1 Dec 2015

I told you so San Diego

Just over three years ago, I wrote a short analysis for the Surfrider Foundation on the Carlsbad desalination project in San Diego. My report [pdf] started with this:
The San Diego County Water Authority (SDCWA) should not sign the water purchase agreement (WPA) with Poseidon Resources, due to its economic, social and logistical flaws. The first flaw is cost: water costing $2,000+ per acre foot will either be sold at a lower price (due to average cost pricing), such that SDCWA “buys high and sells low” or it will be sold at its marginal cost. In this latter case of setting the price of all water to reflect the most-expensive source (marginal cost pricing), we can expect that quantity demanded will fall to a level at which the desalinated water would not be necessary.* The second flaw is social: the desalinated water will only improve local reliability if it’s sold at marginal prices (meaning it would not be necessary). If it’s sold at lower prices and/or delivered to new housing in the region, then SDCWA is losing money on the deal and/or subsidizing new development at the expense of existing customers...
Now, I read (via JF) that San Diego has "too much water" due to water conservation, meaning that customers will be paying more when the plant opens in a few months. I had called attention to this potential (well know) problem as well, i.e.,
It’s important ... to ensure that SDCWA doesn’t get left with a white elephant, as the people of Melbourne, Australia just did with their A$3.5 billion project that is now mothballed due to recent rainfall.
The article concludes with "SDCWA expects the cost of treated imported water to surpass the cost of desalinated water by 2030," i.e., the plant will BEGIN paying for itself in 15 years.

Bottom Line: San Diego's ratepayers are ALREADY paying for a mistake. I now predict that "excess supply" will be used to support further housing development.

* From the report:
Assuming an average demand elasticity of -0.20, then the reduction in quantity demanded resulting from doubling the price of water would be greater than the additional quantity supplied (assuming that the plant supplies 7 percent of total supply), i.e., doubling the price to pay for 7 percent more supplies would reduce demand by 20 percent. Put differently, customers facing a price that reflected the actual cost of desalinated water would reduce their demand by enough to eliminate the need for the plant!