James F. Elliott has 39 years of public finance and management experience, including 35 years with the City of Carlsbad, most recently serving as Carlsbad’s deputy city manager. For the past nine years he has been Carlsbad’s team leader and chief negotiator on the Carlsbad Seawater Desalination Project. He can be reached at jim@jfelliottassociates.com.

Keith R. Solar is the managing shareholder of the San Diego office of Buchanan Ingersoll & Rooney. On behalf of public and private clients, he has extensive experience with negotiating agreements related to water rights, privately owned or municipal water systems and public-private partnerships for municipal water systems. He can be reached at keith.solar@bipc.com.

“If we could ever competitively, at a cheap rate, get freshwater from saltwater, that would be in the long-range interest of humanity (and) would dwarf any other scientific accomplishments.”  – President John F. Kennedy, April 12, 1961

Almost 50 years after President Kennedy’s endorsement, seawater desalination is finally becoming a more viable water supply alternative. However, this option remains controversial; it can be costly and may attract staunch opposition from environmentalists.

So when considering whether to add desalination to a water supply portfolio, city council members or water district board members should weigh at least six primary factors: quality, quantity, reliability, price, public benefit and risk. This article briefly touches on each of these factors.

A public water supplier interested in adding desalination to its water supply portfolio can improve its chances of success by addressing the six factors described here. If the public water supplier is large and can manage the cost and risk of developing its own project, it may choose to proceed to design, permit, construct and operate its own facility. However, many smaller public suppliers will find that the development of a sizeable desalination project brings unacceptable costs and risks. In such cases, working with a private developer or implementing a public-private partnership makes sense. When negotiating with a private developer or partner, providing clarity to the suppliers’ negotiators on quality, quantity, reliability, price, public benefit and risk gives the team firm ground upon which to craft a successful water purchase agreement and project.

1. Water Quality. The quality of desalinated seawater generally is as good as imported water. Desalinated seawater, though, may be too pure. To prevent corrosion, the plant operator must add minerals to the product water post-treatment.

In addition, boron, which is generally present in minute traces in imported water, may occur in much higher concentrations in desalinated seawater. Too much boron can negatively affect the appearance of some drought-tolerant or ornamental plants and fruit trees, so water purchasers and plant operators should negotiate and agree upon acceptable quality standards.

2. Water Quantity. The quantity of desalinated seawater available for purchase depends on plant capacity, the operator’s commitments to other purchasers, and several other factors, including price, reliability concerns and risk tolerance. This decision requires vision, debate and consensus among all council members.

If a drought-proof supply of water is important, then a supplier could decide to purchase 100 percent of its water from the desalination plant. If this is Plan A, consider purchasing — or maintaining the right to purchase — at least some water from the applicable imported water supplier. This will require continued payments of certain charges, like standby or readiness-to-serve charges, to that importer. But it never hurts to have a Plan B.

If a supply portfolio includes other water sources, such as imported, well, surface or recycled water, then desalinated seawater might be just one more diversification option. This also may be the case if a supplier’s customers are willing to conserve and demand hardening is not a concern.

3. Reliability. Most cities or water districts already have a source of water that is at least predictable, if not reliable. When evaluating a move to desalinated water, reliability can be a primary concern.

The technology for desalinating water is not new. It is used around the world in places like the Middle East and Australia. Such plants employ a reverse osmosis process that is reliable and proven.

Public water suppliers should continue to diversify their water portfolios using imported, well, surface or recycled water. Desalination should be one of several sources serving the suppliers’ needs.

But often the primary reliability concern that water suppliers raise is related to project ownership. Private ownership conjures up the specter of interrupted deliveries due to a business failure, which does not exist in a publicly owned project. Cities or districts that purchase water from a privately owned desalination project can mitigate this risk by including language allowing them to step in and operate the plant and to ensure the continued delivery of water should a business failure occur. The public’s interest may be protected without risking a significant public investment in the project.

4. Price. Every source of water has a price. Conventional wisdom has always held that the cost of desalinating water cannot be competitive with the cost of new potable water supplies. However, in the past decade the cost of imported water supplies has been growing at a rate greater than the increase in cost to desalinate water.

A public water supplier’s goal should be to protect its ratepayers from the risk of rate increases related to the purchase of desalinated water. This goal can be accomplished by including language in the water purchase agreement that assures the purchaser will never pay more for desalinated water than it would have otherwise paid for an equal amount of water from the existing source. In addition, if the price of water from existing sources climbs above the cost to desalinate water, the water purchase agreement can provide for a rate reduction.

5. Public Benefit. The development of a desalination project can offer significant public benefits beyond the creation of a new water source.

Publicly and privately owned projects provide the region with a dependable source of water. This water supply boosts the region’s ability to provide a high quality of life for its residents and businesses.

Industries such as biotech and high-tech often require a dependable source of water for their manufacturing processes. Desalinated water meets that needs; it is high quality and reliable, thereby boosting economic development efforts.

Privately developed projects give the region additional benefits in the form of increased property and sales tax revenue and the possibility of franchise taxes on water the project distributes. Privately developed projects also can provide the region with land dedicated for public purposes as well as environmental and greenhouse gas mitigation measures that improve natural spaces and air quality.

6. Risk. The risks of developing the desalination plant could and should be shifted to the private sector. A public entity might be content with just purchasing water, or it might bargain for the option to purchase the desalination plant. Any plant purchase should occur only after all permits have been issued, the California Environmental Quality Act (CEQA) process is completed, any lawsuits are over, construction is finished, the plant passed its performance test, and desalinated water of agreed-upon quality and quantity has been delivered for a certain number of years.

At that point, the risk of purchasing the plant should be greatly reduced, but it won’t come cheap. The developer most likely will want to sell the plant for the greater of fair market value or the development costs, including any existing indebtedness. But like any other issue, the price is always negotiable.

Related Information

To learn more about current and upcoming water conservation requirements, read “Understanding the New Water Conservation Mandates: An Interview With California Department of Water Resources Director Mark Cowin.”

This article appears in the July 2010 issue of Western City
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