Public financing best for water project


Guest Commentary

Monterey County Herald, December 9, 2013

Recently, the administrative law judge assigned to Cal Am's water supply proposal requested that the company show the major components of its approximately $400 million desalination project. (Because of economies of scale, this project is less costly than the locally promoted portfolio project consisting of a smaller desalination plant supplemented by groundwater replenishment.)

In supplying this information, Cal Am presented a number of scenarios. None explicitly showed the total overall cost to ratepayers including profit, interest, and taxes over the amortization years of the project.

In this commentary, using the data supplied by Cal Am, I am going to compare the total overall costs to ratepayers associated with two of these scenarios in relation to the total costs associated with both the worst case scenario and the best case scenario. I am also going to identify the conditions that need to exist for each of these scenarios actually to occur.

Cal Am indicated that the total project cost of $412.9 million includes both equity and debt in a 53-to-47 ratio. The combination of equity and debt is called the rate base, and the Public Utilities Commission authorizes Cal Am to charge ratepayers about 8.5 percent of the rate base to cover profit on the equity portion and interest on the debt portion.

In the worst case scenario, the rate base is equal to the entire $412.9 million. Amortizing that for 30 years at 8.5 percent yields a total project cost over that period of $1.143 billion, of which $730 million consists of profits and interest charged to ratepayers.

Ratepayers also pay Cal Am's taxes, which are proportional to the rate base.

Since the current rate base is about $126 million, the project rate base in the worst case scenario is 3.28 times the current rate base. Taxes now charged to ratepayers are about $5.5 million a year. So the taxes charged to ratepayers over the 30 amortization years of the project would be 30 times 3.28 times $5.5 million, or about $541 million. Adding that to the $730 million 30-year profit and interest charged to ratepayers shows that in the worst case scenario Cal Am's desalination project could cost ratepayers $1.271 billion.

Cal Am has proposed two fixes to lower this cost. The PUC authorizes Cal Am to charge ratepayers 6.63 percent interest on debt. Cal Am's first proposal is to lower this to 4.3 percent with the money coming from the company's own loan program. The result is to charge ratepayers about 7.375 percent rather than 8.5 percent rate of return on the rate base. The second fix is to charge ratepayers a surcharge of $71.5 million that excludes both interest and profit and lowers the rate base to $341.4 million and the tax multiplier to 2.71.

Taking these two fixes into account results in a profit-plus-interest cost to ratepayers of $508 million over 30 years of loan amortization. Including 30-year taxes of $471 million and the surcharge of $71.5 million, that amounts to a total ratepayer cost of $1.027 billion and a savings over the worst case scenario of $244 million. The PUC must approve these two fixes proposed by Cal Am, a likely occurrence.

Cal Am has proposed another fix that requires approval by the state water resources control board. This fix is to secure 2.5 percent funding over 20 years via a revolving fund administered by the board. Since access to this fund is limited to public agencies or nonprofit organizations and since Cal Am is neither, this fix is an unlikely occurrence, and I am not going to consider it further here.

The mayors' regional water authority has proposed an additional fix for which Cal Am has provided data. Called securitization, this would enable the local water management district to obtain public funding at about 3.625 percent for $124.5 million of the project's cost and so lower the rate base to $203.6 million after also subtracting the $71.5 million surcharge. The result is to lower the tax multiplier to 1.62 while keeping the same 7.375 percent rate of return for the rate base proposed by Cal Am.

Taking these changes into account yields a total cost to ratepayers of $846 million over the 30-year amortization period, a savings to ratepayers of $425 million over the worst case scenario. For this fix to occur, the state Legislature must pass enabling legislation and credit agencies must give their approval, both iffy occurrences.

The best case scenario is for a public agency to develop the water supply project with debt financing at 2.5 percent over 20 years via the state revolving fund. Cal Am data show that the project cost in this scenario would be $232 million. Subtracting a surcharge of $71.5 million leaves only $160.5 million to be financed at a cost of $204.1 million over 20 years. Adding back the $71.5 million yields a total 20-year cost to ratepayers of $276 million, for a savings of $995 million over the worst case scenario.

This is 4.1 times the savings from Cal Am's scenario and 2.3 times the savings from the mayors' scenario. Ratepayers have the power to assure the occurrence of the best case scenario. They can do that by voting for the Public Water Now initiative promoting the purchase of Cal Am by a public agency.

Weitzman is president of WaterPlus, which was formed to lobby toward public ownership of Cal Am. He also has been a strong supporter of developer Nader Agha's alternative desalination proposal.

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