As the California Public Utilities Commission is set to consider approving California American Water’s proposed desalination project sometime in September – as the Weekly went to print, it was not yet clear if it would be considered on Sept. 13 or Sept. 27 – crucial questions about the cost of that water remain unanswered.
For Cal Am ratepayers and shareholders, those answers – mainly, how the project’s financial risk is allocated between the two groups – have massive implications.
Already, according to a 2017 study by the nonprofit Food & Water Watch, Cal Am ratepayers have perhaps the most expensive water among the country’s 500 largest water systems, and no matter what happens with the CPUC, those rates are going to go up.
Some of those cost increases are known, and will come as a result of Pure Water Monterey, a recycled water project that will deliver 3,500 acre-feet of water to the Cal Am system, but how much ratepayers will have to shell out for desalinated water is not. On top of that, according to the Monterey Peninsula Water Management District, Cal Am made a mathematical error in its testimony to the CPUC that underestimates the water’s true cost.
According to Cal Am’s testimony before the CPUC, the desalinated water would cost $3,711 per acre-foot to bring into the Cal Am system. (By comparison, Carmel River water – the majority of the current supply, which must be reduced to 3,376 acre-feet by the end of 2021, per a cease-and-desist order from the state – costs $271 per acre-foot, and Pure Water Monterey costs $1,720.)
But in comments filed with the CPUC on Sept. 4, the Water Management District asserts Cal Am’s cost estimate is incorrect due to an error, and that the correct number is $5,515 per acre-foot if the plant is operating at 100-percent of capacity.
(This error, MPWMD claims, is a result of Cal Am incorrectly adding the 3,500 acre-feet from Pure Water Monterey to the denominator of their calculation; a Cal Am spokesperson, when reached on Sept. 11 about the alleged error, could not immediately comment on it.)
Beyond questions about math, there’s another big wrinkle that could affect rates: According to Cal Am’s testimony, the company expects to operate the desal plant at 86-percent capacity.
The unresolved issue: If the plant is running at partial capacity, should ratepayers be on the hook to provide a rate of return to shareholders for the entire plant?
MPWMD General Manager Dave Stoldt says that the proposed 86-percent capacity would drive the cost per acre-foot above $6,000, if the full cost of the plant is spread among ratepayers. “Who should pay for the excess capacity? And for how long?” MPWMD asks in written comments to the CPUC.
Those comments also point out that running the plant at that capacity – in lieu of tapping cheaper sources in Cal Am’s supply portfolio, such as Pure Water Monterey – “could result in Cal Am’s avoidance of leveraging less expensive supplies to the shareholders’ benefit, at the expense of ratepayers.”
That’s because the desal plant would be able to deliver about 6,200 acre-feet of water annually, bringing Cal Am’s annual supply portfolio to about 14,000 acre-feet, well above the recent five-year demand of 9,971 acre-feet annually.
If the cheapest sources were prioritized, MPWMD asserts, the plant should only operate at 36-percent capacity in the near term (which would drive the true cost of the desalinated water to about $15,442 per acre-foot).
Cal Am believes the CPUC’s proposed decision, which was published Aug. 14, puts too much of the project’s risk on the company. For instance, if the water’s cost “far exceeds the anticipated costs,” or it operates “significantly below the… 86-percent capacity,” the proposed decision states shareholders – not ratepayers – should pay.
In Cal Am’s comments to the CPUC filed Sept. 10, the company claims that would jeopardize the project’s financing, and calls the proposed risk allocation “punitive” and “arbitrary.”