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The Economics of Ending Delta Water Exports versus the Peripheral Canal: Response

by Jay Lund, UC Davis and Ellen Hanak, PPIC
November 20, 2008 -- A recent note by Jeffrey Michael from the University of the Pacific[1] critiques the economic analysis in our recent Public Policy Institute of California report, Comparing Futures for the Sacramento-San Joaquin Delta and an associated technical appendix, arguing that we overestimate the costs of ending exports and underestimate the costs of a peripheral canal.

Costs of ending exports

Michael argues that the costs of ending Delta exports are on the order of $0.4 to $1 billion per year, significantly lower than our estimates of $1.5 to $2.5 billion per year.  To obtain these lower estimates, Michael makes some back-of-the envelope calculations to modify the results of our modeling analysis.  He focuses on two data inputs: population estimates for 2050 and the cost of seawater desalination.  He substitutes different values for these variables into our final cost estimates to produce his own estimates. There are several important limitations with Michael’s approach, which significantly bias his conclusions.

(1)   Population estimates: We used a 2002 UC Berkeley study with forecasts of population and land use for 2050 of 65 million.  Population projections are notoriously difficult, particularly for periods as far out as this.  Although the UCB projections are probably high for 2050 (the most recent Department of Finance projections anticipate 59 million by that year), they might not be so far off for 2060 – a time period relevant for our long-term analysis of Delta solutions.  For us, the importance of the UCB study, compared with other forecasts for California, was the ready availability of land use changes that accompany population growth.  For water use, these projections of land urbanization are needed to estimate accompanying reductions in agricultural land areas and water demands.  (If one wanted to overestimate costs, one would neglect to reduce agricultural land in response to urban growth.  Similarly, when Michael adjusts the urban demands downward using lower population estimates, he fails to take into account the implications for increased agricultural demand, thereby underestimating costs.)

(2)   Costs of desalination:  Our model uses a cost in 1995 dollars of $1,400 per acre-foot (af) for desalinated seawater, which converts to $2,072 in 2008 dollars.  Michael assumes an unsubsidized desalination cost of $1,000/af – a level unrealized in the US or Europe.  For decades, technologists have speculated that inexpensive commercial scale desalination technology would become affordable and commonplace soon.[2]  While costs have come down considerably, they appear to remain much higher than alternative water sources or even most economic losses from foregoing water use.  Visits to an actual recent large-scale desalination plant in Spain indicate that operating costs alone are about $450 to $600/af, for cases where brine disposal and coastal siting are non-controversial.  Capital costs (including an 85% subsidy from the European Union) come to about $2,300/af.  So total costs appear to be $2,700 to $2,900/af.  This is not promising.  The U.S.’s only sizable desalination plant is in Tampa, FL, which recently became operational after many years of problems.  Our estimated cost of about $2,000/af for seawater desalination might be a bit high, but could also be low if one considers the likelihood of substantial increases in the cost of energy over time.

Beyond these two data issues, Michael’s analysis highlights the limitations of back-of-the-envelope calculations, changing only one or two variables from a complex analysis.  The calculations we used to estimate the range of costs for ending Delta water exports involve millions of numbers, essentially re-operating California’s water system when its largest set of water intakes (the South Delta pumps) is eliminated. Any complex calculation to estimate future conditions will contain errors. In the Comparing Futures report and many background papers and reports on the CALVIN model over the past ten years,[3] we routinely discuss the limitations of our work.  Usually when people take issue with the results, it is from thinking our cost estimates are too low.  And there are reasons to think that cost estimates from optimization models should tend to be low, because they assume perfect foresight and absence of institutional obstacles to choosing the most cost-effective solutions.

The following table presents a short list of areas of common concern for our analysis of costs for ending Delta water exports, with some thoughts on how each factor is likely to affect the total cost of ending water exports.  On balance, there are reasons to think that our cost estimates might be too high or too low.  (Only lucky or trivial models are perfectly accurate.)


Likely Direction

Likely effect on total cost

Population growth

Could be high or low, more likely high


Per capita urban water demands

Probably high


Agricultural water demands

Probably low (too much urbanization of farm land)


Desalination costs

Could be high or low by several hundred dollars per acre-foot


Wastewater reuse costs

About right


Urban water conservation costs and benefits

Possibly too high for small shortages


Agricultural water conservation costs and benefits

About right


Water market transaction costs

Costs are definitely higher

Increase substantially

Perfect foresight

Model knows more than is possible for floods and droughts

Increase costs for drought somewhat (groundwater access reduces this problem)

Water quality costs

Might be higher or lower


Agricultural land retirements

Might be higher or lower


Recreational fishing

Not included

Unsure.  Might not systematically be affected by exports over long term

Climate change

Not included in these model runs, but examined in other CALVIN runs

Can increase substantially for a drier climate

Costs of a peripheral canal

We use a capital cost estimate of $4.75 to $9.75 billion – estimates based on recent engineering analyses presented in a 2008 Department of Water Resources report, inflated by 20 to 30 percent to allow for cost overruns.  These are the most up-to-date cost estimates for a canal, and the difference relates to construction on the eastern or western edge of the canal (the latter being more expensive but potentially providing greater long-term benefits of adaptation in response to greater sea level rise).  It is certainly possible that the costs of a canal could run higher; in this case, water exporters, who will be expected to pay for the facility, would have less incentive to seek a canal as an alternative to the status quo (with the ultimate prospect of no exports).


In sum, we find differences in costs between ending Delta water exports and a peripheral canal (even at a significantly reduced level of exports) on the order of $1 billion/year, a large number.[4]  It would take an improbable confluence of one-sided errors to significantly narrow this gap.

For those unused to modeling, two alternative lines of reasoning without complex models lead to the same conclusion:

(1)   At a recent (pre-drought and pre-Wanger decision) market price of water exported through the Delta of $150/af and about 6 million acre-feet per year of water exports, the loss to the California economy of ending water exports would be $900 million/year.  Since the market price is a marginal price for the last (cheapest) unit, this is a lower bound estimate, and yet it is higher than our highest estimated annualized cost for a peripheral canal.  For some water users, the value of Delta water is significantly higher – for instance, farmers in the San Joaquin Valley are paying roughly $300/af to purchase water this year – suggesting that the overall value of water exports to the state’s economy is significantly higher.

(2)   Why would export water users be pursuing a peripheral canal if ending exports were cheaper?  If ending exports were less expensive than a peripheral canal, export users would have little reason to still be engaged in the Delta.

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[1] “The Economics of Ending Delta Water Exports Versus the Peripheral Canal: Checking the Data of the PPIC,” October 23, 2008.

[2] See White, G.F.,1966, Alternatives in Water Management, Publication 1408, National Academy of Sciences, National Research Council, Washington, DCand Wiener, A., 1972, The Role of Water in Development, McGraw Hill, NY.

[4] Our annualized cost estimates for a peripheral canal range from $0.25 billion to $0.85 billion.