Water Authority Board Approves Terms and Conditions for Negotiating Carlsbad Desalination Project Water Purchase Agreement

Short Title
Water Authority Board Approves Terms
July 22, 2010

The San Diego County Water Authority Board of Directors today approved key terms for purchasing water from the nation's largest seawater desalination facility in Carlsbad.

Today's action enables Water Authority staff to begin negotiating specific elements for a water purchase agreement with Poseidon Resources, the private firm developing the Carlsbad Desalination Project. These elements include water purchase price, allocation of risk and options to eventually purchase the project's pipeline and the entire desalination plant.

Under terms agreed to by Poseidon and the Water Authority, before negotiations begin on a final agreement, Poseidon must secure sufficient financial commitments from private investors to meet requirements for fully funding project construction. In addition, prior to Water Authority Board approval of a final agreement, Poseidon must execute all agreements for construction and operation of the project and finalize the documents needed to finance the project in the bond market.

"These terms are not a binding contract, but provide a solid foundation for reaching a water purchase agreement that keeps this important regional water supply project moving forward," said Claude A. "Bud" Lewis, Water Authority Board Chair. "They also will protect our ratepayers' interests by assigning appropriate upfront risks of building, financing, and operating the plant to the private sector, while providing for eventual public ownership of the project."

Key terms for the water purchase agreement include:

• The term of the agreement will be for 30 years once commercial operation begins, subject to early buyout provisions outlined below.

• The Water Authority will have no responsibility or liability for the design, permitting, financing, construction, or operation of the project.

• The maximum price for purchasing water will be set equal to the contract price in the existing water purchase agreements with the Desal Partners, nine local water agencies currently contracted to buy water from the desalination project. That contract price consists of a production cost of approximately $1,100 per acre-foot and a delivery charge of about $500 per acre-foot, with annual escalators tied to inflation. That price is competitive with other local supply options and other desalination projects worldwide. The terms also set principles for structuring price so that both parties will explore ways for the Water Authority to share in potential cost-saving measures.



• An option for the Water Authority to purchase the project’s conveyance pipeline from the plant site to the Water Authority’s Second Aqueduct in San Marcos, once the plant has a proven track record of successful operation. Purchasing the pipeline could enable the Water Authority to reduce the price of the project’s water by up to $200 per acre-foot.



• An option to buy the entire plant beginning 10 years after the start date for commercial operation at a price to be specified in the water purchase agreement. The right to purchase the plant at the end of the 30-year water purchase agreement term for $1. This would ensure eventual public ownership of the plant, securing long-term price certainty and regional public benefit from ratepayers’ past investments in the plant through 30 years of water purchase payments.

The Water Authority will also conduct extensive analyses of the project's financial, legal, engineering and other technical aspects to ensure the project's water reliability and water quality meet the Water Authority's standards prior to approving a water purchase agreement.

The Board approved spending up to $300,000 for these studies and for expert business and legal advice during contract negotiations.

The Carlsbad Desalination Project, under development since 1998, is a fully permitted seawater desalination facility with all environmental clearances. IDE Technologies, a worldwide leader in the design, construction and operation of desalination plants, was selected by Poseidon through a competitive procurement process to be the desalination process contractor for the project. IDE has extensive experience in seawater desalination having constructed and operated two of the largest reverse osmosis desalination plants in the world at Ashkelon and Hadera, Israel.

When completed, the Carlsbad plant will provide 56,000 acre-feet of water annually. By 2020, the project will supply approximately 8 percent of the region's total water supply.