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HomeMy WebLinkAboutSUPPLEMENTAL REPORT• Memorandum DATE: April 14, 2006 TO: Land Conservation Act Advisory Committee Members_ Meeting of April 18, 2006 FROM: - Steve Troester, Associate Planner SUBJECT: Supplemental Report to Memorandum of February 14, 2006, regarding Request for Immediate Partial Cancellation of Williamson Act Contract of M&T Incorporated, 1976. Department of Development Services Planning Division The following additional information was not ready for inclusion at the time of mailing of the Supplemental Staff Report included in the LCA Committee packet for the April 18 2006 meeting. This information provides additional analysis and support addressing Consistency Finding #5: Consistency Finding 5: That. there is no proximate, noncontracted land which is both available and suitable for the proposed use. (GC §51282(b)). The following two references, support the importance of haul distance from source to market in determining if land is "suitable" for the proposed use, within the context of this finding. "Transportation plays a major, role in the cost of aggregate to the consumer. Because aggregate is a low -unit -value, high -bulk -weight commodity, it must be obtained from nearby sources to minimize both the dollar cost to the aggregate I consumer and other environmental and economic costs associated with transportation. If nearby sources do not exist, then transportation costs can quickly exceed the value of the aggregate.. Transporting aggregate 25-35 miles will generally double the price of the aggregate. Transporting aggregate from distant sources also results in increased fuel consumption, ■ Butte County Department Of Development Services ■ ■ Supplemental Memo to LCA Committee - M&T Ranch Cancellation (CANC 06-02)0 April 14, 2006 0 Page 1 of 3 0 • air pollution, traffic congestion, and road maintenance. Moreover, transportation cost is the principal constraint defining the market area for an aggregate mining operation. An adequate supply of local aggregate is critical to the building and infrastructure needs of California. In order to ensure local sources of aggregate, it is necessary to identify California's permitted aggregate resources and to project future aggregate demand. Aggregate materials are essential both to maintain the existing infrastructure and to , provide for new construction. The demand for aggregate is expected to increase throughout California as our economy grows." SOURCE: Map Sheet 52; Kohler, Susan L. Aggregate Availability in California. California Geological Survey, July 2002, Page 12. "The opening of a new site for the production of aggregates has both direct and indirect impacts on the environment. The indirect impacts include changes in the environmental costs of hauling aggregates and possible changes in the level of construction activity. In this note, we show that the most likely effect of a new aggregate site is to reduce the truck miles used for aggregate hauling, which is an environmental benefit. We also show that the change in construction activity induced by a new site is likely to be extremely small." SOURCE: A Note On The Environmental Costs Of Aggregates, Working Paper No. 994 by Peter • Berck, Department Of Agricultural And Resource Economics And Policy , Division of Agriculture and Natural Resources , University of California at Berkeley, California Agricultural Experiment Station, Giannini Foundation of Agricultural Economics, January 10, 2005. The Butte County Geographical Information Systems (GIS) Department is preparing a map, for display at the April 18 meeting, depicting the comparative haul distances from current aggregate sources to the City of Chico market and the proposed M&T site. GIS has already calculated the haul mileages noted in the proposed addition to Consistency Finding #5 below. This information also responds to some of the concerns expressed by Mr. Ron Jones in his letter of April 8 2006 which was received by the Department of Development Services on April 10 2006. Staff agrees with Mr. Jones general observation that much of the aggregate used in Butte County in past years has come form outside the County. While staff has not independently verified Mr. Jones' calculations, they suggest that. 978,600 tons of aggregate per year (63% of demand) are imported into Butte County from outside sources. This suggests that the County actually imported more gravel than was produced within the County. Given the associated negative haul costs and air quality impacts associated with out - of -County sources; this appears to support the desirability of identifying and developing "suitable" local aggregate sources in closer proximity to the Chico market. Highway 149 expansion Impacts on Aggregate Supplies: The current Highway 149 expansion project helps to put the County's aggregate supply and production capability in perspective. As stated by CALTRANS at the April 13 2006 groundbreaking for the expansion project, they state that 422,900 tons of rockand aggregate • products will be consumed in that project alone. The general contractor on that project has ■ Butte County Department Of Development Services ■ ■ Supplemental Memo to LCA Committee — M&T Ranch Cancellation (CANC 06-02)0 April 14, 2006 0 Page 2 of 3 ■ • been working with the County to identify new aggregate sources for that project, as they say current supplies within reasonable proximity may be inadequate to complete the project. Staff recommends that the following be added in support of Consistency Finding #5: The proximity of the proposed M&T-Baldwin aggregate mine site, to the City of Chico market (approximatelyl0-mile haul) makes it more suitable as an aggregate source for that market than the existing sources located in Glenn County (Valley Rock, approximately 18 -mile haul), Tehama/Butte County line (Pine Creek Mine approximately 15 -mile haul), and Green Rock Mine (approximately 16 -mile haul). The opening of the M&T site for aggregate production is expected to result in direct and indirect benefits including decreases in fuel consumption and truck exhaust air pollutants, and decreased cost of aggregates for construction and infrastructure projects in the community. An adequate local supply of aggregate for the Chico community is critical to provide for future building and infrastructure needs. Attachment: A Note On The Environmental Costs Of Aggregates, Working Paper No. 994 by Peter Berck, Department Of • Agricultural And Resource Economics And Policy, Division of Agriculture and Natural Resources, University of California at Berkeley, California Agricultural Experiment Station, Giannini Foundation of Agricultural Economics, January 10, 2005. ■ Butte County Department Of Development Services ■ ■ Supplemental Memo to LCA Committee — M&T Ranch Cancellation (CANC 06-02)0 April 14, 2006 0 Page 3 of 3 ■ DEPARTMENT OF AGRICULTURAL AND RESOURCE ECONOMICS AND POLICY DIVISION OF AGRICULTURE AND NATURAL RESOURCES UNIVERSITY OF CALIFORNIA AT BERKELEY WORKING PAPER NO. 994 A NOTE ON THE ENVIRONMENTAL COSTS OF AGGREGATES by • Peter Berck n California Agricultural Experiment Station Giannini Foundation of Agricultural Economics January 2005 • A Note on the Environmental Costs of Aggregates by Peter Berck . January 10, 2005 Abstract: The opening of a new site for the production of aggregates has both direct and indirect impacts on the environment. The indirect impacts include changes in the environmental costs of hauling aggregates and possible changes in the level of construction activity. In this note, we show that the most likely effect of a new aggregate site is to reduce the truck miles used for aggregate hauling, which is an environmental benefit. We also show that the change in construction activity induced by a new site is likely to be extremely small. Peter Berck is Professor of Agricultural and Resource Economics. I would like to thank Atanu Dey for able research assistance. The remaining errors are mine. 2 L A Note on the Environmental Costs of Aggregates The opening of a new quarry for aggregates will change the pattern of transportation of aggregates in the area served by the quarry. In this note, we will show that, so long as aggregate producers are cost minimizing, the new pattern of transportation requires less truck transport than the pattern of transportation that existed before the opening of the new quarry. Since the costs of providing aggregates falls, it is reasonable to assume that the price of delivered aggregates also will fall. This note also. shows that the demand expansion effect is of very small magnitude. Since the demand increase from a new quarry is quite small, the dominant effect is that the quarries are on average closer to the users of aggregates and, as a result, the truck mileage for aggregate hauling decreases. To summarize the effects of a new quarry project: . • a) The project in itself will not significantly increase the demand for construction materials in the region through market forces, which include the downward pressure on pricing. b) Truck traffic (Le. vehicle miles traveled) in the region will not increase and -may decrease as a result of the project. As a result, the effect of a new quarry project will be to reduce the air emissions from aggregate trucking. The reduction in emissions should be included as a positive impact of a quarry project in any analysis of the environmental consequences of a new quarry. • The remainder of this note provides a brief description of the economics of construction materials and explains why these points must be true. Based upon the available evidence, a project would decrease haul distances for aggregates and would therefore decrease emissions from trucks, rather than increase them. s , 3 There are two economic facts that are important to understand in evaluating the likely addition or subtraction to truck traffic from a new quarry. One is the economics of location. The second is the demand for aggregates, which is the quantity of aggregates used as a function of price. That a new site leads to smaller haul distance is a matter of geometry and economics. Transportation is a -major element in the cost of delivered aggregate, so new sites are chosen, within the limits placed by the natural availability of aggregates, to minimize transport costs. An example should make this fact clear. Consider diagram 1. Circles represent aggregate - using projects of equal size. The five projects shown are located at miles marked —1, 0, 1, 2, and 3. Two of the project sites are marked with the letters A and B, and they are potential locations for aggregate production. The location at mile 0 is an existing aggregate production site and it is marked by an asterisk (*). The scale is in miles. For simplicity, each project uses one unit of aggregate. Diagram 1 A * B _1 0 1 2 3 With only one aggregate production site at mile 0, the miles traveled to supply the five projects is seven: zero miles for project at mile 0, one mile for each for the projects at mile —1 and 1, two miles for the project at 2 and three miles for the project at 3 for a total of 7 miles. If an additional aggregate production site is started at A, the miles traveled decreases to six, because there is no transportation required for the aggregate -using project at A and all other projects are served by the original site. However, if the new site • is placed at B instead of being placed at A, transport distance falls to three miles because then two projects have aggregate production at their location and. thus have zero 4 F transportation requirements, and the three remaining sites each require a one -mile transport. Each aggregate production site supplies 2.5 units of aggregates, that is, half the total required by the five projects. Since cost depends on distance and, markets minimize costs, the free market system always will choose a point like B, the one with,the lowest cost. In this case it is also the lowest transport distance. Other forms of industrial organization lead to higher prices being charged for aggregates, but the effect of additional suppliers is to lower prices and haul distances. Appendix A elucidates the case where the price depends upon the delivered costs of the second most efficient producer. The second issue for the siting of aggregate production is the possibility that lower delivered costs lead to more projects or more use of aggregate's in existing projects. The degree to which decrease in the price of a good, in this case construction material, leads to an increase in the quantity of that material used is described by the elasticity of demand. The elasticity of demand is the percent increase. in use caused by a one percent decrease in price. A search of the economic literature found no articles estimating a positive elasticity of demand for aggregates. A review by the Susan Kohlert finds that only population .and not price is correlated with aggregate usage. In other words, a -reduction in the price of aggregate does not lead to an increase in demand for it. While it is a theoretical possibility that the quantity of aggregates demanded (that is, the quantity used in projects) is responsive to price, two facts about construction make this unlikely. First, the cost of aggregates is usually a tenth or less of the cost of a project. Second, the building of projects -- housing, roads, and commercial construction -- is not very sensitive to the costs of producing them. t Map Sheet 52. Aggregate Availability in California. by Susan L. Kohler. Califomia Department of Conservation. California Geological Survey. Sacramento. 2002. Although we have not found literature on the elasticity of demand for either public projects or contract construction, there is an empirical literature on the elasticity of demand for. housing*. In these studies, a one percent change in the price leads to about a half percent change in the quantity of housing consumed. Public projects, like roads, are budgeted, often from specials funds, like road taxes. In that case, a one percent decrease in the costs of all projects in a taxing jurisdiction would lead to.a one percent increase in the quantity of roads built. Since aggregates are very expensive to ship, the quarry being considered likely would only change the costs of nearby road construction, perhaps for just one county. For example, Monterey County has a population of 400,000 while the state population is 33.9 million people.§ Assuming that road construction is roughly proportional to population, about 1.2 percent of road construction would be in Monterey. So, if a new quarry in Monterrey decreased the price of aggregates in Monterrey by 1 percent and left the price the same in the rest of the state, then the average price in the whole state would fall by about 0.01 percent, which is negligible. A project that affects only a small part of a taxing jurisdiction has only a small effect on that jurisdiction's costs and can have no major affect on the quantity of services supplied by that jurisdiction. We know of no evidence of elasticities for construction work as high as one. We estimate the elasticity of demand for projects using aggregates to be much less than one, likely under a half in the private sector and near zero in the public sector. Given that projects will be built, there is some possibility of substituting of other structural materials for aggregates in buildings. However these substitute materials too would be trucked. The realistic possibility for roads is that there are no materials to substitute for aggregates. I do not believe this pathway,to greater use of aggregates in building would be triggered by the transport savings from a new aggregate source or that it would result in an increase in net truck miles. • $ Hanushek, Eric A., John Quigley. "What is the price elasticity of housing demand?" Review of Economics and Statistics. August, 1980. § Population figures are for the year 2000. 6. Since a change in price of aggregates does not lead to either a substantial substitution of other materials for aggregates or a substantial increase in the quantity of projects, the demand for aggregates is very inelastic. This inelasticity of demand is exactly the reason that the State of California can use a fixed per -capita consumption rate for forecasting the .need for construction materials. An example will make clear how the transport advantage and elasticity of demand arguments fit together. Let us consider a new quarry that, through its transportation advantage over existing quarries, would save 12.5 miles of trucking on each and every project in the study area. We shall assume that the average truck haul pre -project was 25 miles. According to the Map Sheet 52: Aggregate Availability in California, the cost of construction aggregate doubles every 25-35 miles from the point of production. The following calculations are carried out assuming that a 25 mile haul doubles the cost. Assuming that a unit of aggregate costs $1 at the production site, then its delivered cost at a project site 25 miles away is $2. If the haul distance were to be reduced to 12.5. miles due to a new quarry, then half of the transportation costs — or $0.50 — would be,saved. This represents a cost savings of 25 percent in the delivered cost of aggregate and is entirely due to a 50 percent decrease in miles traveled. The only way for a new quarry to influence the quantity of construction is through the price of aggregates. This example presents the competitive case, where the delivered price decreases by the full amount'of the transport cost savings. In the competitive case, the effect on the quantity of construction will be extremely moderate, as demonstrated below. (Appendix A presents a less than perfectly competitive example.) In keeping with the fact that the cost of aggregate accounts for less than 10 percent of the • total cost of a construction project, a price reduction of 25 percent on aggregate is a cost saving of 2.5 percent or less on the project. Let us assume a very liberal price elasticity of demand for construction of 0.5. In other words, 2.5 percent reduction in the cost of construction would lead to 1.25 percent increase in the quantity of construction 'demanded. This increased quantity of delivered aggregate leads to additional truck haul miles. The number of increased miles from the increased aggregate sales is 1.25 percent of the original quantity times the new haul distance which is 50% of the original distance. Therefore, the percentage increase in truck haul miles occasioned by a decrease in aggregate price will be 0.625 percent because the new aggregate location is only half as far away. ' In this example, the new quarry saves 50 percent of truck trip miles through location and contributes 0.625 percent of new truck trip.miles from demand increase. This leads to a net decrease of 49.375 percent in truck miles. The following Table 1 summarizes the net reduction of truck haul miles for three' different scenarios — the new aggregate project site located at 12.5, 6.25, and 2.5 miles from a construction site. • Table 1 Distance Decrease Decrease Decrease in Increase in Increase in haul Net to New in haul in construction construction 'miles from decrease Quarry miles (%)� delivered cost (%) quantity (%) additional in miles (miles) aggregate construction(%)tt hauled (%) cost % 12.5 50 25 2.5 1.25 0.62 49.4 6.25 25 37.5 3.75 1.85 0.46 74.5 2.5 miles 90 45 4.5 2.25 0.22 89.8 There is a general rule to be deduced from the example: The percent decrease in cost for the delivery of aggregates equals the percent decrease in miles driven, while the increase in the use of aggregates equals the elasticity of demand for a final product (such as roads) times the cost share of aggregates in making.the product times the decrease in costa Since the elasticity of demand for a final product is much less than one, and the cost • This decrease is with respect to the pre -project haul miles. tt This increase is with respect to the pre -project haul miles. 8 • 0 share of aggregates in making the product is about 8 percent, a new quarry must decrease truck miles and decrease NOX and other emissions.from trucks. • Appendix A Spatial Models with Imperfect Competition When a producer has a price advantage over other producers because of lower transport costs, the producer can'exploit that advantage by charging consumers a price greater than its marginal cost. Marginal cost is the cost of producing one incremental unit. In this appendix, I will briefly investigate one model of spatial competition that is derived from a classical model of Hotelling # In Hotelling's model, two stores (which are analogous to production sites) can relocate at no cost and then compete based on price. Since consumers are some distance from the store, they see the price of a product as the amount they pay for the product plus the cost • of travel. They go to the store with. the least total cost (cost of product plus cost of travel). The stores seek to make the most money they can make. The price the consumer will pay is the largest price that the store the consumer goes to can charge without losing the customer to the other store.§§ In Hotelling's model, the two stores will locate next to each. other, split the market in half, and charge the'competitive price. While the pricing rule of the Hotelling model may well apply to aggregates, the assumption of complete location flexibility is not applicable. Returning to the model of diagram 1, shown above., I now consider the effects on pricing of adding one aggregate production site with competition in prices. Consider the case where both aggregate production sites and aggregate -using projects exist at location A and *. The production site at * would be willing to supply the project at location,A at its , marginal cost of production (mc) plus the cost of transport for one mile, for a total of me + 1 c. This is higher than the marginal plus transport costs that production site A has for 1 5 Hotelling, Harold. 1929. "Stability in Competition." Economic Journal 39:41-57 • S'alop Salop, Steven C. 1979. "Monopolistic Competition with Outside Goods.° The Bell Joumal of Economics. models the competition between stores in terms of quantity, so that the price for consumers near a store is determined as a monopolist would determine price. with a very low elasticity of demand as is true for aggregates, the price competition model of Hofelling seems more appropriate. 10 supplying the project at A. However, the site at A can charge up to me+c without losing the customer. The site charges me+c while its costs are me and makes c units of pure profit. The site at * prices in the same way—a price just high enough to avoid the site at A from taking the customer: For the sites to the right of *, the prices are me+2, me+3, and mc+ 4. In each case, this is the highest price .site * can charge without losing the customer to site A. In this model, one of the best places for a new site would be at B. The new site would sell '/Z unit to the project between it and * at a price of me + c, a whole unit to the project located at B at a price of me + 2c (the price at which the site at * would be willing to supply aggregate), and a whole unit to the project located to its right at a price of me + 3c. The result of adding the new'site would be that the price for each project to the right of the project at * fell by c. With competitive (marginal cost) pricing as described in the body of the note, the addition of the new site at B would result in the prices paid by projects decreasing by four, while with imperfect competition as described in this appendix, the new site would result in the prices paid by projects decreasing only by three. Compared to the competitive case cited above, the imperfect competition example results in smaller changes in prices and therefore a larger decrease in truck traffic.