Water Purchase Agreement Bad News for Orange County

November 30th, 2015

Proposed agreement between the San Diego County Water Authority and Poseidon Resources is a threat to Orange County water suppliers and ratepayers
Media Contact: Pamela Crouch Director of Communications & Marketing (714) 850-1965 |
Orange County Coastkeeper
11/27/2012

The San Diego County Water Authority (SDCWA) Board of Directors will vote to approve a 30-year Water Purchase Agreement (WPA) with Poseidon Resources, (Poseidon) this Thursday, Nov. 29. The WPA is a “take or pay” contract between the SDCWA and Poseidon for at least 48,000 (and up to 56,000) acre-feet of water per year from the proposed Carlsbad Seawater Desalination Project. Considering the implications that this deal may have for the proposed Huntington Beach facility, Coastkeeper hired AC Consulting to conduct an independent financial analysis of the WPA. The report shows three areas where the costs associated with the WPA should raise alarm for the SDCWA, its ratepayers and the Orange County agencies that may be presented with a similar agreement.

The three major provisions of the WPA that will affect the cost of desalinated water are: 1) the potential for a 30% unit price increase due to “uncontrollable circumstances, 2) risk of electricity price increases, and 3) the impact of the debt and equity structure.

The SDCWA has promised San Diego ratepayers that Poseidon bears most of the risk in the proposed WPA, including a purported safeguard for price increases due to “uncontrollable circumstances”. According to the report, however, “this allowance of a 30% increase in the unit price due to “uncontrollable circumstances” places too much risk on the SDCWA and ratepayers. With capital costs (plant & pipeline) making up 52% of the total unit price, a capital cost over‐run of as much as 57% (about $500 million,) could still be passed onto ratepayers if caused by ‘uncontrollable circumstances’. This is an extremely large risk to be borne by ratepayers.” If these capital cost increases occur within the first few years of the 30‐year term, the impact to ratepayers will be even more significant.

The SDCWA and ratepayers assume all of the risk with a rise in electricity prices. The report analyzed a potential electricity rate increase about 3% higher than that assumed in SDCWA calculations. “California utilities must make infrastructure investments and invest in more costly forms of power in order to meet the mandate that 33% of their portfolio come from renewable sources by 2020. If prices were to rise by 5% per year instead of 2%, this would translate into a $373 million cost increase (in 2013 dollars) over the 30-year agreement.” This could raise the price to $2,315 per acre-foot, and adding the “uncontrollable circumstances”, the average price could rise to as much as $3,038 per acre-foot, with a final year cost of $7,834 in 2046. In comparison, imported water from the Metropolitan Water District of Southern California is currently below $800 per acre-foot.

The report also notes that the overall cost of the WPA could be significantly lower if the cost of debt and equity were straight-lined over the 30 years, as opposed to the proposed structure which increases debt and equity payments 2.5% per year. The report found that “[t]his structure makes the initial price tag of the agreement look lower than it really is, and it also results in paying much more in interest payments over the life of the agreement.”

There has been controversy surrounding Poseidon and their proposed Carlsbad and Huntington Beach desalination plants since they were first proposed over ten years ago. The Carlsbad facility was originally estimated to cost $500 million to build, but now the estimates are close to $1 billion. On the same day that
the SDCWA Board will vote on the WPA, a Municipal Water District of Orange County (MWDOC) workgroup and Poseidon will be meeting to finalize a draft Term Sheet for a water purchase agreement for the proposed Huntington Beach plant. MWDOC needs to be aware of the potential liabilities that an agreement with Poseidon will leave them responsible for, which ultimately becomes a burden to
ratepayers.

“This [water] purchase agreement is written to benefit and protect Poseidon and only superficially the ratepayers,” states Coastkeeper’s Executive Director, Garry Brown. “We anticipate that Poseidon will propose a similar plan for Orange County, and we urge local agencies to look at more cost-effective and less environmentally damaging options before considering desalination.” Coastkeeper, in partnership with the Surfrider Foundation, Residents for Responsible Desalination, Coastal Environmental Rights Foundation and the California Coastal Protection Network support continued water use efficiency
programs, expanding water recycling projects such as the Groundwater Replenishment System and storm water capture and viable alternatives that should be explored before resorting to desalination.