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Poseidon's Desalinization Plant: Dream Water Supply or Drain on the Pacific and Taxpayers?
By Janet Wilson

CARLSBAD, California, May 17, 2010 (ENS) - High on a hill above this sunny beach town sits a reservoir filled with water pumped from hundreds of miles away. But the price of that imported water is soaring, and supplies are shrinking. Local officials see salvation to the west - a huge new desalination plant that would turn 300 million gallons a day of the sparkling Pacific Ocean into a new, 50 million gallon river of drinking water.

Down below, Poseidon Resources LLC is pushing to complete a dizzying checklist of approvals before heading to Wall Street for project financing. After 12 years of permitting battles, the desalination plant - which could open the floodgates for many others on the California coast - may finally be built.

Best of all, the developers promise, it will cost the public nothing to build.

"We've always proposed that it will be privately financed. There's no public subsidy for the construction of the desalination plant," said Scott Maloni, a spokesman for Poseidon, which is based in Stamford, Connecticut.

But dozens of interviews and a review of available records by the Public Education Center's DCBureau.org shows that while private equity and bonds would be used for upfront construction, southern Californians would pay at least $640 million over 30 years for the project, including as much as $374 million in public subsidies.

All that money would repay construction costs with interest, operating costs with overhead fees, and unspecified profits to investors for what would be the largest desalination plant in the Western Hemisphere.

Yellow circle marks the location of the proposed Poseidon desalination plant in Carlsbad, California. (Photo courtesy Poseidon)

Company and water officials, along with some industry analysts, say it is well worth the price to bring a local water supply to the drought prone region, as population swells and climate change could begin to wreak havoc with the Sierra snow cap. They say despite recessionary woes, the time is right.

But critics say that far from being a New Age answer to water woes, the plant and others like it are costly, unnecessary boondoggles that often malfunction and carry damaging environmental side effects. They argue keeping water prices artificially low through subsidies for costly desalination plants is the wrong approach, and that conservation, recycling wastewater, and other far cheaper alternatives should be tried first.

Peter Gleick, a water policy analyst who has examined desalination projects around the world, castigated the Poseidon project as a series of "financial travesties."

"Despite the claims of the company, the cost of this plant is going to be borne by not just the ratepayers, but the taxpayers, including taxpayers who will see none of the water," said Gleick, executive director of the Pacific Institute in Oakland. He said the project was hobbled by high costs and environmental impacts. "This is a case study in how not to do desalination."

Officials say those charges are unfair. They say every available water source needs to be tapped, including those Gleick cites and new sources like desalination. They say their project is an environmentally friendly trend-setter, and that because the company has handled all upfront risks, they are more than entitled to a fair return down the road.

"I think it is a great example of a public private partnership," said Skip Hammann, Carlsbad transportation manager, who is overseeing efforts to bring the plant to his city. Carlsbad could buy up to 80 percent of its water from the plant if it is built.

"Where the private company is assuming all the risk and delivering water to the city of Carlsbad at no risk to us, for a rate we would otherwise pay, is a pretty simple concept. It's gotten very complicated along the way, but the concept is pretty simple," said Hammann.

Poseidon Senior Vice President Peter MacLaggan agreed. "We are guaranteeing a supply of reliable water to customers for the same or less than they would pay for imported water. Why is that not a good investment for the public? They're going to get higher quality water ... and a more important benefit, higher reliability water."

Steve Ellis, vice president of Taxpayers for Common Sense in Washington, DC said he has no qualms with the company making a dollar on a badly needed commodity like drinking water in dry southern California, but he is wary of the tax-exempt financing, the subsidies, and the lack of access to detailed advance information about the company's costs and profits.

"Our feeling is essentially the financing, the repayment of the costs of construction, all of that needs to be very transparent and very public," said Ellis, "because otherwise you're asking the ratepayers and [San Diego] county to buy a pig in a poke, they don't really know what they're getting and what the potential costs may be."

MacLaggan and state finance officials said that information will all be available a few days before a May 25 vote by the California Infrastructure and Development Bank to issue tax-exempt bonds and in a sales offering statement once the project heads to Wall Street for bond monies. They said it cannot all be made public right now because of the pending private sale. MacLaggan and some water officials did provide details on the costs in interviews and draft agreements.

From the beginning, Poseidon officials have promised nine northern San Diego County water districts they would never pay more for the desalinated water than they would for imported water. Poseidon and its equity investors - which have included Warburg Pincus, Citi Sustainable and GE Capital - have poured unknown millions into upfront costs. Those investors will be last in line to recoup profits, MacLaggan said, under an arrangement that won't begin for several years.

But there isn't enough capital available to build the project without major financing. MacLaggan estimated about $300 million is needed to build the plant, a sleek, low slung facility designed to look like an office building. Another $100 million is needed to construct a delivery pipeline, and about $100 million in reserve funds are necessary to ensure any technical problems or other delays can be covered.

Earlier this year, the company won permission from Governor Arnold Schwarzenegger, the state controller and the state treasurer to seek $530 million in so-called private activity bonds, which are not repaid or guaranteed by California taxpayers. They do offer potentially lucrative federal and state tax exemptions for bond purchasers.

Gleick of the Pacific Institute said those exemptions are actually lost revenues that could go into sorely depleted state coffers. But Poseidon and state officials said without the tax exemptions, there would probably be no project, meaning no tax revenues. They said the project would also provide a $37 million annual boost to the local economy - including 2,100 construction jobs, 20 jobs to run the plant, and 400 indirect area jobs.

The local water districts won't pay a cent until water is being delivered. "We don't have an obligation or an expenditure until this plant is up and operating," said Mitch Dion, general manager of Rincon del Diablo water district. "We've kept all the risk on Poseidon. ... They cannot come back to us or our ratepayers."

But once the water is flowing, public dollars would begin flowing too. To repay that half a billion dollars in bond debt and other costs while keeping water bills low, Poseidon and the local water districts will rely on major subsidies. Metropolitan Water District of Southern California, one of the nation's largest wholesalers, in November approved up to $350 million in "incentive" funding to help the nine northern San Diego County water districts obtain a local water supply. Both they and Poseidon are at pains to say the monies will be doled out to the water districts, not the company.

But most businesses have to pay their own utility bills, leases, supplies, interest payments, and other operating and capital costs. Poseidon would be eligible for reimbursement for all of those costs, much of which would not be paid by customers actually receiving the drinking water.

A review of the agreement, confirmed by Metropolitan and Poseidon staff, clearly shows that the project's steep electric bills, hefty upfront design and engineering costs, routine filter replacement, chemicals, and a smorgasbord of other expenses will all be reimbursable via the water districts passing the monies through to the company.

Legal bills and public relations costs will not be covered, and Metropolitan's attorneys "stripped out the 14 percent profit" for equity investors that Poseidon requested, according to MacLaggan.

Metropolitan is requiring a thorough audit the first year of operation, and they and the water districts retain the rights to do annual audits. They also are not liable in case of bankruptcy or sale of the project or the company. That all makes it a safe deal for ratepayers, said Metropolitan general manager Jeffrey Kightlinger.

He estimated the incentive program would add between $10 and $20 a month to the average southern Californian's water bill, and said it was well worth the cost because the region desperately needs more local water supply.

"Taking a step back from the nitty-gritty of public private concerns about profit, the reason we do these local programs, it's all about diversifying water supply," said Kightlinger.

Metropolitan has lost a whopping third of its state water supplies in recent years largely because of court cases and federal agency decisions aimed at protecting the endangered Delta smelt fish.

That means less water flowing from Bay Delta rivers and lakes south to greater Los Angeles. Another 600,000 acre feet of water was lost from Colorado River supply because of drought, Kightlinger said. Metropolitan has been forced to make costly side arrangements with Central Valley rice farmers and others who hold senior rights to additional water.

The Poseidon project would only add about 56,000 acre feet, but that's enough to make a difference, Kightlinger said, providing more than 9 percent of San Diego County's supply. "We have gone on a crash course to replace water," he said.

But others say Metropolitan's nearly 19 million ratepayers, most of whom will never receive a drop of Poseidon's water, should not have to foot the bills for a facility that will service 300,000 customers.

"That subsidy is funded by a portion of almost everybody's water bill in southern California," said Joe Geever, California policy coordinator for Surfrider Foundation, who has fought the project because of marine life concerns. "I mean I live in Los Angeles, 100 miles away, and a portion of the money that's paying for this project I oppose is coming from my water bill."

Poseidon's MacLaggan said that the company would be setting aside 66 acres of wetlands, more than compensating for any marine harm that might occur. He and Kightlinger stressed that residents in Los Angeles could have more water available to them because of reduced demand from northern San Diego.

In addition to the Metropolitan subsidy, Poseidon and the nine water districts are now also seeking more subsidies, up to $24 million, from the San Diego County Water Authority. Those terms are still being negotiated.

Gleick of the Pacific Institute said the latest request was a sign of the project's true costs.

"'Give me more, more, more, more' is Poseidon's game plan, and it really shows clearly the financial weakness of this project," he said.

In an even thornier request, Poseidon is now also asking the San Diego county authority to serve as a backstop if Metropolitan ever cancels its far larger subsidy. That is a real possibility because of a separate fight between the two agencies over high water allocation prices. The county agency is extremely unhappy with what they see as unfairly high water rates being charged by the wholesaler and has already threatened to sue. If they do, the incentive program automatically dies.

Bond underwriters have zeroed in on the potential loss of $350 million, water district officials said. Those officials are on pins and needles and working hard behind the scenes to get the regional water authority to agree to fork over the $350 million, if necessary.

"Without the guarantees from the water authority, there won't be the financing, and there won't be a project," said Gary Arant of the Valley Center Municipal Water District, which hopes to buy 20 percent of its water supply from the Carlsbad plant. "Yeah, we're concerned about this because we think it's a very valuable project for the region as a whole."

{A longer version of this article was originally published May 11, 2010 by DC Bureau.}

Copyright Environment News Service (ENS) 2010. All rights reserved.



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