Wednesday, September 15, 2010 | Talk to a Poseidon Resources executive about the company’s proposed $350 million seawater desalination plant in Huntington Beach, and you will very likely hear about how the plant poses “no financial risk to taxpayers.”

But this should not be taken to mean that the private project would come at no cost to taxpayers. In fact, the company will rely heavily on taxpayer-funded programs, incentives and indirect government subsidies, according to interviews with water leaders around the state.

Just how the private water project will be financed has been a sticking point for those who like the idea of turning ocean water into drinking water but worry that taxpayers will get stuck with the bill if something goes wrong.

As planned by Connecticut-based Poseidon, the desalination plant will benefit from tax-free bonds and ratepayer subsidies that make the cost of the drinking water competitive with other Orange County water sources.

Special Bonds

Today, the Poseidon business plan is looking to private investors to pay part of the construction bill for the Huntington Beach plant, the same way it is seeking financial backing for its other project, a $646 million plant in Carlsbad that will be finished in late 2012.

But according to Poseidon Vice President Scott Maloni, the amount of money raised from direct private investors likely will be small. Most of the money for the Huntington Beach plant’s construction will likely come from private activity bonds authorized by the three-member California Debt Limit Allocation Committee.

The committee members are Gov. Arnold Schwarzenegger, state Treasurer Bill Lockyer and Controller John Chiang. Little known outside financial and political circles, the bonds are used to “finance projects and programs that both provide a public benefit and contribute to the economic vitality of California,” according to its website.

Typical projects financed with these bonds include low-income multi-family housing; industrial development; redevelopment projects; and projects for water treatment, sewage or hazardous materials.

The bonds are tax-exempt, making them attractive to buyers, but the private company, not a government agency, is on the hook to pay the principal and interest. These special government-issued, tax-exempt bonds are specifically intended for private businesses.

Last year, Poseidon obtained $530 million in private activity bonds for its Carlsbad project. Maloni said potential buyers generally are large institutional investors and possibly big pension funds, but the bonds cut down on construction costs because they don’t carry high interest rates.

Once the plant is built, Huntington Beach, like Carlsbad, will produce drinking water, but the cost will likely be far higher than what Orange County communities now pay. That brings in the next piece of financing.

Water Subsidies

North Orange County sits on a large aquifer, but even so, it’s far from enough to supply a county of more than 3 million people.

For decades, the county — through the Municipal Water District of Orange County — and the older cities — Anaheim, Fullerton and Santa Ana — have bought water from the Metropolitan Water District of Southern California.

The MWD in turn buys water from Northern California and the Colorado River. Homeowners, apartment dwellers, businesses and other users pay for the water through their monthly water bills.

But there are strong pressures on the imported water supplies. Drought, growth and increasing demands for alternative water-sharing projects have made the Colorado River supplies more tenuous.

In Northern California, court suits over water allocation and threats to the endangered Sacramento-San Joaquin Delta smelt, have raised the cost of water arriving in Southern California. Those increased costs generally are added onto water bills.

About five years ago, Orange County became an international leader in water conservation with a purification system that cleans and reuses sewer water. Other conservation efforts are intended to keep seawater from encroaching on underground wells and to use water-saving technology to cut individual water use.

And then there is desalination.

Poseidon hopes to get final permits within the next several months and complete its Huntington Beach plant adjacent to the AES power plant, which is near the intersection of Newland Avenue and Pacific Coast Highway, by 2014.

It will produce 50 million gallons of drinking water a day, according to Poseidon projections, enough to supply about 300,000 people — roughly the population of a city somewhat smaller than Anaheim.

But without indirect public subsidies, there are unlikely to be many buyers for the finished product.

Desalinated water is expensive. Even with today’s water challenges, it still costs considerably more to take the salt out of ocean water than to pump water from Northern California to Orange County.

Today, water bought through MWD costs about $800 an acre-foot (roughly 326,000 gallons, enough water to cover one acre to a depth of one foot or to supply two households for one year.)

When Poseidon’s plant is completed, current estimates are that the drinking water it produces will sell for $1,350 to $1,450 an acre-foot, including the cost of distribution.

Even if the price of imported water from the MWD continues to rise, there still is likely to be a significant cost disparity, according to a variety of water leaders in Southern California.

But MWD offers a subsidy of up to $250 per acre-foot to local public water agencies to support drinking-water-related projects, including desalination.

The money comes from the water bills that users pay to their local water districts. The districts then buy water from MWD, and part of the money MWD receives was set aside for the subsidies.

In San Diego, no contracts have been signed yet, but the plan is for the county Water Authority to buy high-priced water from Poseidon and then use the MWD subsidy to lower the costs to local buyers. The subsidy only becomes available once the desalination plant is producing water.

It is expected that a similar plan will be used in Orange County, with the Municipal Water District of Orange County taking the lead in buying the desalinated water and applying for the subsidy.

For all the effort it seemingly is taking to see if the Poseidon project will work, one local official said the plan has support because of its long-term potential.

“Having water [produced] locally is the big advantage,” said Kevin P. Hunt, general manager of the Municipal Water District of Orange County.

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Correction: An earlier version of this report misnamed Orange County’s water supplier. It is the Municipal Water District of Orange County.

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