How accurate are these estimates?
It’s hard to tell with the limited amount of information that Poseidon has released on their draft term sheet.
Obviously, a very large user – a high school with athletic fields, a hotel, a homeowners association, an apartment owner, a supermarket, restaurant or manufacturing facility, will have a bill much higher than the average customer. A frugal individual customer may have a much lower long-term cost.
But the cost of these "Take-or-Pay" contracts will be pushed through into the general cost of living throughout Orange County.
Many, Many Questions
There are a lot of unknowns when it comes to the long-term costs of Poseidon’s water because Poseidon is not releasing to the public the underlying data. We can see the total cost they are estimating, and we can also see that they are assuming that they will receive $14 million a year in subsidies which will then be passed onto rate payers.
There are also different estimates of what it will cost to build and operate the pipeline and pump stations that will connect their plant to the water system, a cost that is now assumed to be passed onto the local ratepayers.
But we can't see how they arrived at their numbers and neither do the agencies they are lobbying to sign "Take-or-Pay"contracts.
We can't see whether these calculations jibe with what we can project about electricity rates and water rates. Here are all the areas where there are questions left unanswered:
Demand for Imported Water Steadily Decreasing
Will there be any demand for this expensive manufactured water, or will the higher prices required to buy Poseidon’s water reduce demand to the point that we don’t actually need Poseidon’s water?
Per capita demand for water has been steadily declining and total water demand has been flat.
Here’s a graphic from the Mesa Water District’s website that tracks demand over time as we consumers steadily become more water efficient. Water forecasts continue to show that our biggest source will come from smarter use of our existing water through storage, conservation, and replenishment of our groundwater basin.
In Orange County, our supply of water produced from our local groundwater basin is continuing to increase with the successful completion of the Groundwater Replenishment System. By 2015, seventy-five percent of the water in most Orange County cities will come from the aquifer below us, up from sixty-two percent just a few years ago.
What Is the structure of the bond financing that they are anticipating?
Will they have level payments that stay the same every year, or will they use the type of bonds that were issued in San Diego where the payments escalate over the term of the bonds.
Will their financing costs be higher in Orange County where they don’t have a single agency that has the authority to commit to a thirty-year "take-or-pay" contract that serves as a guarantee for their bonds.Even with that guarantee in San Diego, and using a state agency to issue tax-free bonds , Poseidon’s bond rating was BBB-, the lowest investment grade rating.
The term sheet allows for a thirty per cent increase in the cost of the water based on unforeseen circumstance or changes in regulations.
We know that new regulations regarding ocean intakes are in the process of being implemented but there is no estimate of the final cost when regulations are finalized.
What assumptions is Poseidon making about energy costs?
Estimates show that up to 36% of the cost of water desalination is for energy.
The chart at the left from Pacific Institute shows the annual cost breakdown of a typical seawater desalination plant.
Southern California Edison is in the process of implementing increases in their rates – an immediate 5% retroactive to 2012 and an additional 6.3% for 2013 and 5.9% in 2014 under the PUC order.
What assumptions are being made about future electrical rates, and how much will the price of desalinated water increase to pay higher energy costs, especially if the nuclear plant at San Onofre is never reopened?
Poseidon is assuming that the Metropolitan Water District will provide a $14 million per year subsidy for Poseidon’s water (56,000 acre feet x $250 per acre foot). That subsidy is paid for with higher water rates on water purchased from MET, so in theory, everyone in Southern California is helping to pay for this water, and cities in South Orange County which import almost all their water will pay more.
Ironically, part of Poseidon’s argument for higher water rates is that MET rates will increase, and part of the increase in MET rates will come from the subsidies that go to Poseidon.
What is the Take or Pay Price for an Idled Plant?
If the Poseidon plant is turned off, like four of the six desalination plants recently built in Australia, what is our cost to pay for a "stranded asset?"
Are We Really Replacing Imported Water?
Poseidon frequently releases lowball estimates of the monthly cost per user that seem to assume that Poseidon's water will replace the most expensive water we currently buy - fully treated water purchased from MWD.
But should we compare it to the cost of proven conservation programs that cost from $200 to $600 per acre foot? Should we compare it to the cost of water that can be purchased and stored in Kern County for $40 an acre foot, or untreated imported water that can be spread in our percolation basins? If we take the worst case and assume that we are substituting water that costs $1800 an acre foot for water that costs $835 an acre foot, maybe the calculation should show that the 30 year cost is only $2.8 billion added into local water bills instead of 5.6 billion.
Who Assumes the Risks
Who will insure the long-term cost of risks for Poseidon?
The proposed plant will sit above a confluence of active earthquake faults in the tsunami run-up zone.
Will Poseidon purchase earthquake insurance or will the public be on the hook if an earthquake damages Poseidon's plant or transmission lines?
The draft term sheets only references "Builder's risk insurance", which is a special type of insurance which indemnifies against damage to buildings while they are under construction.
The Phony "Technological Advances" Argument
In a recent Huntington Beach Independent article, Poseidon spokesperson Brian Lochrie claimed,
"Lochrie said the price for their water may currently be steep, but costs could potentially decrease depending on "technological advances" in desalination production in the future."
Speculation about retrofitting an existing plant to new unspecified technology should never be a consideration used in long-term financial decision making. Why hasn't Australia seen reductions in costs as they built out their plants?
The Need for Transparency
Amazingly enough, the San Diego Water Authority signed a 30 year "Take or Pay" contract without completing a detailed study of how the costs would affect customer rates in each individual agency. When they approved over $4 billion in guaranteed payments to Poseidon, they had not even agreed on the framework to do a detailed agency by agency cost projection. We cannot let this happen in Orange County.
Before any agency signs any agreement that will increase future water bills, we need to see the detailed projections of exactly what it will cost residents and businesses, how demand is projected, with detailed data about how the assumptions are reached.
More information on costs and risks can be found in this report by the Pacific Institute.