.” Because the federal government will not be paying these costs, the SWP and MWD will have to pay a higher share of the total costs of WaterFix. In a prior blog I explained why Goldman Sachs’ presentation to the Westlands Water District, which similarly failed to account for the costs associated with Delta exports to the Exchange Contractors and wildlife refuges, was also inaccurate.  

This incorrect assumption has major implications for MWD member agencies. Instead of paying for 26% of total WaterFix costs, assuming that all other SWP and CVP contractors opt in, MWD is likely to pay a minimum of 32-35% of the total cost. This incorrect assumption is likely to increase the cost to MWD and other SWP contractors by nearly 30% compared with what MWD presented in its white paper. 

In addition, MWD’s memo largely ignores what happens if other contractors opt out (USBR’s Participation Memo assures CVP contractors that they will not suffer any water supply impacts or financial impacts if they opt out of WaterFix). If other contractors opt out, then the share of those contractors who opt in would necessarily have to increase. Similarly, the prior financial analysis for the California Treasurer’s office also noted that the contracts will have to include provisions to deal with contractors defaulting or opting out later (step up provisions), as well as provisions to deal with how agricultural contractors can afford to pay for the project in dry and drought years when they get little or no water from the Delta. And if the contractors decide to capitalize interest payments during the construction period (as some other analyses have assumed), this would also increase the repayment costs. All of these factors are likely to result in additional fiscal impacts that MWD ignores.

NOTE: MWD and other SWP contractors apparently have been meeting with the Bureau of Reclamation and CVP contractors for months to discuss WaterFix cost allocation, but they have refused to make any of those documents publicly available.  NRDC filed a request for these documents under the Public Records Act on April 10, 2017, but the California Department of Water Resources has repeatedly delayed providing any documents in response to our request. 

Inaccurate Assumption #2: WaterFix will increase water supply by 1.3 million acre feet.

MWD’s memo asserts that WaterFix would increase water supply by 1.3 million acre feet per year, with MWD getting 337,000 acre feet of additional water supply per year.  In contrast, the final EIS/EIR for WaterFix estimates that the State Water Project would increase exports by 186,000 acre feet, and the Central Valley Project would reduce exports by 14,000 acre feet, for a total increase of 172,000 acre feet per year.  Of course, one could ask why CVP contractors would agree to pay half the cost of a project that reduces their water supply, but we’ll ignore that problem for now. 

MWD member agencies should be alarmed by MWD’s continued use of this fake baseline to estimate water supply costs. Why are staff hiding behind fake numbers, and refusing to use the numbers in the EIS/EIR to calculate per acre foot costs? MWD’s continued use of these false numbers to compare with other water supply options is false and misleading. Indeed, MWD’s use of this fake baseline to estimate increased water supply might be considered fraudulent if it was asserted in an official statement for a bond or other financial document.

In contrast, if we use MWD’s estimated $207M annual cost for WaterFix (ignoring incorrect assumption #1 above), and assume that MWD gets 47.13% of the 186,000 acre feet per year increase in SWP exports from the final EIS/EIR (fixing incorrect assumption #2), then the cost per acre foot is approximately $2,361. Even ignoring incorrect assumption #1, fixing incorrect assumption #2 shows that the cost per acre foot is nearly four times the cost estimate in MWD’s memo. If we were to try to fix incorrect assumption #1 and incorrect assumption #2, the costs would skyrocket.

Conclusion #1: WaterFix is less cost effective than local water supply projects.

Contrary to MWD’s incorrect assumptions and assertions, WaterFix is more expensive than other local water supply projects. As shown above, even without fixing incorrect assumption #1, fixing incorrect assumption #2 shows that the cost of WaterFix is more than $2,300 per acre foot, significantly more expensive than the cost of local recycled water projects and is nearly the same as desalination. There are numerous local water supply projects that MWD Member Agencies have identified in their urban water management plans, which will enable Southern California to reduce reliance on the Delta, increase drought resilience, and help protect the economy and environment. Below are just a few examples of projects that are significantly cheaper than WaterFix:

Conclusion #2: MWD’s White Paper provides an inadequate basis for the Board of Directors to make this major fiduciary decision.

MWD’s Board of Directors has a fiduciary duty to the millions of Southern Californians who would have to pay for this project. If WaterFix is approved, Southern Californians will pay for the project for decades; that’s true even if they don’t use any water from the Bay-Delta, since MWD has assumed it will collect more than $100M per year in property taxes across the region to pay for WaterFix. The Board of Directors must have an accurate assessment of the costs and cost allocation to make this decision. In addition to understanding what the actual cost of WaterFix is likely to be, the Board of Directors must also decide whether WaterFix is a better investment than other water supply projects, and whether paying for the tunnels precludes more cost-effective investments in local and regional water supply projects that the member agencies have planned in their Urban Water Management Plans. MWD’s white paper fails on all counts.

Ultimately, MWD’s White Paper on Cost Allocation is misleading, inaccurate, and an inadequate basis on which to decide whether to spend billions of dollars over the coming decades. If I were on the Board of Directors of MWD, I would demand an independent review and significantly more time to weigh the pros and cons of this momentous decision.