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Water Authority approves purchase agreement for desalination plant's water

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People in San Diego County can now — officially — expect to be drinking desalinated seawater within a few years.

The San Diego County Water Authority voted overwhelmingly Nov. 29 to approve the proposed water purchase agreement between it and Poseidon Resources, the developer of the seawater desalination plant proposed for construction in Carlsbad.

The water purchase agreement now in effect was negotiated through the last year and announced in a draft form in September. The motion to accept the recommendation earned support from 85 percent of the board.

Board directors listened to comments from numerous public speakers and each other throughout the afternoon on a variety of issues, from rate structures and cost analysis to worries of liability, health and wildlife concerns.

Director Mark Watton, representing the Otay Water District, left no doubt as to how he’d be voting.

“Otay fully supports desal,” he said. “We fully support diversifying our water supply,”

But Otay isn’t convinced the deal with Poseidon is the right deal for the region, Watton continued, adding that the water district’s leaders have examined and discussed it at length.

“First off, in my view, this really isn’t a private deal anymore,” Watton said.

The risk transfer written into the water purchase agreement, from the Water Authority’s involvement in how the plant is constructed to the potential for the Water Authority to purchase the plant after 10 years, comes at a cost, Watton said.

“If you’re going to buy out a private equity deal sometime in the future, that gets baked into the cost,” Watton said. “I don’t know what that cost is because when you start out with a negotiation like that, it’s not going to be a discreet number.”

The rate impacts on Otay Water District’s customers would be too great, he added.

“Water rates that are already on schedule (have) an impact on customers by 2017 of $16 per month on an average household,” Watton said.

The agreement to buy Poseidon’s desalinated water would add $8.66 to that already-scheduled rate rise in a best-case scenario, assuming everything goes as planned for Poseidon, Watton added, meaning that by 2017, Otay’s customers could be paying an average of $24.66 more per month than they do now.

But more directors thought the investment was worth it than those who did not.

Director Javier Saunders, who represents the city of San Diego on the board, said that experiences from just a couple of years ago highlighted San Diego’s need for self-produced supply. In having to comply with strict water allocations imposed by the Metropolitan Water District of Southern California — the county’s foremost water supplier — local water districts and the Water Authority were forced to conserve.

“I can’t tell you when our next drought cycle will be,” Saunders said, “but I certainly know that this (desalination) plant will play a big role in our long-term water and our long-term strategy plan. This is really about protecting our economy and our quality of life.”

While supply reliability seemed to help drive Saunders’ support, he also didn’t see the issues of cost through the same lens as Watton.

He complimented the Vallecitos and Carlsbad Municipal Water Districts for opting to purchase fixed amounts of the plant’s output, citing projections that at sometime between 2025 and 2030, the cost of the desalinated water will be less than what the Water Authority pays for water from MWD.

Fewer than 24 hours after the board cast its vote, the California Pollution Control Financing Authority approved the issuance of up to $840 million in bonds to finance the project. CPCFA administers and allocates the state’s annual allotment of federal tax-exempt private-activity bonds for the financing of private development projects that benefit the public. The approval allows the project to proceed with the sale of tax-exempt private-activity and municipal-purpose bonds.

Poseidon expects the bond sale to take place in mid-December, with construction to commence shortly thereafter, the company said in a release.

If built according to schedule, the desalination plant would produce 50 million gallons of drinking water per day starting in 2016. Estimates are that by 2020, water produced there would account for 7 percent of the total regional supply, or about one-third of all water generated in San Diego County.

Each of the Water Authority’s member agencies had the option to propose fixed-amount water purchase agreements with the Water Authority that would guarantee them shares of the water. Those member agency-level proposals are subject now to the drafting of a contract, review and Water Authority board approval. Carlsbad Municipal’s proposal is to purchase 2,500 acre-feet of water per year, and the Vallecitos Water District has proposed to buy 3,500 acre-feet per year.

Preliminary work at the proposed construction site — located on a corner of the Encina Power Station on the edge of Carlsbad’s Agua Hedionda Lagoon — began in 2009. Poseidon began planning for the plant much earlier, though, executing a lease agreement with the owner of the Encina Power Station, NRG Energy, for space at the build site as far back as 2003.

Under the 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. The Water Authority would have the option to purchase the plant after 10 years of operation under Poseidon, with a reduction in the plant purchase cost to $1 following the full 30-year term of the agreement.

The facility will cost about $691 million to build, plus about $213 million in financing costs on the underlying debt, according to figures provided previously by Poseidon. According to Water Authority staff, project costs needed to be recovered through the authority’s rates and charges will be reduced in line with the fixed purchase amounts desired by the two member agencies.

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