San Diego Water-Purchase Plan Of Interest To Monterey Ratepayers

By DOUG WILHELM and DALE HEKHUIS
Guest commentary
The San Diego County Water Authority (SDCWA), a public nonprofit, is considering whether to purchase about 50,000 acre-feet of desalinated water annually from Poseidon Resources, for-profit, privately owned water development company. Poseidon would construct, operate and own the facility in Carlsbad, adjacent to the Encina Power Station. The project has obtained all the required environmental permits and clearances. If constructed, this would be the first large-scale desal plant in California. A contract could be signed by the end of the year.

However, our interest in the Poseidon project is not with its large scale, but rather with the San Diego Authority’s path-breaking water purchase agreement. There are three critical elements in this agreement that are of special interest to Monterey water ratepayers.

The first element is water cost for SDCWA, which is estimated at $2,000 per acre-foot. Cal Am’s cost is estimated to be in the range of $4,000 to $5,000 per acre-foot for desalination water. The obvious question is why. Not only that, the estimates of Cal Am’s competitors, Deepwater and People’s, both of which would be located at Moss Landing, are in line with the San Diego estimate. This suggests that, far from being substantial underestimates as some Peninsula critics have claimed, the Deepwater and People’s estimates are on the mark.

The second element is risk containment. On this matter the SDCWA took a strong stand. The risks associated with developing the project, design, permitting, financing, construction costs, construction cost overruns and operations are all assigned to Poseiden. This is in contrast to Cal Am, which has a practice of passing all such costs to its water customers with the powerful assistance of the California Public Utility Commission (CPUC). For example Cal Am was able to obtain a $40 million approval from the CPUC for expenses for the shutdown of the failed Regional Desalination Project. Ratepayers will end up paying for this on their water bills. This has all the appearance of being a reward for failure and would not have occurred if a San Diego-type contract had been in effect.

The third element is project ownership. Between 10 and 30 years after startup, the nonprofit SDCWA can purchase the Poseidon facility using a formula contained in the water purchase agreement. The price would be the amount of outstanding bond debt (which has to have been preapproved by SDCWA), the remaining equity return and any remaining contractor costs. At 30 years, the SDCWA can purchase the Poseidon Facility for $1. No such options are available for the Cal Am facility. Why?

In our view, SDCWA has taken a principled approach that provides low-cost desal water and protects the interests of the authority, Poseidon and the ratepayers. SDCWA has made a landmark achievement that has served to stimulate rethinking about ratepayer interests here on the Peninsula.

The Monterey Peninsula Regional Water Authority (MPRWA), informally known as the mayor’s group, should have its independent engineers validate the Poseidon, Cal Am, Deepwater and People’s cost estimates.

It should be recognized that ratepayers are the real investors in the Cal Am project, not Cal Am. Therefore, the real investors should insist that the same risks picked up by Poseidon in the San Diego project should be picked up by Cal Am or any other desal supplier.

Third, the mayor’s group and the Monterey Peninsula Water Management District need to jointly address the issues involved in public ownership, risk containment, and the concept of the 10-year and 30-year San Diego buyout provisions.

Doug Wilhelm and Dale Hekhuis are leaders of the Peninsula Water Ratepayers Alliance. Hekhuis is a former chairman of the Monterey Peninsula Water Management District.