Water Authority Board Continues Due Diligence on Proposed Desalination Contract
October 25, 2012
The San Diego County Water Authority’s Board of Directors on Thursday continued reviewing the financial details of a proposed contract…
The San Diego County Water Authority’s Board of Directors on Thursday continued reviewing the financial details of a proposed contract to buy water from a planned seawater desalination plant in Carlsbad, and it heard answers to a range of questions raised by residents about the proposed contract at two special public meetings this month.
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Public Review of Proposed WPA
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The board plans to consider the public-private partnership project at its special meetings November 8 and 15, and the earliest a vote could occur is November 29. The Water Purchase Agreement was reached after nearly a year of negotiations. It sets terms for securing this new, drought-proof water supply while protecting Water Authority ratepayers by assigning appropriate development and operations risks to the private developer, Poseidon Resources.
“It was great to see that the public is so interested in this project and we are taking the comments we heard to heart as we try to balance the costs of the desalination plant with the increased water reliability it offers,” said Thomas V. Wornham, Chairman of the Water Authority’s Board of Directors.
At Thursday’s meeting, Water Authority staff presented additional financial details about the proposed public-private partnership. For Poseidon and its investors, the Water Authority said it has targeted a 9.38 percent internal rate of return for the “equity return charge” component of the water unit price. Poseidon and its investors will provide $164 million in equity to complete the construction financing.
Most of the project’s capital cost – 82 percent – will be financed through tax-exempt bonds as a direct pass-through to the Water Authority at what are currently historic-low interest rates. Poseidon earns no profit on this portion of the project’s financing.
Poseidon’s return on investment will change based on its performance. If the project is completed on time and budget, if it consistently meets the Water Authority’s demand for water and if it is operated efficiently, Poseidon could achieve a return between 10 percent and 13 percent. This range is on the low end of market rates for a comparable investment, according to Water Authority analysis. If construction and operating conditions are not met, Poseidon’s equity return could be substantially lower.
The proposed facility would provide 48,000 to 56,000 acre-feet of desalinated seawater annually – about 50 million gallons per day — starting as early as 2016.
In 2020, the plant would account for an estimated 7 percent of the total projected regional supply and about one-third of all locally generated water in San Diego County. It would be the largest desalination plant in the Western Hemisphere, and the cost of its water would be similar to other new sources such as indirect potable reuse.
The project, including contract terms and costs, has been discussed at public meetings more than 30 times since July 2010. Under the draft agreement, the total price for the desalinated water – including related upgrades to the Water Authority’s pipelines and treatment plant – is estimated at $2,041 to $2,290 per acre-foot in 2012 dollars, depending on how much is purchased annually. (An acre-foot is approximately 325,900 gallons, or enough to supply two typical single-family households of four for a year.)
Once the price is set in the Water Purchase Agreement, it can only increase by the rate of inflation and other predetermined factors set in the contract. The price is expected to grow by an average of 2.5 percent annually, though there are a few circumstances that would allow it to rise by up to 10 percent in a single year. Those events include terrorism and earthquakes or certain changes in law. In any case, the price cannot increase by more than 30 percent above the cost of inflation over the 30-year term of the agreement.
To pay for desalinated water, the average household bill in the region is projected to increase $5 to $7 a month by 2016. The exact amount will vary by retail water agency. The Water Authority has met with member agencies numerous times in recent months to help fine-tune their rate analyses to account for desalination costs.
The Water Authority has investigated seawater desalination as a new source since 1993. Desalinated seawater is about twice as expensive as existing supplies, but the proposed facility would make the local water supply more reliable by reducing the region’s dependence on imported water sources that are vulnerable to droughts, disasters and regulatory restrictions.
On Thursday, Water Authority staff also reviewed desalination in the context of the region’s overall water resources mix, which includes recycling and conservation. The Water Authority has aggressively pursued indoor and outdoor water-use efficiency programs – including appliance rebates and state legislation – that have helped to drive down per capita consumption across the region over the past two decades.
In related business, the Water Authority Board also adopted a uniform contract that would allow member agencies to directly purchase from the Water Authority a share of what is produced by the Carlsbad plant at full cost. Member agencies have until November 26 to sign up for that specially contracted supply.