‘Soaky the Drop’ Says of Poseidon Carlsbad Financing: ¡No Nos GUSta!

Carlsbad Desal Plant with Soaky in the pool

Is Orange County about to get soaked by Poseidon? Let’s look at what happened to Carlsbad!

Our friends at the Gus Ayer-created “No Deal with Poseidon” website have a new story up on the company’s Carlsbad water desalination project, the precursor to the one they’re trying to impose on ratepayers in Huntington Beach and the rest of Orange County.  The Carlsbad project has just been chosen as the “North American Water Deal of the Year” — although for reasons that should make clear why we should not want something like it repeated here.  “Deal of the Year” is a description from the perspective of the investors, not of the public.

(By the way, I’ve decided that if no one else is going to name that gleeful and somewhat sinister (or arguably not, if it represents people taking back their money from Poseidon) symbol, I’m going to call it “Soaky,” for reasons that either already are or are about to become obvious.  And I’m giving the site a motto, in Gus’s honor, “¡No Nos GUSta!” — “We don’t LIKE it!”  Yes, this is an abuse of my power as a blogger, but who can stop me?  BWAAAHAHA!  OK, actually, any of either the artist, or the people running the website, or the organization, or Vern can stop me — perhaps by asking why Soaky is speaking Spanish.)

 Anyway: here’s what the linked article above says:

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.

“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” — the practice, and probably the publication as well —  is basically about two things: (1) building big projects, whether they are prudent and necessary or not, and even more so (2) giving investors — like those in Singapore, Dubai, London, and New York — a safe and profitable place to put their money.  How does an investment become profitable?  Two elements are desirable: (1) it should have a “risk premium” built in that allows investors to demand more than the paltry amount they could get from savings accounts nowadays, and (2) where possible most or all of the risk justifying that risk premium should be shunted off onto others — generally the public — so that technically little or no such premium should be justified.  If you want an example: you want to charge people extra for delivering something in a war zone — and then you want to ensure that if you don’t actually get it into the war zone, someone else, such as the public, pays the penalty for that failure.

Why does that happen?  Come with me and look at the terms of the finance deal, from the news release!

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

Why is this such a “good deal” for the public?  Why it’s because, as the website says:

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.

Uh-huh.  And what should you want to know, when you read this list telling you that the investors get a guaranteed long-term 4.78% interest on this investment (meaning that — applying the “Rule of 72” the value, unadjusted for inflation, doubles approximately every 15 years, as opposed to every 288 years like the 0.25% you may be getting in your personal savings account these days)?  You should want to know who pays the bill if the investors are wrong.  Do the investors just eat it?  Or is the public on the hook?

Of course, there are different ways of being wrong.  Maybe we’d see cost-overruns, requiring more money from investors — and do you think that they’d charge higher or lower interest for that additional “you’re between a rock and a hard place” financing?  Maybe those projections about cost-competitiveness are a mite unrealistic.  Maybe it’s an expensive solution that doesn’t meet the actual projected need.  Maybe, as critics of the HB plant suggest, the plant is trying to pawn off old technology — if it’s not ready for prime time (or in this case for brine time?), that’s not their fault for selling it; it’s our fault for buying it!

I don’t know how they’re doing it in Carlsbad, but in HB the plan is that ratepayers in the whole county will pay for a share of the water, whether they use it or not!  In other words, investors are sure to get their money, because you, Dear Orange County Reader, are guaranteeing the deal!

Here’s what one of the people behind Soaky’s site has to say (with what I think is one slight correction), based on knowledge of this deal far superior to mine:

Yes…….this “deal” is a humdinger alright. To hell with the rate payers in bonded indebtedness for the next 30 years for a project only providing 1/10 of the water they needed. Shame on them ALL!

If you can guarantee a healthy profit for investors while doing a lousy job of providing the public’s needs, then — from the perspective of Project Finance — you may well have completed the DEAL OF THE YEAR!  From the perspective of the public — not so much.  And that’s why so many people in Orange County are looking at Poseidon’s actual plans and saying: ¡no nos GUSta!  The public does not want to be soaked!

About Greg Diamond

Somewhat verbose attorney, semi-retired due to disability, residing in northwest Brea. Occasionally runs for office against bad people who would otherwise go unopposed. Got 45% of the vote against Bob Huff for State Senate in 2012; Josh Newman then won the seat in 2016. In 2014 became the first attorney to challenge OCDA Tony Rackauckas since 2002; Todd Spitzer then won that seat in 2018. Every time he's run against some rotten incumbent, the *next* person to challenge them wins! He's OK with that. Corrupt party hacks hate him. He's OK with that too. He does advise some local campaigns informally and (so far) without compensation. (If that last bit changes, he will declare the interest.)