The Orange County Water District (“OCWD”) Board of Directors has approved a term sheet with Poseidon Resources (“Poseidon”) for the proposed Huntington Beach Desalination Project. The term sheet amends a previous term that was agreed to in 2015 and has an approach of paying Poseidon’s actual cost.
The four major changes in the 2018 term sheet are designed to save OCWD money, including a cost-of-service pricing structure, option for OWCD to have Poseidon finance and construct the desalinated water delivery system, shift in who bears the risk of electricity rate increases from Poseidon to OCWD, and shorter contract term.
Under the cost-of-service pricing structure, which is consistent with the pricing structure in San Diego County Water Authority’s agreement with Poseidon, OCWD would pay Poseidon’s actual cost of service plus a return on equity. Under the 2015 term sheet, pricing would have initially been set at 20% above the MWD water supply rate for the first 10 years, up to 15% above the MWD for the second 10 years, and so forth. Parties would have negotiated a minimum annual increase and compared the rate against Poseidon’s cost-of-service in future years.
If OCWD exercises the option to have Poseidon finance and construct the desalinated water delivery system, Poseidon would take the responsibility to coordinate the timing of constructing the treatment plant with the distribution system. OCWD would be relieved of the responsibility and financial obligation to make sure construction is completed on time, but the district would retain the lead role in developing the system and would have the discretion to purchase the system once it is completed.
Shifting the risk of electricity rate increases from Poseidon to OCWD maintains the approach of paying actual costs. OCWD staff note that if Poseidon bears the risk, they would charge a higher rate due to the cost exposure, but if OCWD bears the risk, they expect to negotiate a lower rate. Staff also note that an excessive increase in electricity rates would impact the entire water industry and effect of other supply sources.
The contract term would be shortened from 50 years. The longer term allows for the capital costs to be amortized over a longer period resulting in a lower unit cost, but the total amount paid would be more. The term sheet contemplates both a 30-year term and an alternative 35-year term. Considering both the cost-of-service pricing structure and the shorter contract term, the unit cost is estimated to be $1,791/AF under the 30-year term and $1,729/AF under the 35-year term. Staff projections anticipate residential water bills to gradually increase by a total of $3 to $6 per month, depending on the distribution plan chosen.
“The working men and women of Orange County appreciate the OCWD board taking the steps to bring this long-awaited project to fruition,” said Ernesto Medrano, Council Representative of the Los Angeles-Orange County Building Trades Council. “Tonight’s action will reduce the cost of the product water over the long term, which is important for those in disadvantaged communities, but the construction of this water production facility will create thousands of jobs.”
The project, which would supply 56,000 AF/year to Orange County, has strong bipartisan support from every state elected official in Orange County, as well as a supermajority of the California Legislature. In letters to the California Coastal Commission, these legislators note water supply and economic benefits. They specifically highlight that it is a drought-proof, reliable supply and that it “will be privately financed, built and operated—generating 3,000 new jobs during construction while protecting taxpayers from construction and operating risk…”
Poseidon is currently working with state agencies to obtain the final necessary permits and anticipates completing the permitting process in 2019.
“The amended term sheet is just the latest indication that Orange County values the water supply reliability benefits provided by the Huntington Beach Desalination Project,” said Poseidon Vice President Scott Maloni. “We look forward to bringing closure to the permitting process early next year so we can finalize a water purchase agreement and bring this long-await project online.”
Written by Marta L. Weismann