Is The BDCP Doable—Redux, Part 1

Call me skeptical. After reading the California Debt and Investment Advisory Commission’s The Bay Delta Conveyance Facility: Affordability and Financing Considerations, my skepticism metastasized.

  • The affordability analysis buries the cost of BDCP water—although it creates the opportunity for teachable moments in economics. (Part 1)
  • three card monteIn contrast, the discussion of risk and financing considerations must be studied by anyone who has invested or intends to invest a nickel in the BDCP. (Part 2)

WARNING: you may regret your actions.

A Teachable Moment at Trader Joes

You are in the wine section with twelve bottles of “two buck Chuck” in your cart. Ignoring volume discounts, what is the cost of wine? $2 per bottle, right? As you stroll to the checkout stand, you see a $100 bottle of French wine. What is the cost of the French wine? Consider two choices:

  1. $100
  2. $7.69

You may ask what the *#@# is $7.69? $7.69 is the result of spreading the $100 cost of the French wine over thirteen bottles of wine.

As you consider purchasing the French wine, you notice a German wine for $50 dollars. Which is cheaper? Consider two comparisons:

  1. French wine is more expensive: $100 is greater than $50
  2. French wine is less expensive: $7.69 is less than $50

Common sense (and even economics) would select Answer A to both questions. Remarkably, the study selected Answer B. What gives?

Study’s Affordability Analysis

To quote the study, “(t)o estimate the resulting total cost for all water exports, we divide the total peak annual costs . . . by the water exports” (p. 23). In other words, annual BDCP costs divided by all State Water Project and Central Valley Project Deliveries, not by how much the BDCP is expected to increase water deliveries.

The study’s calculation is not about the cost of BDCP water. Instead, the calculation is about how much project water rates must increase if the cost of BDCP water is spread over all project water deliveries. However, suppose the BDCP is treated as a supplemental project. The water rate for BDCP water would not spread the cost of BDCP water over all project deliveries.

The study’s discussion of project alternatives is also flawed. It asserts that the average costs of BDCP water are competitive to recycling projects (ranging from $955/AF to $1,672/AF) and desalination (ranging from $1,194/AF to $2,257/AF)—p. 36. There are three problems.

First, the study compares cost of alternatives to BDCP costs spread over all project deliveries. As shown below, the relevant benchmark (BDCP costs per expected yield of BDCP) is substantially higher and approaching the range of costs for alternative projects.

Study Estimate of Peak Annual Cost/AF of BDCP Water*

Delta Scenario

Best Case Base Case

Worst Case

  Low Outflow




  High Outflow




* p. 25 

Estimate of Peak Annual Cost/AF of BDCP Water Based on BDCP Water Yield*


Delta Scenario

Best Case Base Case

Worst Case

  Low Outflow




  High Outflow




* adjust study estimates by ratio of BDCP yield to average project yield.

Second, the study ignores location. The BDCP water is at the Delta. The alternative projects are local and integrated into local regional distribution. A meaningful discussion must include the cost of conveying the BDCP water from the Delta and integrating into local regional distribution systems.

Third, the comparison does not consider the fact that BDCP water is not reliable and the alternative projects are. The study’s comparative framework is bunk.

The affordability discussion for agricultural water users is not encouraging for the BDCP. Again, the study makes the conceptual error of comparing payment capacity (table below) with their estimate of cost. Agriculture benefits from purchasing BDCP water if the payment capacity below exceeds the cost of the BDCP based on the BDCP water yield (table immediately above).   Oops. Not so.

Estimated Water Payment Capacity of Agriculture (2012$)

Crop Category












* p. 37

** p. 38

A Teachable Moment Channeling Warren Buffett

You are sitting in your home study in Omaha. A recent hire calls you about a merger negotiation involving one of your firms. Your firm is currently worth $100 billion. You are seeking to acquire a firm that you value at $25 billion. The new hire informs you that your $21 billion bid was just topped by another suitor who bid $30 billion. He recommends a counterbid at $35 billion. After all, your firm is worth $100 billion so you can afford to pay more. You patiently point out that if you bid $35 billion, the combined firm would then be worth $90 billion. Who hired this guy?

THE BDCP is at Best a Marginal Deal

The California Debt and Investment Advisory Commission study fails to show the economic viability of the BDCP. It obscures the cost of BDCP water by spreading BDCP costs over all project water deliveries, not the water yield of the BDCP. The BDCP is at best marginal in comparison to alternative new supply sources. German wine is indeed cheaper than French wine. The BDCP is generally underwater for agriculture in the absence of subsidies. Just because you are worth $100 billion, do not pay $35 billion for a firm worth $25 billion.

The BDCP’s future looks even dimmer after considering the study’s discussion of risk and financing considerations (see Part 2)


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About Rodney T. Smith

Rodney T. Smith, Ph.D., President of Stratecon Inc.—an economics and strategic planning consulting firm—advises public and private sector water users on the acquisition, sale and leasing of water rights and water supplies in the western U.S. He is routinely involved in economic valuation of water rights, water investments, and negotiation of water acquisition and transportation agreements and has served as an expert witness in the economic valuation of groundwater resources, disputes over the economic interpretation of water contracts, economics of water conservation and water use practices, and the socio-economic impacts of land fallowing. For more information, see