The State of California recently ended its state of emergency related to the state’s longest recorded drought, lasting almost eight years. ((U.S Drought Portal, http://www.drought.gov/drought/states/california (last visited Oct. 16, 2019).)) While Executive Order B-40-17 lifted the emergency status, many previous conservation efforts enacted by Executive Order B-37-16 will continue to be in effect. ((California State Water Resources Control Board, B-37-16, Making Water Conservation A California Way of Life (2017), http://water.ca.gov/LegacyFiles/wateruseefficiency/conservation/docs/20170407_EO_B-37-16_Final_Report.pdf.)) This includes a goal of the state to reduce urban water usage by 20 percent by 2020. ((Id. at 3-3.)) California’s population growth particularly in Southern California, makes achieving these goals rather difficult. ((California State Association of Counties, Moving East: California’s Population Growth, http://www.counties.org/csac-bulletin-article/moving-east-californias-population-growth (last visited Oct. 16, 2019).)) Overall, the state has grown in population by 6.2 percent from April 1, 2010 to July 1, 2018, which is equivalent to an increase of over 2 million people. ((U.S. Census, QuickFacts California (July 1, 2018), http://www.census.gov/quickfacts/ca.))
After decades of proposals in California for desalination plants in order to improve water supply to urban areas, almost all have failed except one: the Claude Lewis Carlsbad Desalination Plant (CLCDP). ((Irvin Dawid, What Happened to all those Desalination Plants Proposed for California?, Planetizen, (Nov. 2, 2016 10:00 AM), http://www.planetizen.com/node/89483/what-happened-all-those-desalination-plants-proposed-california.)) This single desalination plant is located in the greater San Diego area and is the largest desalination plant in the western hemisphere. ((Id.)) The construction and eventual usage of the plant was highly controversial due to the externalities created by the exorbitant cost of the plant, which had an eventual price tag of over a billion dollars. ((Michael Hiltzik, Desalination plans aren’t a good solution for California drought, L.A. Times (Apr. 24, 2015 7:59 PM), http://www.latimes.com/business/hiltzik/la-fi-hiltzik-20150426-column.html.))
This blog will focus on the public-private partnerships created by desalination plants and the risks associated with the contracting done in this context. Throughout the discussion, particular attention will be on the CLCDP because it is the largest plant in North America. There will also be an emphasis on California as it is the main jurisdiction in the United States with a potential for significant use of this technology. Furthermore, the blog will answer causes of concern including the high cost of desalination projects, and the issue of how contracting between public and private partners shifts construction risks to private parties but still holds public intuitions liable.
Public Private Partnerships & Contracting
Other than being the first major desalination plant in the United States, the CLCDP it is also an example of a successful public private partnership. No taxpayer dollars were used for the construction of the plant. ((Claude “Bud Lewis Carlsbad Desalination Plant, http://www.carlsbaddesal.com/faqs.html (last visited Oct. 16, 2019).)) The plant’s owner, Poseidon, financed the entire project through debt and equity financing. ((Id.)) The crucial contract for the project was the water purchase agreement between the San Diego County Water Authority and Poseidon. ((San Diego County Water Authority, Seawater Desalination, http://www.sdcwa.org/seawater-desalination (last visited Oct. 16, 2019). )) This purchase agreement requires the minimum purchase of 48,000 and up to 56,000-acre feet of desalinated seawater per year for 30 years. ((Id.)) This is enough water for approximately 400,000 people. ((Id.)) At the end of the 30-year agreement, the Water Authority has the option of purchasing the plant for $1. ((Id.)) The main argument for private construction and operation of the plant was to keep costs low and maintain environmental standards. However, even through cost mitigation via the public-private partnership model, the price of water from the desalination plant is the most expensive water supply in San Diego. ((Ry Rivard, Why San Diego Pays Some of Highest Water Rates in State and County, Water Deeply, http://www.newsdeeply.com/water/articles/2017/05/30/why-san-diego-pays-some-of-highest-water-rates-in-state-and-country (last visited Oct. 16, 2019).))
The Water Authority has pointed to supply risks and the increasing population to justify the high cost of CLDCP. The cost of desalinated water from CLDCP is double the price compared to the Water Authority’s cheapest supplier. ((Id.)) The plant’s substantial cost of construction and operation increased the average resident’s monthly water bill by $5. ((Id.)) The probability that the plant will be needed in the long term is very high, which should reduce the risk to the Water Authority. However, at the same time, the water purchase agreement still holds the Water Authority liable to purchase water even if other circumstances change.
There is a considerable amount of risk transfer to Poseidon, in that the Water Authority is not required to purchase the water if the quality does not meet strict standards. ((San Diego County Water Authority, Seawater Desalination, http://www.sdcwa.org/seawater-desalination (last visited Oct. 16, 2019).)) However, the Water Authority still bears a significant amount of risk through the purchase agreement, which forced the Water Authority to purchase at least 48,000-acre feet of desalinated seawater per year. ((Id.)) This minimum requirement is to ensure that the Water Authority will pay for the sunk costs of the project. ((Id.))
Aside from specific contractual terms between the Water Authority and Poseidon, desalination plants also face additional risks from structural threats. The entire state has undergone a significant water conservation effort that has reduced water usage by over 20 percent. ((California State Water Resources Control Board, B-37-16, Making Water Conservation A California Way of Life (2017), http://water.ca.gov/LegacyFiles/wateruseefficiency/conservation/docs/20170407_EO_B-37-16_Final_Report.pdf.)) If conservation like this continues, it reduces the short-term necessity of the desalination plant, especially if population growth in the county no longer grows as estimates suggest. While the likelihood of this occurring is rather low, it does not immunize the Water Authority. Furthermore, there is significant controversy in the cost transfer to users. Water is a basic human necessity and forgoing the social justice argument, the Water Authority had the ability to expand cheaper sources of water for the county. However, the Water Authority chose not to do this. Even though the Water Authority holds some risk in the project, recent renegotiation of the contractual debt financing shows that the entire deal is less risky than previously thought, and has a high likelihood of overall success.
Earlier this year, a renegotiation of the project’s bond financing provided an indication that the CLCDP is a success, but such an indication of success should be qualified. ((San Diego County Water Authority, Water Authority Saves Nearly $18 Million with Bond Refunding, https://www.sdcwa.org/water-authority-saves-nearly-18-million-bond-refunding (last visited Oct. 16, 2019).)) Through lower maintenance costs and an increase in bondholder confidence in the project, there was a refinancing of debt, which saves the project nearly $18 million. ((Id.)) Despite the promising indications associated with the renegotiation, the public should view the use of municipal bonds in the project’s financing qualifying the success of the project. This is because the Water Authority guarantees the bonds and this is the first large desalination plant in the western hemisphere. The refinancing could be because of bondholders’ risk aversion in the original financing to the project, as desalination construction has not happened previously in California. Since this is a new type of infrastructure, there could have been a high-risk aversion at the bond issuance, which caused an artificially higher price to the bonds. Therefore, once the project proved not to be a failure, the market corrected itself to the proper bond value.
Concerns of Water Pricing
The increase of the average monthly water bill in the county by $5 is worth discussion. ((Ry Rivard, Why San Diego Pays Some of Highest Water Rates in State and County, Water Deeply, http://www.newsdeeply.com/water/articles/2017/05/30/why-san-diego-pays-some-of-highest-water-rates-in-state-and-country (last visited Oct. 16, 2019).)) Neither the State of California nor San Diego County has an official program to subsidize the cost of water to low-income individuals. ((See The City of San Diego, Help to Others San Diego (H2O SD) Program, http://www.sandiego.gov/public-utilities/customer-service/h2osd (last visited Oct. 16, 2019).)) This is unlike State-sponsored energy monopolies, which allow for reductions of over 30 percent in monthly electricity and gas statements. ((SDGE, Assistance Programs, http://www.sdge.com/residential/pay-bill/get-payment-bill-assistance/assistance-programs (last visited Oct. 16, 2019).)) This issue is compounded by the fact that San Diego County specifically, and the state of California overall, has some of the highest water bills in the country. ((Ry Rivard, Why San Diego Pays Some of Highest Water Rates in State and County, Water Deeply, http://www.newsdeeply.com/water/articles/2017/05/30/why-san-diego-pays-some-of-highest-water-rates-in-state-and-country (last visited Oct. 16, 2019).)) The state can require Water Authority subsidization of water bills if this model is going to expand throughout the state. If one desalination plant increased every San Diegan’s water bill by $5, the construction of multiple plants in one water district has the effect of becoming a large burden to families. ((Id.))
Even though desalination infrastructure may cause an increase in the price of water bills for low-income individuals, the public-private partnership model is an overall success. By allowing private financing, ownership, and maintenance, the project transferred risk from the Water Authority to private parties. ((San Diego County Water Authority, Seawater Desalination, http://www.sdcwa.org/seawater-desalination (last visited Oct. 16, 2019).)) Furthermore, contractual requirements for water quality and supply intensify the contractual power of the Water Authority against Poseidon. This limits the likelihood of Poseidon failing to meet requirements in the water purchase contract. ((Id.)) Other than the basic improvement in reliability of water supply in the region, the project also helped spur the local economy by creating 2,500 jobs in the construction, infusing $350 million into the local economy, and creating permanent technology jobs. ((San Diego County Water Authority, Seawater Desalination 4 (2019),http://www.sdcwa.org/sites/default/files/desal-carlsbad-fs-single.pdf.)) This contrasts the majority of other water suppliers for the Water Authority, which are out-of-state, therefore providing no economic benefit to the local economy. ((Id.))
Many see desalination infrastructure as the innovative water source of the future, but there are drawbacks that countries need to take into account when considering it. ((The World Bank, Seawater and Brackish Water Desalination in the Middle East, North Africa and Central Asia 12 (2004), http://documents.worldbank.org/curated/en/890811468002102369/pdf/335150v10Seawater0mainreport1Final2.pdf.)) One potential drawback is the inherent risk in public-private partnerships. The first consideration involves the cost it puts on people in the Water Authority and specifically its indigent residents. The second drawback is the inherent risk in public-private partnerships.
In localities considering desalination, politicians must address the potential cost increase of water to consumers, due to the high price of desalination. One way of solving this issue is to create subsidization programs for water authorities in the state. The risks inherent in public private partnerships require water authorities to practice careful prudence when making decisions. This is because long term contracts such as the one used in CLCDP can significantly affect the budgets of small municipal water suppliers. ((San Diego County Water Authority, Seawater Desalination, http://www.sdcwa.org/seawater-desalination (last visited Oct. 16, 2019).)) The CLCDP plant is a necessity in San Diego County because most of the water supplies are from out of state and are highly variable depending on seasonal and yearly weather patterns. These particular conditions are rare in the United States, making desalination a specific solution to specific areas with low freshwater accessibility, and areas with the ability to afford the prohibitive costs. Therefore, while desalination is innovative, it will have limited use in the 21st century and will unlikely ever become widespread.
Latest posts by Robert Timby (see all)
- The world is getting thirsty, so will we drink the ocean? - November 11, 2019