Oroville Dam and the Infrastructure Policy Swirl

Given the policy incoherence of the Trump administration the temptation is strong to assert nothing they attempt on behalf of US infrastructure is likely to work. While this is true in a broad sense, it’s important to create roughly two classes of infrastructure that current policy proposals are likely to either neglect, or affect.

The first is that class of infrastructure that generates little to no revenue, or, whose cost can never be recovered fully through rate payers. Into this box, you might place schools, public drinking water systems, and a number of large public transport mega-projects. These are the infrastructure typologies that pay out long-term social dividends and efficiencies to the economy. This is also the class most neglected precisely because policymakers, in their short-sightedness, find it hard to quantify the dispersed nature of the payoff—despite its potentially large accrual to human well being, and GDP.

The second is that class of infrastructure that more typically produces steadier cash flow: internet infrastructure, pipelines, toll roads and bridges, and power plants. It’s the class of infrastructure into which large, sovereign funds like Australia’s superannuation and globally listed, dividend-seeking mutual funds have historically devoted capital.

Now that Oroville Dam—and its power plant, the 0.819 GW Fred Hyatt hydroelectric station—have been in news this week, let’s ask the question: into which category would this piece of power infrastructure fall? Over at CityLab, they took a stab at this question and concluded needed repairs to Oroville’s spillway was the kind of project that Trump’s plans would neglect. But I don’t think that’s correct. Indeed, Trump’s preference for P3 (public-private partnerships–which are not necessarily a bad thing), would very likely target a power station like Oroville’s Hyatt. One could easily see an offer to Oroville in the form of a financing-stack, one that blends private capital with federal assurances, in exchange for a cut of the power station’s future cash flow.

Oroville’s power station is valuable, despite the fact that its generation is hugely variable: not only month to month but year to year, due to California’s rainfall seasonality, and its longer cycle of flood and drought. That said, the station tends to produce about 1,500,000 MWh per year.

But there’s more to Oroville’s Hyatt dam than simple hydro generation. The structure also contains pumped-storage capability, giving the station the ability to timely release flow at times of peak demand. And given the rate at which California is adding renewables (solar generation reached 10% of state demand in 2016), the state needs to build much more storage capacity in addition to utilizing stations like Oroville.

It should be said, nearly all public infrastructure offers relatively low rates of return in the form of cash flow. But the flaw in Trump’s infrastructure plan is that the neglected class will continue to be neglected, because in combination with an austerity-minded Congress, the infrastructure  most needed now requires federal investment that’s disproportional to its cash returns. (As President-elect, his team put together a quick 50 list, but it’s a more of a Hey, What About This? list than a coherent plan.)

Oroville represents a very different risk, therefore. It’s not, as CityLab suggests, likely to be overlooked but rather is the type of infrastructure likely targeted by the administration. I reported on the issue of P3 (public-private partnerships) late last month in Route Fifty, as it happens, and it should also be said that P3 approaches can form the basis of smart, infrastructure design. But who really thinks smart design would be a feature of the Trump administration in any policy rollout, especially infrastructure?

–Gregor Macdonald

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  • MCE

    Gregor – following you for years and you are way more informed then I am –
    Oroville seems to be a very expensive fix (prior and more so now) and the narrative is already how Trump won’t do it right, but where is the conversation on how for the last (you pick) 4-8-12 years – nothing appears to have been done to properly maintain the integrity of the dam / spillway.
    Wondering if this is an unintended consequence of the climate change argument – by that I mean, if you were convinced that there would be very little snow and wet weather in the future ie drought is the new normal – could the argument have been that the dam would never be full again – so why put money into maintaining a spillway system that we wont need anyway?

  • Yes, you could make a new argument that Oroville is not attractive for P3 because of its vulnerability to California rainfall. But, if California emerges from its drought period–as it has in the past–then that argument loses its explanatory usefulness. The reason I thought Oroville was a good candidate to talk about infrastructure is that in my canvass of infra professionals over the past year, I concluded that these two classes of infra are important to think about. In other words, the infrastructure issue is fairly complicated, even after one sets aside the competing fiscal philosophies that often drive policy making. In a way, you could read me as predicting, generally, that any infra plan from the current administration will generally come down on one side: away from many needed projects, and will focus on the cash flow.

  • MCE

    I agree “as it has in the past” relating to the cyclical historical reality – the problem I feel like I’m seeing is “certainty” of different this time mentality.
    Re infrastructure projects – would love for repatriating US$ go straight to this –
    Very straight line, more then enough demand – this would then fall under your thoughts on which projects get prioritized – but from an available funds it would change the math possibly – not taking on bonds instead outright pay for it (although wall street would love to change that into a securitized event(s) I’m sure)