HomeMy WebLinkAbout11-28-12 Board Packet
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OTAY WATER DISTRICT
SPECIAL MEETING OF THE BOARD OF DIRECTORS
BOARDROOM
2554 SWEETWATER SPRINGS BOULEVARD
SPRING VALLEY, CALIFORNIA
WEDNESDAY
November 28, 2012
3:30 P.M.
AGENDA
1. ROLL CALL
2. PLEDGE OF ALLEGIANCE
3. APPROVAL OF AGENDA
4. PUBLIC PARTICIPATION – OPPORTUNITY FOR MEMBERS OF THE PUBLIC TO
SPEAK TO THE BOARD ON ANY SUBJECT MATTER WITHIN THE BOARD'S
JURISDICTION BUT NOT AN ITEM ON TODAY'S AGENDA
INFORMATIONAL ITEM
5. DISCUSSION OF SAN DIEGO COUNTY WATER AUTHORITY’S PROPOSED
AGREEMENT WITH POSEIDON RESOURCE’S REGARDING THEIR CARLSBAD
DESALINATION PROJECT (WATTON)
6. ADJOURNMENT
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All items appearing on this agenda, whether or not expressly listed for action, may be
deliberated and may be subject to action by the Board.
The Agenda, and any attachments containing written information, are available at the
District’s website at www.otaywater.gov. Written changes to any items to be considered at
the open meeting, or to any attachments, will be posted on the District’s website. Copies
of the Agenda and all attachments are also available through the District Secretary by
contacting her at (619) 670-2280.
If you have any disability which would require accommodation in order to enable you to
participate in this meeting, please call the District Secretary at (619) 670-2280 at least 24
hours prior to the meeting.
Certification of Posting
I certify that on November 26, 2012, I posted a copy of the foregoing agenda near
the regular meeting place of the Board of Directors of Otay Water District, said time being
at least 24 hours in advance of the special meeting of the Board of Directors (Government
Code Section §54954.2).
Executed at Spring Valley, California on November 26, 2012.
/s/ Susan Cruz, District Secretary
STAFF REPORT
TYPE MEETING: Special Board Meeting MEETING DATE: November 28, 2012
SUBMITTED BY: Bob Kennedy
Senior Civil Engineer
Ron Ripperger
Engineering Manager
PROJECT: N/A DIV. NO. All
APPROVED BY:
(Chief)
Rod Posada, Chief, Engineering
German Alvarez, Assistant General Manager
Mark Watton, General Manager
SUBJECT: Informational Item - Discussion Regarding the San Diego
County Water Authority Desalination Project
GENERAL MANAGER’S RECOMMENDATION:
That the Otay Water District (District) Board of Directors (Board)
receive as an informational item the San Diego County Water Authority
(CWA) Desalination Project and a summary presentation.
Committee Action:
None.
PURPOSE:
The CWA has scheduled a regular board meeting for November 29, 2012
to consider approving the Water Purchase Agreement (WPA) for the
CWA’s Desalination Project with Poseidon Resources (Channelside) LP,
a California Limited Partnership (Poseidon). The proposed WPA
outlines the proposed commercial and financial terms for the
production and delivery of desalinated ocean water from the planned
desalination plant to the CWA’s regional conveyance system. It also
outlines the terms of the potential purchase of the plant by the CWA.
AGENDA ITEM 5
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ANALYSIS:
Background
The Carlsbad Desalination Project is a 50 MGD seawater desalination
plant and conveyance pipeline being developed by Poseidon, a private,
investor-owned company that claims to develop water and wastewater
infrastructure. In development since 1998, the project was
incorporated into the CWA’s 2003 Water Facilities Master Plan and
into the 2005 and 2010 updates to the Urban Water Management Plan.
The project site is on industrially zoned land on the Encina Power
Station in Carlsbad. The project has obtained all required
environmental permits and environmental clearances necessary for the
construction of the facilities. However, the various permits allow
for, or may require changed conditions that could have a large impact
on the cost of the desalination water, up to 30%, as discussed later
in this report. Prior to commercial operations, Poseidon is required
to obtain a permit from the California Department of Public Health
(CDPH) to deliver drinking water to the CWA’s aqueduct system.
The planned project includes a 10-mile, large-diameter pipeline to
the CWA’s Second Aqueduct in San Marcos. The CWA would make a number
of improvements to its pipeline system and the Twin Oaks Valley Water
Treatment Plant (Twin Oaks) to integrate desalinated water into the
CWA’s aqueduct system for a total distance from the plant to Twin
Oaks of 15.5 miles. The CWA and Poseidon have completed planning and
technical studies to determine exactly what improvements would be
necessary and what those estimated costs would be.
The CWA estimates that, in 2020, water produced by the project would
account for about one-third of all locally generated water in San
Diego County.
Under the WPA, the CWA will buy 48,000 acre-feet of water from the
project for 30 years with an option to purchase up to 56,000 acre-
feet. The term can also be extended up to three years due to “force
majeure” events (earthquake, other disasters, etc.).
The CWA also has options to purchase the project. The CWA has the
option, but not an obligation, to buy the project beginning 10 years
after the date of commercial operation. The price would be equal to
the amount of outstanding bond debt, the remaining equity return, and
any remaining contractor costs. If Poseidon defaults, the CWA has
the option to purchase the project for outstanding bond debt only,
with no payments to equity investors. At the end of the agreement’s
term, the CWA has the right, but not the obligation, to purchase the
desalination plant for $1. This would provide for public ownership
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of the plant, intake and discharge facilities, and rights to the
long-term lease with 25 years remaining, with Cabrillo Power I LLC, a
subsidiary of NRG Energy, Inc., and the owner of the plant site.
The WPA sets the purchase price at $1,876 - $2,097 per acre-foot in
2012 dollars, depending on how much is purchased annually. The first
48,000 acre-feet of water purchased each year will pay for the fixed
costs of the project and the variable costs of water production. Up
to 56,000 acre-feet of desalinated water may be purchased at the
CWA’s discretion at a lower rate that reflects only the variable
costs of incremental water production.
Additional costs for improvements to the CWA’s aqueduct system to
integrate this new supply would bring the total cost to $2,042 -
$2,290 per acre-foot, depending on how much water is purchased
annually. Although CWA’s staff contends that between $5 - $7 would
be the impact on individual ratepayers, it will vary depending upon
their local water agency, a typical Otay Water District household of
four people can expect to pay approximately $8.66 - $16.09 per month
more for desalinated water by 2017 if the WPA is approved and the
plant produces desalinated seawater as planned. This same household
will pay $15.98 for primarily CWA/MET’s increases for a total
increase of $24.64 - $32.07, which is equivalent to 34.3% - 45.1%
increase.
Because of these costs, staff has prepared an analysis of CWA’s
proposed project and the potential rate impacts. This analysis has
been divided in five main points:
1. Power Costs
2. Water Requirements for Drought Proofing
3. CWA’s Risks Associated with the WPA
4. Financing True Costs
5. Projected Rate Impacts on Otay’s Rate Payers.
Costs associated with future changes in law or regulations will be
passed on to the CWA. Poseidon would be allowed to increase its
price to accommodate changes in law or regulations that generally
apply industry-wide to water treatment facilities or wastewater
dischargers. These cumulative increases are capped at 30 percent
over the 30 year term, 10% per year (as an example, 10% per year over
3 years could yield a 30% increase in 3 years). The WPA also allows
for annual price increases for inflation, the rising cost of
electricity and to cap the amount the CWA must pay for a change to
the intake system.
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1. Power Costs
Poseidon bears electricity consumption risk, meaning that Poseidon
will not receive additional compensation if actual energy
consumption exceeds the projections in the WPA. This is a very low
risk since the equipment power requirements are well known and the
power required for the membranes is well known. The CWA bears the
risk for the price of electricity. This is a direct pass through
to the CWA. It is not linked to a published index, such as CPI,
but instead is based on the specific electricity tariff. The CWA
can only mitigate its exposure to future SDG&E electricity prices
through its right to designate the electricity supplier.
The cost of electricity is expected to account for 25% of the cost
of the water produced from this project. Clean Energy Capital, LLC
has prepared three scenarios for the future price for electricity
for this project, a low 1.2% growth rate, a middle growth rate of
2%, and a high growth rate of 2.4%. CWA staff has used the 2%
growth rate for their cost projections; however, this has been
challenged by several member agencies at the CWA meetings.
Recently, Clean Energy Capital, LLC revised their projection to
3.4%. The growth rate over the last seven (7) years has been 8.3%
and the California Public Utilities Commission has estimated a
growth rate of 4.1% for the next eight (8) years.
2. Water Requirements for Drought Proofing
On November 11, 2012, the Fallbrook Public Utility District
(Fallbrook) prepared a presentation entitled “The Cost of Improving
Regional Reliability through Desalination” (see Attachment J). In
the presentation, Fallbrook outlined three scenarios of CWA’s
regional water demand - one with no shortages, the second with 20%
MWD shortage, and the third with 20% MWD shortage plus penalties.
The purpose of these analyses was to demonstrate that the cost of
desalinated water is substantially higher than the cost of imported
water. In the third scenario the cost of importing 56,000 acre-feet
is $53.6 million against the cost of desalinated water which is in
excess of $114.4 million. The presentation concludes that the
increase in reliability is equivalent to a 4,480 acre-feet and the
cost of this water using the desalinated plant could be the
equivalent of $13,582/acre-foot.
Otay’s staff also prepared an analysis of the regional supply mix
adding the potential of all local and imported water sources and
found that CWA is overestimating water demand in an amount close to
100,000 acre-feet per year. CWA’s future demands estimates are
based on the 2010 UWMP. This 2010 UWMP does not take into account
the sharp decline in water consumption between 2009-2011 which,
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within CWA’s area of service, the consumption declined by 20% -
30%. Otay’s and other District’s recent experiences shows that the
upward cost of water will produce an increase in conservation by
rate payers.
3. CWA’s Risks Associated with the WPA
Staff prepared a thorough analysis of the WPA. This analysis
demonstrated that CWA is taking risks that are going to impact
rates upwardly. Risks such as changes in law, bond financing
interest rates, electricity rates, unusual seawater parameters,
uninsurable force majeure events, uncontrollable circumstances,
etc. Staff compiled a total of twenty pages of comments.
According to David Zetland, Senior Water Economist, in an
October 16, 2012 paper titled, “The SDCWA-Poseidon Water Purchase
Agreement Does Not Serve the People of San Diego,” (see Attachment
I), concludes that “SDCWA customers risk paying higher than
promised costs if something goes wrong; Poseidon Resources has not
successfully constructed and operated a desalination facility”...
“SDCWA needs to work harder for its customers instead of spending
$3.3 billion on an “easy” solution that does nothing to reduce
long-term scarcity in the region.”
Another potential risk not included in CWA’s proposed rates is the
change to the intake system when the power plant is decommissioned.
The impact of intake system modification on water unit price has
been estimated by CWA staff and has modeled the impacts on the
Intake System Modifications assuming it is initiated in 2019 and
placed in service in 2021. The increase in Capital charge will be
$47 per acre-foot. The increase in the Operating and Electricity
Charges are due to the increase in pumping cost. Seawater used as
intake by the desalination project will be cooler post-
decommissioning, and will potentially require more energy
consumption for the RO membrane process.
Estimated Increase in Cost for Intake System Modification
Component 2022 Dollars
for 48,000
Acre-Feet/Year
Cost
$/Acre-Feet
Increase in Capital Charge $2,270,000 $47
Increase in Operating and
Electricity Charges $3,280,000 $68
Impact of Cooler Raw
Seawater $160,000 $3
Total Increase in Water
Unit Price $5,710,000 $119
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Staff raised concerns about the agreement between the District and
CWA on the East County Regional Treated Water Improvement Program
(ECRTWIP). The purpose of this agreement was to expand utilization
of Helix Water District’s Levy Water Treatment Plant so as to offload
other regional water treatment plants. The District is obligated to
purchase 10,000 acre-feet per year. Depending on the rates and
charges adopted by CWA, the City of San Diego preferred the option of
adding $192 per acre-foot could be added on the melded rate. If that
is the case, the District will have a resultant impact up to $1.9
million for this water supply.
4. Financing True Costs
The CWA has proposed a WPA that masks the true costs of financing
by back-loading the bonds. CWA incorporates an upward-sloping
Capital Charge, meaning that the sum of the Debt Service Charge,
Equity Return Charge, and Pipeline Installment Payments grow at an
annual escalation rate of 2.5%. This proposal is intended to phase
in the cost of the desalination project over time. The rate of
2.5% was picked to match the expected inflation over that time and
is the rate the CWA has used for other projects.
Staff considers that a more appropriate method of calculating debt
financing should be a flat rate with a bond principal amount that
doesn’t change over the life of the bond. This is estimated to
cost $352 per acre-foot more per year at the beginning of the 30
year agreement and a flat rate is expected to cost $908 less per
acre-foot by the end of the agreement. A flat rate bond principal
repayment saves over $300 million in interest costs.
5. Projected Rate Impacts on Otay’s Rate Payers
To fully understand the above mentioned potential increases in the
cost of desalinated water due to power increases, risks taken by
CWA in the WPA and true financing costs, staff developed three
scenarios of the potential rate impact on Otay’s rate payers.
Each scenario has two alternatives that are CWA’s apparent
preferred alternative (2B), and the City of San Diego preferred
option, that were used in each of the three cost scenarios. The
first scenario only considers CWA’s provided costs where they
assume a 2% electrical inflator and they minimize the financing
cost in the early years back-loading the cost into later years.
Staff’s next two scenarios increase power cost to 4.1% which is
what the CPUC determined to be a more accurate power increase and
levels the debt payments which staff recognizes as a more
appropriate method; and, the final scenario takes the second
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scenario and adds the additional intake cost that CWA left out in
their calculations.
These versions of higher water cost to Otay were then added to the
rate model to determine the impact on Otay’s rate payers. Under
CWA’s scenario the cost increase will be between 12.6% - 18.7% for
desalinated water cost only and between 34.3% - 40.4% for including
planned rate increases which are primarily due to CWA pass-through
costs. Under the higher energy cost and level debt payment
scenario the impact increases to between 15.3% up to 22% for
desalinated water cost only, and between 37% - 43.7% with all CWA
pass-through costs included. Finally, in the third scenario when
the additional intake costs are added, these rate increases grow to
16.1% - 23.4% for desalinated water only with the total rate impact
with the planned pass-through cost increases between 37.8% and
45.1%.
To make CWA aware of Otay’s concerns, staff has written several
letters to CWA requesting a Cost of Service Study, inquiring on the
rate structure and demand estimates presented by CWA staff and also
questioning why CWA is hurrying through this process (see Attachments
B and C). The CWA provided a response to the District (Attachment D)
which staff considered a very inadequate response. In spite of the
several requests to allow for more time to fully evaluate the WPA and
CWA’s taken risks, staff has been unsuccessful. CWA staff claims
that if the WPA is not approved by November 29, 2012, the land lease
between Poseidon and its landowner would expire. To verify that
statement, Otay requested a copy of the lease in the above noted
letter and was informed that the lease is not a public document.
Subsequently, Otay filed a California Public Records Act Request for
the lease. The lease was made public on November 19th. A reading of
the lease reveals no mention of a November 30, 2012 termination.
Several other letters from the Independent Rate Oversight Committee
and many non-governmental organizations have been sent to CWA
questioning many aspects of this project. Copies of their
correspondence and a response from the CWA are included with
Attachments E, F, G, H, and I.
FISCAL IMPACT: Joseph R. Beachem, Chief Financial Officer
The estimated cost to customers, as a result of approving the WPA, is
expected to be significant. By Fiscal Year 2017, the average
customer’s bill will increase approximately $8.66 – $16.09 for the
cost of desalinated water only. These increases are in addition to
the already anticipated CWA increases of $15.98 for a total range of
$24.64 - $32.07.
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STRATEGIC GOAL:
This report supports the District’s Mission Statement, “To provide
high value water and wastewater services to the customers of the Otay
Water District in a professional, effective, and efficient manner”
and the General Manager’s Vision, “A District that is at the
forefront in innovations to provide water services at affordable
rates, with a reputation for outstanding customer service.”
LEGAL IMPACT:
None.
BK/RR/RP:jf
P:\Bob Kennedy\Staff Report\BD 11-28-12, Carlsbad Desal\BD 11-28-12, Staff Report, Carlsbad Desal (BK-RR).docx
Attachments: Attachment A – Presentation
Attachment B – OWD Letter to CWA Dated 9-20-2012
Attachment C – OWD Letter to CWA Dated 10-25-2012
Attachment D – CWA Response Dated 11-15-2012
Attachment E – IROC Letter to Mayor Sanders Dated
10-18-2012
Attachment F – CWA Response to IROC Dated 10-23-2012
Attachment G – NGO Joint Position Paper
Attachment H – CoastKeeper Position Paper Dated
10-4-2012
Attachment I – David Zetland Abstract Dated 10-16-2012
Attachment J – Fallbrook Presentation Dated 11-11-12
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San Diego County Water Authority
November 29, 2012 Board Meeting
CWA Desalination Project
November 28, 2012
Attachment A
Pacific
Ocean
Encina
Power
Station
Desal
WTP
Carlsbad
San Marcos
TOVWTP
Pi
p
e
l
i
n
e
4
Pi
p
e
l
i
n
e
3
P3 relining
5.5-miles
54-inch steel pipe
10-miles
Pipeline
Interconnection
TOVWTP
Improvements
CWA Project Components
2
Desal Conveyance Pipeline
10-miles of new 54-inch pipe
Pipeline 3 Relining
(27,100 feet)
TOVWTP
Improvements
Desalination
Plant
Aqueduct
Connection
Facilities
3
New local Drought-proof water supply
Improved water quality
48,000 Acre-Feet per Year Take or Pay
with 30 year agreement
Option to take up to 56,000 Acre-Feet
per Year.
10 Mile 54-inch Conveyance Pipeline
Relining 5.5 Miles of Pipeline 3
Improvements at TOVWTP
Early buy-out provisions
4
San Diego County Water Authority (CWA)
Project Company: Poseidon Resources (Channelside)
LP, a California Limited Partnership
Plant EPC Contractor: Kiewit-Shea Joint Venture
Process Engineering and Equipment: Israel
Desalination Enterprises (IDE) Technologies Ltd.
Operating Services Provider: IDE Technologies Ltd.
5
South Bay Water Reclamation
Plant, California
J. F. Shea
Advanced Water Treatment Plant,
Fountain Valley, CA Ashkelon (83 mgd)
IDE
Total Capital Cost
Total Unit Cost 1
6
48,000 acre feet per year 56,000 acre feet per year
$2,290/AF $2,041/AF
1Includes debt service, operations, CWA
construction oversight and administrative costs
Plant and pipeline cost $691 million
Financing costs $213 million
CWA improvements and oversight $80 million
Total Capital Costs $984 million
7
8
QUESTIONS?
SDG&E Current
Rate Increase
• CPUC: Rate Increase of 4.1% next 8 Years
9
10
Deregulation
Source: Clean Energy Capital Securities LLC
$515 $525 $536 $547 $557 $569 $580 $592 $603 $615 $628
$515
$536
$558
$581
$605
$630
$655
$682
$710
$739
$770
$500
$550
$600
$650
$700
$750
$800
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Impact of differing assumptions on Fixed and Variable
Power Costs
2% Inflation 4.1% Inflation
11
DRAFT 11/10/12 12
Imported Water
$53,580,800
Desalinated Water
$114,428,000
44,800
Acre-Feet
56,000
Acre-Feet
shortfall (8%)
penalty
4,480
6,720*
* 15% of 44,800
13
180 270 280 280 280
109
118 122 124 126
0
56 56 56 56 0 17 34 93 20 20
20 358 231 223 240 211
0
100
200
300
400
500
600
700
800
900
1000
2015 2020 2025 2030 2035
MWD Imported Supplies
Otay WD Proposed Rosarito
Desalination Project
City of SD RWS (IPR)
Proposed Carlsbad
Desalination Project
Projected Local Supplies
(Verifiable)
CR Transfers (QSA Supplies)
Projection of Demands with
Current Per Capita Use
2010 UWMP Demands with
SBX 7-7
Th
o
u
s
a
n
d
A
c
r
e
-fe
e
t
CWA Preferential Rights to MWD
Supply of 1.3 MAF~220,000 AFY
14
Risk Transferred to
Poseidon
Risk Retained by
San Diego County Water Authority
Construction cost overruns Change in law (CDPH/Environmental)
Contractor disputes Bond financing interest rates
Intake costs over SDCWA limits Up to $20 M for intake changes
capital expenditures
Operating cost overruns Up to $2.5 M for intake changes operation expenditures
Electricity Consumption Electricity rates
Labor supply and relations Unusual seawater parameters
Insurable force majeure events Uninsurable force majeure events
Permitting Uncontrollable circumstances
Project schedule delays General price inflation
Regulated-differing site conditions
15
CWA does not include this additional
$119/AF in 2022 dollars because they do not
know the exact timing of cost.
Impact of $5.7Mil in today’s dollars is $4.5Mil
or 6.2% of additional annual revenue needed
on top of the $72Mil for Desal
The impact on Otay’s rate payers is between
0.8% and 1.4% for the water intake system
modification
16
Initial deferral is $352 per AF in 2016
By 2046 the additional debt cost due to the
deferral is $908 per AF
A flat rate Bond principal payment saves over
$300 Million in principal and interest costs
17
18 18
19
20
2% Electrical Inflator
Debt is Deferred (1)
4.1% Electrical
Inflator With Level
Debt Payments (2)
Additional Intake
Cost With 4.1%
Electrical Inflator
Level Debt Payments
(3)
Rates & Charges
2B
Alternative
San Diego
Alternative
2B
Alternative
San Diego
Alternative
2B
Alternative
San Diego
Alternative
IAC $/Meter/Month $2.20 $0.86 $2.59 $1.01 $2.72 $1.06
Treatment $/AF $34 $192 $40 $226 $42 $237
Transportation $/AF $30 $45 $35 $53 $37 $56
Melded Supply $/AF $34 $13 $40 $15 $41 $16
Standby Charge $/AF $18 $0 $21 $0 $22 $0
Note: At one point the 2B Alternative appeared to be CWA’s preferred alternative, collecting an additional
$72Million annually in rates by member agencies.
(1)Based on CWA’s Rate Structure Alternatives
(2)Based on power cost at 4.1% (CPUC’s assumption) vs 2% (CWA’s
assumption) and adding back $352/AF for debt deferral
(3)Based on (2) above plus additional $4.5 Mil in 2013$ ($5.7 Mil in 2022$)
for cost of Intake System Modification 21
CWA Desal
Project
Planned
Increases
(Primarily
CWA)
2% Electrical Inflator
Debt is Deferred
(1)
4.1% Electrical
Inflator With Level
Debt Payments (2)
Additional Intake
Cost With 4.1%
Electrical Inflator
Level Debt
Payments (3)
2B
Alternative
San Diego
Alternative
2B
Alternative
San Diego
Alternative
2B
Alternative
San Diego
Alternativ
e
Monthly Dollar
Impact $15.98 $8.66 $12.84 $10.49 $15.13 $11.05 $16.09
% Change 21.7% 12.6% 18.7% 15.3% 22.0% 16.1% 23.4%
Cumulative Dollar Increase $24.64 $28.82 $26.47 $31.11 $27.03 $32.07
Cumulative Percentage Increase 34.3% 40.4% 37.0% 43.7% 37.8% 45.1%
These values are as of 2017, when the full impact of the CWA desal contract will be realized by Otay customers. The amounts
are inflated from 2013 using CWA's anticipated overall rate increases.
22
23
November 28, 2012
Questions ?
23
... COedtcated to Communtty getn!tce
2554 SWEElWATER SPRINGS BOULEVARD, SPRING VALLEY, CALIFORNIA 91978-2004
September 20, 2012
Mr. Michael Hogan
Chairman
TELEPHONE: 670-2222, AREA CODE 619
San Diego County Water Authority
4677 Overland Avenue
San Diego, CA 92123
Dear Mike:
www.otaywater.gov
We have watched with interest the cost-of-service process prepared by the County Water Authority
(CWA) staff over the last several months in conjunction with the potential acquisition of desalinated
water from the Carlsbad Desalination Project (the {{Project"). While we appreciate the hard work of
CWA's staff, we do not believe the process being used for cost allocation is fitting in light of the changes
to the CWA water portfolio and the high costs associated with the Project. We have made note of our
concern for {{seemingly" conducting a Cost-of-Service Study in the boardroom and, most recently, at the
September 18th Agency General Managers meeting. The project changes the dynamics of the CWA
water portfolio to a significant enough extent that using existing cost allocations, with some custom
modifications and add-ons for the desalinated water, is not an appropriate way to proceed.
As you are aware, cost allocations are generally followed by a rate structure study in order to enhance
the benefits of the allocation and mitigate negative impacts. The customary process used by public
agencies is to first prepare a full cost-of-service review and then distribute the costs to the appropriate
portions of the rate structure based on cost-causative allocations. This is a delicate act that should be
performed by skilled rate professionals, not staff, general managers, or the Board of Directors of the
CWA. Such outside professional rate consultants will provide different perspectives on {{equity," on cost
allocations, and, in this case, on the effect on the member agencies of CWA. The consultants should
work with and report to the Water Planning Committee or Finance Committee. Several scenarios, with
detailed back-up, should be prepared by the consultant and then presented to the committee(s).
Currently, many public agencies are initiating such a process, including the Otay Water District. Cost
allocation methodologies that might have been appropriate five years ago are most likely outdated due
to changes in the economy and the usage patterns of their customers. Otay is currently going through
the Request for Proposal process to hire a qualified rate consultant to update the cost allocations for our
water, recycled water, and sewer user rates. The cost allocation process may require modifying parts of
our current rate structures to keep them in line with current industry standards and the usage patterns
of our customers. Other large water agencies such as Sacramento Suburban are in the process of hiring
experienced rate consultants to {{prepare a water revenue, rate structure, long-term financial plan, and
capacity fee study".
CWA needs a fresh look at its rate structures based on changes in circumstances. CWA should initiate
this process and hire a qualified rate consultant to look at total current and future costs collectively, not
on a piece-meal basis as appears is the case now. This study should not look at just one aspect of the
CWA cost allocation or rate structure, as has been the practice in the past, instead, it should look at all
Michael Hogan
September 20, 2012
Pa ge 2
cost allocations and their interaction with each other to determine if the consultant believes that these
allocations should continue or be modified. Modifications would be based on the changed conditions
since CWA's last cost-of-service study and specifically due to the addition of 48,000 acre feet per year of
very expensive base load local water supply.
It is envisioned that the most appropriate of the cost allocations could be merged together to form the
bas is for a new cost allocation methodology for rate setting at the CWA that is based on current facts
and circumstances, has detailed back-up to support the cost allocations, and is fair and equitable to all
member agencies. In light of the complexity, expense and new dynamics brought by the Project, we
believe this sound process is warranted and essential. Any decisions made by the CWA Board without
going through this validation process are premature at best.
In addition, the current process that staff is pursuing, adding in bits and pieces to a rate structure
without performing a full cost-of-service analysis, may not comply with the requirements of Proposition
26. To be exempt from the requirements of Proposition 26, services charged by a government agency
cannot exceed the cost of providing the service. The current staff process does not seem to comply with
the intent of this law because the rate structure is being crafted first and then costs are being backfilled
into the ad -hoc rate structure.
In summary, we do not believe it is appropriate for a political body such as the CWA Board of Directors
to make a decision on a rate structure in a vacuum and prior to truly understanding the financial
implications of updated cost allocations nor their impacts on individual CWA member agencies, and
potentially without complying with California law. The Board should follow the normal cost-of-service
process and retain professional guidance so that it may make appropriate decisions based on updated
cost allocations that reflect today's circumstances.
We request that this letter be entered in the administrative record for the rate setting and approval of
the Desalination Water Purchase Agreement related to the Project.
Thank you in advance for your consideration of our comments and concerns.
Sincerely,
~he~~
Director General Manager
... COedtcated to CowuYiui'ILt~ ~e!nllce
2554 SWEETWATER SPRINGS BOULEVARD, SPRING VALLEY, CALIFORNIA 91978-2004
TELEPHONE: 670-2222, AREA CODE 619
October 25, 2012
Mr. Thomas Wornham
Chairman
and Members of the Board of Directors
San Diego County Water Authority
4677 Overland Avenue
San Diego, CA 92123-1233
SUBJECT: Poseidon Carlsbad Desalination Project
Dear Tom:
www.otaywater.gov
We have reviewed the many abbreviated PowerPoint presentations to the Board on the
Carlsbad Desai Project ("Project"), but we still have many unanswered questions and
are concerned that the Project has not been fully vetted to be considered for approval.
Because the WPA omitted documents that were expected to be included with the recent
release, we cannot fully assess the impacts of the agreement and understand the cost
impact to the District ratepayers. Below are some of the comments, questions, and
additional document requests that we would like addressed before the Project is
presented for approval.
• Please provide the lease, all amendments, easement documents, existing
encumbrances of all lease areas, and any contracts, or pending contracts being
negotiated with SDG&E or other power providers.
• Please provide a list of Poseidon's investors, equity partners, or any other entity
having an interest in this Project. Include all contractors, professionals, and
consultants who have had or will have a contract for this Project.
• What are Navigant Consulting Inc.'s projections for the cost of electricity over the
term of the agreement being negotiated with SDG&E for the Lake Hodges
agreement? How does this compare against the projections in the WPA? Has
Navigant performed any AB32 rate analysis for other clients that we may obtain?
Thomas Wornham
Poseidon Carlsbad Desalination Project
October 25, 2012
Page 2 of 3.
• The presentation before the Water Authority's Water Planning Committee on
October 11, 2012 provided an overview of Australia's projects. Essentially, the
take away message from that presentation was that, those plants that serve
areas with very limited water supply alternatives are currently operating and
producing water, up to 45°/o of the supply. For those plants that serve areas
analogous to our situation here in San Diego, all the plants are in "hot standby,"
not producing water to mitigate cost increases on rates. Wouldn't it be prudent to
examine such an alternative here as Australia has? Did staff investigate that
option? If so, what were the financial findings?
• Based on the staff discussion at the October 11, 2012 meeting it appears staff
has performed the cost of service study, if that is the case, please provide the
calculations, methodology, rationale, and detailed back-up to support the cost
allocations that shows this is fair and equitable to all member agencies.
• The presentations and written materials represented that the Project will have an
average of $5 to $7 cost increase per month per household. Traditional Water
Authority blanket average costs have not been representative of the cost to Otay
ratepayers. Provide the methodology used, rationale, and details for this
determination.
• The Water Authority has identified Twin Oaks Valley WTP as a stranded asset.
However, staff at the October 17, 2012 Metro TAC presentation stated the Twin
Oaks Valley WTP will be fully utilized in the future. Please identify how this
facility will be fully utilized and the timing of same.
• The Independent Rates and Oversight Committee's letter dated October 18,
2012 to Mayor Jerry Sanders asks many pertinent questions about this Project.
The Water Authority has been negotiating and reviewing this Project for a long
time now, living and breathing the details of this Project, however, everyone else
has been waiting to see the details and need more assurance this is the right
Project needed at the right time. It would be helpful to have a current Master
Plan that is looking at all of the changed conditions and the potential for IPR.
Currently, we are reviewing the Water Purchase Agreement, related rate issues,
and water supply needs. We agree with the IROC comment of allowing more
time for review of a very lengthy and complicated Water Purchase Agreement.
• Slide 8 of the August 23, 2012 presentation to the Water Planning Committee
shows that without the Desai Project, a 111,000 AFY shortfall will occur in the
year 2030 (Potential Multi-Dry Water Year with MWD Supplies Further Limited).
However, this is exactly the water supply estimated to be produced by the Metro
Wastewater IPR project. This appears to indicate that if you have both IPR and
Thomas Wornham
Poseidon Carlsbad Desalination Project
October 25, 2012
Page 3 of 3.
desal, you will have stranded the desal asset. The Water Authority needs to
consider how the IPR project will be integrated as a future supply. The IPR
project may be imposed on the region in response to an extension request or an
outright loss of the waiver at Point Lama. The substantial cost for this Desai
Project potentially puts the IPR project, and any other local water supply project,
at risk.
• The proposed pricing structure would place a disproportionate share of the cost
on the customers buying treated water provided by the Water Authority. Since
there is already an oversupply of local treatment capacity and the Water
Authority's response to I ROC has confirmed "water currently being purchased by
the Water Authority from the Metropolitan Water District, which desalinated
seawater, a local supply, would replace," further points out this source is a raw
water supply and the Water Authority should price it accordingly. Every
presentation made, as well as the Water Authority web page, has compared
desal to new water supply projects, not the existing water supplies it will replace.
This also supports that the desal cost should be placed on the raw water supply.
In addition to the above, we also have many questions on the WPA and why the Water
Authority is taking on so much risk, but we will comment on those later in a separate
review of the WPA. Due to the complexity of the Project, all of the concerns that we
have, and the concerns I ROC has expressed, it would be advisable to fully vet all these
concerns before making a decision.
Sincerely,
OTAY WATER DISTRICT
Gljjer,if~
Director
rk Watton,
General Manager
San Diego County Water Authority
4677 Overland Avenue •San Diego,California 92123-1233
(858)522-6600 FAX (858)5226568 www.sdcwa.org
October 23.2012
The Honorable Jerry Sanders
Mayor,City of San Diego and
Honorable Members of the City Council
202 C Street
San Diego,CA 92101
City of Escondido
City of Nohonol City Dear Mayor Sanders and Council Members:
City of Oceonside
City of Powoy The Water Authority was invited to make a presentation to the City of San Diego’s
Cityof Son Diego Independent Rate Oversight Committee at its Oct.15,2012 meeting regarding the
proposed Water Purchase Agreement with Poseidon Resources for the Carlsbad
Poblic lihirty District Seawater Desalination Project.
Helix Woter District
District On Friday,October 18,the Water Authority received a copy of a letter addressed to you
Monicrpol Water Distr from the chair of IROC.That letter covers a wide range of issues,many of which were
Oloy Woter Distoct not discussed by IROC Committee Members during the October 1 5 meeting and upon
Municipal which Water Authority staff was neither questioned nor afforded the opportunity to
CornpPnedleton address.Accordingly,we hope the following information is helpful to you as you
Marine Corps Base review the IROC letter.Below are a number of excerpts from the IROC letter and our
Municipal Water Dtnict response.
Municipol Water Ystrrd “Many of the details of the proposed agreement were not yet available.”
Riri,rn del Dioblo
Monicipol Woter Districi
All terms of the proposed Carlsbad Desalination Project Public-Private Partnership are
delineated in exacting detail in the Water Purchase Agreement (WPA),which was
released to the public on Sept.27,2012.That 200-page agreement,and its 18 Teclmical
Appendices amounting to an additional 300 pages,have been widely distributed,and are
prominently posted on the Water Authority’s website at www.sdcwa.org\issue-desal.
The agreement was provided upon its release to member agency staff,all members of the
Water Authority Board of Directors,the news media and the public.The terms of the
Water Purchase Agreement are a result of,and consistent with a Term Sheet approved
by the Water Authority Board on July 22,2010.The Project,including contract terms
and cost has been discussed in public meetings more than 30 times since then.
County of San Diego
“...the Public Utilities Department (PUD)did not have enough information on the
proposed agreement to be able to provide IROC with more than a vague estimate
of the impact on San Diego water ratepayers.”
A public agency providing a safe and reliable water supply ta the San Diego region
MEMBER AGENCIES
Carlsbod
Municipal Water District
City of Del Mar
San Diegoilo Wotnr District
Santa Fe Irrigation District
Sooth Boy Irrigation Dist,ict
Vallecitos Water District
Valley Center
Municipal Water District
Vista Irrigation District
Yoinro
Municipal Water District
OTHER
REPRESENTATIVE
PRINTED ON RECYCLED PAPER
Hon.Jerry Sanders and City Council Members
Oct.23,2012
Page 2
In addition to the detailed information contained in the WPA and its Technical
Appendices,the Water Authority has provided to the City’s staff,and staff of its other 23
member agencies,information sufficient for each agency to develop a range of potential
impacts to their respective ratepayers based upon the estimated total unit price of the
water and the cost allocation alternatives reviewed to date.The Water Authority first
provided its Board and member agencies,including City of San Diego representatives,
rate impact estimates as early as October 2011,which resulted in an average of $5-$7
per month on the typical residential water bill.Estimates were again provided at
meetings in June,July,August and October 2012.The highest potential cost estimate of
$2,350 A/F has consistently been used since that time and the estimated average
residential rate impact has remained at $5-$7 per month.On August 30,2012,all
member agency general managers received a detailed financial analysis of the potential
impacts of the desalination project with a comparison of all four alternatives discussed.
In response to suggestions from member agencies,including the City of San Diego,
Water Authority staff analyzed those additional cost allocation alternatives and
presented those to our Board of Directors at a special meeting held on October 11,2012.
These additional alternatives continue to result in estimated rate impacts in the $5-$7
month range for the typical residential customer.We will soon distribute the detailed
cost information for these additional alternatives to each member agency for them to
analyze the range of rate impacts for their respective customers.
It is also critical to note that the Water Authority Board of Directors is expected to
approve at its November meeting the selection of a firm to prepare a Cost of Service
Study as part of its 2014 rate-setting process.Therefore,if the Board approves the
WPA,it will also provide direction for incorporating the cost of desalination into the rate
structure,which will be evaluated during the Cost of Service Study.This will provide
even greater certainty as to the nominal variation of cost impact to the member agencies
that would be implemented when the cost of desalination is incorporated into the rates.
The Cost of Service Study for the 2014 rates will be completed by May 31,2013,and
the study will also determine the allocation of costs for the desalination project,which
will be incorporated into the rate structure and added to rates and charges in fiscal year
20 15-2016.
While a specific cost allocation method has not yet been selected,such a final
determination is not necessary for member agencies to produce rate impact analyses that
provide an accurate and narrow range of retail rate impacts.The reason for this is
simple:as detailed in Article 17 of the WPA and Appendix 10,the exact cost is
contractually set and detailed for each charge.The cost of the desalinated water will be
between $2,041/acre-foot (for 56,000 AF)and $2,290/AF (for 48,000 acre-feet),which
is lower than the $2,350 A/F used in the analysis above.It is true that how those costs
Hon.Jerry Sanders and City Council Members
Oct.23,2012
Page 3
are allocated among rate components will affect the retail rate impact for a specific
member agency (given the mix of fixed and variable charges,among other factors).
Additionally,the Water Authority has held numerous meetings with Member Agency
General Managers,Member Agency Finance Officers and other agency staff during
which information was provided and questions were addressed;these meetings are
continuing,as needed.We respect that each member agency follows its own process
and timeline for producing their respective rate impact analyses,and the Water Authority
has been fully responsive to requests by member agency staffs for any additional
information and analyses that they need to perform their work.We stand ready to
respond to any additional requests for information from our Board and our member
agencies that may be forthcoming.
“As you know,CWA has announced that it intends to vote on the WPA as soon as
next month....”
The question of when the Water Authority will vote on the WPA is the sole prerogative
of the Water Authority’s Board of Directors.What the Water Authority announced
weeks ago is that the earliest the board would consider voting on the matter would be no
sooner than 60 days following the release of the WPA.
“...without conducting the most thorough due diligence.”
As you know,the WPA was the product of more than a year of negotiation and
comprehensive due diligence by the Water Authority and a team of engineering,finance
and legal expert consultants with broad and deep experience in development of projects
of this nature,size and scope.Due diligence activities covered every facet of the project,
including the physical facilities and technology being used,the competitive procurement
process used by Poseidon to select its contractors and the costs of construction and
operations.The Water Authority also negotiated a pricing structure that is completely
transparent and reflects the actual costs that are incurred,extensively analyzing
Poseidon’s financial information and opportunities for profit.As noted above the WPA
is also consistent with the terms of the July 2010 Term Sheet.While recognizing that
opinions may differ on what constitutes “thorough”due diligence,Water Authority
management believes the due diligence on this project and the WPA has been thorough
and extensive.The project,under development since 1998,underwent extensive
environmental review between 2005-2008.In July 2010,the Water Authority and
Poseidon approved a Term Sheet that provided the essential terms and framework for the
Water Purchase Agreement that was released September 27.Since the Term Sheet was
approved and released,the Water Authority has held more than 30 public meetings and
workshops related to the project.In 2012 alone,the Water Authority has conducted 17
public meetings.These included evening public meetings in San Diego and Carlsbad on
Hon.Jerry Sanders and City Council Members
Oct.23,2012
Page 4
October 2 and 10,respectively.More than 260 members of the public attended these
meetings,and many provided testimony.
“Investors are demanding a very high rate of return to finance this project....”
No questions were asked of Water Authority staff about rate of return during the October
15 ]ROC meeting.As you know,this project is a public-private partnership in which the
private sector bears the risk and costs of project development,a risk that is recognized in
the rate of return the private entity receives from a successful project.This is an
increasingly common method of project delivery for major public works projects.In
fact,many municipalities are turning to the private sector for city projects and services
where public-private partnerships can provide efficiencies,cost savings and risk
avoidance for the public enterprise.For the Carlsbad desalination project,the Water
Authority has targeted a 9.45 percent internal rate of return for the Equity Return Charge
component of the water unit price.It is important to note that 82%of the project’s
capital cost will be financed through tax exempt Private Activity Bonds and Municipal
Purpose Bonds as a direct pass through to the Water Authority at currently historic low
interest rates to the benefit of all ratepayers.No profit is earned on this portion of the
project’s financing.Poseidon’s return on investment may be higher or lower depending
upon their performance and efficiency.If the project is completed on time and budget,if
it consistently meets the Water Authority’s demand for desalinated water,and if it is
operated efficiently,we estimate Poseidon could achieve an actual return between 10
percent and 13 percent.This range is on the low end of a market range for comparable
infrastructure equity investment.If,however,these construction and operating
conditions are not met,the equity return could be substantially lower.
“The CWA estimates that the plant and related infrastructure will cost
approximately $980 million to stand up,and proposes to commit ratepayers to
absorb an additional $100 million and up,every year for thirty years beginning as
soon as 2016.”
The estimated total project cost,including financing costs,is $980 million.That is the
capital cost.The $100 million cited in the passage above already incorporates debt
service costs (along with operation and energy costs)on the capital investment,so those
costs are not additional;nor do they reflect the current or future cost of imported water
currently being purchased by the Water Authority from the Metropolitan Water District,
which desalinated seawater,a local supply,would replace.
“This project will require significant rate increases,puts at risk alternative supply
options such as IPR,and places further pressure on member agencies to defer
essential maintenance and replacement of existing critical infrastructure.”
Hon.Jerry Sanders and City Council Members
Oct.23,2012
Page 5
All water supply project investments come at a cost —a cost that is borne by water
ratepayers.Rates would be expected to rise if this or any other comparable project is
approved,built and operated.As noted above,the City’s PUD staff is able to provide
estimates of the retail rate impact to city ratepayers.The central question that the policy
makers considering any such investment must answer is whether the cost to ratepayers is
worth the water supply reliability benefit the project will provide.I do not agree with
the statement that approval of the WPA would put other water supply options,including
Indirect Potable Reuse,at risk.That proposed project is a joint approach to both
wastewater treatment and local water supply development.The rate impact information
that the Water Authority has provided for the Carlsbad Desalination Project would
constitute a very small percentage of the joint water-wastewater bill in the Metropolitan
Wastewater System and would be a cost shared by all ratepayers in the County.
The very core of the Water Authority’s water resource strategy for the past two decades
has been water supply reliability through diversification,through both Water Authority
investments and local supply investments of its member agencies.The pie charts below
embody the success of this strategy,which has already protected our region’s economy
and quality of life by reducing the impact of nearly two years of water shortages from
the Metropolitan Water District of Southern California (2009-20 11).
Increasing San Diego County’s Water Supply
Reliability through Supply Diversification
1991 2012 2020
26TAF
(5%)
7OTAF 24TAF 44TAF
BOTAF (11%)(4%)18TAF (6%)
552TAF (13%)
_________
/TAF
Z 56TAF
S5TAFd —(10%)
(14%19OTAF1 27TAF
Total =578 TAF ‘24’Y’(4%)
274TAF
(45%)P 4STAF
(6%)
Total =612 TAF
D Metropolitan Water District D Recyc(ed Water
•Imperial Irrigation District Transfer Seawater Desalination
•All American &Coachella Canal Lining fl Groundwater
•Conservation (existing and additional)Local Surface Water
Total =779 TAF
TAF=Thousand Acre-Feet
Hon.Jerry Sanders and City Council Members
Oct.23,2012
Page 6
The Water Authority respects the views of each of its member agencies and the advisory
bodies they appoint to advise them,and appreciates this opportunity to clarify issues
raised in IROC’s October 18 letter.If you have any questions,please call.
Sincerely,
Maureen A.Stapleton
General Manager
Attachment:Oct.18,2012 IROC letter
Cc:Water Authority Board of Directors
Gail Welch,Chair,City of San Diego IROC,and TROC Members
Roger Bailey,Director of Public Utilities
Jay Goldstone,Chief Operating Officer
Andrea Tevlin,Independent Budget Analyst
Jan Goldsmith,City Attorney
Independent Rates
Independent Rates Oversight Committee
Mayor Jerry Sanders
Council President Tony Young
City Council Members
202 C Street
San Diego,California 92101
RE:Proposed Water Purchase Agreement between the County Water Authority and
Poseidon Resources
Dear City of San Diego Officials:
At its October 15,2012 meeting,the Independent Rates Oversight Committee (IROC)
received a presentation by a staff member of the County Water Authority (CWA)on the
proposed 30-year water purchase agreement (WPA)with Poseidon Resources.Many of the
details of the proposed agreement were not yet available.Because ofthat,the Public Utilities
Department (PUD)did not have enough information on the proposed agreement to be able to
provide IROC with more than a vague estimate ofthe impact on San Diego water ratepayers.
Based on this information IROC voted unanimously to express to the Mayor and Council our
concerns about the City’s representatives on the CWA making such an important decision
without adequate information about the impacts on the PUD and the ratepayers.
As you know,CWA has announced that it intends to vote on the WPA as soon as next month,
before it announces how it will allocate the very substantial and recurring costs of this
project to member agencies and their ratepayers.
With all due respect to CWA,this places the cart before the horse.Accepted standards of
corporate governance make clear that no board member,including members of our own City
10,should make decisions that would have such a material impact on ratepayers,and likely
also limit water policy options available to current and future elected council members,
without first conducting the most thorough due diligence.Those standards also require that
board members act independently,inquire actively,and have an adequate factual basis for
any such decisions.
Unfortunately,the CWA is pushing this vote in a way that flies in the face of good
governance practices,and exposes San Diego ratepayers to unknown financial impacts for
decades to come.
Oversight Committee
October 18,2012
858-292-6324 fax:858-292-6310 iroc@sandiego.gov www.sandiego.gov/mwwd/general/commissions.shtml
Page 2
City of San Diego Officials
October 18,2012
The stakes are high.Investors are demanding a very high rate of return to finance this project
(which cost will be borne by the ratepayers),and it can not move forward unless the CWA
commits to purchase water at a high cost for thc next thirty years.The CWA estimates that
the plant and related infrastructure will cost approximately $980 million to stand up,and
proposes to commit ratepayers to absorb an additional $100 million and up,every year for
thirty years beginning as soon as 2016.
This project will require significant rate increases,puts at risk alternative supply options such
as TPR,and places further pressure on member agencies to defer essential maintenance and
replacement of existing critical infrastructure.
With this letter,IROC urges you to call on CWA to adjust the timeline for its vote on
the WPA,to a future date that permits full public vetting of the risks of the proposal,
and provides time for CWA to develop and approve a plan to allocate the costs of the
project in a way that provides transparency to member agencies and the public,and
time to permit the City of San Diego to estimate the financial impact on its ratepayers
and on the future ofits water system.Only then can City 10 members have an adequate
basis to make a decision on the merits of this proposal.
Specifically,IROC urges that the Mayor and City Council strongly suggest to the City’s ten
representatives on the CWA that no vote to adopt a purchase agreement be scheduled until:
-the full proposed agreement has been made public for at least 120 days and public
hearings are held to answer the questions of the public and participating agencies,and
-the PUD staff and or consultants have had time to fully assess the impacts ofthe
agreement on the City of San Diego ratepayers,the water system,access to other
sources of water,and the implications for future financing.
1ROC feels that it would be imprudent for the City to be locked into such an agreement
without the benefit of such due diligence.
We stand ready to discuss this with you at your earliest convenience.
Sincerely,
Az 2%1
Gail Welch,Chair
TROC
cc:San Diego City 10,Water Authority Board
Jay Goldstone,Chief Operating Officer
Andrea Tevlin,Independent Budget Analyst
Jan Goldsmith,City Attorney
Roger Bailey,Director ofPublic Utilities
Poseidon Water Purchase Agreement: Private Profit, Public Risk
For more information, contact: Marco Gonzalez: marco@cerf.org, or Julia Chunn-Heer: julia@surfridersd.org
- 1 -
1. Poseidon initially promised that the cost of desalinated water from its proposed Carlsbad Desalination Plant would not exceed the cost of imported water.i However, the latest estimates released by Poseidon and the San Diego County Water Authority (SDCWA) reveal that the true cost of this desalinated water has nearly tripled from roughly $900ii per acre-foot to roughly $2400 per acre-foot with no cost cap.iii Some analystsiv believe the $2400 per acre-foot estimate is still low.v
The San Diego County Water Authority (SDCWA) is signing a 30-year “take or pay” contract with
Poseidon for at least 48,000 (and up to 56,000) acre-feet of water per year. This amounts to $115 million per year, or $3.5 billion for the initial 30-year term of the contract. Though this $3.5 billion has yet to
be accurately translated as a rate increase to end users, ratepayers can expect their water bills to increase by a minimum of 8-11 percent. With no firm cap either in the cost to purchase the water or the price the consumer is required to pay, water bills will likely go up well beyond this estimate.vi
To put this commitment in context, at the same time the SDCWA is considering this 30-year contract to
pay $115 million annually for Poseidon’s desalinated water (even during times the water is not needed), it
is vigorously pursuing litigation against the Metropolitan Water District over alleged overcharges of $28 to
$77 million per year.vii The County Water Authority also saw an 18 percent reduction in water use in 2010.
In 2011, the agency reported an additional 17 percent reduction in usage.viii Because of this “new normal”
where water sales volumes and revenues to the SDCWA are below the levels on which the previous
budgets were based, the SDCWA has decided to save dollars by deferring major capital improvement
projects ($150 million in planned expenditures).ix
These deferred projects will eventually be added back
into the budget in the coming years (and therefore additionally increase future rates).
Ratepayers and SDCWA member agencies should question both the substantial increase in the cost of water per acre foot as well as the commitment of at least $3.5 billion for the Poseidon
project when the SDCWA is reluctant to make other long-term expenditures because water sales and demand (i.e. revenues) have been lower than expected. 2. The cost of desalinated water is expensive due to the high energy usage involved in production. Compounding this, the cost of electricity in the San Diego area is increasingly volatile due to the shutdown of the San Onofre Nuclear Generating Station.x The liability for paying for the variable impact of the energy cost to produce the desalinated has been assigned to SDCWA ratepayers.xi
The independent think-tank Equinox Center has this to say about energy and desal:
“Concerns about the availability and cost of energy, as well as greenhouse gas emissions, make
energy intensity a key issue in assessing the different water options. Desalination is the most
energy intense solution, with an estimated requirement of 4,100 to 5,100 (kilowatt hours) per acre
foot.”xii
Energy costs make up a larger percentage of the cost of desalinated water than any other water supply.
For Poseidon’s project, energy accounts for a quarter of the price of desalinated water. Thus, as energy
prices go up they will disproportionately impact this water supply source.xiii At a recent SDCWA meeting,
its consultant, Clean Energy Capital, attempted to forecast the stability of energy costsxiv for the next 30
years. Relying on lengthy disclaimers, the consultant made a huge and undocumented assumption that
Poseidon Water Purchase Agreement: Private Profit, Public Risk
For more information, contact: Marco Gonzalez: marco@cerf.org, or Julia Chunn-Heer: julia@surfridersd.org
- 2 -
energy rates will not follow more recent trends, projecting energy rate increases would not exceed more
than 1.18 or 2.28 percent annually. However, the consultants own figures demonstrate that rates have
actually increased over 60 percent in the last seven years.xv SDGE’s recent request to the Public Utilities
Commission for $1.1 billion to cover the expenses of the San Diego wildfires, and the unanticipated
shutdown of San Onofre are just a few examples of the unpredictable nature of energy price
speculation.xvi
This type of variability makes the cost of desalination equally volatile.
The SDCWA should not absorb the increasing, variable cost of the electricity to produce Poseidon’s desalinated water.
3. Poseidon's Coastal Development Permit (CDP) contains numerous conditions that must be fulfilled in order for the plant to commence construction and operation, including a Green House Gas Reduction Plan (GHG Plan). After the CDP was approved, the Coastal Commission found that Poseidon intentionally misled the Commission by contending its desalinated water would replace an equivalent amount of imported water; thus the offsets it claimed as part of its GHG Plan were no longer valid. As a result, the new additional costs of implementing a revised GHG Plan will be shifted to the SDCWA. Poseidon has not shown that these costs have been accurately reflected in the price per acre-foot of desalinated water.xvii
Special Condition 10 of Poseidon's CDP requires it to account for all of its indirect greenhouse gas (GHG)
emissions resulting from electricity use each year by implementing its approved Energy Minimization and
Greenhouse Gas Reduction Plan (GHG Plan). When the CCC approved Poseidon’s GHG Plan in August
2008, Poseidon asserted that each acre-foot of water produced by desalination would replace imported
water from the State Water Project on a one-to-one basis. As a result, the vast majority of its GHG
emissions (70 percent) were automatically “offset”, and Poseidon projected it would only have to
purchase carbon offsets for approximately 16,000 metric tons of carbon dioxide equivalent (MtCO2e).xviii
However, Poseidon has since acknowledged that the desalinated water it produces will NOT replace
imported water on a one-to-one basis.xix This admission radically changes the amount of carbon offsets
Poseidon will have to purchase by more than 500 percent from 16,000 MtCO2e to about 83,500
MtCO2e.xx
The cost of carbon offsets fluctuates with the voluntary over-the-counter market. Current estimates range
from $5 to $40 per MtCO2e. In order for Poseidon to buy five times more carbon offsets than originally
planned, it must further raise the cost of desalinated water. As an example, a carbon offset that costs $10
per MtCO2e will add an additional $12 to each acre-foot of water produced by Poseidon.xxi Importantly,
this is NOT a one-time cost. Poseidon, per Special Condition 10, must account for its indirect GHGs each
year, and thus must buy the necessary amount of carbon offsets each year as well. The average price for
MtCO2e has only increased over time, and this trend is predicted for the future.xxii
Regardless of the exact
price of MtCO2e, this represents a new cost to the overall price per acre-foot.
SDCWA should protect itself, and its ratepayers, and ask Poseidon to demonstrate where the cost
of fulfilling its GHG permit requirement is included in the current estimates being negotiated.
4. The SDCWA Water Purchase Agreement is the collateral that will be used to convince private
investors to buy the bonds to finance the construction and operation of the project.xxiii The project was first described as a $250 million project, but soared to $530 million in 2010xxiv, increased another 47% percent to $780 million in 2012, and is now rumored to be in the range of $970 million.xxv
Poseidon Water Purchase Agreement: Private Profit, Public Risk
For more information, contact: Marco Gonzalez: marco@cerf.org, or Julia Chunn-Heer: julia@surfridersd.org
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In 2002, Poseidon indicated its project would cost only $250 million.
xxvii. Each new submittal lists a larger project cost.
For example, the 2010 application listed the
xxviii
xxvi Since written verification of water
purchase agreements is required by bond raters, Poseidon has not yet been awarded a final bond rating
or allocation. This delay, among others, has resulted in Poseidon repeatedly applying for California
Pollution Control Financing Authority (CPCFA) bonds
project cost as $530 million and a 2012 application listed it as
$780 million. Current press reports based on the SDCWA’s own cost estimates peg the project at
between $870 million to $970 million with financing costs added in, just shy of a $1 billion cost
estimate.
These estimates do not include indirect costs of relining one of the two requisite pipelines that will
connect the desalinated water from its production site to its distribution site, as well as operations and
maintenance or treatment plant inefficiencies at the distribution facility.xxix
When these additional
expenses are added together, the project easily tops the $1 billion mark.
The SDCWA and the ratepayers should question why the cost of Poseidon’s Carlsbad Desalination Plant has soared over a relatively short period of time from a $250 million project to
an almost $1 billion project with no clear end in sight.
5. A contract requiring the SDCWA to buy water at all times, even when it is not needed, as
opposed to enabling water purchases only when necessary guarantees a strong profit to Poseidon and its investors, but places the ratepayers at substantial financial risk.
In other places, such as Tampa Bayxxx and Sydneyxxxi
, water agencies have decided to let their expensive
desalination plants sit idle instead of running them because of the high operational costs. Under the
Water Purchase Agreement with Poseidon, the desalination plant will never be shut down, even when the
water is not needed.
If Poseidon’s Carlsbad Desalination Plant is truly a sound investment, ratepayers should be able to purchase Poseidon’s desalinated water only when they need it.
6. The State Water Resources Control Board (SWRCB) is in the process of amending the
California Ocean Plan to include provisions and restrictions for ocean desalination facilities, and it is possible that those changes will place additional obligations on Poseidon's Desalination
Plantxxxii - changes that the SDCWA has not factored in to the true cost of the water.
Poseidon originally proposed “co-locating” the desalination facility with the Encina Power Station to utilize
the cooling water discharge both as “source water” intake for the desalination facility, as well as “dilution
water” for the brine discharge. Since then, the State Water Resources Control Board (SWRCB) has
adopted a Policy on Cooling Water Intakes that undermines the pre-conceived benefits of co-location.xxxiii
Further, the SWRCB is currently developing an amendment to the Ocean Plan to set standards for
seawater desalination intake technology and brine discharges that will have to be incorporated into the
existing Regional Water Quality Control Board’s NPDES permit.xxxiv Expert panels assembled to inform
and guide the SWRCB have studied these issues and provided “findings and recommendations” for
possible amendments to the Ocean Plan. The expert reports have been criticized by consultants hired by
Poseidon. Nonetheless, should the recommendations submitted by the expert panels be adopted by the
SWRCB, it will result in significant costs not currently under consideration or accounted for.
Poseidon Water Purchase Agreement: Private Profit, Public Risk
For more information, contact: Marco Gonzalez: marco@cerf.org, or Julia Chunn-Heer: julia@surfridersd.org
- 4 -
In the interest of full disclosure and transparency, the Water Purchase Agreement should include an analysis of the costs associated with meeting the yet-to-be adopted SWRCB Ocean Plan
amendment. The analysis should include an assumption that the recommendations of the expert panels will be adopted. This will ensure that reasonably foreseeable costs associated with design
changes or retrofitting of the desal facility required as a result of the Ocean Plan amendment are fully understood and considered by participating agencies and ratepayers..
7. Shifting responsibility for the ownership and construction of the pipeline to connect the Poseidon Desalination Plant increases the SDCWA's financial exposure and makes the SDCWA liable for fulfilling all of Poseidon's Coastal Commission permit obligations.xxxv
The conveyance pipeline which will connect the desal facility in Carlsbad with the SDCWA aqueduct will
be owned by SDCWA.xxxvi
xxxvii
If Poseidon defaults, the SDWCA may be left paying $150 million for this
“pipeline to nowhere.” In addition, SDCWA will have to rehabilitate one of its existing pipelines to get the
desalinated water up to the Twin Oaks treatment facility in San Marcos. This relining and rehabilitation
project, which would otherwise be unnecessary, will cost an additional $50-56 million and require $10-12
million in modifications to the Twin Oaks Valley Water Treatment Plant.
If Poseidon defaults,
ratepayers will have unnecessarily spent an additional $60-$68 million on these improvements.
Further, because Poseidon’s CDP was issued jointly for both the desalination facility and the “pipeline to
nowhere,”, once the SDCWA assumes ownership of this pipeline it becomes jointly liable for all the permit
conditions. This includes the GHG Plan and a Marine Life Mitigation Plan that requires at least 66 acres
of mitigation.
Thus, even if SDCWA never receives a drop of desalinated water, it may be required to fulfill (and finance) Poseidon’s CDP mitigation requirements, in addition to expending hundreds of millions
of dollars for pipeline construction and improvements.
8. Before the SDWCA commits ratepayers to paying at least $3.5 billion for desalinated water, we should compare this with the cost of other alternatives.
Approximately 61 percent of the County Water Authority’s water goes to residential use. About 60 percent
of that water is used outdoors, primarily for irrigation. This outdoor water use will account for about
311,000 acre-feet per year in 2030.xxxviii
xxxix The County Water Authority’s modeling predicts a shortage of
111,000 acre-feet in an “uncertainty scenario” which is used to justify the need for Poseidon’s project.
By simply reducing outdoor irrigation by one-third this gap can be filled. Instead, to obtain half that
amount, or 56,000 acre feet ratepayers will pay over $115 million annually. In contrast, conservation
comprised only $10 million of the SDCWA’s 2010-2011 budget, but resulted in 67,000 acre-feet of
conserved water. As a “take or pay” contract, Poseidon’s Water Purchase Agreement actually
disincentivizes conservation because ratepayers will pay for this water regardless of how much they use,
or conserve.
The City of San Diego and other SDCWA member agencies are considering building their own local,
reliable water supply by turning wastewater into drinking water. Environmentalists, businesses, ratepayer
advocates, and various agencies support this water supply option because it is less energy-intensive, less
expensive and environmentally superior.xl In the first phase alone the City of San Diego’s Indirect Potable
Reuse project could provide 100 million gallons per dayxli (twice the output of the Carlsbad facility).
Poseidon Water Purchase Agreement: Private Profit, Public Risk
For more information, contact: Marco Gonzalez: marco@cerf.org, or Julia Chunn-Heer: julia@surfridersd.org
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The County Water Authority is also considering its own desalination plant at Camp Pendleton.xlii
This
facility would be a publicly owned and operated desal plant, which could be designed to avoid the marine
life impacts and reduce greenhouse gas emissions associated with Poseidon’s project. With the County
Water Authority running the plant, it could be used as a supply of last resort and scaled appropriately to
meet our water needs.
The SDCWA needs to carefully consider the cost and reliability of a range of water supply options before it commits its member agencies and its ratepayers to an expensive source of water that it
is required to buy even when it is not needed.
i No guarantees for Carlsbad Desal plant, David Rosenfeld, April 6th, 2011 http://www.dcbureau.org/20110406178/natural-resources-news-service/no-guarantees-for-carlsbad-desal-plant.html ii Recommended Findings – Coastal Development Permit Application E-06-013 Poseidon Resources (Channelside) LLC November 2, 2007 – Page 17 of 88 iii Incorporating Carlsbad Seawater Desalination Project into SDCWA Rates and Charges, Administrative & Finance Committee Meeting, August 23, 2012 (http://sdcwa.org/sites/default/files/files/board/2012_presentations/presentations_2012_08_23.pdf) iv San Diego’s Water Sources: Assessing the Options, Equinox Center and Fermanian Business & Economic Institute, July 2010 v An Investigation of the Marginal Cost of Seawater Desalination in California, James Fryer, March 18, 2010 vi http://www.sdcwa.org/water-authority-takes-steps-advance-carlsbad-desalination-project vii “The stakes in the litigation are estimated at between $1.3 billion and $3 billion over a 45-year period.” http://www.sdcwa.org/mwdrate-challenge viii General Manager’s Budget Message, SDCWA Adopted Budget for Fiscal Years 2012 & 2013, p.1 ix General Manager’s Budget Message, SDCWA Adopted Budget for Fiscal Years 2012 & 2013, p.1, Capital Improvement Program, pp. 106-07. x San Diego’s Water Sources: Assessing the Options, Equinox Center and Fermanian Business & Economic
Institute, July 2010 xi http://www.sdcwa.org/sites/default/files/files/board/2012_presentations/presentations_2012_07_26.pdf xii San Diego’s Water Sources: Assessing the Options, Equinox Center and Fermanian Business & Economic Institute, July 2010, Executive Summary xiii San Diego’s Water Sources: Assessing the Options, Equinox Center and Fermanian Business & Economic Institute, July 2010 xiv http://www.utsandiego.com/news/2010/dec/18/puc-approves-sdge-rate-increase-plus-gives-it-a/ xv http://www.sdcwa.org/sites/default/files/files/board/2012_presentations/presentations_2012_07_26.pdf (Historic Energy Prices) xvi http://www.nctimes.com/blogsnew/business/energy/energy-navy-opposes-sdg-e-rate-increase/article_1e850c8a-7b0d-56e4-bff3-d45a3b08585e.html and http://www.ocregister.com/articles/sdg-347338-costs-county.html xvii Personal communication with Coastal Commission staff. xviii California Coastal Commission, Carlsbad Seawater Desalination Project, Energy Minimization and Greenhouse Gas Reduction Plan. Final Adopted Plan, September 2009 xix Coastal Commission staff report, February 9, 2010, http://documents.coastal.ca.gov/reports/2010/2/W6a-2-2010.pdf xx These figures come from the final approved GHG Plan and represent both Poseidon’s and Coastal Commission staff’s best estimate of the amount of energy the desalination plant will use in a given year, and the anticipated amount of associated GHG emissions. The actual amount of energy used, its associated emission factor and GHG
Poseidon Water Purchase Agreement: Private Profit, Public Risk
For more information, contact: Marco Gonzalez: marco@cerf.org, or Julia Chunn-Heer: julia@surfridersd.org
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emissions generated will not be known for certain until after the first year of operation, at which time adjustments will be made as needed to the amount of carbon offsets required for the following year. This protocol of annual
adjustments is further detailed in the final approved GHG plan. xxi As stated in Poseidon's approved GHG Plan, the automatic credit for reduction in imports from the State Water
Project is 67,506 MtCO2e. If Poseidon's desalinated water does not replace imported water, as recently acknowledged, Poseidon will now have to account for these 67,506 MtCO2e. At a price of $10 per MtCO2e, the
cost per acre foot can be attained as follows: 67,506 tons per year X $10 per ton = $675,060 / 56,000 acre-feet per year = $12 per acre-foot xxii Developing Dimension: State of the Voluntary Carbon Markets 2012. A Report by Ecosystem Marketplace & Bloomberg Energy Finance. May 31, 2012.
http://www.foresttrends.org/publication_details.php?publicationID=3164 xxiii Poseidon asks to sell up to $780M in tax-exempt state bond, North County Times, December 8, 2011
http://www.nctimes.com/business/73cc7198-61a1-5d18-ab6b-358556498de6.html xxiv www.ibank.ca.gov/res/docs/pdfs/2010.../Minutes_04-27-10_Final.pdf xxv UTILITIES: Desal project would raise average water bills 7 percent, http://www.nctimes.com/business/utilities-desal-project-would-raise-average-water-bills-percent/article_70060da2-
6c48-54d2-a0c6-2a1ab2594103.html xxvi http://www.nctimes.com/business/poseidon-asks-to-sell-up-to-m-in-tax-exempt/article_73cc7198-61a1-5d18-
ab6b-358556498de6.html xxvii “The San Diego County Water Authority (SDCWA) is continuing to work on the project details with the project
sponsor, Poseidon. Mr. Paparian stated that the project proponents are expecting to have two related bonds, a governmental purpose bond to be issued on behalf of the SDCWA and a private activity bond to be issued on behalf
of Poseidon. Both bonds are expected to come through CPCFA in an amount close to $750 million.” Minutes, California Pollution Control Financing Authority, April, 17, 2012 www.treasurer.ca.gov/cpcfa/minutes/2012/20120417.pdf xxviii http://www.utsandiego.com/news/2012/jun/15/carlsbad-desal-plant-pipe-costs-near-1-billion/ xxix http://sdcwa.org/sites/default/files/files/board/2012_presentations/presentations_2012_06_14.pdf (pp. 11-12 of second presentation) xxx http://www2.tbo.com/weather/weather/2010/dec/15/tampa-bay-water-idle-desal-plant-saves-money-ar-23284/ xxxi http://www.abc.net.au/news/2012-06-26/sydney-desalination-plant-to-switch-off/4092482?section=nsw xxxii http://www.waterboards.ca.gov/water_issues/programs/ocean/desalination/ xxxiii http://www.swrcb.ca.gov/water_issues/programs/ocean/cwa316/ xxxiv http://www.waterboards.ca.gov/water_issues/programs/ocean/desalination/ xxxv Personal communication with Coastal Commission staff. xxxvi Special Desalination Board Workshop, June 14, 2012, http://sdcwa.org/sites/default/files/files/board/2012_presentations/presentations_2012_06_14.pdf xxxvii http://sdcwa.org/sites/default/files/files/board/2012_presentations/presentations_2012_06_14.pdf xxxviii http://www.sdcwa.org/2010-urban-water-management-plan xxxix http://www.sdcwa.org/sites/default/files/files/board/2012_agendas/2012_08_12_Board%20Packet.pdf xl http://www.equinoxcenter.org/assets/files/pdf/AssessingtheOptionsfinal.pdf xli http://www.sandiego.gov/water/waterreuse/pdf/news/2012/waterreusescheme120525.pdf; http://www.sandiego.gov/water/waterreuse/pdf/recycledfinaldraft120510.pdf xlii http://www.sdcwa.org/desalination
THE SDCWA-POSEIDON WATER PURCHASE AGREEMENT
DOES NOT SERVE THE PEOPLE OF SAN DIEGO
DAVID ZETLAND
∗
Abstract.The San Diego County Water Authority (SDCWA) should not sign the
water purchase agreement (WPA) with Poseidon Resources, due to its economic,
social and logistical flaws. The first flaw is cost: water costing $2,000+ per acre
foot will either be sold at a lower price (due to average cost pricing), such that
SDCWA “buys high and sells low” or it will be sold at its marginal cost. In this
latter case of setting the price of all water to reflect the most-expensive source
(marginal cost pricing), we can expect that quantity demanded will fall to a level at
which the desalinated water would not be necessary. The second flaw is social: the
desalinated water will only improve local reliability if it’s sold at marginal prices
(meaning it would not be necessary). If it’s sold at lower prices and/or delivered
to new housing in the region, then SDCWA is losing money on the deal and/or
subsidizing new development at the expense of existing customers. Third, the WPA
is too complicated to understand, which means that SDCWA customers risk paying
higher-than-promised costs if something goes wrong; Poseidon Resources has not
successfully constructed and operated a desalination facility. The bottom line is
that SDCWA should find cheaper and more effective ways of improving regional
water security. Higher prices that reduce demand are easier to implement and
cost ratepayers nothing (assuming excess revenue from those using more water is
rebated to all customers). Governance reform at the Metropolitan Water District
of Southern California (MWD), the provider of most of SDCWA’s imported water,
would remove uncertainty from SDCWA’s supply by allocating water to MWD
member agencies willing to pay more for water, rather than allocating water using
the current outdated, politicized and inefficient allocation mechanism. SDCWA
needs to work harder for its customers instead of spending $3.3 billion on an “easy”
solution that does nothing to reduce long-term scarcity in the region.
Observations outside the WPA
Let’s begin with SDCWA’s summary of the WPA:
1
Under the agreement, the total price for the water including costs
to make improvements to the Water Authority’s pipelines and treat-
ment plant to accommodate the new supply is estimated at $2,042 to
$2,290 per acre-foot in 2012 dollars, depending on how much water is
purchased annually. (An acre-foot is approximately 325,900 gallons,
or enough to supply two typical single-family households of four for a
Date: October 16, 2012(Draft 1.1).
∗Senior water economist, Wageningen University (dzetland@gmail.com;kysq.org/pubs/cv.pdf).
This political-economic analysis was prepared for the San Diego chapter of the Surfrider Foundation.
1http://sdcwa.org/water-authority-releases-proposed-carlsbad-desalination-water-purchase-agreement
1
2 DAVID ZETLAND
year [at a rate of 112gcd].) The impact of this new supply on an indi-
vidual’s water bill will vary depending upon their local water agency.
The average household’s water bill would increase approximately $5 to
$7 a month by 2016 to pay for the new supply.
In addition, the Water Authority’s 24 local member agencies must
declare within the next 60 days whether they intend to purchase a
portion of the desalinated seawater supply directly from the Water
Authority as a local supply at the full cost per acre-foot. Local supplies
help improve water agencies’ water supply reliability, especially during
times of drought or shortages in imported water supplies.
Some thoughts:
If that cost per acre foot is averaged with other cheaper water sources to arrive at
a postage stamp price of, say, $1,100 per acre foot,
2 then SDCWA is planning to lose
money on each acre foot.
If SDCWA sold ALL its water at this marginal cost ($2,200 per af),
3 then what
would consumption be? Assuming an average demand elasticity of -0.20,
4 then the
reduction in quantity demanded resulting from doubling the price of water would
be greater than the additional quantity supplied (assuming that the plant supplies 7
percent of total supply), i.e., doubling the price to pay for 7 percent more supplies
would reduce demand by 20 percent. Put differently, customers facing a price that
reflected the actual cost of desalinated water would reduce their demand by enough
to eliminate the need for the plant!
Although customers in San Diego may not feel much pain from paying $5-7 per
month ($60-84 per year), we have to ask them if they are interested in wasting that
much money per year, for 30 years, in a total that works out to over $3.3 billion
(48TAFY * $2,290 or 56TAFY * $2042 over 30 years sums to $3.3-3.4 billion).
This point above brings us to an important question. Is SDCWA looking for the
cheapest way to improve reliability? A desalination plant is certainly easier to control
than the Metropolitan Water District of Southern California (MWD) or the weather,
but it’s also possible to reduce demand. Using SDCWA’s numbers from the quotation
above (112gcd),
5 we can see that water consumption is already quite high. Urban
demand in Australian cities with similar weather is usually less than 180 lcd (47 gcd),
or less than half SDCWA’s level. Demand in Monterey, California is 65 gcd.
6 It seems
2According to http://www.sdcwa.org/rates-charges, SDCWA charges $714+$256+$93=$1063
to deliver a treated acre foot to its member agencies, which then add their own charges.
3Economists advise that companies should sell their production at a price that reflects the marginal
cost of the last unit produced. This is what happens in the for-profit world. Utilities that are not
allowed to “make profits” assume that they should price their goods at the average cost, but it’s
more sensible to sell the goods at marginal cost and apply the excess revenue to (1) pay fixed costs
and then (2) customer rebates.
4The price elasticity (a ratio reflecting the fall in quantity demand resulting from an increase in
price) for indoor water use can be as low as -0.10, but the price elasticity of outdoor water use is
much “stronger,” i.e., -0.60 or lower.
5I tried to find consumption data for the City of San Diego, without luck.
6Per my experience on another consulting project but probably available from the CPUC.
THE WPA DOES NOT SERVE THE PEOPLE OF SAN DIEGO 3
that SDCWA and its member agencies have not done very much to reduce demand
before looking for new supplies. Where is SDCWA’s comprehensive assessment of
options for closing the supply-demand gap? Is there, in fact, an actual threat of a
damaging shortage, or are water managers taking an easier path that requires less
work from them but increases costs to ratepayers?
This point brings up the interesting question of whether SDCWA wants this ad-
ditional water as a means of serving current customers or as a supply that can be
used to meet new demand from housing developments, industrial expansion, agricul-
tural irrigation, etc. As a point for discussion, consider that agricultural water use
in FY2011 was 44TAF, of which 34TAF came from SDCWA – a number that should
be compared with the desalination plant’s capacity of 56TAF.
7
Just as a final note (before we get to other matters), consider a potential complica-
tion: SDCWA wants local agencies to sign 30-year purchase agreements in the next
60 days rather than allowing them to buy desalinated water on an as-needed basis
over the life of the contract. Such deals will surely reduce SDCWA’s exposure to the
$3.3 billion liability, but it does nothing to encourage those agencies to limit their
water demand. If they are committed to take the water, then they will find ways to
use it.
Water scarcity in San Diego.The SDCWA was formed in 1946 to merge the
interests of local water providers into one entity that could then join MWD, but
SDCWA’s relationship with MWD has been strained over the years – mostly due to a
mismatch between SDCWA’s (high) water purchases and (low) voting power at MWD.
Governance reform at MWD has been blocked by members who prefer the status
quo and a lack of intervention by the State Legislature. Alternative mechanisms for
allocating water and money within MWD have, likewise, been blocked. The resulting
dysfunction at MWD has raised costs to water customers in Southern California,
decreased water supply reliability, and reduced regional cooperation.
8
One result of this dysfunction has been SDCWA’s quest for “independence” – a
quest that has cost ratepayers millions of dollars as SDCWA has built duplicate
facilities. This $900 million desalination plant is only the most recent addition to
SDCWA’s portfolio. Poseidon Resources has attempted to bring this “solution” into
operation for over ten years.
9
Who is Poseidon?Under “Our Experience” Poseidon Resources lists zero operating
desalination projects, two perspective projects (Carlsbad and Huntington), and six
water treatment projects – five of which are with PEMEX in Mexico (the other is in
Rhode Island).
10
7http://www.sdcwa.org/sites/default/files/files/finance-investor/cafr2011.pdf
8See my dissertation (“Conflict and Cooperation within an Organization: A Case Study of the
Metropolitan Water District of Southern California” at http://ssrn.com/abstract=1129046)for
details.
9I interviewed Peter MacLaggan in 2005 or so.
10http://www.poseidonresources.com/our_experience.html
4 DAVID ZETLAND
They therefore omit to mention their involvement with the 25MGD Tampa Bay de-
salination project, which ran over budget and overdue as three of Poseidon Resources’
engineering partners went bankrupt (easy when a corporation is established for each
project, to limit liability to the parent company). Tampa Bay Water ended up buying
out Poseidon Resources and arranging for American Water/Pridesa to bring it online.
Poseidon Resources, as project manager, will neither finance, design, build nor
operate this facility. What will Poseidon Resources do to earn its profits? Why isn’t
SDCWA, an agency with considerable financial resources and a much stronger stake
in a successful project, doing business with Poseidon Resources? There are these
potential reasons:
(1) Poseidon Resources is using its political power to collect money. This is fea-
sible given earlier reports of Poseidon Resources support for San Diego politi-
cians not directly related to SDCWA.
11
(2) Poseidon Resources has some genius in managing projects. This is not obvious
from Poseidon Resources’ experiences.
(3) Poseidon Resources is taking on financial risk that SDCWA prefers to avoid.
This is hard to support, given that project bonds will be issued by the CPCFA
– California Pollution Control Financing Agency (page 5 et seq.).
(4) Poseidon Resources is assuming technical risks. This is also hard to support,
as Poseidon Resources is subcontracting EPC (Engineering Procurement Con-
struction) to Kiewit Infrastructure West-Shea Construction JV) and opera-
tions to IDE Technologies (WPA Appendix 14.3.2) These companies will post
performance bonds (12.1.B).
(5) Poseidon Resources has worked on this project and cannot be easily replaced
(path dependency).
I would not raise these questions if Poseidon Resources had won a bidding contest
for an RFP posted by SDCWA (or its predecessors), especially if the bid had allowed
for “unconventional sources” such as recycled water.
Inside the WPA
In an ideal contract, Poseidon Resources would finance, build and operate a project
that would provide water to SDCWA at an agreed price for 30 years, but Poseidon
Resources is neither financing, building or operating this plant. That is perhaps why
the contract is so long and complex. I am quite overwhelmed by the text in the WPA
and its appendices, e.g., 2.2.R
12
11Poseidon Resources says it “has not directly or indirectly offered or given any gratuities (in the form
of entertainment, gifts, or otherwise) to any Water Authority Indemnitee with a view toward securing
this Water Purchase Agreement or securing favorable treatment with respect to any determinations
concerning the performance of this Water Purchase Agreement” at 2.2.N.
12Or how about this?
Project Company Acknowledgment (9.1.A).The Project Company acknowl-
edges that the Project will constitute: (1) a primary source of treated drinking
water for conveyance to the Member Agencies and their customers through the
THE WPA DOES NOT SERVE THE PEOPLE OF SAN DIEGO 5
Practicability of Performance.The Design Requirements, the
technology and the construction management practices to be employed
in the Project are furnished exclusively by the Project Company and
its Project Contractors and Subcontractors, and the Project Company
assumes and shall have exclusive responsibility for their efficacy. The
Project Company assumes the risk that the Raw Seawater pilot test-
ing conducted by the Project Company for the Project may, to any
extent, have been inadequate or of insufficient duration to provide a
proper basis for the design, construction, operation or maintenance of
the Project or for the establishment of the Performance Guarantees
and the Monthly Water Purchase Payments. The Project Company
further assumes the risk of the practicability and possibility of per-
formance of the Project on the scale, within the time for completion,
and in the manner required hereunder, and of treating Raw Seawa-
ter and producing and delivering Product Water through the design,
construction, operation, maintenance and management of the Project
in a manner which meets all of the requirements hereof, even though
such obligations may involve technological or market breakthroughs
or overcoming facts, events or circumstances (other than Uncontrol-
lable Circumstances) which may be different from those assumed by
the Project Company in entering into this Water Purchase Agreement.
The Project Company agrees that sufficient consideration for the as-
sumption of all such risks and duties is included in the Monthly Water
Purchase Payments. No impracticability or impossibility of any of
the foregoing shall be deemed to constitute an Uncontrollable Circum-
stance. Nothing in this paragraph, however, shall be construed to limit
or deny the Project Company’s right to be excused from performance
where specifically provided elsewhere in this Water Purchase Agree-
ment.
Now it’s all well and good to be clear, but these 500+ pages of contracts indicate
a certain lack of trust between the parties. From experience, we know that contracts
can seem to say one thing but turn out to mean another. I can’t really understand
the implications of the many inter-related and cross-referenced clauses in this WPA –
Water Authority Distribution System; and (2) a critical part of the Water Au-
thority’s emergency storage program, which consists of a system of reservoirs, in-
terconnected pipelines and pumping stations designed to make water available to
the San Diego region in the event of an interruption in imported water deliveries.
The Project Company further acknowledges that the Water Authority, in meeting
the water supply requirements of the Service Area, is providing an essential public
service and, in complying with Applicable Law, will rely on the performance by
the Project Company of the Contract Obligations. [YES] The parties acknowl-
edge and agree that this subsection shall not be construed to expand or otherwise
modify the Project Company’s obligations under this Water Purchase Agreement
[NO].
6 DAVID ZETLAND
and I wonder if SDCWA’s General Manager or customers can either. It’s important –
especially with Poseidon Resources’ past failure in Tampa – to ensure that SDCWA
doesn’t get left with a white elephant, as the people of Melbourne, Australia just did
with their A$3.5 billion project that is now mothballed due to recent rainfall.
I’ve noted that the contract is take or pay, i.e., SDCWA promises to buy 48TAFY
for 30 years (5.1), but I’d like to see a few scenarios that clearly spelled out:
•What happens (who pays) if the project goes over cost (Poseidon Resources
pays, per 6.1.A, but do water prices stay the same?) or if it’s late?
•What happens if Poseidon Resources goes bankrupt (“default” is in Article
20 but then what?) or its subcontractors fail? This is relevant since Posei-
don Resources is actually signing the contract as a special purpose LLC, i.e.,
Poseidon Carlsbad LLC.
•How much will SDCWA pay to buy the project in year 10?
•Poseidon Resources will make an unknown equity contribution (2.2.G), but
it will receive equity return charges specified in Table 1.2 (WPA Appendix
10-5). Is Poseidon Resources getting paid $310-790/af for contributing pro-
portionally to the equity:debt mix? Table 1.2 shows debt service payments of
$650-1240/af. Does that imply that Poseidon Resources’ equity contribution
will cover 32 percent of costs? If the proportion is lower, then why is Posei-
don Resources getting paid a premium, given that subcontractors are posting
performance bonds and CPCFA is issuing the bonds?
13
•What happens to Poseidon Resources’ equity if they fail to deliver on time
and at price?
•Why does San Diego pay for damage in excess of the insured amount in an
earthquake?
•What happens if the Cabrillo lease is cancelled or the seawater intake is de-
certified in 2017 (4.7 and 20.1.8)?
•Electricity is important (25 percent of total costs?), but Appendix 9 is painfully
exact with prices and formulas. Who bears the risk if prices change?
13These calculations may be confused by charges in tables 1.3 and 1.4, so please check.
Fallbrook Public Utility District
DRAFT 11/10/12
1
Attachment J
Desalination costs:
48,000 acre-feet ($2288)= $109,824,000 (take-or-pay)
8,000 acre-feet ($553)= $4,424,000 (extra plant capacity)
56,000 acre-feet total: $114,248,000
The 8,000 acre-feet could be extraordinary local supply
MWD Imported water costs:
(Tier 2)= $920 per acre-foot
56,000 acre-feet ($920)= $51,520,000
Penalty rate: (Tier 2 rate x 2)= $1840 per acre-foot
DRAFT 11/10/12 2
DRAFT 11/10/12 3
Imported Water
$51,520,000
Desalinated Water
$114,428,000
56,000
Acre-Feet
56,000
Acre-Feet
DRAFT 11/10/12 4
Imported Water
$41,216,000
Desalinated Water
$114,428,000
44,800
Acre-Feet
56,000
Acre-Feet
11,200
Acre-Feet shortfall (20%)
DRAFT 11/10/12 5
Imported Water
$53,580,800
Desalinated Water
$114,428,000
44,800
Acre-Feet
56,000
Acre-Feet
shortfall (8%)
penalty
4,480
6,720*
* 15% of 44,800
Scenario One: no increase in reliability
= $62,908,000 (insurance premium)
Scenario Two: $114,428,000 - $41,216,000
11,200 acre-feet
= $6537 per acre-foot
Scenario Three: $114,428,000 - $53,580,800
4,480 acre-feet
= $13,582 per acre-foot
DRAFT 11/10/12 6
11,200 acre-feet is:
◦Less than 2 % of regional demand
◦About 6 % of in-region emergency storage
◦Perhaps a quarter of the region’s unaccounted water losses
◦Well within the region’s short-term conservation
capabilities (based upon past SDCWA campaigns)
DRAFT 11/10/12 7