Desalinomics: How Taxpayers Created the Desalination Industry

This is the 3rd of three parts first published in the OC Voice online May 9, 2009

By John Earl
OC Voice

Poseidon Resources Inc.’s website claims that the desalination plant it wants to build in southeast Huntington Beach, at Newland and Beach avenues, 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.”

City council representative Don Hansen praised the project’s supposed free market values to a crowded city council chamber before he gave Poseidon his vote along with three other council members, Keith Bohr, Gil Coerper and Cathy Green.

“My belief is that the market is going to drive the majority of these decisions. I truly believe that,” Hansen said.

If the Poseidon desalination plant is not profitable, he added, it “will never see the light of day. And it’s purely born on private investment dollars, the risk that they [Poseidon] are going to take.”

In a candidates’ debate last year, Hansen warned that “We’re going to need the water” and reassured again that “It’s not us building the plant. It’s all private investment.”

If all goes well for Poseidon, its Huntington Beach plant will produce 50 million gallons of drinking water per day by sometime in 2011. It still needs to obtain additional government permits and must work out a franchise agreement with the city first.

Poseidon plans to build an almost identical desalination plant in the city of Carlsbad. That project is further along in the permit process and if financing comes through it could start construction this summer. Poseidon’s CEOs dream of building large desalination plants at other California coastal locations as well.

Hansen’s appeal to the free market instincts of the voters is persuasive in a city where the call for smaller government is almost a religious doctrine. But attributing either Poseidon project to to free-market karma is misleading because the company could benefit from as much as $1 billion in taxpayer supplied subsidies that would make it easier for Poseidon to attract the private sector financing that it also needs but still lacks in order to build and operate the two plants.

Public vs. Private Ownership
Poseidon’s current desalination proposals are part of the push by larger multi-national corporations to privatize publicly owned water systems around the world. In the case of desalination, public-private partnerships that are heavily dependent upon tax dollars are often the preferred route for shifting control of water resources from the public to the private sector.

Privatization is a radical departure from past approaches to managing water in the United States. Public ownership of water systems is based on the Public Trust Doctrine, a centuries old legal concept that sees access to water as a universal human right based on public ownership for the common good.

Sierra Club attorney Mark Massara says that approval of Poseidon’s plans will set a dangerous legal precedent. “In California and the coastal zone Poseidon is the very first (private) residential desalination facility. And that is a marked departure from the entire history under the Coastal Act.”

Federal and state laws, including the California Coastal Act, treat ocean water as a part of the public commons that must be used primarily for non consumptive uses. One purpose “does not necessarily impair its ability to be used for others,” according to a 2004 analysis by the California Coastal Commission’s research staff. In contrast, privatization advocates treat water as a commodity and more of a human need rather than a human right.

Water privatization began in earnest in the early 1990s as part of the neo-liberal economic reform movement and is now backed by international treaties and banking policies. Neo-liberals deplore government regulations on foreign investors and calls for free and open trade between all nations. In practice, according to critics, free trade imposes privatization upon other nations and allows foreign investors like Poseidon to bypass local labor and environmental regulations.

In separate reports, the Coastal Commission staff and the National Association of Attorney Generals raised serious concerns about the effect of international trade treaties on the ability of state and local governments to force multinational corporations to obey their laws.

Those concerns were quickly brushed aside by the Huntington Beach City Council after Poseidon representatives claimed hat the company was not a multinational corporation, so it could not bypass local laws. But Poseidon promotes itself as the “largest private developer/investor of water treatment facilities in Mexico,” where it has operated for over a decade. Its presence in Mexico and the United States makes Poseidon a multinational corporation by definition.

Costly Water
Desalination is still the most expensive choice for providing water anywhere in the United States. Even with the help of public funds, the price of water from the H.B. plant would still be at least twice as high as regular water source rates for the foreseeable future, an increased financial burden to be paid by southern California residents through increased water fees.

Poseidon executives cite technological improvements in the past two decades that have cut desalination costs considerably. In a 2004 article published in a trade journal, Nicolay Voutchkov, Poseidon’s senior vice president of technical services, wrote about “major breakthroughs” in membrane technology that have made desalination affordable. “Membrane productivity—the amount of water that can be produced by one membrane element—has more than doubled in the past 20 years,” he claimed.

Poseidon’s website promises that desalinated water from its Huntington Beach plant will be “competitive with other new sources of high quality drinking water,” and will be “the lowest cost desalinated water on the west coast.”

And Poseidon VP Peter MacLaggan wrote in a Los Angeles Times op-ed piece last year that seawater desalination is no longer cost prohibitive “due in large part to technological advances and the escalating scarcity of traditional water sources.”

But it was taxpayer funded research conducted by the public sector, not by the private sector, that created the breakthroughs that Poseidon CEOs note—although desalination is still far from being in the economic mainstream, even according to some of its strongest advocates.

Over $1 billion (in 1999 dollars) in federal research and development funds provided by the Saline Water Act passed by Congress in 1952. That led to the development of efficient reverse osmosis, the process that Poseidon will use to convert seawater into drinking water, and to the cost efficiency gains that enable the desalination industry to exist today.

So says “Desalination and Water Purification Technology Roadmap,” an exhaustive and favorable report on the future role of desalination, published in 2003, by the U.S. Bureau of Reclamation.

The report was researched and written by Sandia National Laboratories, a subsidiary of government contractor, Lockheed Martin. Sandia also does research and development about nuclear weapons, national security and economic issues for the U.S. Government.

Desalination to the Rescue?
Sandia advocates privatization of public water systems worldwide based on the theory that government institutions are too short on cash and too inefficiently run to provide adequate water infrastructure and services to the public. Corporate partnerships with government regulatory agencies and the application of free market pricing principles will ensure affordable water for all people and healthy corporate profits too, according to this view.

Poseidon’s Huntington Beach plans. Photo Poseidon Resources The report assumes future water shortages nationwide in response to a growing U.S. Population and its increasing demand for water, especially in the southwestern states. It suggests strategies for creating and applying modernized and more cost effective desalination technologies as the solution to those potential shortages.

But abundant supplies of water delivered through public water systems—at little more than basic costs—have limited the need and financial incentive for research and development of desalination technology in the past.

Due to desalination’s high costs for energy use, construction, and maintenance, industry profit margins are in the single digits. Large scale desalination plants are built only in areas of the world where there is little if any other option—mostly in its most arid regions. Only 0.4 percent of water for drinking and industrial use comes from desalination, according the National Academy of Sciences (NAS).

Considering the low demand for desalinated water and its higher costs, it’s no surprise that the desalination industry invested only about one percent—about $5-$10 million—of its gross annual revenue on research and development as of 2003, and most of that went toward modifying existing technologies instead of creating the new ones that are needed for desalination to thrive, according to Sandia. That amount may be more than doubled at present, according to NAS, but that would still be far less than other industries spend for research and development.

But America’s industry and its ever increasing human population greedily exploited its abundant and cheap water supplies in order to maintain and profit from their consumption-based lifestyles. Unbridled development, excessive irrigation of agricultural land and huge lawns were greater priorities than conservation and good management.

Today, it’s payback time. California has declared a state of emergency after a prolonged drought. Our public water systems are severely strained; a dire situation that is exacerbated by human induced climate change and expertly exploited by mulitnational water profiteers to convince the public that desalination’s time is now.

A Drop in the Bucket
As “unimpaired” water resources diminish, Sandia claims, “our nation is now forced to turn to using these impaired water sources,” meaning brackish water from the nation’s inlands and seawater for large urban areas like those that exist all along much of the California coast.

Despite Sandia’s idealist view of private sector efficiency, its proposed roadmap calls for the government to lead the way in funding future technological improvements that it says are necessary to make desalination viable.

Without a renewed surge of government funding for research and development, Sandia says, desalination technology will advance slowly, and large scale desalination plants will remain out of financial reach for the private sector until 2030 or beyond—a long delay during a water supply crisis. But with sufficient government support, the report says, the technological breakthroughs could come as soon as ten years.

The Sandia report dismisses some already proven water management strategies, including conservation as alternative solutions. In fact, the report warns that conservation can also decrease water supplies by reducing the recycling of wastewater “with serious environmental consequences.”

But even the World Bank, an international lending institution based on neo-liberal economic policies, warned that desalination should be an absolute last resort “after all appropriate water demand management measures have been implemented and after carefully evaluating alternative options for conventional bulk water supply…,” in a report it issued in 2004.

Whether the private sector will benefit from another federal spending surge for desalination research and development or not remains to be seen, but current funding levels are a drop in the bucket compared to the amount of money taxpayers gave in 1952.

Congress passed the Water Desalination Research and Development Act of 1996 but only $6.5 million was actually dispersed. Funded projects were small, including an experimental plant built in Long Beach, California. Funding under the act was held back after 2001 by the Bush administration and funding from congressional earmarks fell from $25 million in 2005 to only $10 million in 2007.

Subsidy Worries
The exact amount that taxpayers will pay toward the two southern California desalination plants is still undecided. But Poseidon is banking on a minimum of $700 million funneled through local water districts, at $350 million per project, to help make the Carlsbad and Huntington Beach projects become economically viable.

There are worries, however, even from desalination advocates about the effects of government subsidies.

Subsidies may give the private sector an incentive to continue holding back on research and development, knowing that the government will do it, the Sandia report cautions.

And the World Bank worries that “Excessive investment in desalination,” through direct or indirect public financing, could create a “drain on the national budget” and “implies a cost risk for the end-users/or taxpayers in a country,” especially if demand for the water turns out to be less than expected.

Massara says that Poseidon should have to pay its own way as it promised, but because its Huntington Beach and Carlsbad projects are “not economical,” subsidies are required to get them up and running.

“Every time they walk into a hearing they go, ‘The price is coming down. We know how to do it really cheap now.’ But when you dust off the rhetoric, you realize that it’s still much more expensive than existing water supplies,” Massara complains.

Surfrider Foundation’s California director, Joe Geever, agrees that Poseidon’s plans are unrealistic without subsidies. “Ocean desalination is so energy intensive that the price of that water will never be competitive with any other source of water,” he explains.

“Poseidon’s water is 40 percent more energy intensive than pumping the water all the way here from Sacramento. How will the price ever get competitive if they don’t get subsidies?”

Poseidon’s Maclaggan acknowledges the high energy costs, but he says that they apply across the board. “In truth, the escalating energy costs…will affect all means of new drinking water production,” including water reclamation (recycling sewage), he wrote in his Times column.

But the “toilet to tap” recycling plant operated by the Orange County Sanitation District in Fountain valley turns raw sewage into triple the amount of safe drinking water that Poseidon’s Huntington Beach plant will produce and at about one-third the cost, according to the OCSD (see “No Crap Tap,” OC Voice, June, 2008).

A 2005 report issued by the Pacific Institute, a non-partisan and well respected California based environmental research group, concluded that “More energy is required to produce water from desalination than from any other water supply” and that desalination costs may rise due to volatile economic conditions.

The Pacific Institute also questioned the need to subsidize the desalination industry. “The technological state of desalination is sufficiently mature and commercial to require the private sector to bear most of the research costs” it said, and public research funds should focus on environmental concerns that affect the public rather than private sector.

In a free market utopia, Poseidon would pay its way 100 percent. And if there has to be a desalination plant in Huntington Beach, that’s the way Joe Geever would like it to be.

“It’s ridiculous,” he fumes, “Why should we spend taxpayers’ money on a project that a private company has already promised to build on its own?”