Southwest Sees a Future in Desalination Plans

DALLAS — In the drought-prone Southwest, the value of water is rising nearly as fast as the population, fueling efforts to convert the most abundant supply — salt water — into something usable and affordable on dry land. Over the next decade, the desalination industry worldwide is expected to grow 140%, with $25 billion invested by 2010, experts say.In the United States, most of that investment comes in the form of state, federal, and local funds, with the expectation that bonding will play a larger role as the industry matures.“The promise is enormous,” said G. Wade Miller, executive director of the Water Reuse Association in Alexandria, Va. “This is the wave of the future.” The association will hold a conference this week that will focus on desalination.Despite the higher cost of removing salt from seawater and brackish groundwater, cities and rural areas in the Southwest are turning to the technology to improve their resistance to drought.“Desalination is about producing the next incremental source of water,” says Jorge Arroyo, director of special projects for the Texas Water Development Board. “You develop it when your other sources are used to the maximum — so you have to compare its cost to other options, and there are not many other options.”In Texas’ southernmost and westernmost cities, new desalination plants began operating this year with an eye toward future development of the technology.In the West Texas city of El Paso, the largest inland desalination plant in the world opened in August with a 27.5-million gallon per day capacity. The $87 million plant serving the city and Fort Bliss Army Post increases water production by 25% by treating brackish groundwater from the Hueco Bolson aquifer. The joint project of El Paso Water Utilities and the U.S. Army was named for U.S. Sen. Kay Bailey Hutchison, R-Tex., who helped obtain federal funding.In Brownsville to the far south, a $2.2 million pilot project is treating seawater to test different processes and pave the way for a $150 million treatment plant expected to be built in 2010. With a sense of urgency brought on by drought, rapid growth, and exhaustion of Rio Grande water sources, the TWDB began working on the Brownsville pilot project in 2004 with the Brownsville Public Utilities Board. With the drought ending in most parts of the state this year, the Legislature declined to provide the $70 million the water board sought for the larger plant.“It’s not as bad as it sounds in that it gives the project a chance to finesse the numbers and determine capacities,” Arroyo said.From 1990 to 2000, the Brownsville area grew 43% to 372,000 people. The population is expected to approach 500,000 by 2020. To the north, the San Antonio Water System is in the early stages of planning a system to treat brackish water from deep strata of the Edwards Aquifer. The city-owned water system last month received 17 responses to initial feelers for interest in the project.“The level of interest is stronger than we anticipated,” said Doug Evanson, vice president and chief financial officer for SAWS. “They are all large national and international players.”SAWS expects to have a procurement document ready by early next year based on the ideas the respondents have brought to the table. The desalination plant could be up and running by 2011.“We would probably not have any bond activity until 2009,” Evanson said.SAWS is seeking input about how to use debt for such a project from its financial advisers First Southwest Co. and Estrada Hinojosa & Co. The project could use traditional muni bonds, a public-private partnership, or private-activity bonds, according to Evanson.“We’re not certain if that debt is going to be on our balance sheets,” he said. Because the desalination process is energy-intensive, power plants are usually built nearby.“We do not anticipate building a power-generating facility,” Evanson said. “However, access to power is a critical component.”Planning for power could be simplified by the fact that San Antonio owns both the water utility and energy provider CPS Energy.In planning its treatment plant, San Antonio is studying the experience of Tampa Bay, Fla., site of the nation’s largest desalination facility.Troubled by breakdowns, contractor bankruptcies, litigation, and delays since 2001, Tampa Bay Water saw costs for its plant soar $48 million beyond expectations to $158 million. The plant’s woes represent a P3 gone bad, with the public Tampa Bay Water ending up owning the plant after design-build partners went bankrupt.To buy the plant from its failed owners, TBW issued $108 million of revenue bonds in May 2002. The deal carried A-plus ratings from Standard & Poor’s, which expected the plant to be operational in 2003. However, the plant’s production proved sporadic until 2005, when it was shut down for remediation.Moody’s Investors Service rated the plant bonds .Aa3, while Fitch Ratings rated them AA.Standard & Poor’s noted Tampa Bay Water’s rising debt load and “sizable future capital requirements that now include the direct financing responsibility for the desalination plant that was originally going to be privately financed.”Amid a severe drought, the plant began producing water in March while awaiting its acceptance test, expected next month. The utility, serving six Florida governments, said the desalination plant should be able to provide up to 10% of the region’s drinking water supply. Up to 25 million gallons a day of desalinated water will be blended with other sources.Since March, the desal plant has contributed 1.7 billion gallons to Tampa Bay Water’s supplies as it awaits formal acceptance by the utility. The cost of treating water at the plant is $3.19 per thousand gallons compared to about $2 per thousand gallons from traditional sources.“Clearly, there’s no dispute that that’s the most expensive source of water in the system,” says Neil Callahan, vice president of R.W. Beck, the Tampa company that serves as program manager for the plant. “But by comparison to other desal plants, it’s one of the most cost effective in the world.”Desalination also holds up well economically against other alternative source schemes, such as piping or trucking water from rural areas, Callahan said. In Texas, oil billionaire T. Boone Pickens is developing plans to pipe water from four remote Panhandle counties to urban areas such as Dallas-Fort Worth. Until Pickens finds a buyer for the water, he cannot proceed with the project that is expected to cost $1.5 billion with financing from tax-exempt revenue bonds.Plants that treat brackish water inland are becoming increasingly common in areas such as Colorado, New Mexico, and Arizona. Often the water is used for farming and ranching, Callahan said.“There are certainly hundreds of brackish plants; the brackish plant operators have been around the block once or twice and have a higher skill level,” he said. “Outside the Tampa Bay plant, there are only a handful of seawater desal plants. It’s definitely a bellwether project.”Building a desal plant is also a law-intensive process that requires attorneys specializing in environmental and regulatory issues. In that arena, Florida and Texas have an advantage over another ambitious desalination state, California, Miller said.“Most of the big projects being considered in California are never going to happen,” Miller said. “The promise in the U.S. will be realized in Texas and Florida long before California. It’s nowhere near as difficult to obtain permits in those two states.”Despite the challenges and costs, Callahan said he expects growing demand for desalination projects as water becomes more precious — and contentious — in growing cities in arid climates.“There’s a saying that I’ve often heard in the Southwest,” Callahan said. “Whiskey is for drinking and water is for fighting over.”