Untangling Public Benefits of California’s Prop. 1

On November 4, 2014, California voters overwhelmingly approved Assembly Bill 1471, Water Quality, Supply, and Infrastructure Improvement Act of 2014, more commonly known as Proposition 1 or the Water Bond. This bill unlocked $7.12 billion in bond funds to pay for water projects throughout the state. Many aspects of the bill were written in rather general language, and this and subsequent pieces aim to unravel key elements of the bill.

Excellent descriptions of the full bill have been written by the Association of California Water AgenciesSPUR, and the Legislative Analyst’s Office, as well as others.

History and Current Status of Public Benefits of Water Storage in California

Public benefits are related to the economic definition of public goods. A good is considered public if the “consumption of it by one individual does not actually or potentially reduce the amount available to be consumed by another individual.” Examples are recreational water use, clean air, military defense, and the light emitted from a lighthouse. Government almost always funds public goods because individuals will fail to do so; the reason being is that the benefits of public goods are by definition shared by many people, so individuals have little incentive to pay for them.

Hence, enter the government, in this case, the state of California. Public benefits are very different from private benefits, which accrue directly to the groups that pay for the good and can control access to the use of the good (such as water distributed from a reservoir or a private road that requires an access code). A cost-sharing arrangement for water storage between the state (pays for public benefits) and local governments (pays for private benefits to local water customers) makes for sound fiscal, public, and environmental policy, yet it is a complicated affair, especially when it comes to doing the math.

However, public benefit provisions for California’s water storage projects are not new. Public benefits were also required back in 2012 with passage of the Safe, Clean, and Reliable Drinking Water Supply Act of 2012.At that time, the California Water Commission began developing methods for quantifying public benefits associated with water storage projects. Public documents on the California Water Commission’s website indicate that no final methodology on the quantification of benefits yet exists.

What Are Public Benefits of Water Storage?

The most recent California Water Commission draft (dated November 1, 2013) identifying types of public benefits required for state funding mirrors those included in 2014’s Prop. 1. I applaud the consistency! According to both the 2012 and 2014 water regulations, public benefit means an ecosystem, water quality, flood control, emergency response, or recreation benefit as defined and qualified by the act. The five types of public benefits of water storage for which the state will contribute up to 50 percent of the project cost, from AB 1422 (§ 79743) and AB 1471 (§ 79753), are as follows:

  1. Ecosystem improvements include changing the timing of water diversions, improvement in flow conditions, temperature, or other benefits that contribute to restoration of aquatic ecosystems and native fish and wildlife, including those ecosystems and fish and wildlife in the Delta.
  2. Water quality improvements include improvements in the Delta, or in other river systems, that provide significant public trust resources, or that clean up and restore groundwater resources.
  3. Flood control benefits include, but are not limited to, increases in flood reservation space in existing reservoirs by exchange for existing or increased water storage capacity in response to the effects of changing hydrology and decreasing snow pack on California’s water and flood management system.
  4. Emergency response includes, but is not limited to, securing emergency water supplies and flows for dilution and salinity repulsion following a natural disaster or act of terrorism.
  5. Recreational purposes include, but are not limited to, those recreational pursuits generally associated with the outdoors.

According to the Fresno Bee, state and federal water officials are examining five major reservoir projects in California:

  • Sites Reservoir in Colusa County, which would be filled by water pumped from the Sacramento River at a cost of $3.8 billion
  • Temperance Flat Reservoir on the San Joaquin River at a cost of $2.5 billion
  • Raising Shasta Dam to increase capacity at a cost of $1.2 billion
  • Raising the dam at Los Vaqueros Reservoir in Contra Costa at a cost of $1 billion
  • Raising the dam at San Luis Reservoir in Merced County at a cost of $360 million

Beyond public benefits, a number of locational, procedural, and project stipulations will ultimately determine the projects selected for funding by the Water Bond. The water commissions have been working on the public benefit guidelines since 2011 and plan to have a draft of the Strategic and Business Work Plan for the commission’s review at the January 15, 2015, meeting.

Doing the Math: Quantifying Public Benefits of Water Storage

Quantifying public benefits has a long history in economics in the United States. Such calculations are not straightforward because of the following:

  • Some public benefits have a monetary value. For example, flood control mechanisms’ contribution to reduced flood damage (related to the third benefit above).
  • Even for benefits with a monetary value, many assumptions are involved in the calculations. For example, for any single flood damage calculation, assumptions such as this one are required: I assume that once every five years, a rain event will produce 2 feet of water to overrun the river bank and result in $10 million of damage to local homes, agriculture, and businesses. There are dozens of these for each calculation.
  • Even more difficult is assessing nonmonetary benefits. For example, related to the fifth public benefit above, how should we calculate the benefit derived from a family’s day at the beach along a finely designed storage facility with recreational benefits?
  • In fact, economists have been working on quantifying nonmarket goods (such as a day at the beach) for some time and AB 1422 and AB 1471 will allow for nonquantifiable benefits with some restrictions. It is worth noting here that the first legal case where nonmonetary benefits were allowed as evidence occurred in the Exxon Valdez oil spill case in which “US citizen’s valuation of how much they were willing to pay to simply know that Prince Williams Sound existed in a pristine state” were admitted as evidence for assessing damages.

The California Water Board is continuing to develop its guidelines for quantifying public benefits and took a step back from publishing updates until Prop. 1 passed. As such, the stakes are high (>$10 billion!) for developing guidelines that are fair to all parties and yet do not place all projects and circumstances in an overly uniform process that does not make sense.

What Does This Mean for California’s Local Governments and Water Agencies?

Ultimately, a panel appointed by the California Water Commission will bear responsibility for deciding the eligibility of projects and the allocation of funds. The project evaluation panel will be composed of technical experts from the Division of Water Resources, the California Department of Fish and Wildlife, and the State Water Board. This will be done as a ranked system to determine priority of projects (and funds) per consultation with the Division of Water Resources and the California State Water Resources Control Board. As such, close attention to the agency’s methods and a well-documented articulation of benefits will be critical.

The winners of this process will be the consulting firms that grind out all of these monetary values, the citizens in the vicinity of the selected projects, and also the agencies that are not number one or two in line to present their cases. The net losers in the process will be the agencies that go first and endure the “growing pains” of the commission panel, the citizens in areas whose projects are not funded, and the consulting firm that receives the first red-stamped ”reject” on its client’s application.

I will continue to monitor and update readers on how Prop. 1 allocations will work. My company Valor Water Analytics is busy developing tools and information products to assist water agencies as they apply for grants and funds to support local water resource conservation and development.