Orange County Water District Ward Street Fountain Valley, CA July 17, 2018

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1 3151 Airway Avenue, Suite F-110 Costa Mesa, CA Phone Fax Orange County Water District Ward Street Fountain Valley, CA July 17, 2018 Re: Orange County Coastkeeper Comments on Revised Poseidon Term Sheet: Dear Board members, Orange County Coastkeeper is an environmental organization with the mission to promote and restore water resources that are drinkable, swimmable, fishable and sustainable. We have reviewed the proposed revised Term Sheet and have the following comments. We begin with the premise for buying water from Poseidon. In the background section of the June 6 th staff report it says sources of imported water can be vulnerable to drought, climate variability, natural disasters, environmental concerns, and regulatory restrictions. It also says Poseidon would increase the security and reliability of local water supplies. The facts are that the vulnerabilities of the Poseidon project are just as significant as imported water and Poseidon has proven to be far from reliable. The proposed site is located on an earthquake fault in a flood and tsunami zone next to a toxic waste dump. This makes the project extremely vulnerable to natural disasters and hazardous wastes. This vulnerability would also subject it to significant environmental regulation. A June 22 from Coastal Commission staff to John Kennedy states that while the Term Sheet includes several provisions that would require Poseidon to repair any damage to the facility, those provisions could conflict with our coastal hazard condition (see Special Condition #14) that limits the amount of repair allowed and that could require removal of all or part of the facility. Additionally the Term Sheet (on page 22) assigns OCWD the responsibilities to address any hazardous substances along the distribution system route. Considering the proximity of the ASCON Superfund site this is taking on considerable risk. The proposed Term Sheet would have Poseidon and OCWD share responsibilities for the distribution system and/or would allow OCWD to purchase the desalination facility and the distribution system at some point. Under those scenarios, and because Coastal Development Permits run with the land, OCWD would need to either share or take on full responsibilities for meeting the Coastal Development Permit conditions. Poseidon will also be subject to other regulatory restrictions. For example, the regulatory structure of the State Water Board Ocean Plan Amendment (OPA) on desalination makes Poseidon subject to regulatory restrictions every time there is a significant change in the plant design. The Poseidon Carlsbad plant is adapting its design to adapt to the closure of the Encina Power plant by installing its own water intake pumps. This has subjected the plant to new OPA requirements to minimize mortality to marine life and will have significant impacts to the operation and costs of the plant. Over the proposed thirty or more year lifespan of the proposed Huntington Beach plant, significant changes in its

2 operating technology should be expected. These changes will subject the plant to additional regulatory review under the OPA and other existing and future regulations. Despite Poseidon s statements to the contrary, documentation from the San Diego County Water Authority show that Poseidon has had serious problems with their Carlsbad desalination plant. Due to environmental variability in their source water and other problems the Carlsbad plant was down for 54 days in 2017 and was unable to meet water delivery requirements. Climate change related impacts to ocean water quality including increased red tides can be expected to increase in the future. The resulting conditions will likely reduce reliability at the proposed Huntington Beach plant due to the proposed use of open ocean intakes. Documentation from the San Diego Regional Water Quality Control Board shows Poseidon is not meeting the requirements of their Waste Discharge Permit. In their 2017 annual report to the Regional Water Board Poseidon stated that it had exceeded chronic toxicity limits in 36 chronic toxicity tests, had 11 insufficient monitoring violations and 2 reporting violations. Their toxicity identification testing remains inconclusive to this day. In 2018, Poseidon has exceeded its chronic toxicity limits 11 times, had one reporting violation and one violation for Total Suspended Solids. Poseidon has only been able to meet its waste discharge requirements in two of five months of reporting in Poseidon has repeatedly attempted to mislead the OCWD board regarding these violations. But the facts are indisputable and forty percent compliance with permit requirements is not the sign of a reliable operation. The need for 56,000AFY of water from the Poseidon project is also not supported by fact. OCWD is relying on unsubstantiated need estimates identified in their 2015 Groundwater Management plan and Long Term Facilities Plan. In 2016 the Municipal Water District of Orange County (MWDOC) released their Long Term Reliability Study. This study used scientific models and statistical methods to more accurately determine the future water needs for OCWD and Orange County. The study shows that by 2040 OCWD faces an average new water need of 6,300 AF/year and would only need the full capacity of Poseidon approximately every nine years. The study also states that Poseidon is just one of many options for obtaining the 6,300 AF/year. All of these options are far less expensive than Poseidon and should be fully implemented first. The MWDOC study is now being revised in light of the new term sheet and will provide additional information on need. Another study was done by the City of Garden Grove in Garden Grove is the only city that has directly analyzed its need for Poseidon s water so far. Their White Paper (attached) states in its summary of finding on page 4 that Due to high capital and operational costs, and currently a non-existent need for additional water, desalination is not an option for immediate City water supply needs. Before moving forward with a Term Sheet with Poseidon OCWD needs to work directly with the groundwater producers to accurately identify their needs as Garden Grove has. The questions OCWD posed to the groundwater producers for this term sheet evaluation are designed to elicit support for Poseidon and missed the most relevant points. Do they actually need the water? Are they willing to pay over $2,000/AF for desalinated water whether it is needed or not instead of $1,000 for imported water as needed? Is $1,000/AF a fair premium for perceived water independence? All discussions of costs for Poseidon s water should reflect the full true cost of the water including distribution. Delivery by some method has to occur and the significant costs for the distribution system must be factored into any decision regarding the project. The Local Reliability Program subsidy from the Metropolitan Water District should not be used as a tool to obscure the true cost of desalinated water. Instead, it should clarify this subsidy is temporary in nature and is not guaranteed. In the revised Term Sheet, OCWD takes on responsibility for electricity cost increases. This is convenient for Poseidon as rising electricity costs have drastically cut into Poseidon s profits at their Carlsbad plant. Electricity is the most determining factor on cost of desalinated water and hiding the true cost of desalinated water through

3 OCWD subsidizing Poseidon s electricity costs is fraudulent. The staff report cost predictions for desalinated water estimate a 2% electricity cost escalation, a more realistic rate of 3.0% to 4.2% that includes state mandated GHG charges should be used. The staff report states that if electricity rates go up it will impact the entire water industry, but it fails to acknowledge that rates vary based on source, time of day and other factors. The fact that the desalination plant runs 24/7 is a weakness that exposes OCWD to the highest electricity rates while other water supply options can operate on an intermittent basis to take advantage of lower electricity prices. Graphs in the summary section show Poseidon water crossing the line with several high range cost projections for MWD water in 2035 or Poseidon has been saying these lines would cross for over fifteen years and yet desalinated water in Carlsbad (which reflects the current true cost of desalinated water) is still about two times the cost of imported water. The revised staff report includes information on water costs for the GWRS system. This is comparing apples and oranges. Other than using reverse osmosis, ocean desalination and wastewater recycling are completely different with vastly different energy needs, pretreatment processes, and post treatment distribution schemes. The statements from some board members that arguments against and opposition to Poseidon is similar to when GWRS was approved are just incorrect. The fact is, OCWD has described, with a certain amount of pride, the GWRS entitlement process had no real opposition. The summary states that the Replenishment Assessment (RA) for groundwater producers will go up by $100-$250 per acre foot. That is a 20% to 50% increase in the current RA. The recent rejection by three of the major pumpers to a proposed $27 RA increase is telling. OCWD should not expect Anaheim, Santa Ana and Fullerton to accept a $100 to $250 RA increase. The Irvine Ranch Water District and Golden State Water District have made it clear that they do not want to pay for Poseidon. During the development of the existing Term Sheet, the Cities of Fullerton and Anaheim submitted written comments indicating that they only wanted to pay for desalinated water during times they needed it, not through a take or pay contract. OCWD needs to determine how it can move forward with the Poseidon project without participation from these groundwater producers before agreeing to a Term Sheet with Poseidon. The summary states that the average residential water bill increase is predicted to be $3-$6 per month, the fact is that there are few average residential users and a great many residential users will see much larger increases in their water bill. Additionally business users will see significant increases in their water bills. This is particularly tough on small businesses that generally have low margins. For example the Heritage milk processing plant is Santa Ana is a huge water user. The grocery industry runs on a 1% profit margin and they will not be able to absorb the huge water rate increases from Poseidon. The huge price increases from Poseidon will put jobs at risk in our community. This needs to be studied in more detail. It is not difficult to estimate these costs, the Irvine Ranch Water District has done so and OCWD should too. In the Future Board Actions and Schedule section of the summary, it says that if the Term Sheet is approved, then OCWD is committed to taking 56,000 Acre Feet/Year of water from Poseidon. It is important for OCWD to always clarify the Term Sheet is a non-binding framework for a potential Water Purchase Agreement and not a firm commitment to buy Poseidon s water. OCWD and Poseidon should not mislead the public and regulators of this fact. Section 16 lays out options for OCWD to purchase the Poseidon Plant between five and seven years of operation. This is clearly designed as a way for Poseidon to exit the project early and for OCWD rate payers to cover their stranded costs. Recent report show that Poseidon is already in negations to sell their interest in their Carlsbad plant. This along with the exit clause show Poseidon is not in this to produce water for the long term. It is not a coincidence that this timing is just before the impacts of sea level rise will really kick in. The idea of taking over the plant in 30 or 35 years is a joke. A 35 year old plant, even in excellent condition is obsolete. Also in 30 to 35 years, the site is likely to be an island during some seasons

4 of the year. If OCWD wants a desalination plant in five or seven years then OCWD should build it instead of bailing out Poseidon. In the revised Term Sheet the Terminology section, part 4 states, The current delivery System is described in the SEIR, as defined below. In comments on our June 6 th letter OCWD reiterates that it has not completed work on the distribution system. The fact is that OCWD has done extensive work on potential delivery systems and they are not described in any of the existing EIRs. No Term Sheet should be approved until customers and distribution options are identified in regulatory documents. In section 1 of the revised Term Sheet under Conditions Precedent, Condition F The Desalination Plant in the City of Carlsbad will have demonstrated 90 days or more of successful operation has been eliminated. Currently the Carlsbad plant is not operating successfully as promised. This section should be kept and re-worded to say that the Poseidon Carlsbad plant must demonstrate the ability to produce and deliver the agreed upon minimum volume of water and meet all water quality permit requirements before OCWD moves forward with a Water Purchase Agreement. In closing it is clear that there is a lot of work to be done to identify actual need for, cost and delivery options for the project and it is unclear at this time that Poseidon can successfully produce the promised volume of water while meeting water quality permit requirements. It has also come to our attention that the Municipal Water District of Orange County (MWDOC) is revising its Long Term Reliability Study to evaluate the changes in the revised Term Sheet. Orange County Coastkeeper respectfully requests that OCWD postpone a vote on the revised Term Sheet until OCWD identifies customers and a distribution plan for the project and reevaluates the need for Poseidon s water. Respectfully, Ray Hiemstra Associate Director Orange County Coastkeeper

5 OBJECTIVE To provide the City Council with information and analysis regarding an ocean water desalination facility in Huntington Beach being proposed by the Poseidon Resources Corporation, a private company. The analysis will present costs and benefits as the project relates to the City of Garden Grove (City). BACKGROUND The Poseidon ocean water desalination project located at the AES power plant in Huntington Beach will deliver a maximum of 53,000 acre feet (AF) of water per year. Poseidon began soliciting interest from local water agencies for commitments to purchase desalinated water from the Huntington Beach Plant several years ago. In fact, the City entered into a non-disclosure agreement with Poseidon in 2010 to receive information on the project. Over the last few years, the City participated in a working group with other agencies interested in the Huntington Beach project. The group met on a regular basis at the Municipal Water District of Orange County (MWDOC) to review project study results and to discuss the proposed attributes and costs of the proposed project. Garden Grove participated in this process for a couple of years and announced its resignation in 2012 due to the high costs of the water from the project. The working group ended in 2013 with limited interest among agencies to participate in the project. Since then, the Orange County Water District (OCWD) has been exploring the project and is now in contract discussions. Earlier this month the OCWD approved a non binding term sheet that establishes the framework of a contract that is due by December 31, The term sheet provides sufficient information to determine the financial impact to the City. DISCUSSION Desalination The desalting or desalination process separates saline water into two streams: fresh water and water containing concentrated salts, or brine. Although there are many technologies that can be considered for desalination, the two most widely used desalting technologies are thermal (distillation) processes and membrane (filtration) processes, such as reverse osmosis (RO). Poseidon uses RO. RO is a process where pressure is used to force water through a semi-permeable membrane that filters and removes up to 99% of the solids in the seawater, including the salts. Of all the available technologies, RO is considered the best available technology for desalination, due to high salt removal rate, lower waste stream volume, and lower energy consumption and capital costs. Following desalination treatment, the product water requires further post-treatment (ph 1 P a g e

6 stabilization and disinfection) to meet potable water standards and to be noncorrosive. There are many applications of RO, including treatment of brackish and waste water and the costs for producing water from these sources is equal or below the cost for water from traditional sources. Advances in RO membrane and energy recovery system technologies have significantly reduced the capital and operating costs of seawater desalination projects over the past 30 years. However, the costs of desalting seawater remain significantly higher than more traditional water sources. Because of its high costs, large scale ocean desalination has only been used in areas where water supplies are extremely limited and expensive to procure. Continued dramatic cost reductions for RO treatment are not expected to continue because it appears that the most significant technological advances have already occurred in the membrane industry. The following is a list of similar seawater reverse osmosis (SWRO) desalination projects that are currently in operation, under construction, or are being considered/proposed in the United States during the last decade: Marina Coast Water District, CA million gallons per day (MGD) in operation. Tampa Bay, FL - 25 MGD in operation. Cambria Community Services District, CA MGD in design, on hold Marin Municipal Water District, CA - considered 5 to 10 MGD, halted due to the voter approval requirement. Honolulu Board of Water Supply, HI - proposed 5 MGD, on hold due to conservation efforts. Long Beach, CA - proposed 9 MGD, determine not be cost effective. Carlsbad, CA construction is nearing completion of 50 MGD. This is a Poseidon project. City Water Program The City is reliant on two primary sources of water, pumped and imported. On average, we are pumping 70% of our water from 13 City owned wells and we purchase import water for the remaining 30% from the Municipal Water District of Orange County (MWDOC). Our wells draw water from a basin that is under the management of the Orange County Water District (OCWD) and they are responsible for setting the pumping percentage, which is why we pump about 70%. The City wells are capable of delivering 100% of our water supply for limited periods of time, and we are one of two agencies that can pump all of our needs. The City currently pays $294 per AF to OCWD for pumped water and we pay MWDOC $923 per AF for imported water. If the City were to pump over the set 2 P a g e

7 percentage we will have to pay $614 per AF from OCWD on the extra water making it equal to the cost of MWDOC imported water. The Orange County Basin contains about 38 million AF of water. The OCWD has determined that the maximum dry storage (empty volume) of the basin should be limited to 500,000 AF. OCWD s goal is to operate the basin with 200,000 AF of dry storage which is within the safe operating range of 100,000 to 434,000 AF of available dry storage. Currently, the basin has 380,000 AF of dry storage available. Last year the City used approximately 25,100 AF of water, which is down from a peak of 30,000 AF in The reason the City s usage has dropped lies in two recent pieces of legislation. Senate Bill x7-7 for water conservation, seeks to achieve a 20% statewide reduction in urban per capita water use by December 31, 2020, and an interim 10% goal by Additionally, Governor Brown has issued an emergency mandate for the City to reduce our water use by 28% of our 2013 water usage. Therefore, the City needs to reduce our usage by just over 7,000 AF by February of Consequently, the most pressing need for the City s water program at this time is the implementation of water conservation measures to achieve this goal and avoid any state fines for non-compliance. Fiscal Analysis The total fiscal impact to Garden Grove s rate payers is difficult to assess at this time because of the following unresolved issues: The cost to distribute water - injected into the basin or distributed in upsized pipes to retailers. This cost is borne by the OCWD in the term sheet. Final disposition of MWDOC Local Resources Program (LRP) - a subsidy that will be passed to Posiedon thus lowering the cost to OCWD, thus lowering the cost to OCWD for the early years of the 50 year commitment. o Three options are available for payment. Currently Poseidon is leaning towards the largest that covers the first fifteen year of the project operation. o MWDOC could require a reduction in demand which in effect would cause OCWD to exchange high cost Posiedon water with MWDOC import. Additional costs that may be required for environmental mitigation, such as a new underground intake system. Financing for the project is not in place. These preceding issues are important and have the ability to significantly increase the proposed cost of water detailed on the Posiedon term sheet. OCWD s independent financial analysis of the Poseidon estimates that groundwater pumping costs will increase 32.7% to cover the cost of the project. Using our existing 3 P a g e

8 pumping amounts and the additional amount of desalinated water available to use, we can determine that Garden Grove can expect to add between just over $1M to just under $2M per year in water costs. This will increase the average residential rate payer bill by $6 to $12 or from 6% -12%. Alternatives There are a few alternatives being suggested at this time. The following are possible fiscal impacts of Poseidon and of the recharging option being proposed by the Irvine Ranch Water District (IRWD): Purchase MWDOC water during good times and recharge the basin with 280,000 acre feet of water (equals Poseidon output for about 5 years and 3 months). These good times in the past included all but two years during nearly the last thirty years. This IRWD option would have provided a full basin at the beginning of this year at a ten year cost of over $500 Million less that the Poseidon project and is environmentally friendly. Expand OCWD s Ground Water Replenishment System (GWRS) again or construct a new facility. The successful ground water recharge system using treated sewage is already expanding and will be online by the end of The $142.7 million project will create an additional 30 million gallons per day of new water supplies as compared to the Poseidon project that may produce 50 million gallons per day at an estimated cost of $1 billion. Conservation and the price and impact to the environment are negligible and this option is immediately available to us with state and regional funds available to implement. It should be noted that this option will also assist the City in meeting our mandatory reduction mandate from the State. Construct additional measures within and adjacent to the local storm channel that will infiltrate storm water into the basin. Expand the recycled water system. This is the purple line that uses partially treated sewage to provide non-potable water for uses like irrigation. This option will also help the City meet our mandatory reduction goals. Summary of Findings Due to high capital and operational costs, and currently a non-existent need for additional water, desalination is not an option for immediate City water supply needs. Desalination may play a part in long-range planning ( timeframe), but probably under the circumstance that the project can obtain significant state and federal funding assistance. The proposed site is likely to remain available into the future. The following are the advantages and disadvantages of a desalination program as compared to other options, such as a GWRS program. 4 P a g e

9 Advantages of a Desalination Facility: Less significant distribution pipeline system required when compared to nonpotable water sources Desalination is a new source of potable water, which increases the City's flexibility for using this supply for any potable, irrigation or industrial use Disadvantages of a Desalination Facility: Extensive environmental review process (full EIR) and permits still required with uncertain mitigations. Potential additional treatment for certain emerging contaminants due to the mixing of desalinated water with existing imported and groundwater supplies. Increased brine discharges to the ocean. Very high capital and operating costs and financial risk in the event of default, if OCWD finances the distribution system. Significant timeline for implementation (5-7 years from initiation). OCWD already has implemented a recycled water and water conservation program. While the effectiveness of the conservation program is yet to be determined, the GWRS is recognized as an industry leading example. SUMMARY The City was hopeful when we entered into the 2010 agreement with Poseidon for a desalination water supply that could provide increased reliability to the City, especially during times of a drought. Unfortunately, the original promise of a new water supply at the same cost as imported water has been replaced with a project that will provide water at double the cost of imported water. The cost escalation is similar to the Poseidon project in San Diego. When compared to other options, a desalination facility is a relatively expensive option for a new potable water supply for the City of Garden Grove and will not immediately resolve the City water s conservation mandate. However, the City should continue to be open to new sources of water and new ideas and urges OCWD to fully explore less expensive options currently available before proceeding with ocean desalination. In time, a project such as Poseidon may become economically viable and environmentally sound and it is unlikely that a decision to forego its implementation at this time will preclude its future use. 5 P a g e