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«Fielding L. Greaves B.A., University of California, Santa Cruz, 2006 THESIS Submitted in partial satisfaction of the requirement for the degree of ...»

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EVALUATING CALIFORNIA WATER SUPPLY

COST-EFFECTIVENESS ANALYSIS

Fielding L. Greaves

B.A., University of California, Santa Cruz, 2006

THESIS

Submitted in partial satisfaction of

the requirement for the degree of

MASTER OF PUBLIC POLICY AND ADMINISTRATION

at

CALIFORNIA STATE UNIVERSITY, SACRAMENTO

FALL © 2011 Fielding L. Greaves

ALL RIGHTS RESERVED

ii

EVALUATING CALIFORNIA WATER SUPPLY

COST-EFFECTIVENESS ANALYSIS

A Thesis by Fielding L. Greaves

Approved by:

____________________________________, Committee Chair Robert Wassmer, Ph.D.

____________________________________, Second Reader William Leach, Ph.D.

______________________________

Date iii Student: Fielding L. Greaves I certify that this student has met the requirements for format contained in the University format manual, and that this Thesis is suitable for shelving in the Library and credit is to be awarded for the Thesis.

________________________________________ ____________________

Robert Wassmer, Committee Chair Date Department of Public Policy and Administration iv Abstract of

EVALUATING CALIFORNIA WATER SUPPLY

COST-EFFECTIVENESS ANALYSIS

by Fielding L. Greaves The debate over how to address California’s future water needs has generally split people into two main camps: those that think the state should move forward with new supply projects, including surface storage (dams) and desalination and those that believe the state should invest in conservation and efficiency measures first before we consider any other alternatives. State policymakers remain convinced of the need for new water supplies but are unsure of how to proceed given budget constraints related to the economic downturn. This thesis will analyze the existing body of economic and cost-effectiveness analysis for the three leading alternatives: water use efficiency, seawater desalination and surface storage. After evaluating the best available data on each alternative and case studies, I found that efficiency measures and surface storage are more cost-effective than desalination proposals which remain expensive relative to other alternatives.

_______________________, Committee Chair Robert Wassmer, Ph.D.

_______________________

Date

–  –  –

I would like to thank Professors Rob Wassmer and William Leach whose patience and encouragement helped me finish this thesis.

I would also like to thank my mother, Violet Gray, and Professor Daniel Montello who have instilled in me a respect for the importance of continuous learning throughout life and whose support made this possible.

Finally, I would like to thank the California State University, Sacramento, Public Policy and Administration Program for revolutionizing the way I think about politics and policymaking. The program complimented my other education and will enhance everything I go on to do in my career.

–  –  –

Dedication …………………………………………………………………………….. vii Chapter

1. INTRODUCTION …………………………………….………………………….. 1 Overview of Report …………………………………….…………………….... 9

2. LITERATURE REVIEW …………………………………………….…………. 12 The 2009 California Water Plan Update ………………………….………….. 12 The Pacific Institute ……………………………………………… ………… 15 Other Sources ………………………………………………………………… 18

3. METHODOLOGY …………………………………………………………….... 21

3.0 Cost-Effectiveness Analysis ……………………………………………... 21

3.1 Cost Information …………………………………………………………. 24

3.2 Demand Reduction Alternatives ……………………………… ………… 26

3.3 Supply Improvement Alternatives ……………………………………….. 27

4. COST-EFFECTIVENESS ANALYSIS ………………………………………… 29

4.0 Demand Reduction & Supply Improvement Alternatives ……………….. 29

4.1 Water Use Efficiency …………………………………………………….. 30 4.1.0 Agricultural Water Use Efficiency ……………………………………... 30 4.1.1 Urban Water Use Efficiency …………………………………………… 36

4.2 Desalination ……………………………………………………………… 46

4.3 Surface Storage …………………………………………………………... 54 vii

5. CONCLUSIONS ………………………………………………………………... 72 Appendix A …………………………………………………………………............... 80 Resources …………………………………………………………………………….. 81

–  –  –





Projected population growth in California, and other pressures on demand for water, makes improving access to water a top priority for state policymakers. The question facing state policymakers is: how can the state make the most of its limited water resources when confronted with choices between capturing additional water for use and conserving that water already in use? Debates over this question revolve around three key policy alternatives: conservation and improvement in efficiency, surface storage in new or expanded dam reservoirs, and desalination of ocean saltwater, a high-tech solution with unrealized potential and an uncertain future.

As late as 2010, the State of California faced serious drought conditions that earned a Declaration of Emergency in 2009 by Governor Schwarzenegger and designation of 21 counties as eligible for Federal Disaster Assistance. Despite a wet fall and winter in 2010, the state experienced three consecutive years of below average precipitation, depleting reserves and creating shortages around the state (Schwarzenegger, 2009). The trend accompanied a severe global recession and a deluge of serious environmental problems related to water shortage that prompted state officials to reduce allocations of state water for the state's major water users (Gorman, 2009).

Severe water shortages often exacerbate recessionary economies, which is especially the case in Central Valley agricultural counties hit hardest by water shortages and recent court decisions reducing water exports from the Delta (Stahl, 2009). In these counties millions of dollars of revenue was lost from the economy and tens of thousands of acres of farmland are fallow. Unproductive agricultural land also faces growing competition from suburban land development. Public revenue is also down, partly as a result of water shortage, contributing to the state budget deficit and creating ripple effects in communities around the state. Other sectors of the economy are also constrained by water shortage. Thousands of jobs have been lost as a result - in some agricultural communities at the height of the shortage, unemployment has reached 40% or more (The Economist, 2009). These are just a few examples of the harm of water shortage.

Shortages can quickly lead to emergency when unreliable or insecure water systems are poorly maintained or go unimproved to meet demand. To illustrate the costs of a water emergency, in the summer of 2008, the Spanish Government was forced to import emergency water rations, by tanker, for three months, to augment Barcelona’s drinking water supply for its 1.7 million residents (Keeley, 2008). It did this at a cost of about $34 million for 18 shiploads, each carrying about 180,000 liters.

On a marginal cost basis that comes to a staggering $100,000/acre-foot. An acre-foot (af) of water is the volume of water required to inundate one acre, equal to about 325,853 gallons. Typical California municipal water costs vary between under $100/af and up to around $1000/af. A few months of emergency water importation to the Los Angeles-Long Beach-Riverside Combined Statistical Area serving 17.8 million residents could cost hundreds of millions of dollars.

To confront the state's growing water crisis, the California State Legislature in 2010 approved a water bond and policy package that could dramatically reshape water operations in the state (California Department of Water Resources, 2009). California voters would have to grant final approval to the $11.14 billion bond package, a large portion of which would go to finance improvements to the state’s water supply system, and complete ongoing water projects in the Central Valley (p. 7). Before ballots were printed, key water bond supporters decided to withdraw the proposal in favor of gaining more time to develop their campaign and win public support (BizFed, 2010).

Financing large water supply projects will challenge state policymakers to identify and pursue those projects that maximize beneficial uses of water at the lowest cost. The demand for additional water supply is high, yet only $11.14 billion would become available for diverse water-related projects under the water bond – only a portion of that would be available for supply improvements and grants for demand reduction. Inevitably, major California water policy changes must be weighed against consideration of federal policy and broader questions of appropriateness of water use.

A large part of California’s water problem stems from the fact that agricultural water is not priced appropriately in California, frequently falling far below other types of water, resulting in overconsumption by agricultural water users. Instead of a water market, wherein all water users compete for access to water by sending and receiving price signals, most California water is obtained and earmarked for specific uses in government programs. This includes the Central Valley Project (CVP), operated by the US Bureau of Reclamation (BoR), which provides federally subsidized water to agriculture for irrigation under fixed-rate contracts for up to 40 years. Today, this wellintentioned policy devised in 1933 has resulted in artificially low water prices for agricultural water users (US General Accounting Office, 1994).

This is especially problematic because the CVP is the single largest owner of water rights in California, holding approximately 38% – water rights are the legal entitlement to a share of useable water and are usually attached to a source like a watershed, reservoir or river (Legislative Analyst’s Office, 2008). The General Accounting Office (renamed the Government Accountability Office in 2004) found that the fixed-rates were no longer working and that the revenue from the contracts do not cover the operation and maintenance costs and are insufficient to cover the repayment costs of the $1 billion capital costs of the project (p. 13). In fact, the vast majority of the capital cost remains unpaid today, highlighting the historical divergence between the price of the water delivered and the cost of production.

Historically, fixed water rates, those charged by the CVP to water districts and wholesalers, have ranged between $2-$10/af (p. 14). After the cost of conveyance and delivery is factored in by the district or wholesaler, the final price paid by farmers may rise substantially. Yet the final prices still remain below the actual cost of production and the price paid by other water users around the state – Central Valley retail agricultural water users frequently contract for water at prices of only $7-$150/af (p.

14).

This eventually resulted in the Reclamation Reform Act of 1982 which created new rate structures that reflect the operation and maintenance costs and the repayment of capital costs (p. 13). This has partially addressed the problem, but hundreds of millions of dollars remain unpaid, both for the capital cost, interest on that cost serviced by the federal government and operation and maintenance debt. The 1982 legislation requires new terms for fixed-rate contracts (upon renewal), chiefly that the cost of repayment of the capital cost costs be incorporated into the rates going forward and that the capital cost be completely repaid (without interest) by 2030 (p. 14). Operation and maintenance deficit costs are also to be included in the new “cost-of-service” rates. In 1997, it is estimated that “over one-fourth” of the original 40-year contracts will have become subject to the new rates.

Progress on federal water finance policy for the CVP only addresses part of the problem with agricultural water pricing relative to shortages. Because farmers are locked into actual contracts with the federal government, any modification could result in successful litigation based on claims that the United States breached its contracts – these lawsuits could even subject the federal government to claims for damages (p. 43).

Therefore, many aspects of CVP policy are unalterable in the near future to the extent that a large portion of 40-year fixed rate contracts remain on the books. As some costs were left out of the new rate structures provided for under the 1982 legislation, it is hard to imagine that CVP water will come into perfect market price parity in the next several decades. Still, the tremendous demand for water for other non-agricultural uses makes long-term planning around the potential for bringing more agricultural water into a market an important consideration for state policymakers.



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