By David Rosenfeld
Wednesday, 06 April 2011
When it comes to the future of desalinated water in California, San Diego County is facing a reality check. In agreements signed years ago, nine local water agencies brokered sweetheart deals with Poseidon Resources, an investor-owned Connecticut company that has been planning to build and operate a desalination plant in Carlsbad for the past 12 years.
The agreements guaranteed those nine agencies would not pay the true cost of desalinated ocean water – the most costly form of tap water on the planet – until the costs of imported water was even greater. And at that time, they would split the difference for up to 30 years once the plant was up and running.
But those contracts, as they appeared, were too good to be true. They were so good, in fact, for the water agencies that it made the project financially unfeasible, resulting in a near junk bond rating last year as Poseidon prepared to float $530 million in tax-exempt private activity bonds.
So the bond sales were put on hold and the contracts were renegotiated with Poseidon asking the San Diego County Water Authority for an additional subsidy and possibly to buy the nearly $700 million plant if there are future problems. (Poseidon had trouble with their desalination plant in Tampa Bay, Floridaand the Tampa Bay Water Authority had to take over that project.)
Rather than pass-through millions of dollars in subsidies, including up to $350 million from the regional wholesaler Metropolitan Water District of Southern California, the Water Authority is brokering its own deal with Poseidon to purchase the water directly.
“Those (local) agencies wanted to purchase the desalinated water at a price that was never more than buying water from the Water Authority, and that’s not possible. That was not financially viable,” said Ken Weinberg, director of water resources for the San Diego County Water Authority. “Discussions we’re having now is about paying the actual cost of production and distribution of that water.”
The maximum price would be set at $1,600 per acre-foot in today’s dollars compared to around $800 for imported water currently. Exactly how much desalinated water the Water Authority will agree to buy from Poseidon – to then resell to local agencies – is still being negotiated in closed-door meetings. Poseidon spokesman Scott Maloni did not return repeated requests for comment.
Based on the average price of desalinated water around the globe at around $3,000 to $4,000, Poseidon may be still underestimating.
The new deal will certainly be more favorable to Poseidon’s equity investors – which change frequently and have included Warburg Pincus, Citi Sustainable and GE Capital.
The deal will undoubtedly be worse, however, for Southern California ratepayers, who increasingly find themselves at a disadvantage when it comes to what they will pay for life’s most essential resource.
“The Water Authority will have to raise its rates to cover additional costs of desalination,” said Glenn Pruim, utilities director for Carlsbad Regional Water District. “It’s definitely in the best interest of the investors. This is a really good deal for Poseidon. It’s a good deal for the Water Authority because they are securing a regional source of water and it could be a good deal for Carlsbad. We just hope they are as good at negotiating deals as they are at making water.”
Eight of the nine local water agencies that had deals with Poseidon – all but Carlsbad – have agreed to rip up their contracts and let the Water Authority proceed. Carlsbad is holding out for an agreement that guarantees a portion of the tax revenues the city would lose if the Water Authority ever exercised its right to buy the plant. Pruim said the two parties will likely reach an accord soon.
“Poseidon’s business plan doesn’t really make sense except that they get bought out by a public agency,” said Conner Everts, director of Desal Response Group, which would prefer more conservation measures before beginning desalination efforts. “We don’t really think they are there to honestly be a company producing water. We think they are there to buy permits and then get bought out.”
The Water Authority along with Poseidon and its investors are betting that the price of imported water will soon exceed the astronomical price of desalinated water. Various experts interviewed for this series believe it could be anywhere from 10 to 20 years. Yet Poseidon reportedly believes it could take less than five years.
“I don’t know how practical that is,” Pruim said. “Part of it is just reality. Poseidon isn’t manipulating the price of water. It is what it is. They are taking advantage of that in a way. The only thing that could go wrong is if Poseidon can’t produce it and they go bankrupt.”
An analysis by the Public Education Center’s DCBureau.org published last year showed that while private equity and bonds would be used for upfront construction, southern Californians would pay at least $640 million over 30 years for the project, including as much as $374 million in public subsidies. Those subsidies are largely still in place as Poseidon looks to forge a new agreement and finally break ground later this year to start producing water by 2015.
In Poseidon’s latest legal victory, California’s 4th District Court of Appeal rejected a claim by San Diego Coastkeeper to conduct additional environmental studies.
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