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MEMORANDUM Project No.: 090045-009-01 December 21, 2012 To: Dave McClure, Klickitat County Adam Fyall, Benton County Bruce Beauchene, City of Kennewick cc: WRIA 31 Planning and Advisory Committee From: J. Ryan Brownlee, PE Senior Water Resources Engineer Daniel R. Haller, PE Associate Water Resources Engineer Timothy J. LHG, CGWP Principal Hydrogeologist Re: Initial Benefit – Cost Assessment for Water Allocation Options, Switzler Reservoir, Horse Heaven Water Storage Appraisal Assessment, WRIA 31 Funded by Ecology Grant No. G1100215 Introduction This memorandum presents an initial evaluation of estimated costs and economic benefits under a range of potential scenarios for allocating a new water supply from the proposed Switzler Reservoir, and is presented for review and discussion with the WRIA 31 Planning and Advisory Committee (Advisory Committee). Based on Advisory Committee input, a refined water allocation scheme will be included as part of the Phase 2 Report for the appraisal assessment, taking advantage of refined project cost estimates that are currently in preparation. This initial evaluation included limited coordination with economists from Washington State Department of Ecology (Ecology) and Washington State University (WSU), and application of industry-standard tools for estimating economic benefits associated with large-scale infrastructure projects. However, it is not intended as a detailed economics evaluation for the Switzler Reservoir water storage project (Project). It is intended to provide a starting point for discussion regarding how best to allocate the potential new water supply, and a first-cut fatal flaw analysis of Project economics consistent with the other technical analyses of the Phase 1 appraisal assessment. More detailed economic evaluation will be necessary should the Project proceed beyond this appraisal phase. This assessment is part of Task 1.4 under the WRIA 31 Horse Heaven water storage appraisal assessment funded by Washington State Department of Ecology’s (Ecology) Office of the Columbia River (OCR). earth+w a t e r Aspect Consulting, LLC 401 2nd Avenue S. Suite 201 Seattle, WA 98104 [PHONE REDACTED] www.aspectconsulting.com ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 2 Summary of Findings The proposed Switzler Reservoir storage project (Project) involves the creation of a new 44,000 acre-foot surface water impoundment in Switzler Canyon approximately 1-mile upstream of the Columbia River. The proposed new infrastructure includes an earthen dam approximately 325 feet tall with a crest length of approximately 2,000 feet. The construction also includes pumping, conveyance, and environmental mitigation improvements. Project costs are currently estimated at approximately $281 million (capital) with additional ongoing (annual) operations and maintenance (O&M) costs estimated at $4.5 million (Aspect and Anchor QEA, 2012). Considering both capital and O&M on a per-year amortized basis, annual project costs are estimated at approximately $17.5 million ($427 per acre-foot, per year). It is believed that this cost ($427 per acre-foot, per year) exceeds what the market may bear for pricing of water in the form of reimbursement through local recipients. Therefore, due to the scope and scale of this Project; grant funding from regional, state, and possibly federal sources will be required to augment local match funding1. A process which estimates the Project’s resulting economic benefits places initial bounds on the magnitude of public funding which could be reasonably justified. The difference between the total Project cost and magnitude of public funding provides a ‘balance’ that represents the estimated cost (price) to be borne by prospective users of the stored water. Should that resulting balance equate to a value sufficiently low such that the market could bear, then the total cost is not a fatal flaw for Project development. This memorandum lays out a preliminary process using two different economic tools (methodologies) to estimate Project benefits across various water allocation scenarios that may be preferred by the WRIA 31 Planning and Advisory Committee. These tools mimic those used by public water resources agencies to make decisions about Project economic viability. The results indicate that there are economic benefits that sufficiently approach (or exceed) current estimated Project cost levels. In other words, there are several likely scenarios that could be justifiably funded with a mix of public and private funding. Based on this appraisal-level evaluation, Project economics are not identified as a fatal flaw. However, more detailed economic evaluation will be necessary should the Project proceed beyond this appraisal phase. Summary of Economic Evaluation Methodologies Although the new reservoir would have a maximum storage capacity of 44,000 acre-feet, the project would create an estimated 41,000 acre-feet of new mitigated supply2. New mitigation water could be used to appropriate new water rights for multi-purpose uses. The project involves putting water into storage, and establishing mitigated water rights for use of the stored water (indirectly). Distribution and use of most of the stored water exercising the mitigation water rights) will likely be directly from the Columbia River rather than directly from the Switzler Reservoir. The stored water provides a new seasonal water supply that could: 1 For example, rate or connection charges from municipal beneficiaries, assessments from irrigators, and drought leases by interruptible water users. 2 41,000 acre feet would be supplied with over 90% reliability based upon Columbia River water availability. In some years, new water supply would be curtailed to approximately 31,000 acre-feet This would occur on an approximate frequency of 1 in 10 years. ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 3 Mitigate for interruptible water rights during drought years (sustaining current agriculture, and providing mitigation water for exercise of the Quad Cities municipal water right). Mitigate for new water rights (expanding the agricultural economy or benefiting new municipal growth). Improve instream flows and habitat in Switzler Canyon of the reservoir and in the mainstem Columbia River. During the irrigation season, water stored in the Switzler Reservoir would be released back to the Columbia River or directly pumped from the reservoir by nearby irrigators using their systems. Water released from the Switzler Reservoir back to the Columbia River could mitigate for diversions from McNary Pool, John Day Pool, or any reach of the mainstem. Due to the scope and scale of the proposed Project, it is anticipated that grant funding from regional, state, and possibly federal sources will be required to augment local match funding. The level of public funding is directly related to the public economic benefit derived. For projects involving substantial public funding, the standard practice for justifying such funding is through the implementation of a benefit-cost assessment (BCA). To justify complete grant funding, the BCA must yield a result in which project benefits exceed costs borne by the public (B/C ratio greater than 1.0 [at a minimum]). Public agencies such as Ecology, Bureau of Reclamation, and US Army Corps of Engineers use various input-output models to perform BCA on projects which they consider for funding. A thorough BCA which evaluates multiple economic market sectors in detail is beyond the scope of this appraisal assessment. However, to provide meaningful information for decision making at this stage, a high-level assessment of potential public benefits has been performed using BCA-type methodologies. Estimation of the Project’s economic benefits places initial bounds on the magnitude of public funding which could be reasonably justified. Having an estimate of public funding for the Project, combined with estimated total costs of the Project, provides, by subtraction, a first-cut estimate of the cost (price) to be borne by prospective users of the stored water per acre-foot). If that prospective cost is what the market will bear what cities charge for developing new water supply, what irrigators pay to bring water to their property, and what interruptibles will lease water for), then the total cost is not a fatal flaw for project development. For this initial assessment, two complimentary tools (methodologies) have been employed to estimate benefits: The first methodology is similar to an economic development (NED/RED) input-output economic model employed by federal agencies such as Bureau of Reclamation and the U.S. Army Corps of Engineers to quantify economic benefits of project proposals on both national and regional scales (Method Using this method, various scenarios of water allocation among a variety of project beneficiaries (agricultural, municipal, and environmental [instream benefit]) were considered and economic values for each beneficiary group were estimated. The second methodology estimates the economic effects related to property values and jobs created at the State level as a result of the Project (Method This method is primarily used by Washington State Department of Ecology’s (Ecology) Office of the Columbia River (OCR) in evaluating economic viability of prospective State-funded projects. Ecology’s OCR utilizes the Washington State Office of Financial Management (OFM) ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 4 2002 Input-Output model which has been tailored to account various sectors in the Washington State economy specifically. In employing each method, economist Mike Brady of Washington State University (Method 1) and economist Kasia Patora of Washington State Department of Ecology (Method 2) were consulted. Both methodologies seek to compare economic benefit to project costs in terms of “present value”, that is, the present-day value of the complete stream of benefits and costs throughout the project life span. For planning purposes on this Project, we assumed a Project life of 100 years and a discount rate of 4.0%, which is the current discount rate assumed for federal water resources projects for fiscal year 20123. Final water pricing will be driven by two elements: 1) the balance of costs which are in excess of non-reimbursable public grant funding sources; and 2) market forces. For example, should available grant funding cover only 75% of the Project costs, the remaining 25% of the costs would be recovered through pricing of mitigated water rights (subject to willingness/ability to pay). Ultimately, a water allocation that maximizes economic benefit while meeting Project objectives, including environmental benefit, is optimal. Summary of Potential Economic Effects This section briefly summarizes the results of the BCA. Subsequent sections provide additional detail regarding the estimated Project costs and benefits. Estimated Project Cost Project costs include both capital (planning, design, and construction) and ongoing operations and maintenance (O&M) costs total approximately $304 million (present value) based upon current estimates. Estimated Project Benefits Method 1, Economic Development, Input-Output Methodology Six scenarios were developed to illustrate potential economic development impacts related to water allocation (see Table Each water allocation scenario represents a different mix of water appropriation between the various beneficiary groups considered (agricultural, municipal, or instream). Scenarios 1, 2 and 3 represent ‘extremes’ which allocate the full supply to individual beneficiary groups. These scenarios are not intended to represent the most likely outcomes, but rather illustrate the magnitude of variation between the potential beneficiaries under various extremes. In contrast, Scenarios 4, 5 and 6 seek to illustrate more balanced allocations. That is, scenarios which provide water supply to multi-purpose beneficiaries. For example, Scenario 4 divides the 41,000 acre-foot supply evenly between three groups; new agriculture, municipal and instream. Scenario 6 is similar to Scenario 4, with the exception that drought supply related to interruptible agriculture is included, and at an equal proportion to new agriculture, municipal, and instream. Scenario 5 illustrates the economic impact of allocating the full supply to agriculture (50% new/50% interruptible). Using economic development input-output type methodology, the estimated present value of overall project benefits for six assumed water allocation scenarios range from approximately $19 3 ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 5 million to $1.2 billion. The range is broad, representing “book end” conditions across a range of choices that the Advisory Committee may endorse and for which funding may be available. The scenarios selected as part of this study range from those focusing on one beneficiary group (scenarios 1, 2, 3 and 5) to the exclusion of others agriculture over municipal or vice versa), to more balanced scenarios where the storage benefits are allocated to multiple beneficiaries. For example, within the balanced scenarios, the total present value of Project benefits range from approximately $353 million to $439 million compared to a cost of $304 million. Using this methodology, it appears that the Project’s economic benefits could ultimately approach or exceed Project costs (B/C ratio greater than 1.0); therefore, Project economics do not appear to represent a fatal flaw at this time. A tabulation of economic benefits relative to Project costs for several water allocation scenarios using economic development input-output type methodology are presented in Table 1. Table 1 – Benefit Cost Analysis, Method 1 Scenario Benefit Allocation (acre-feet) Local Match (per acre-foot, per- year) Total Benefit less Total Cost (PV) B/C Ratio Total Project Cost, Including O&M (PV) Total Project Benefit (PV) Agriculture Drought Municipal Instream 1 41,000 0 0 0 * $927,271,806 4.0 $304,423,118 $1,231,694,924 2 0 0 41,000 0 $269 -$237,082,369 0.2 $304,423,118 $67,340,749 3 0 0 0 41,000 $324 -$285,086,840 0.1 $304,423,118 $19,336,277 4 13,667 0 13,667 13,667 * $135,034,746 1.4 $304,423,118 $439,457,864 5 20,500 20,500 0 0 * $357,504,437 2.2 $304,423,118 $661,927,555 6 10,250 10,250 10,250 10,250 * $48,209,916 1.2 $304,423,118 $352,633,034 PV: Present value. *See Local Match section (below). Local Match Local match represents the potential funding shortfall balance that would be borne by prospective users of the stored water (per acre-foot4). For the purposes of this study, this amount is calculated by subtracting total Project cost from total Project benefit and distributing the balance evenly among the water supply5. The amount of local match varies by water allocation scenario, ranging from $269 to $324 per acre-foot (amortized). In some scenarios (Scenarios 1 and total Project benefit significantly exceeds total Project cost, which implies that little or no private contribution in the form of local match may be necessary. However, as a practical matter, few public funding sources exist to cover the on-going pumping and operation O&M portion of the total project costs. By contrast, more options are available for capital project construction. Current estimates identify 4 Local match in terms of $ per acre-foot reported in Table 1 represents amortized (yearly) amount based upon assuming a loan term of 50 years at 4.0% interest. 5 It is likely the case that the various beneficiary groups have different thresholds for market pricing. For example, willingness of private parties to pay for water for agricultural purposes may be higher than that of private parties for instream benefits (per acre-foot). ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 6 the power and O&M costs for Switzler Reservoir as $109 per acre-foot. Unless a perpetual funding source is identified that can subsidize this cost, this may represent a lower bound on local match. Method 2, Ecology OFM, Input-Output Methodology Improvements to property values and jobs in Benton and Klickitat Counties were estimated for various water allocation scenarios (agricultural and domestic) using Method 2. Because this methodology relies on inputs related to agricultural and municipal supply only, three scenarios were developed which loosely correspond to Scenarios 1, 2, and 5 of Method 1. Improvements to property values for various scenarios range widely from approximately $63 million on the low end to nearly $14 billion on the high end. Potential job benefits associated with scenarios range from approximately 900 to 85,000 new jobs created (excluding temporary construction related jobs) 6. A tabulation of economic benefits relative to project costs for several water allocation scenarios using property value and jobs methodology are presented in Table 2. Table 2 – Benefit Analysis, Method 2 Scenario Benefit Allocation Total Project Benefit ‐ Improved Land Value (PV) Total Project Benefit ‐ Jobs Added Agriculture Municipal 1 41,000 0 $63,357,368 894 2 0 41,000 $13,540,715,794 85,235 5 20,500 20,500 $6,802,038,831 43,065 Estimated Project Costs Project costs include both capital costs and ongoing O&M costs. Current capital construction cost is estimated at approximately $281 million, which was assumed to be repaid over a period of 50 years at a rate of 4.0%. For the purposes of this analysis, we assume that construction would begin in 2017 and last 5 years, with the project becoming available for use in 2022. Ongoing O&M costs are estimated at $3.5 million per year beginning upon construction completion in 2022. O&M costs will continue through the life of the Project, which is currently estimated at 100 years from construction completion until 2116). Figure 1 illustrates both the estimated yearly project costs including capital plus O&M (red line), as well as the present value of the annual costs using a discount rate of 4.0% per year (blue line). The drop in Project cost at 2067 indicates full repayment of the 50-year-amortized capital costs. The 6 In comparison, Ecology OFM results for Sullivan Lake which is an Office of Columbia River (OCR) funded project, resulted in an estimated economic benefit if $1.4 billion in additional tax base, 1,483 short run jobs and 1,753 long run jobs from the creation of approximately 9,400 acre-feet of new supply (50% municipal/industrial [M&I] allocation / 50% other [agricultural, stockwater, etc.]) http://www.ecy.wa.gov/programs/wr/cwp/sullivan.html. Similarly, Ecology OFM results for the Lake Roosevelt drawdown (OCR project) result in an estimated economic benefit of $3-billion and 35,000 new jobs from the creation of approximately 55,000 acre-feet of new supply (30,000 acre-feet for Odessa [agricultural] / 25,000 acre- feet for M&I) http://www.ecy.wa.gov/programs/wr/cwp/cr_lkroos.html. ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 7 sum of present value of annual costs (area under curve) represents the total present value of capital costs associated with the Project, and has been calculated at approximately $304 million. Figure 1 - Estimated Annual Project (Capital + O&M) Costs, 2012 to 2112 Un-quantified Project Costs In addition to estimated project costs, un-quantified project costs exist which should be acknowledged and could be quantified as a result of further study. Due to the potential increased water supply and subsequent increase in agricultural output, additional economic costs may exist related to the general decrease in the value of goods and services derived from the Horse Heaven area. That is, as supply increases, unit cost may drop. Quantification of these additional economic cost impacts are complex and outside of the scope of this Project and therefore have not been estimated at this stage. Also, Project costs associated with conveying and making use of the water made available by the Project have not been accounted for as part of this study. That is, new water supply made available from this Project is simply ‘mitigation’ water (as opposed to direct water supply). Individual users will experience varying levels of additional costs associated with physically capturing and transmitting water to their intended place of use. For example, additional pumps and piping from the river to new farmlands will be needed, along with the on-farm irrigation infrastructure in order to put lands into production that cannot be served directly from the reservoir. These additional unquantified costs would directly impact end user willingness/ability to pay, which suggests the need for a higher B/C ratio than 1.0, such as those evaluated in Scenarios 1 and 5 (Table Finally, it is anticipated that economic effects exist related to impact to hydropower supply along the mainstem of the lower Columbia River as a result of this Project. We expect that most of the water stored in the Switzler Reservoir will be allocated to out-of-stream uses (much of which will be consumed). Consumption of water formerly available at lower Columbia River Dams John Day, Bonneville) will result in lost power revenue. Quantification of this impact is beyond the scope of this study; however, it is assumed that this impact will be nominal, primarily because filling will likely occur when surplus water exists in the river. There may even be potential for $0 $5,000,000 $10,000,000 $15,000,000 $20,000,000 2012 2022 2032 2042 2052 2062 2072 2082 2092 2102 2112 Project Lifecycle Costs Project Cost Discounted Project Cost ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 8 power benefit by adding electric load opportunistically by coordinating refilling with times when excess power exists in the system. Estimated Project Benefits Two independent methods were used to estimate project benefits for the proposed storage Project. Each methodology is described below. Method 1, Economic Development, Input-Output Methodology In consultation with Washington State University, the first method used is to estimate Project benefits relies on an input-output-type process in which the economic values of goods and services across multiple project beneficiaries are determined. Where possible, economic benefits quantified under this methodology include effects classified as direct, indirect, and induced. Direct, indirect, and induced effects are characterized by the following: Direct effects are new expenditures that directly result from the project sales of a crop); Indirect effects are secondary changes in the economy as are result of direct effects fertilizer for a crop); and Induced effects represent the money that is re-spent in the economy as a result of increased spending from direct and indirect effects food sales, gas, etc.). Project beneficiaries considered include agricultural (both new and drought mitigation), municipal (domestic water supply), and instream (fish). Multiple water allocation scenarios consisting of different mixes of beneficiaries were considered to develop low/high “bookends” as well as more realistic (balanced) allocations. Agricultural Benefits Methodology Agricultural benefits were quantified using methodology similar to IMPLAN® input-output model which is a tool used by economists such as Mike Brady of Washington State University to model regional impacts related to agricultural projects that affect the economy. This methodology relies on factors which are applied to farm-gate revenue to determine direct, indirect, and induced economic impacts. Based on discussion with Mike Brady, the factors associated with direct, indirect, and induced impacts were selected as 1.0, 0.7, and 0.4, respectively, which simulate IMPLAN® output. Direct economic impacts are defined as those which are directly related to the goods and services produced. In this case, farm gate revenues for various crops were considered direct impacts. Farm gate revenues were estimated by translating water supply quantity to new irrigated acreage using Washington Irrigation Guide methodology and considering a crop mix representative of the Horse Heaven region for various scenarios (USDA/NRCS, 1997). The assumed crop mix consisted of potatoes sweet corn –fresh market sweet corn – process market field corn grapes and apples (10%)7. Farm gate unit price revenue / acre) were applied to 7 USDA statistics indicate that in 2007, approximately 32,000 acres of potatoes, 22,500 acres of sweet corn, 12,600 acres of field corn, 23,300 acres of grapes and 10,000 acres of apples were grown in Benton County representing proportions of approximately 30%, 22%, 12%, 26%, and 10%, respectively. It is assumed that the sweet corn production was divided evenly between the fresh and process markets (11% each, of total). ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 9 new acreage based upon USDA/NASS 2011 Washington Annual Agricultural Bulletin data for the various crops selected (USDA/National Agricultural Statistics Service, 2011)8. Indirect and induced economic impacts were then calculated and incorporated into the total benefit using the assumed factors stated above. Indirect impacts include economic activities which are necessary to support the production of the goods and services considered as direct impacts (seed, fertilizer, equipment, etc.). Induced impacts represent yet a further layer of support and include economic impacts such as need for additional goods and services (food sales, fuel, etc.). Agricultural Benefit – New Irrigated Acreage Annual agricultural economic benefits for new irrigated acreage were calculated using an assumption that a gradual build out would occur over time with approximately 25% of new acreage brought online by 2027, 50% by 2037, and 100% by 2047. Present value of annual agricultural economic benefits for various irrigation water allocation levels were calculated, and are displayed on Figure 2. Annual present values of agricultural benefits (direct, indirect, and induced) were totaled for each scenario to determine total present value of agricultural benefits. Total present value of agricultural benefits over the assumed 100-year life of the project for various agricultural water allocation levels are shown in Table 3. Figure 2 – Estimated Annual Present Value of Agricultural Economic Benefits (New Irrigated Acreage for Various Allocations of New Irrigation Water Supply) 8 The extent to which new irrigated agricultural acreage will displace existing dry-land farming practices (such as dry-land wheat) has not been quantified as part of this study. This effect would be reflected by a reduced net benefit associated with new irrigated acreage (where applicable). $0 $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 2012 2022 2032 2042 2052 2062 2072 2082 2092 2102 2112 Discounted Agricultural Benefits 41,000‐acre‐feet 20,500‐acre‐feet 13,667‐acre‐feet 10,250‐acre‐feet ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 10 Table 3 – Estimated Total Present Value of Agricultural Economic Benefits over Assumed 100-Year Project Life (New Irrigated Acreage for Various Allocations of New Irrigation Water Supply) Agricultural Benefit (New) Quantity (Acre‐Feet) Present Value 41,000 $1,231,694,924 20,500 $615,847,462 13,667 $410,564,975 10,250 $307,923,731 Agricultural Benefit – Drought Mitigation Interruptible water rights within the Horse Heaven area exist and are subject to curtailment during drought years. A proportion of the stored water could be dedicated to this group for use as drought mitigation supply. For the purpose of this assessment, a drought frequency of 1 in 20 years was assumed9. In other words, it is anticipated that five instances of drought may occur over the assumed 100-year project life cycle. In order to estimate an agricultural drought mitigation economic benefit, the five instances of drought were assumed to occur at 20-year intervals, and present values of agricultural benefit of each of those instances were calculated (benefit = value of crops not lost to drought). Economic benefit of each drought year for various water allocation scenarios was computed using similar water budget methodology as the new agriculture exercise described above (Washington Irrigation Guide methodology, representative crop mix, etc.). It is understood that additional benefit related to drought mitigation may exist due to the likely conversion of low-value crops to higher-value crops as a result of a more reliable source of water becoming available. These benefits have not been calculated due to the limited nature of this assessment. The total present value of economic benefit for the five instances of drought over the assumed 100-year life of the project under multiple water allocation scenarios are shown in Table 4. Table 4 – Estimated Total Present Value of Agricultural Economic Benefits over Assumed 100-Year Project Life (for Various Allocations of Drought Mitigation Water Supply) Agricultural Benefit (Interruptible) Quantity (Acre‐Feet) Present Value 20,500 $46,080,094 10,250 $23,040,047 9 For example, since the Columbia River instream flow was adopted in 1980, interruptible water users have only been curtailed once in 2001, which would represent a 1:32 year event (from 1980 to 2012). However, had the rule been adopted in 1977 (also a severe drought year), then interruptibles would have been curtailed twice in the period 2 in 35 years or about 1:17 year event). Therefore, Aspect selected 1:20 as an estimate in this memo. ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 11 Municipal Benefits Municipal economic benefits are associated with new water supply for use by municipal water purveyors including the Quad Cities (project would make available new mitigated water rights within McNary Pool). The estimated benefits associated with municipal are based upon a cost- avoided approach. That is, provided that a new supply of domestic water is made available, cost of purchasing water at wholesale municipal prices from neighboring purveyors would be avoided – resulting in a net benefit. Using this approach, annual municipal economic benefits (cost-avoided) were estimated by applying a $235 per-acre foot per year wholesale water price to municipal water supply volumes (Reclamation, 2006). Similar to the agricultural benefits methodology, it is assumed that municipal water supply benefit would be realized gradually with 25% brought online by 2027, 50% by 2047, and 100% by 2067. Present value of annual municipal economic benefits for various municipal water allocation levels were then calculated and are shown on Figure 3. Annual present values of municipal benefits were totaled for the assumed 100-year project life to determine total present value of municipal benefits. Total present value of municipal benefits for various agricultural water allocation levels are shown in Table 5. Figure 3 – Estimated Annual Present Value of Municipal Economic Benefits for Various Allocations of New Municipal Water Supply $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 2012 2022 2032 2042 2052 2062 2072 2082 2092 2102 2112 Discounted Municipal Benefits 41,000‐acre‐feet 13,667‐acre‐feet 10,250‐acre‐feet ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 12 Table 5 – Estimated Total Present Value of Municipal Economic Benefits over Assumed 100-Year Project Life (for Various Allocations of New Municipal Water Supply) Municipal Benefit Quantity (Acre‐Feet) Present Value 41,000 $67,340,749 13,667 $22,447,464 10,250 $16,835,187 Instream Benefits Methodology Instream benefits consist of those which directly benefit aquatic habitat and fish, namely anadromous salmonids. Quantification of instream benefits is complex; therefore, for the purposes of this initial analysis, a range of benefits (low end and high end) were considered based upon general studies developed by others as well as analogous water supply projects with instream benefits. Low-End Fish Benefits For the purpose of this study, low-end fish benefits are defined as the more economically conservative limit of the range, and include those benefits to instream flows in the lower Columbia River only. The limited available literature related to water quantity benefit to fish suggests that value is on the order of $4 per acre-foot (Olsen and White, 2003). It is assumed that instream benefits would be realized immediately upon project completion. Annual present values of low-end instream benefit were estimated for various instream water allocation levels and are illustrated on Figure 4. Annual present values of instream benefits were totaled for each scenario to determine the low end of total present value over the assumed 100-year life of the Project, as shown in Table 6. ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 13 Figure 4 – Estimated Annual Present Value of Instream Economic Benefits (Low End) for Various Allocations of New Instream Water Supply Table 6 – Estimated Total Present Value of Instream Economic Benefits (Low End) over Assumed 100-Year Project Life (for Various Allocations of New Instream Water Supply) Fish Benefit (Low) Quantity (Acre‐Feet) Present Value 41,000 $2,209,860 13,667 $736,620 10,250 $552,465 High-End Fish Benefits For the purpose of this study, high-end fish benefits are defined as the more exhaustive limit of the range and include those benefits related to improved stream flows directly within Switzler Canyon (itself) of the dam plus benefits to Columbia Additional high-end benefit may exist related to high-flow and/or temperature refuges that might be created within Switzler Canyon as a result of environmental mitigation efforts. Recent project examples indicate that a high-end market value for instream fish benefit approached $870 per acre-foot (capital). Such is the case with the Barker Ranch project recently funded by Ecology’s OCR10. The benefits may also be higher for this project due to discrete habitat benefits within the channel in Switzler Creek. Applying an assumed discount rate of 4% over a 100-year Project term equates to an instream benefit of approximately $35 per acre-foot per year. 10 http://www.ecy.wa.gov/programs/wr/cwp/barker.html. $0 $20,000 $40,000 $60,000 $80,000 $100,000 2012 2022 2032 2042 2052 2062 2072 2082 2092 2102 2112 Discounted Instream Benefits Low End 41,000‐acre‐feet 13,667‐acre‐feet 10,250‐acre‐feet ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 14 Applying this assumption, annual present values of high-end economic fish benefit were estimated for various water allocation levels and are illustrated in Figure 5. Annual present values of instream benefits were totaled to determine the high-end total present value of instream benefits. Total present value of instream benefits over the assumed 100-year life of the Project for various water allocation levels are shown in Table 7. Figure 5 – Annual Present Value of Instream Economic Benefits (High End) or Various Allocations of New Instream Water Supply Table 7 – Total Present Value of Instream Economic Benefits (High End) over Assumed 100-Year Project Life (for Various Allocations of New Instream Water Supply) Fish Benefit (High) Quantity (Acre‐Feet) Present Value 41,000 $19,336,277 13,667 $6,445,426 10,250 $4,834,069 Method 2 – Ecology OFM, Input-Output Model Methodology As part of this study, the OFM model was used by Ecology to generate ‘scalable’ economic values related to new homes, new irrigated acreage, and jobs created. Using the OFM model, 1,000 new homes and 1,000 acres of new irrigated land (in both Benton and Klickitat Counties) were used to determine corresponding improved land value and new jobs created (increased tax base). This methodology is commonly employed by Ecology’s OCR in evaluating economic effects related to developing various water supply projects. $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 2012 2022 2032 2042 2052 2062 2072 2082 2092 2102 2112 Discounted Instream Benefits High End 41,000‐acre‐feet 13,667‐acre‐feet 10,250‐acre‐feet ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 15 Potential new water supply for various irrigation water allocation scenarios was translated to new irrigated acreage using Washington Irrigation Guide methodology and considering the same representative crop mix as applied in Method 1(USDA/NRCS, 1997). Farm gate unit revenues / acre) were applied to new acreage based upon USDA/NASS 2011 Washington Annual Agricultural Bulletin data for the various crops selected (USDA/National Agricultural Statistics Service, 2011). The number of new homes corresponding to water supply allocation level was estimated by applying an average daily demand of 555 gallons per day per home based upon 2009 City of West Richland Comprehensive Water System Plan data (J-U-B Engineers, Inc., 2009). Scaled data provided by Ecology related to improved land value and jobs created are summarized in Tables 8 and 911. Table 8 – Estimated Improved Land Value, Benton and Klickitat Counties Benton County Klickitat County Improved Land Value ‐ Domestic (Per Home) $165,798 $244,864 Improved Land Value ‐ Agriculture (Per Acre) $540 $8,458 Table 9 – Estimated Jobs Created, Benton and Klickitat Counties Benton County Klickitat County Jobs From Domestic (Per Home) 1.04 1.54 Jobs From Agriculture (Per Acre) 0.01 0.12 An even distribution of water supply (50% Benton County/50% Klickitat County) was applied to the various scenarios to determine total improved land value (agricultural and domestic) and jobs which has been tabulated in Table 212. References Aspect Consulting, LLC (Aspect) and Anchor QEA, 2010, Water Storage Pre-Feasibility Assessment Report, Horse Heaven Area, WRIA 31, October 2010. J-U-B Engineers, Inc., 2009, Water System Plan Update, City of West Richland, October 2009. Olsen, D. and White, 2003, Estimating the Value of Water from Key Resource Sectors from the Mainstem Columbia River, Pacific Northwest Project Technical Memorandum, October 2003. 11 Variation in improved agricultural land value between Benton and Klickitat Counties is dramatic due to the existing variation in median farm property value between the two counties. That is, median farm values in Benton County are currently relatively high compared to Klickitat County, therefore increase in property values will be less substantial on a per-farm basis in Benton County. 12 It is likely the case that an unbalanced water supply between the two counties would result depending upon beneficiary group demand at the time water becomes appropriated, etc. For example, a disproportionate amount of new water supply might go to new municipal water rights appropriations in Benton County (as opposed to Klickitat), which would drive the overall improved domestic land values reported in Table 2 down. ---PAGE BREAK--- MEMORANDUM December 21, 2012 Project No.: 090045-009-01 Page 16 Reclamation, 2006, 2006 M&I Water Rate Survey Data, U.S. Bureau of Reclamation, Office of Program and Policy Services, Contract Services Office, Denver Co. USDA/National Agricultural Statistics Service, 2011, 2011 Washington Annual Agricultural Bulletin, 2011. USDA/NRCS, 1997, United States Department of Agriculture/Natural Resources Conservation Service, Part 652 Irrigation Guide, National Engineering Handbook, September 1997. Limitations Work for this project was performed and this memorandum prepared in accordance with generally accepted professional practices for the nature and conditions of work completed in the same or similar localities, at the time the work was performed. This memorandum does not represent a legal opinion. No other warranty, expressed or implied, is made. All reports prepared by Aspect Consulting are intended solely for the Client and apply only to the services described in the Agreement with Client. Any use or reuse by Client for purposes outside of the scope of Client’s Agreement is at the sole risk of Client and without liability to Aspect Consulting. Aspect Consulting shall not be liable for any third parties’ use of the deliverables provided by Aspect Consulting. Aspect Consulting’s original files/reports shall govern in the event of any dispute regarding the content of electronic documents furnished to others. W:\090045 WRIA 31 Phase 4\Deliverables\Phase 2 Report\Appendices\Apx A Preliminary Benefit-Cost Analysis\HHH Project Economics Memo Draft 8-20-12_rev2012 12 19.docx