$1 Billion Desal Bailout?

Originally published in the OC Voice online March 17, 2009. The 1st of three parts.

By John Earl
OC Voice

Poseidon Resources Inc. and the four Huntington Beach city council members who voted in 2006 to approve the company’s request to build a desalination plant in the city’s southeast section promised that the project would be paid for with private funds-at no cost to the city’s taxpayers.

L-R: Huntington Beach Councilmembers Don Hansen, (Mayor) Keith Bohr, Gil Coerper, Cathy Green.

But Poseidon, a multi-national equity investor and developer of privatized water systems, currently controlled by “zombie” bank, Citigroup (which is being bailed out by federal tax funds), could directly and indirectly benefit from $1 billion in public funds, about 70 percent of that courtesy of taxpayers in Los Angeles, Orange and San Diego counties and the rest paid for by taxpayers across America through the American Recovery and Reinvestment Act (ARRA) signed into law recently by President Barack Obama.

The subsidies would also be directed at a nearly identical Poseidon desalination plant in the city of Carlsbad and would help ensure but not guarantee that both plants are cost effective for Poseidon to build and to operate. Under the city approved plan, Poseidon would build the desalination plant in Huntington Beach next to the AES power generating station at Beach and Newland streets. Poseidon’s plant would suck in 127 million gallons of seawater per day through existing AES cooling pipes to create 50 million gallons of per day or 56,000 acre feet of drinking water each year.

Poseidon would sell 3.2 million gallons of converted seawater per day to the city, a small fraction of its total daily water usage from other source, at five percent less than it pays the Municipal Water District of Orange County (MWDOC) for water. The other 47.8 million gallons per day would go to MWDOC’s member districts at government subsidized prices. Jobs would be created by the building and operation of the plant and the city’s tax base would go up, according to predictions made by Poseidon and city staff.

Councilmember Don Hansen summed up the council majority’s view three years ago when he reassured hundreds of city residents packed into the council chambers that the desalination plant was “born purely on private investment dollars” to be spent at Poseidon’s risk, not the taxpayers’.

“I’m actually pretty comfortable having a private company potentially evaluate the dedication of a source for our future water supply,” he said.

City council members Gil Coerper, Cathy Green and Keith Bohr, who now is the city’s mayor, also voted for Poseidon.

Two years later, while running for reelection, Bohr and Hansen were still proudly exalting Poseidon’s “no risk” virtues in a public candidates’ debate.

“We’re going to need the water,” Hansen warned, adding, “It’s not us building the plant. It’s all private investment.”

Poseidon’s web site still claims that its H.B. desalination plant will be “a cost-effective solution to provide residents with a safe and reliable water supply by using existing structures – at no cost to taxpayers.”

Subsidize it,  please
But the Metropolitan Water District of Southern California (MWD) has already designated $350 million in subsidies ($250 per acre foot at $14 million a year for 25 years) to offset the high price of drinking water to be produced by Poseidon’s proposed Carlsbad desalination plant (close in design to the Huntington Beach. plant) after company and city officials insisted it would be too expensive to build otherwise.

Poseidon is also banking on the same type of 25 year subsidy for its Huntington Beach plant, based on a Memo of Understanding (MOU) that it has with MWDOC and discussion with MWD officials, according to a recent letter from Poseidon V.P. Scott Maloni to the Coastal Commission.

The MOU, quoted in Maloni’s letter, clearly expresses MWDOC’s desire to buy all the drinking water that the plant will produce. It states, in part, “…we are providing Poseidon with this letter of intent to purchase, subject to approval by the governing boards of the group, 56,000 acre feet of water from Poseidon Resources’ Huntington Beach Desalination Facility.” The intent represents the “collective desire” of MWDOC’s member districts to seek “reliable/cost effective local water alternatives” to imported water.

Despite the MOU some water officials are less certain, however. MWDOC’s Director of Public Affairs, Darcy Burke, told the Voice in January that “they’re investigating…but there is no agreement. So I think that any conversation on that is way premature.”

Stephen Arakawa, group manager of the Water Resource Management Group at the MWD, also speaking in January, said that all current subsidies through his agency were selected in 2000 and that the smaller and publicly owned desalination plant approved for the city of Dana Point, not Poseidon’s H.B. plant, was chosen. Before subsides can be given, he added, Poseidon must move forward and have a signed contract.

That contract is likely to occur, according to Karl Seckel, assistant general manager for MWDOC. “There are a lot of fairly dramatic negotiations” to come, he said, but “the bottom line is we need the water in the state. So I think that something will be worked out.”

$175 million uncertain
In addition to the MWD subsidies, the San Diego Water Authority recently requested $175 million in ARRA funds to construct a 7.5 mile long pipeline that will carry water from the Carlsbad desalination facility into San Diego County’s public water system. Poseidon’s Vice President, Scott Maloni, claims that the pipeline’s cost would be no more than $110 million. In any case, in return, Poseidon would sell its water at a lower rate.

Similarly, MWDOC officials recently placed Poseidon’s H.B. plant on a list of construction projects to be considered for ARRA funding. A likely target for any funds received would be that facility’s 10-mile pipeline for transporting water (Poseidon’s cost estimate is $95 million tops).

Despite promises that the plant would be financed 100 percent with private money, MWDOC-like San Diego-has the option to pay for the pipeline with public funds.  Negotiations between Poseidon and MWDOC are pending.

“There are two portions to the project,” says Poseidon Attorney Rick Zbur. “We are committed to building the desal plant and we’re committed to pay for the pipeline if they ask us to do that.”

Maloni says that Poseidon officials did not ask for any stimulus money and that the pipeline is separate from the desalination plant, even though the two parts are connected and mutually dependent.

“It’s an awkward cost because it’s not money for our project or us. Any paying down of the pipeline cost would be a direct benefit to the rate payers because it would reduce the cost of the water,” he said.

But the San Diego Union-Tribune reported in December that Maloni acknowledged the obvious, that a stimulus subsidy would allow Poseidon’s Carlsbad plant to break even sooner, as well as reduce water rates. Presumably, any potential subsidies for the Huntington Beach pipeline would act the same way if approved.

Stimulus funding for either desalination plant is still uncertain due to state guidelines and ARRA language that requires fund recipients to have their permits approved by June and to start construction during the summer, according to Seckel. “There was a decision made by the Department of Public Health not to fund ocean desalination projects out of any of those funds,” he said.

There are a “whole bunch” of other stimulus funding avenues available, however, Seckel added, including the U.S. Army Corps of Engineers, but deadlines still apply. The Carlsbad plant might make it, he believes, but probably not Huntington Beach. “I think Huntington Beach is too far behind Carlsbad to make that window. It’s just unfortunate from a timing standpoint, but I think they are six months or a year behind that schedule.”

Incomplete application
In fact, in January, Poseidon received a Notice of Incomplete Application from the California Coastal Commission. After at least seven exchanges of letters over the past three years, Commission scientist Tom Luster says that there are still “major items outstanding” in Poseidon’s application, including vital information about the project’s alternatives, feasibility, effect on costal resources, greenhouse effects and landowner approvals and right-of-ways, according to his Feb. 27 notice sent to Poseidon.

There still might be a chance for Poseidon’s H.B. plant to receive stimulus money, however, because in February California Gov. Arnold Schwarzenegger declared a drought emergency in the state and called for streamlining the review process for desalination plants. It’s not clear yet, says Luster, how that will affect the Coastal Commission’s review of Poseidon’s Huntington Beach application.

Rising costs
If some Poseidon project related subsidies are uncertain, rising costs have already occurred. Project costs for the Huntington Beach plant have more than doubled and the estimated cost of water to be produced by the plant may also go up.

When the project first came before the Huntington Beach City Council Poseidon’s estimated cost of construction was $150 million. But its most recent cost estimate is $485 – $520 million, including the pipeline.  Add to that a yearly cost of $23 million for maintenance.

Poseidon estimates a water production cost of $1,126 per acre foot, far below most informed estimates, which range up to $2,000 per acre foot.  Using that low estimate, minus the $250 subsidy, the price to consumers would be about $876 per acre foot, according to Luster in an e-mail to the Voice. Including the cost of transporting the water, another $150 – $200 per acre feet, the best low cost estimate for consumers is probably going to be from $1,026 to $1,076. Add to that the probable rise in the cost of electricity needed to run a large desalination plant, not included in Poseidon’s cost estimates.

Financing troubles?
Without subsidies to help offset rising costs during a declining economy, attracting the private investors that Poseidon also needs in order to proceed with the Carlsbad and Poseidon plants seems less likely. Poseidon’s parent company, Citigroup, which has already had its own huge government bailout amid the banking crisis, is apparently considering cutting back on desalination development and other “alternative energy” investments, according investors cited in a recent article published by MarketWatch.

But desalination does not save energy. In fact, it uses more energy than any other method for acquiring water, a point noted by Poseidon’s critics. “Ocean desalination is so energy intensive that the price of that water will never be competitive with any other source of water,” says Joe Geever, California Policy Coordinator for the Surfrider Foundation, which opposes both of Poseidon’s desalination plants.

“The cost of the water comes from energy used in transporting the water,” he adds. “Poseidon’s water is 40-percent more energy intensive than pumping water all the way here from Sacramento. How will their price ever be competitive if they don’t get subsidies?”

Geever is outraged at the idea that Poseidon might receive any public money for its proposed facilities.  “It’s ridiculous. Why should we spend taxpayers’ money on a project that a private company has already promised to build on their own?”

Mark Massara, Director of Coastal Programs for the Sierra Club, mixes his outrage with doubts that either of Poseidon’s desalination plants can get the private financing needed for construction. “Because it’s still not economical, they can only do this with subsidies,” he said.

Maloni  acknowledges that Poseidon has yet to find investors for either project, but says that they will sign on soon for Carlsbad and that Huntington Beach will follow.

“The distinction is that in Carlsbad we’re fully permitted,” he said. He expects to close financing for that project before the first half of 2009.

In contrast, he says, Poseidon still needs approval from the State Lands Commission and the Coastal Commission for the H.B. plant. “Until we acquire those approvals we will not attempt to finance the project. You can’t finance something that hasn’t been approved.”

Pointing to the signed 30-year contracts that Poseidon already has with nine San Diego County water districts to provide them water from the Carlsbad plant, Maloni is optimistic. Publicly owned water districts have “outstanding credit ratings” which Poseidon’s creditors will see as 30 years of guaranteed income. “So that’s a pretty attractive situation,” he says.

Editor’s note: For improved accuracy, the second sentence of the first paragraph under the heading, Financing troubles?, has been slightly revised as “Poseidon’s parent company, Citigroup, which has already had its own huge government bailout amid the banking crisis, is apparently considering cutting back on desalination development and other “alternative energy” investments, according investors cited in a recent article published by MarketWatch.”

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