March 8, 2013 - 

The Carlsbad Desalination Project was honored Thursday in New York as the “North American Water Deal of the Year” for 2012 by Project Finance, an international trade publication that annually highlights major industry accomplishments around the world.

Carlsbad Desalination Project

· Total capital cost: $1.003 billion (includes plant, pipeline, financing costs and Water Authority system modifications)

· Bond interest rate: 4.78 percent

· Developer: Poseidon Resources

· Construction contractors: Kiewit Infrastructure West and J.F. Shea Construction Inc.

· Water deliveries: Expected to begin in 2016

· Production: 48,000 to 56,000 acre-feet/year

The magazine’s March issue said the $734 million bond issue in December “could serve as a useful template” for public-private partnerships in the water industry, particularly for seawater desalination projects.

“The San Diego County Water Authority … was the key to bringing the deal to close,” said Project Finance, which bases its accolades on innovation, deal repeatability, value, problem solving, risk mitigation and other factors. This year, it is holding awards ceremonies in Singapore, Dubai, London and New York.

Project Finance highlighted the Carlsbad project’s Water Purchase Agreement, which allowed the Water Authority to shift appropriate construction and operation risks to developers. The Water Authority only pays for water that is produced according to pre-set quality and quantity standards. The magazine also noted the public nature of the desalination project, which included more than 40 public meetings before the purchase agreement was approved by the Water Authority’s Board of Directors on Nov. 29, 2012.

“This is wonderful recognition of the dedication and cooperation by all parties to work through complex issues and find solutions so that we could proceed with a vital water supply project that will be a cornerstone for meeting our region’s water needs for decades,” said Thomas V. Wornham, Chair of the Water Authority’s Board.

Board approval launched an effort to meet project benchmarks by the end of 2012.  Moody’s assigned a Baa3 rating to the desalination project bonds, bolstered by what Project Finance called the Water Authority’s “sterling” credit rating. “Bond funds, insurance companies and investment advisers eagerly bought in,” the magazine said.

On Dec. 13, the project team secured a 4.78 interest rate for the bonds, saving Water Authority ratepayers an estimated $200 million over three decades compared to earlier projections. Financing closed on Dec. 24.  Construction is now underway.  The project is expected to produce up to 50 million gallons a day of desalinated water starting in 2016.

The Carlsbad Desalination Project includes a seawater desalination plant and a 10-mile, large-diameter pipeline being developed by Poseidon Resources, a private, investor-owned company that develops water and wastewater infrastructure. 

The plant is being built on industrially zoned land adjacent to the Encina Power Station in Carlsbad.  The pipeline will deliver water from the plant to the Water Authority’s Second Aqueduct in San Marcos. The Water Authority will also make a number of improvements to its pipeline system and the Twin Oaks Valley Water Treatment Plant to integrate desalinated water.

The total cost for desalinated water, including the pipeline, is projected at $2,014 to $2,257 per acre-foot in 2012 dollars. While that’s more costly than current water supplies, desalination is a more reliable, drought-proof supply.  Water Authority projections also show seawater desalination it may be cost-competitive with imported water sources by the mid-2020s.

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At the moment, the seawater is being diverted from the ocean to cool an aging natural-gas power plant. But in three years, if all goes as planned, the saltwater pulled in at that entryway will emerge as part of the regional water supply after treatment in what the project’s developers call the newest and largest seawater desalination plant in the Western Hemisphere.

Large-scale ocean desalination, a technology that was part of President John F. Kennedy’s vision of the future half a century ago, has stubbornly remained futuristic in North America, even as sizable plants have been installed in water-poor regions like the Middle East and Singapore.

The industry’s hope is that the $1 billion Carlsbad plant, whose builders broke ground at the end of the year, will show that desalination is not an energy-sucking, environmentally damaging, expensive white elephant, as its critics contend, but a reliable, affordable technology, a basic item on the menu of water sources the country will need.

Proposals for more than a dozen other seawater desalination plants, including at least two as big as Carlsbad — one at Huntington Beach, 60 miles north of here, and one at Camp Pendleton, the Marine Corps base — are pending along shorelines from the San Francisco Bay Area southward. Several of these are clustered on the midcoast around Monterey and Carmel.

The San Diego County Water Authority has agreed to buy at least 48,000 acre-feet of water from the plant each year for about $2,000 an acre-foot. An acre-foot equals about 326,000 gallons, roughly enough for two families of four for a year. The authority has made a long-term bet that those costs — now double those of the most readily available alternative — will eventually be competitive. But it still means the authority will pay more than $3 billion over 30 years for only about 7 percent of the county’s water needs.

As Sandra Kerl, the deputy general manager of the authority, said in a recent interview, “There’s a lot of eyes on this.”

The technology used in the Carlsbad plant, known as reverse osmosis, was developed decades ago. It involves pushing the water through a series of microscopic sieves rolled up into larger cylindrical filters. The energy-intensive process separates pure water from both salt molecules and impurities. The filters, some of which are made locally, are cheaper and more durable than they were a decade ago, industry accounts say, bringing down the overall price of the plant and its operations.

In the Western United States, where the complexities of water law and heavily subsidized federal and state water projects have complicated the economics of water delivery and hamstrung any widespread development of water markets, the Carlsbad plant offers a peek into a future when water prices reflect the actual cost of procurement and delivery. David Moore, a managing director of Clean Energy Capital, financial advisers to the San Diego County authority, said the water authority had “made the call that over time this water is going to be more affordable than other sources. That was the fundamental risk of the transaction.” The price of water the authority now gets from the Metropolitan Water District of Southern California is about $1,000 an acre-foot.

The bet on this technology was not an obvious one; the recent history of desalination in the United States and Australia has been mixed, at best. Some recently constructed Australian plants are flourishing while others stand idle some of the time. In this country, technological missteps, delays and bankruptcies dogged the first big plant, which finally opened in Tampa in 2007.

“Tampa was a buzz kill for the sector,” Mr. Moore said.

So the Carlsbad plant is being watched not just for its performance or its effect on the local marine environment, but for its financial architecture.

Mr. Moore and other financial advisers are trying to make investors and bondholders comfortable with the technology by mimicking the financial approach of a merchant power plant — for instance, substituting a “water purchase agreement” for a “power purchase agreement,” to show that Carlsbad’s water has a guaranteed market.

The water purchase agreement was signed by the San Diego authority and the plant’s developer, Poseidon Resources, of Stamford, Conn., in late November. Poseidon bears the responsibility for completing the plant and operating it; the authority does not pay for any water that is not delivered.

The project’s costs are financed by two bond offerings totaling $734 million and a $189 million equity investment. In addition, the water authority is committing about $80 million to other capital needs. All of these arrangements have interlocking guarantees and risks, with the costs of constructing the plant borne by the project developers and the water authority responsible for constructing a 10-mile pipeline to send the water on its way to San Diego’s taps.

The public water authority did not want its ratepayers to be responsible for paying for water that was never delivered; it will pay only for water that meets its standards and goes into its reservoirs. That said, when the water is flowing in 2016 the county must pay as much as $113 million annually, which could rise over time.

Late last year, this financial picture prompted Fitch Ratings to give the project’s bond issue a BBB- rating, the lowest for investment grade debt. For Fitch executives, familiar with the unexpected obstacles in deployment of desalination technology, the water purchase agreement was a critical factor leading to a rating above junk level.

The cost comparison remains ugly for desalination right now, but the water agency has calculated that, given the history of annual rate increases from the Metropolitan Water District of Southern California, the desalinated water could be cheaper than the current supply by 2024.

Then there is the question of reliability. Water supplied by the Southern California water district comes from Northern California transfers and Colorado River diversions. Climate change is likely to cut into both sources over time. And San Diego and the Southern California district have a history of antagonism; the Carlsbad plant, which would supply as much as 7 percent of the region’s needs, is the most recent of several San Diego efforts at diversification.

But water policy experts and local environmental activists are skeptical about the value of desalination compared with conservation and reuse. They will be watching the plant from a very different perspective.

Heather Cooley, a senior research associate with the Pacific Research Institute, an Oakland-based nonprofit group specializing in water supply questions, said that even if the Carlsbad plant worked well, a new rush to desalination was hardly certain.

It depended, she said, on whether “water demand continues to grow, as was likely in the past, or whether, as we’ve seen in the past 15 years, it stays the same or even declines, based on efficiencies and conservation and the structure of the economy.”

She added that by promising to buy at least 48 million gallons a day from the plant, the county water authority has less incentive to step up its push for water conservation, or to invest further in water reuse.

The environmental group the Surfrider Foundation, which has fought the Carlsbad plant at every turn, expects the plant to be an object lesson in how not to guard against water shortages. Among other things, the foundation emphasizes the energy needs of the plant, which will consume 5,000 kilowatt-hours of electricity to produce an acre-foot of water.

As electricity costs go up over time, the county’s water bill — already estimated to be $5 to $7 a month higher for each customer by 2016, thanks to Carlsbad — will rise in tandem.

But authority officials noted that water delivered from the Southern California district also required energy, and its cost, too, would go up in such circumstances.

The costs have been one focus of opponents.

“If the county had taken a holistic, practical approach to water management and water supply needs, it would never have done something so costly,” said Belinda Smith, a member of Surfrider.

She and her colleagues see the surface water intake valve as the plant’s Achilles’ heel. The current state permit covering the intake’s operations expires when the Encina natural gas power plant is no longer using cooling water. If the new permit required expensive changes — if, for instance, the entire intake had to be moved below the surface — the cost to ratepayers, and particularly to Poseidon, could increase significantly.

The county and the developers said this eventuality was covered in the financial planning.

But for the moment, Poseidon officials are energized by the prospect of beginning construction, after a decade of delays. Peter M. MacLaggan, a senior vice president at Poseidon, referred to the experience of the company’s desalination technology partners when he said, “We’re at desal 3.0 or 4.0 here at Carlsbad.”

He added that the need for new water supplies could provide a ready market for the technology, if it is effective. “Water in California has been cheap and plentiful. And that’s no longer the case,” he said. In San Diego, he said, “We’re facing it. The rest of California is facing it to different degrees. We’re all challenged in finding new water supplies.”

Concurrent with the financial closing, Poseidon has given the notice to proceed to the joint-venture company that will design, construct and start up operations at the plant, as well as construct a 10-mile pipeline that will deliver the approximately 50 million gallons per day of treated water produced by the plant into San Diego County's water system.

Done in partnership with the San Diego County Water Authority, the project financing is one of the largest project-specific financings for new water assets in the United States.

Poseidon and the Water Authority brought together numerous qualified parties that worked collaboratively to drive the project to this historic moment. The project-specific structured deal assigns responsibility and accountability to the appropriate parties, which protects San Diego ratepayers while mitigating the risk to investors.

"I'd like to acknowledge the San Diego County Water Authority for its leadership and diligence throughout this enormously successful financing process," said Poseidon Resources CEO Carlos Riva. "I am grateful for the skill and support of Water Authority General Manger Maureen Stapleton and her staff, who brought this complex financing together on a compressed timeline. I also would like to thank our site host NRG for the important role it played in allowing this project to move forward."

Kiewit Shea Desalination, a joint venture between subsidiaries of Kiewit Corp. and J.F. Shea Construction Inc., will provide engineering, procurement and construction (EPC) services for the desalination plant and the pipeline under a fixed-price contract. IDE Americas Inc., a subsidiary of IDE Technologies LTD, will design the seawater process plant under the direction of Kiewit Shea Desalination. IDE will also be responsible for the operation and maintenance (O&M) under a 30-year contract.

The signing of the EPC and O&M contracts coincided with the close of the sale of $734 million in tax-exempt bonds issued by the California Pollution Control Financing Authority on behalf of Poseidon and the Water Authority, with underwriting led by JP Morgan. Private equity investor Stonepeak Infrastructure Partners provided the remainder of the project capital.

Under the terms of the Water Purchase Agreement between Poseidon and the San Diego County Water Authority, the agency pays only for delivered product that meets its stringent quality standards. This ensures Poseidon has significant incentive to avoid construction delays, plant downtime, labor disputes and inefficiencies -- costs that Poseidon would absorb if incurred.

In turn, Poseidon sought to minimize these risks by selecting highly qualified firms with vast experience in large-scale infrastructure and desalination projects, history of success and sufficient resources to support accountability measures in their contracts.

• Kiewit Corp. has more than 127 years of heavy civil construction experience, which includes building the Olivenhain Dam for the San Diego County Water Authority.
• J.F. Shea Construction Inc. is one of the oldest and most experienced construction and engineering firms in the United States. It was involved in the construction of the Golden Gate Bridge and Hoover Dam, as well as 70,000 feet of pipeline for the San Diego County Water Authority.
• IDE Technologies LTD has designed, built and currently operates some of the world's largest desalination and water-treatment facilities.

"We chose the very best in the business to ensure the Carlsbad Desalination Project delivers on its promise of a reliable local supply of water to the San Diego region," said Riva. "The high level of accountability built into every aspect of this project will make it a model for effective public-private partnerships."

Construction is set to start immediately, with commercial operations commencing in 2016. The project will create 2,300 jobs during construction and will support more than 575 jobs for the life of its operations.

"Surfrider Foundation (Surfrider) appeals from the trial court's denial of its petition for a writ of mandamus challenging the approval of the National Pollutant Discharge Elimination System (NPDES) permit by the California Regional Water Quality Control Board, San Diego Region (the Regional Board) for a desalination facility that Poseidon Resources (Channelside), LLC (Poseidon) plans to build on the coast in Carlsbad, California.

Surfrider contends that in issuing the NPDES permit the Regional Board failed to comply with the requirements of Water Code section 13142.5, subdivision (b) (section 13142.5(b)),1 which provides that "[f]or each new or expanded coastal powerplant or other industrial installation using seawater for cooling, heating, or industrial processing, the best available site, design, technology, and mitigation measures feasible shall be used to minimize the intake and mortality of all forms of marine life." (Ibid.) We reject Surfrider's arguments and conclude that the Regional Board complied with section 13142.5(b). Accordingly, we affirm the judgment."

Download the full ruling. 

The California Pollution Control Financing Authority (CPCFA) today unanimously approved the issuance of up to $840 million in bonds to finance the Carlsbad Desalination Project.

The approval allows the project to proceed with the sale of tax-exempt private-activity and municipal-purpose bonds to fund the construction of the desalination plant, auxiliary water-delivery-system infrastructure and environmental mitigation projects. CPCFA administers and allocates the state’s annual allotment of federal tax-exempt private-activity bonds for the financing of private development projects that benefit the public.
Poseidon expects the bond sale to take place in mid-December, with construction to commence shortly thereafter.

Also on Friday, the 4th District Court of Appeal ruled in favor of the project in the appeal by the Surfrider Foundation of the California Superior Court decision upholding the project approval by San Diego Regional Water Quality Control Board, establishing the conditions under which Poseidon is able to withdraw seawater from the Pacific Ocean.

In the original lawsuit challenging the RWQCB’s project approval, the Surfrider Foundation alleged the project did not comply with California Water Code Section 13142.5(b), which requires new industrial facilities using seawater for processing to use the best available site, design, technology and mitigation measures feasible to avoid the intake and mortality of marine life.

Poseidon Water prevailed in that lawsuit in 2011, with Judge Judith Hayes finding that the RWQCB properly applied state law in its approval. Surfrider then appealed the ruling, contending that in issuing the permit the Regional Board failed to comply with the requirements of the California Water Code.

In its decision, the Court of Appeal rejected Surfrider’s arguments and concluded that the Regional Board complied with the California Water Code. The decision is Certified for Publication, marking its legal significance.

The decision ends the 14th and final remaining legal challenge to the project.

The San Diego County Water Authority Board of Directors has approved the purchase of the water produced by the proposed Carlsbad Desalination Project, a seawater desalination plant that will produce enough water to meet about 7 percent of the region's water needs in 2020, reducing San Diego's dependence on imported water and significantly improving water reliability in the region.

The agreement clears the way for the sale of bonds to finance the fully permitted project, which includes the plant as well as a 10-mile pipeline to deliver the treated water to customers. The bond financing is expected to proceed next month, and construction will begin early next year on the facility, which is located next to the Encinas Power Station in Carlsbad, Calif. The plant is expected to be in operation in 2016.

Under the 30-year agreement approved today, the CWA will purchase the plant's output of approximately 50 million gallons per day of drinking water, which is enough to serve nearly 450,000 county residents.

"San Diego has reached a major milestone in its long-term plan to develop drought-proof, local sources of water to sustain our economy and quality of life, and Poseidon is proud to be part of it through this partnership with the County Water Authority and its 24 member agencies," said Carlos Riva, chief executive officer for Poseidon Resources. "The Carlsbad Desalination Project has been more than a deade in the making, and we're grateful to the many supporters who helped shape the project and move it forward so we can deliver this much-needed supply to San Diegans."

The project and the Water Purchase Agreement enjoys broad support from elected leaders, including the region's entire Congressional and state Legislative delegation, as well as mayors and councilmembers throughout the county. It also won the support of respected business and trade groups such as the San Diego Regional Chamber of Commerce, Biocom, the San Diego County Taxpayers Association, the San Diego and Imperial Counties Labor Council, the San Diego Building Trades & Construction Council and groups representing agricultural interests.

Construction of the plant will create about 2,300 jobs in the region, with ongoing operations supporting about 575 jobs. In addition to creating jobs, the project will help protect the region's economy from the devastating impact of water shortages.

Adding to the project's benefits is Poseidon's restoration of 66 acres of wetland habitat in San Diego Bay, which will return the bay to the original condition before it was altered for farming and industrial use. The project will restore natural tidal flows and encourage the return of native plants, migratory birds and aquatic life.

Poseidon Resources specializes in developing and financing water infrastructure projects primarily seawater desalination and water treatment plants. These projects are implemented through innovative public-private partnerships in which private enterprise assumes the developmental and financial risks.

The San Diego County Water Authority board on Thursday will consider a 30-year contract to buy the water from Poseidon Resources LLC, which needs the deal to move ahead with plans to sell bonds that would pay for more than 80 percent of $984 million project. The plant in Carlsbad would produce 50 million gallons of highly purified drinking water a day, enough to supply about 8 percent of the region in 2020." By ELLIOT SPAGAT Associated Press. Read the full AP article.

The organization determined the comprehensive contract between the County Water Authority (CWA) and the project developer, Poseidon Resources, provides considerable protections for ratepayers, minimizing the risk to ratepayers of nonperformance and construction cost overruns.

“Our support is in part based on the numerous ratepayer protections built into the agreement, which ensure that major risks are on the project’s developer and not on the public,” said Lani Lutar, President and CEO of the Taxpayers Association. Download the full article.

In November 2011, the Water Authority and Poseidon began direct negotiations on the draft WPA, and Poseidon is now reviewing a second draft of the agreement. The parties plan to have their next negotiating session in mid-February. At least two public workshops, which could take place in May and June, will be part of the review process, and the WPA could be presented to the board for consideration at its June or July board meetings.

The Water Authority staff and consultants are also conducting a due diligence review of financial and other project documents as part of the project’s bond rating process, including the following agreements between Poseidon and its contractors:

• An agreement between Poseidon and a Kiewit Infrastructure–JF Shea Construction joint venture to construct the facility and conveyance pipeline,
• An agreement between the joint venture and IDE Technologies to design the desal plant, and,
• An agreement between Poseidon and IDE to operate the plant.

At last week’s meeting, the Board also agreed to approve consultant contract amendments and to increase its current budget from $2 million to $4.8 million to reflect the current WPA negotiations.

The project’s current cost of water is estimated at $1,865/AF ($1.51/m3; $5.72/kgal) and its capital cost is estimated at $780 million.

If the Water Authority approves the WPA this summer, desalted water from the Carlsbad project should be available by 2016 – 18 years after Poseidon began to develop the project – and will comprise seven percent of the total regional supply.

Of the big four, water is hands down the most vital. If deprived of water, human beings will be on the fast track to the river Styx within three days, which alone is sufficient to make water the most vital urban service.

Moreover, without water, a city’s sewage service will collapse and its ability to fight fires will be degraded to close to zero. When it comes to vital urban services, water is first among equals.

That being the case, one would suppose that just about the last thing a city would like to see located in a foreign country is its water supply, especially if the government of that country was showing signs of losing control of parts of it to armed gangs and private militias.

But four water utilities that supply San Diego, Phoenix, Las Vegas and southern California are seriously thinking about building a major water desalination plant in Mexico instead of the United States.

The utilities commissioned a study of the feasibility of building a 50-million-gallon-a-day (300 acre feet) desalination plant, which could supply enough water for 100,000 people, in Mexico at Rosarito, south of San Diego. The study found no show-stoppers, and the utilities have commissioned a second study, which will include costs. Negotiations with the Mexican government are also under way. What’s more, a private company is considering building a 100-million-gallon-a-day plant in the same area and selling its output to the gringos.

Why would American utilities even consider such a course, let alone pursue it? Why, indeed.

About 10 years ago a company called Poseidon Resources set out to build a 50-million-gallon-a-day desalination plant at Carlsbad, Calif., near San Diego. A decade of studies, hearings and litigation ensued before the company finally won approval from the California state regulators. There may well be further challenges.

The project’s main nemesis has been an organization named the Surfrider Foundation, an environmental group founded by Malibu surfers in 1984 that focuses on protecting beaches and marine water quality. Today it has 50,000 members and 80 chapters worldwide. In addition to the Carlsbad project, it opposes proposed desalination plants in Huntington Beach and Monterey.

The Surfrider Foundation’s main objection to the projects is that their intake pipes can suck in fish eggs and that they discharge concentrated salt brines that can also damage marine life into the ocean. The foundation also objects to the high-energy demands of desalination processes, presumably because the energy would come from burning fossil fuels.

All three objections seem pretty weak. The brine and fish egg problems do not seem beyond the ability of civil and process engineering to fashion solutions. As for the energy issue — use wind, solar or nuclear. Of course, that might require the California greens who are fighting wind and solar power plants in the Mojave Desert and the power lines to connect them to the grid to lighten up.

Shortly after he became energy secretary, Nobel laureate Steven Chu gave an interview in which he pointed to climate models that predicted global warming could result in the Sierra Nevada mountains, the source of most of California’s water, losing 90 percent of their snowpack by the end of the century. If Chu is right, the state of California would be looking at an annual water shortfall amounting to 35 million or 40 million acre feet at a minimum.

(By way of comparison, California’s annual water consumption is around 70 million acre feet. Its draw from the Colorado River comes to six or seven million acre feet.)

It took California a hundred years to put in place its current water infrastructure. Assuming Chu is right, it needs to start building the successor system now, and central to the successor system is a massive commitment to desalination and waste-water recycling (which to a large extent will use desalination technology).

Viewed from this perspective, the Surfrider Foundation is being irresponsible, or perhaps more charitably, self-absorbed beyond words.

Which raises a couple of questions:

1) Are environmental organizations like the Surfrider Foundation capable of distinguishing between what is important and what isn’t? Hint: Ensuring an adequate water supply for 38 million people in the face of impending climate change is more important than the welfare of a few square miles of fish eggs, just as the commercialization of solar and wind energy is more important than a few square miles of desert tortoise habitat.

2) If the country has so hamstrung itself with regulatory process and tolerance for greens gaming the system that public agencies responsible for the water supply think that contending with the Zetas in Mexico is a more attractive option than contending with the Surfrider Foundation in California, are we facing an environmental crisis of existential proportions — or a governance crisis of existential proportions?

“Poseidon Resources is pleased to donate these legal costs to a worthy organization like the Agua Hedionda Lagoon Foundation. The Foundation is an established and respected coastal organization with a track record of real, tangible environmental stewardship,” said Scott Maloni, Vice President of Poseidon Resources. “The donation is our way of ensuring that these misguided lawsuits produce something positive for the coastal environment,” said Maloni.

“Poseidon Resources has demonstrated time and again its commitment to preserving and protecting the Agua Hedionda Lagoon,” said Lisa Cannon-Rodman, Executive Director of the Agua Hedionda Lagoon Foundation. “We have a longstanding relationship with Poseidon Resources because we share a common interest in maintaining a healthy watershed and lagoon ecosystem. The Agua Hedionda Lagoon is an environmental and recreational treasure, and it will soon be the source of drinking water for three million San Diego County residents. We are very appreciative of Poseidon’s continued support of the Foundation’s efforts to protect this precious natural resource.”

The $3,932.64 donation comes from the Surfrider Foundation’s repayment of its share of the court costs stemming from litigation it brought against the project in conjunction with San Diego Coastkeeper. Court costs were required to be reimbursed by the litigants because all lawsuits filed against the project -and dismissed- were determined by the courts to be without merit.

In total, Coastkeeper and Surfrider have been responsible for 14 legal challenges (nine lawsuits and an additional five administrative permit appeals) to permits issued to the desalination project. Thirteen of the legal challenges have been dismissed. The fourteenth challenge – a Surfrider Foundation lawsuit appealing the California Superior Court’s June 2011 decision to uphold a permit condition approved by San Diego Regional Water Quality Control Board – is pending but has no bearing on the project’s underlying Regional Board permit and no effect on the project’s financing and construction schedule.

In addition to providing San Diego County with 50 million gallons per day of drought-proof, high quality drinking water, the Carlsbad Desalination Project will have a tremendous impact on the regional economy. Once full-scale construction begins, the project will support over 2,400 jobs and contribute an estimated $350 million in local spending during construction and $50 million in annual spending throughout the region once the desalination plant operations begin in 2014. Poseidon is currently finalizing a water purchase agreement with the San Diego County Water Authority that covers the plant’s full 56,000 acre feet/year capacity. County Water Authority Board approval of the water purchase agreement will clear the way for the start of the next phase of project construction.

Poseidon Resources specializes in developing and financing water infrastructure projects, primarily seawater desalination and water treatment plants. These projects are implemented through innovative public-private partnerships in which private enterprise assumes the developmental and financial risks. For more information on Poseidon Resources and the Carlsbad desalination plant visit our website at www.carlsbad-desal.com.

“The Carlsbad project is the largest shovel-ready water infrastructure project in the state of California. It will create over 2,000 skilled jobs and generate over $350 million in economic activity during the 36-month construction phase. Once operations begin, the project will support 400 permanent jobs and contribute over $50 million annually to the regional economy.

“We look forward to working with the County Water Authority to finalize a water purchase agreement so that we can start construction on this new locally-controlled, drought-proof water supply for San Diego County.”

Riva has had a distinguished career as President or Chief Executive Officer of a number of major infrastructure companies, including J. Makowski Company, Intergen, Amec Group, Ltd, and most recently as CEO of Verenium Corporation, a San Diego-based pioneer in the fields of advanced biofuels and industrial enzymes. He holds engineering degrees from M.I.T. and Stanford University and an MBA from Harvard Business School.

Riva joins Poseidon at a time when it is poised for rapid growth after several years of active development of a number of seawater desalination projects. The fifty-million gallon per day Carlsbad, CA project (the first large-scale seawater desalination project permitted in California) is set to close project financing later this year. Another fifty-million gallon per day project in Huntington Beach, CA is in the final permitting stage and is expected to reach financial close in 2012. The company’s development pipeline includes additional seawater desalination projects in California, Texas and Florida.

“I am very pleased to be joining the Poseidon Resources team at such a pivotal time,” said Riva. “The company has done a remarkable job bringing forward these large infrastructure projects in a very challenging regulatory environment and is now poised for significant growth. Poseidon has built important strategic relationships with public agencies and world-class engineering contractors that will be important to our success as we move ahead with our development and construction program. This is a very exciting time for me professionally, and for the shareholders and partners of Poseidon,” said Riva.

Poseidon Resources specializes in developing and financing water infrastructure projects, primarily seawater desalination and water treatment plants. These projects are implemented through innovative public-private partnerships in which private enterprise assumes the developmental and financial risks. For more information on Poseidon Resources and the company’s projects, visit www.poseidonresources.com.

Between 2006 and 2009, thirteen legal challenges – eight lawsuits and five permit appeals – were filed against the Project primarily by the San Diego Chapters of Surfrider Foundation and Coastkeeper (see attached litigation chronology). Superior Court Judge Judith Hayes’ ruling resolves the last outstanding legal challenge against the Project.

“We appreciate the Court’s thoughtful consideration of the record built by the Project over the past decade,” said Poseidon Resources’ Senior Vice President Peter MacLaggan. “The ruling is definitive and is the latest independent determination that the Project complies with all applicable state and federal environmental laws,” said MacLaggan.

In the lawsuit, the Surfrider Foundation alleged that the Project did not comply with California Water Code Section 13142.5(b), which requires new industrial facilities using seawater for processing to use the best available site, design, technology and mitigation measures feasible to avoid the intake and mortality of marine life.

In issuing her judgment, Judge Hayes ruled that the San Diego Regional Water Quality Control Board properly applied state law, and that “Water Code Section 13142.5(b) does not prohibit the implementation of restorative mitigation measures when considering a project’s best available, site, design, technology and mitigation measures feasible.” Judge Hayes’ ruling went on to say, “The plain language of the Section 13142.5(b) provides that mitigation measures, together with the best available site, design and technology will be used for each new coastal industrial plant.” Judge Hayes also ruled that the Federal Clean Water Act Section 316(b) does not apply to desalination plants as originally asserted by Surfrider.

The Project underwent approximately 20 public hearings with over 80 hours of public testimony and deliberation over a seven year permitting period that started in 2003. Each and every one of the state’s environmental permitting and regulatory agencies that reviewed the Project approved it.

“The across-the-board approval of the Project by California’s environmental regulators including the Coastal Commission, San Diego Regional Water Quality Control Board and State Lands Commission is a clear indication that the Carlsbad Desalination Project is fully protective of the environment,” continued MacLaggan. “While the opponents’ litigation strategy was unfortunate, we now have a robust legal record to guide the future permitting of desalination projects in California, “said MacLaggan.
Phase I Project construction was initiated in November 2009 and Phase II will commence after Project financing is completed later this year.

Poseidon Resources specializes in developing and financing water infrastructure projects, primarily seawater desalination and water treatment plants. These projects are implemented through innovative public-private partnerships in which private enterprise assumes the developmental and financial risks. For more information on Poseidon Resources and the Carlsbad desalination plant visit our website at www.carlsbad-desal.com.

Poseidon’s proposed 66-acre restoration site is located in the South San Diego Bay Unit of the San Diego National Wildlife Refuge and is part of an ongoing restoration effort by the United States Fish and Wildlife Service (USFWS). The wetlands restoration site is managed and owned or leased by the USFWS exclusively for restoration of coastal wetlands and associated uplands. Poseidon and the USFWS are entering into a partnership to facilitate the restoration and enhancement of wetlands. The Commission’s approval of the wetlands restoration site clears the way for Poseidon and the USFWS to prepare environmental studies and a final project design.

“Poseidon is grateful to the Coastal Commission for its unanimous support,” said Poseidon vice president and project manager Stan Williams. “Poseidon has extensively studied the feasibility of the site in the San Diego National Wildlife Refuge and the Commission’s decision to provide for wetlands restoration within the Refuge will provide measurable environmental benefits. We look forward to working with the community on the final restoration project design,” said Williams.

Poseidon’s proposed site was endorsed by the Commission staff and widely supported by federal and state resource agencies and environmental organizations and local elected officials including: the California Coastal Conservancy, California Department of Fish & Game, San Diego Regional Water Quality Control Board staff, Environmental Health Coalition, Audubon Society, Agua Hedionda Lagoon Foundation, WiLDCOAST, Friends of the San Diego Wildlife Refuges, San Diego County Supervisor Greg Cox, Chula Vista Mayor Cheryl Cox, National City Mayor Ron Morrison, San Diego Mayor Jerry Sanders, Imperial Beach Mayor Jim Janney, State Senator Juan Vargas, State Assemblyman Ben Hueso and San Diego City Councilman David Alvarez.

In 2007, the Coastal Commission approved a Coastal Development Permit (CDP) for Poseidon’s Carlsbad Desalination Project. The approved CDP included a condition that Poseidon prepare a Marine Life Mitigation Plan (MLMP) to address potential impingement and entrainment impacts to marine life that might occur during the lifetime of the desalination plant. The Coastal Commission approved the MLMP in August 2008 and required Poseidon to research and propose a site for the wetlands restoration.

A mitigation milestone may come Wednesday when the California Coastal Commission meets in the Chula Vista City Council chambers. Commission staff, supported by a long list of regulatory and environmental groups, recommends approval of Poseidon’s preliminary plan to convert 66 acres of commercial salt ponds in south San Diego Bay into wildlife refuge.

Restoration of the wetlands to their natural state would be a wondrous development for the wildlife and fish near the tip of San Diego Bay and for the people of South County, especially with the South Bay Power Plant coming down.

The Otay River floodplain site is 40 miles from Agua Hedionda Lagoon, the desalination plant’s future location. Some in North County may ask why not restore a lagoon closer to home. Put Esther Sanchez in that camp. She’s an Oceanside City Council member and Buena Vista Lagoon is certainly near and dear to her. As a member of the Coastal Commission, however, Sanchez surely understands that her own commission has set parameters on the required mitigation. It must be for a minimum of 66.4 acres covering no more than two sites, be able to be finished in a time certain and so on.

Lump six North County lagoons together and only 51 acres of the required type of mitigation could be accomplished. Read the requirements carefully and three – Buena Vista, San Elijo and Agua Hedionda – do not qualify. Just one site in the entire region, the Otay River floodplain, meets all criterion.

But North County will have other chances. Recent improvements in San Dieguito Lagoon near the Del Mar Fairgrounds were mitigation for the San Onofre Nuclear Plant. Interstate 5 widening will carry heavy mitigation requirements.

The Poseidon plant already has been approved – in November 2007, actually. An endless series of harassment lawsuits no longer has the ability to stall. Poseidon is finalizing a water supply and tax payment agreement with the Carlsbad Municipal Water District and plans to seek financing soon. This should be the year of actual construction. Delaying approval of the mitigation plan would only delay wetlands restoration itself.

California has precious few wetlands left, offering migratory and permanent homes to thousands of species of birds, fish and mammals. This is an opportunity to reclaim at private expense 66 of those lost acres, at a site next to an existing wildlife refuge. What could be more compatible with the Coastal Commission’s central mission of protecting our coastline?

This should be an easy vote for commissioners. Approve the mitigation now.

Over a seven year permitting period from 2003-2009, the project underwent approximately 20 public hearings and over 80 hours of public testimony and deliberation. In response to the approval of the Project by the state’s environmental permitting and regulatory agencies, a handful of seawater desalination opponents have unsuccessfully filed a dozen permit appeals, revocation requests and lawsuits in an attempt to delay the desalination project.

In August 2008, the California State Lands Commission unanimously authorized a lease agreement that allowed for operation of the Project using the Encina Power Station’s seawater intake and outfall facilities. The San Diego chapters of the Surfrider Foundation and Coastkeeper appealed the decision to the California Superior Court. In August 2009, the Superior Court dismissed the lawsuit, leading Project opponents to file an appeal.

"We appreciate the Court’s thoughtful consideration of the record and ruling upholding the Superior Court’s 2009 decision,” said Poseidon Resources’ Senior Vice President Peter MacLaggan. “The ruling is definitive and is the latest in a series of independent determinations that the Project complies with state environmental law,” said MacLaggan.

The litigants unsuccessfully argued that as a responsible agency under the California Environmental Quality Act (CEQA), the State Lands Commission should have required additional environmental studies. The Court of Appeal found no merit in the petitioner’s arguments and denied the petition on all grounds.

Poseidon Resources specializes in developing and financing water infrastructure projects, primarily seawater desalination and water treatment plants. These projects are implemented through innovative public-private partnerships in which private enterprise assumes the developmental and financial risks.

San Diego – Poseidon Resources today announced the San Diego County Water Authority (SDCWA) Board of Directors voted unanimously to direct its staff to work with Poseidon on a contract to purchase drinking water from Poseidon’s Carlsbad Desalination Project (“Project”). The Project’s capacity is 56,000 acre feet per year, enough drinking water for 300,000 San Diego County residents.

Poseidon currently has executed water purchase agreements with nine San Diego County retail water agencies collectively known as the San Diego Desal Partners. Each of the San Diego Desal Partners is a local water retailer and member agency of the SDCWA. The San Diego Desal Partners will relinquish their rights to the Project output if Poseidon and the SDCWA are able to reach an agreement.

“Today’s action by the San Diego County Water Authority demonstrates the critical importance of the Carlsbad Desalination Project to the region’s water supply reliability,” said Poseidon Resources Senior Vice President Peter MacLaggan. “The direct involvement of the Water Authority ensures that the water supply benefits associated with the Project will be shared throughout the region,” said MacLaggan.

The Carlsbad Desalination Plant is fully permitted and Poseidon started phase one construction on the facility in November 2009. “The leadership from the San Diego Desal Partners was instrumental in achieving these milestones,” continued MacLaggan. “Poseidon is grateful to the San Diego Desal Partners and the Water Authority for their support and continued cooperation as we work together to complete this critically needed water supply project as quickly as possible,” said MacLaggan.

Poseidon Resources specializes in developing, financing, owning and operating water infrastructure projects, primarily seawater desalination plants. These projects are implemented through innovative public-private partnerships in which private enterprise assumes the developmental and financial risks. For more information on Poseidon Resources and the Carlsbad desalination plant visit our website at www.carlsbad-desal.com.

The State Water Resources Control Board has three times dismissed appeals from the Surfrider Foundation to deny a permit for the Poseidon Resources desalination plant. Surfrider's latest lawsuit was filed against the San Diego Regional Water Quality Control Board.

The California Coastal Commission has already approved the project and preliminary construction on the proposed plant has begun. Whether or not desal is the best solution to the region's water woes, it's time for Surfrider to find another battle to fight.

Could this be the answer to California's water crisis? Could ocean water desalination end the fight over water rights to the Colorado River, eliminate the need for new canals and pipelines to bring water to Southern California and even allow for the return of stretches of biologically damaged parts of the Sacramento River delta to healthy wetlands?

The Golden State is in desperate need of solutions--it has the unfortunate distinction of holding four spots on Forbes' list of the Top 10 Thirstiest Cities, the American cities most likely to face dire water shortages in the next decade. Among these cities (of 750,000 population or more), the greater Los Angeles metroplex takes first place, followed by San Diego. Bakersfield comes in fifth, while Sacramento, despite being on a river, ranks eighth.

Our list was compiled with the help of Bert Sperling, who created his Sperling Drought Index by combining a variety of data and indices from the National Climatic Data Center. The rankings are based on long-term indicators like aquifer levels, precipitation patterns and historic balance of supply and demand.
As you'd expect, parched places like San Antonio, Phoenix, Las Vegas and Tuscon are also on the list. More surprising: Honolulu, where recent rainfall has been far short of historic norms, and Portland, Ore., where development means water needs have outstripped supply--even in the wettest region of the U.S.

But no state in the U.S. faces problems as big as California's. Even with the crush of snowfall the Sierra-Nevadas got this winter, enough to fill many of California's reservoirs to healthy levels, the states water woes are only getting worse.

California's Department of Water Resources says it would like ocean water desalination to add 500,000 acre feet a year of water to the Golden State's supplies, a modest amount compared with California's overall water consumption. Given 326,000 gallons in 1 acre foot, that would mean building roughly 10 plants the size of Poseidon's.

It sounds great in theory: using human ingenuity to make fresh water for the most parched state from the world's biggest ocean. Poseidon is working on permits to build a second plant up the coast in Huntington Beach; the military is considering a giant one at the Camp Pendleton Marine base. It could rival in size the world's largest, in Jubail, Saudi Arabia, which processes 200 million gallons a day. More than a dozen other plants have been proposed for California.

Disputes with environmentalists have slowed the first one. Poseidon has had to wade through legal appeals from groups concerned about intake pipes sucking in fish, and outflow pipes raising marine temperatures and salinity levels. Poseidon has gotten around that by promising to protect 55 acres of wetlands nearby, and will buy carbon offsets to balance out the emissions from the electricity it will use.

To avoid drawing more water than necessary out of the ocean, Poseidon is building adjacent to NRG Energy's ( NRG - news - people ) Encino, Calif., power generation plant, which currently sucks in ocean water to use for cooling, then pipes it back to the ocean. Poseidon will use the water when the power plant is done with it. For every two gallons of water the plant takes in, its reverse osmosis process will make one gallon of fresh water and send back to the ocean one gallon with twice the salinity level. Poseidon is still wrangling with environmentalists over a desalination plant it wants to build in Huntington Beach adjacent to a power plant owned by AES ( AES - news - people ).

Environmental issues aside, the biggest challenge for Poseidon, and desalination in general, is cost. Scott Maloni, a vice president with Poseidon, explains that it costs $1,100 to desalinate 1 acre foot of water. A third of that is the electricity to run the plant. Then there's another $400 per acre foot to transport the water by pipe into San Diego's water system. Compare that all-in cost of $1,500 to the roughly $900 per acre foot it costs San Diego's water districts to top off its marginal water needs with piped-in imports.

To convince nine nearby water districts to sign 30-year contracts to take Poseidon's water, Maloni had to promise to never charge them more than the going price of imported water. This is not a path to profits, at least in the short run. But Maloni is convinced that within a decade those import costs will rise to meet and exceed Poseidon's production costs. This assumes population growth continues its pace, that people keep flushing toilets and filling pools, and that California rainfall doesn't rise much above its average of 24 inches per year.
To survive financially while waiting for those cost lines to cross, Poseidon has raised more cash than the $350 million needed to build the desalination plant. It has sold $530 million in bonds, and plans an equity offering of $120 million. That will cover $110 million in interest payments. The Connecticut-based company was founded by former executives at General Electric ( GE - news - people ). It built the nation's current largest desalination plant in Tampa Bay, Fla., and has done a host of water projects in Mexico.

Poseidon will probably make out well on this investment, but the risk associated with putting so much capital into a business that is not yet commercially viable means we won't see a building boom of desalination plants in California anytime soon.

Furthermore, even 20 desalination plants would only add a cup to California's water bucket. Though 500,000 acre feet might sound like a lot, California uses 80 million acre feet a year. Just 9 million of that goes to cities for people to use. Another 31 million is used to irrigate crops, and 39 million more flows through rivers and streams, keeping the fish and frogs wet.

So what to do? California's water bureaucrats figure homeowners could save 3 million acre feet a year by being smarter about home water use. Really? That's roughly one-third of urban water use, a fairly ambitious goal. Despite advances in efficient toilets and faucets, residential water use in the state remains where it was in 1972, at 220 gallons per person per day.

Nonetheless, cities can do a lot more with what they have, says Patricia Gober, professor of environmental studies at Arizona State University. In Phoenix (ranked sixth on the list), 70% of residential water is used for outdoor purposes, and an economist in Gober's research group has determined that people are willing to pay $200 more per month to live in a subdivision with lots of irrigated landscaping. For the same money, you can do some first-rate xeriscape landscaping that uses drought-tolerant plants and needs no additional irrigation.
Gober says it's unlikely that any new large dams will be built in the West, "thus any new sources of water for cities of the West will come from current agricultural uses." She says some 80% of the water in the Colorado River basin is now used for agriculture.

That seems like a lot, until you consider that California produces half of the country's fruits, vegetables and nuts and 90% of the wine (550 million gallons a year). Still, to maintain water supplies for city slickers, farmers have seen their allocations slashed, and have even been selling their water to cities. In 2003 San Diego bought rights to 200,000 acre feet a year from farms in the Imperial Valley.

"If you think about it," says drought indexer Gary Sperling, "with every truckload of watermelons or tomatoes that farmers ship, it's like California is exporting water to the rest of the country."

However, Poseidon also said it had to get a two-month extension on state authorization to sell $530 million in tax-free bonds, because it was still completing the final terms of its 30-year contracts with local water agencies. The previous deadline was April 27, said Peter MacLaggan, a Poseidon senior vice president.

Meanwhile, the water agencies say they're still fairly confident the plant will be built.

"I don't think it's the end of the world," said Kimberly A. Thorner, general manager of Olivenhain Municipal Water District, one of the contracting water agencies. "Obviously, we need the water sooner rather than later, but I'm still hopeful that everything is moving forward."

Olivenhain and eight other local agencies and cities have signed binding agreements to buy the water, once it becomes available. However, some items have yet to nailed down for a final contract, such as a guarantee of a price subsidy, MacLaggan said. This isn't expected to be troublesome, he said, but buyers of the tax-free bonds want to see all the details in writing before plunking down their $530 million.

Metropolitan Water District, Southern California's water wholesaler, has offered a subsidy of up to $250 per acre-foot to bring the desalinated water's cost to the agencies down to that of traditional water sources. An acre-foot is about 326,000 gallons, or about what two families of four use in a year.

Yet Metropolitan's approval was hedged ---- if the subsidy is challenged by a member agency, it may be canceled. One of Metropolitan's member agencies is the San Diego County Water Authority, the county's main water importer.

The water authority is also a party to the Poseidon deal. So if the authority changed its mind and opposed the subsidy, that could conceivably invalidate it.
Poseidon is asking for a backstop guarantee from the water authority to make sure the subsidy is available, MacLaggan said.

Investment grade

The bonds' tax-free status was granted in January by the California Debt Allocation Committee, or CDLAC (pronounced "SEED-lack"). The committee grants tax exemptions for projects deemed to be to the state's benefit. In this case, the benefit would be a new and reliable supply of water for drought-vulnerable San Diego County.

The committee reauthorized the tax-free bonds at a March 24 meeting, giving Poseidon until late June to complete the sale, MacLaggan said. Because they're tax-free, the bonds can be sold at a lower interest rate to investors than taxable bonds, lowering the cost of the project and hence the cost to agencies buying the water.
Standard & Poors has rated the bonds at BBB-, the lowest level of investment grade status. Investment grade bonds are considered to be safer, even for unsophisticated buyers. Investors consider investment-grade bonds more reliable than so-called "junk bonds," which are highly speculative and meant for well-informed, risk-tolerant buyers.

A committee staff report stated that Barclay's Capital, Poseidon's financial adviser, said the market for such low investment-grade bonds is strong.

"In its ratings analysis, Standard & Poors evaluated the strength of the project and all of the project counterparties, including equity sponsors, contractors, the operator and all nine of the water districts entering into purchase agreements," the staff report stated. "Through its review of Standard & Poors' analysis (as summarized in its Rating Determination Letter), CDLAC staff believes that their conclusions were sound."
Poseidon had initially considered attempting to get an even higher rating by buying bond insurance, MacLaggan said. However, the cost of the insurance outweighed the benefit, so that idea was scrapped.

Construction delayed

Poseidon began construction in November with its own funds. But that was mainly a formality to ensure its building permit from the California Coastal Commission didn't expire. So far, Poseidon has torn down structures and prepared the land for construction.

The delays were not a surprise, said Greg Blakely, water utilities manager for the city of Oceanside.  "It's a novel project," he said.

Now the deal-makers are taking a closer look at the project's revenue sources to make sure they're guaranteed, said Gary Arant, general manager of Valley Center Municipal Water District. He said that scrutiny is to be expected as the time draws near to make a funding commitment.

"Public agencies have ways of ensuring they can fund projects," Arant said. "It's a little different when you have a private company."

Sweetwater Authority is willing to be patient, said Jim Smythe, operations manager for the authority, which serves the South Bay region of San Diego County.

"Everything's fine," Smythe said. "Of course they've had numerous delays, but it's not as if we're sitting here waiting for water."

Oceanside, Olivenhain, Sweetwater and Valley Center are four of the nine agencies that have agreed to buy water from the Poseidon plant.

The others are the city of Carlsbad, Santa Fe Irrigation District, Vallecitos Water District, Rincon del Diablo Municipal Water District, and Rainbow Municipal Water District.