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Economic Analysis and Water Planning

Need for Ecomonic Analysis Improvement
In December 2000, a group of noted resource economists from across the state gathered to discuss the use of economic analysis in the regional planning process. The economists noted in their report summarizing the conference that rule changes should be developed to incorporate "the use of appropriate economic principles in Senate Bill 1 Water Planning at the regional and state-wide levels." They also state that:
The result of not incorporating valid economic theory into water resources planning assessments is that some projects may appear to be the best choice on the surface, but in reality may not be optimal once all the economic realities are considered. In fact, projects may actually not have benefits that exceed costs, but this cannot be determined without comprehensive benefit-cost analysis and use of discounting procedures. Without incorporation of these basic principles, it is hard to divine any meaning or significance of a project's being "in the region's plan."

Because full economic analysis of all projects proposed in the regional plans has not been performed, we simply cannot say: 1) that any individual project produces benefits that are greater than its costs, or 2) that any project produces greater benefits than other projects (for the same amount of investment).

Basic Economic Principles

There are several economic principles essential to water planning. Failure to incorporate each of them on a consistent basis can lead to improper selection of water projects.

  1. Discounting costs and benefits over the life of the planning horizon to estimate the present value of a project. Discounting is the only way to accurately compare and evaluate projects that incur costs and benefits at different points of time.

  2. Closer examination of the relationship between user demand and price, especially considering the reaction of quantity demand to water prices and the opportunity to transfer water from one use to another. The current planning regime often treats demand as a static concept and does not adjust demand forecasts to account for rising water prices or alternative patterns of water use.

  3. The definition of a drought and the way the probability of drought is distributed over the 50 year planning horizon. The current planning protocol appears to overestimate the expected severity and frequency of drought conditions. This would exaggerate the benefits of water development projects and could result in wasteful investment of limited funds.

  4. Analysis of the cost and benefits of individual projects. Unless cost-benefit analysis is conducted for individual projects, a regional or state plan may actually consist of several good projects that subsidize other projects where the benefits do not outweigh costs. More efficient use of scarce water resources and water development funds requires funding only the specific projects that generate positive benefits.

  5. Costs and benefits should include impacts on environmental values such as instream flows, bays and estuaries, and recreational values. Current plans do not evaluate the impact of water development projects on environmental values. This has the effect of underestimating the cost and/or overestimating the benefits associated with a particular project.

The Value of Water

When water is treated as a marketable commodity, questions arise as to how to set its value. It is possible to tally up the going rate for an acre-foot of water, treatment costs, associated piping, etc. But treating water as a simple commodity like oil or livestock is too simplistic. It's value runs deeper and includes preserving our cultural heritage, the rural economy and way of life, and more tangible aspects such as maintaining soil moisture levels, springflow, and base-flows for rivers and streams. It is extremely difficult to quantify these values on the same scale as the price municipalities are willing to pay for water supplies.

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Report: Economic Principles for Sound Water Planning
Environmental Defense, 2003