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A recent webinar, on the use of green bonds [1] by municipalities, has brought insight on how cities are using green bonds to finance infrastructure, such as mass transit, and renewable energy. San Francisco Public Utilities Commission (SFPUC), gave a presentation on their green hydro bond. The money from this bond is being used to maintain and upgrade the power component, of the Hetch Hetchy Water & Power System (HHWPS) [2, 3]. HHWPS provides drinking water for 2.6 million people in the Bay Area, as well as approximately 17% of the electricity consumed within the city of San Francisco. It is a large system [Fig. 1], consisting of reservoirs, aqueducts, power stations and power lines stretching to the Sierra Nevada. It sounds like a great example of how green bonds can be used to encourage investment in infrastructure that have a positive impact on the environment. However, there is a catch because HHWPS holds center stage in the struggle between the ideas of environmental conservation and preservation in American history [4]. This struggle has lasted over 100 years, and continues to this day with the announcement of a law suite [5], on April 22, 2015 and the issuance of this bond, on May 20, 2015. At issue is not the entire system, but its namesake the Hetch Hetchy Reservoir, and it may make some investors question how green is this bond.

Fig. 1, Hetch Hetchy System Map

Hetch Hetchy Reservoir is located in Yosemite National Park, and the first proposal for its development was made by San Francisco Mayor James Phelan in 1890, the same year the Park was created. The Hetch Hetchy Valley [Fig. 2] is around twenty miles from Yosemite Valley. John Muir, the driving force behind the creation of Yosemite National Park, called it the "Tuolumne Yosemite, for it is a wonderfully exact counterpart of the Merced Yosemite (Yosemite Valley), not only in its sublime rocks and waterfalls but in the gardens, groves and meadows of its flowery park-like floor" [6]. From the beginning John Muir fought James Phelan's efforts to damn the Tuolumne river and flood Hetch Hetchy Valley. In the process he created the Sierra Club. At first the Sierra Club had success, with the help from President Teddy Roosevelt, but after the Great Earthquake and Fire of 1906, San Francisco doubled its efforts and after the election of Woodrow Wilson, who appoints former San Francisco City Attorney Franklin Lane as Secretary of the Interior, the tide sharply turns. By 1913, with encouragement from Franklin Lane, Congress passes the Raker Bill allowing the building of a damn to flood the Hetch Hetchy Valley. John Muir dies one year later.

Fig. 2, Hetch Hetchy From Road, Albert Bierstadt

Framing these events was an epic struggle for the definition of environmentalism in the United States, that is still on going today. On one side was John Muir, the Preservationist, who advocated protecting the Nations great natural resources from development, seeing them as priceless resources that have to be preserved in their original state for future generations to appreciate. On the other side was Gifford Pinchot, the Conservationist, who saw the over exploitation of the nations natural resources, and promoted the idea of the efficient management of these resources for the benefit of the Nation. Gifford saw the creation of a Hetch Hetchy Reservoir as "the highest possible use which could be made of it." Today Gifford Pinchot ideas are embodied in the United State Forest Service, which he managed, and was instrumental in its development, by having it moved from the Department of the Interior to the Department of Agriculture [7]. John Muir's ideas are embodied in the National Park Service. He is considered the "Father of the National Parks". His writings were very influential in the creation of the National Park Service [8], and also influenced generations of environmentalist.

The current law suite was filed by Restore Hetch Hetchy, on the grounds that "continued operation of the reservoir is a violation of the prohibition against unreasonable methods of diversion in Article X, section 2 of the California Constitution" [9]. Basically it is saying that the value of a restored Hetch Hetchy Valley is worth more than the current reservoir. It is important to understand that the law suite is about the reservoir, not the entire Hetch Hetchy System. The efforts to restore the valley have always contended that it could be done with out the loss of water for the San Francisco Bay region.  This has been demonstrated in multiple studies to be true [10, 11]. However the same studies indicate there would be a loss in power production, but this would vary depending how many modifications are done to the system.

The current efforts to restore the Hetch Hetchy valley began in the Reagan Administration, when Secretary of the Interior Don Hodel suggests removal of O'Shaughnessy Dam and the restoration of Hetch Hetchy Valley. In 1999 the organization Restore Hetch Hetchy was created, with the help of the Sierra Club. In the 2000's Restore Hetch Hetchy was successful in pushing for studies, one of which was done by the state of California [10], all showing the feasibility of restoring the Valley. It know became a question of cost. The California study reviewed past studies and came up with a cost of between $2.9 to 9.8 billion. However, this was a comprehensive view, which among other things included cost for the restoration of the valley floor, which would be done by the National Park Service, as well as the cost of increasing efficiency which the city should be doing anyway. In 2012 San Francisco had a local ballot measure, that proposed funding a study to determine the cost of draining Hetch Hetchy Reservoir and finding additional water and power supplies. Unfortunately, the measure was defeated, so we will never know what the results would have been. However, SFPUC promotes the ballot defeat, on their web site [5], as a rebuke by the voters of the idea of restoring the Valley.

The $32,025,000 from the Green Bond are not funding any work directly on the Hetch Hetchy Reservoir, and as a consequence has very little to do with the restoration of the Valley. Some of the proceeds are being used to rehabilitate the Kirkwood Powerhouse to increase its life expectancy, and to prevent oil discharges from the oil separation systems within the hydroelectric powerhouse. The Kirkwood Powerhouse is the closest link to the Hetch Hetchy Reservoir, and if the Valley were restored it would be the most effected power unit. There are plans to enable it to continue operating, but at a much reduced capacity. However, its rehabilitation also indicates how the entire system is in need of investment, so money from the bond is essential, and will be well spent on work that should have been done long ago.

It is very ironic that so early in the development of green bonds one is issued with connections to the Hetch Hetchy Valley, and its long history of conflict between environmental conservation and preservation. Green bonds, in their very nature, are tools of conservation, but many of the people who purchase them would see the value of restoring the Hetch Hetchy as a symbol of preservation. Its real value far exceeds the $30,000 a year San Francisco pays the U.S. National Park Service for use of Hetch Hetchy. If you look at the success of Yosemite Valley in providing natural solitude, recreation and most influentially a symbol of the California brand, then the law suite stands on firm ground stating Hetch Hetchy Valley is worth more in its natural state. In fact the growth in the popularity of Yosemite Valley, over the past 100 years, has been so great that it has diminished its natural character. This makes the restoration of Hetch Hetchy Valley far more important than it was in the past. The application of the money, from this bond, for restoration that should have been performed decades ago, also indicates how San Francisco has used this resource as a cash cow [12], and legitimizes claims of mismanagement.

Over the past 100 years we have learned that Conservation and Preservation are far more allied in the same effort to save our diminishing natural resources, than they are in conflict. The U.S. National Forest Service is a great example, with the Wilderness Act of 1964 [13], which now preserves over 9.1 million acres as wilderness in the U.S. National Forest. It shows you must conserve resources before you can preserve them. Today we are facing ever greater environmental challenges, and need to use both concepts as effectively as possible. Green bonds are a powerful new tool that will enable the world to focus financial resources on efforts that will conserve our natural resources, and in many cases make future preservation possible. However, with the increase focus, there will be increased scrutiny and innovation on how those financial resources are being used. The effects of Climate Change will force us to think in different ways. The current drought in California is a great example. At first you may think it solidifies San Francisco's case in maintaining the Hetch Hetchy Reservoir. However, it is forcing the entire state of California to rethink how it uses water, and will dramatically increase the case for conservation. This may present new possibilities, such as reducing the acreage of high water use crops, like almonds, in the Central Valley, and in turn open that land up for new applications, such as solar electricity production, allowing the water to be used for other purposes. With greater water and electricity efficiency, and the possible opening up of Central Valley resource, there may be increased pressure on using Hetch Hetchy Valley for higher purposes.

In the words of John Muir, "The making of gardens and parks goes on with civilization all over the world, and they increase both in size and number as their value is recognized. Everybody needs beauty as well as bread, places to play in and pray in, where Nature may heal and cheer and give strength to body and soul alike. This natural beauty-hunger is made manifest in the little window-sill gardens of the poor, though perhaps only a geranium slip in a broken cup, as well as in the carefully tended rose and lily gardens of the rich, the thousands of spacious city parks and botanical gardens, and in our magnificent National parks--the Yellowstone, Yosemite, Sequoia, etc. -- Nature's sublime wonderlands, the admiration and joy of the world."

References

  1. https://www.climatebonds.net/2015/09/invitation-usa-green-city-bonds-webinar-24-sept-1300-est-benefits-how-do-it-    seattle-sound
  2. http://www.reuters.com/article/2015/04/29/ny-fitch-ratings-sfpuc-idUSnBw296583a+100+BSW20150429
  3. http://emma.msrb.org/ER881975-ER689101-ER1090744.pdf
  4. http://vault.sierraclub.org/ca/hetchhetchy/timeline.asp
  5. http://www.sfwater.org/index.aspx?page=568
  6. http://vault.sierraclub.org/john_muir_exhibit/writings/the_yosemite/chapter_16.aspx
  7. https://en.wikipedia.org/wiki/History_of_the_United_States_Forest_Service#List_of_Forest_Service_Chiefs
  8. http://www.nps.gov/history/bestideapeople/Muir.html
  9. http://www.hetchhetchy.org/restore_hetch_hetchy_files_lawsuit
  10. http://www.sfwater.org/modules/showdocument.aspx?documentid=2625
  11. Reassembling Hetch Hetchy: Water Supply Without O'Shaughnessy Dam, Sarah E. Null and Jay R. Lind, Journal of the American Water Resources Association; Apr 2006; 42, 2.
  12. http://www.sfgate.com/green/article/A-CHRONICLE-SPECIAL-REPORT-S-F-looted-region-s-2796611.php
  13. http://www.foresthistory.org/ASPNET/policy/Wilderness/1964_Wilderness.aspx

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