Latest on the Water Front

Transcription:

Devin (00:05):

Hi everyone. Thanks for joining. We'll go ahead and get started. Let folks come on in here. We've got a great panel for you today. I'm super excited about it. We're going to be discussing the water situation in California and management through some pretty complex situations and options for that, including desalination. To start off, I think it's kind of helpful to figure out or to talk about where we were last year at this time, when the drought monitor reported that essentially 99% of the state was experiencing some stage of drought following the 2023 water year, which folks have in some cases labeled almost a miracle water year. The drought monitor recently said that there's only 6% of California experiencing abnormally dry or drier conditions. So a huge turnaround. That kind of variation obviously creates significant challenges for water utilities and agency management in the state. And so today we have a unique opportunity to here from two significant regional wholesale water providers about how their organizations manage through these challenges and their ongoing approaches to building resiliency while balancing system investment costs with affordability.

(01:26)

First to my right, we have Lisa Marie Harris. Lisa Marie has served as the director of Finance and treasurer for the San Diego County Water Authority since May, 2014. Lisa Marie's responsible for overseeing the Water Authority's 2.3 billion debt portfolio, the $410 million investment portfolio, and the development of the authorities biannual $1.7 billion operating budget and the setting of annual rates and charges to her right Samuel Smalls. Sam was appointed in March, 2021 to the position of manager of Treasury and Debt Management in the office of the Chiefs financial officer of the Metropolitan Water District of Southern California. In this role, Sam leads a team responsible for cash management, investment portfolio management, treasury operations, debt issuance and management, property tax, program management, and administration of the district's procurement card program. To his right is Ted Chapman, Ted's a managing director at Hilltop Securities specializing in credit research, environmental, social and governance factors and the municipal marketplace. Before joining Hilltop Securities in 2021, Ted spent most of the last 20 years as a municipal bond credit analyst at s and p where he served as their subject matter expert and a credit rating criteria author for municipal water utility revenue bonds. So just kind of getting into it, given the frequency of drought in California and the severity of the recent drought, Lisa, Ray and Sam, how have your agencies addressed the tension of providing safe and reliable water, making prudent investments in infrastructure while managing rates and affordability?

Lisa Marie Harris (02:56):

Sure. I'll get started just to provide context for those of you that don't know much about San Diego County Water Authority, but again, we are a wholesale water agency and our role is to deliver water to the 3.3 million residents of the region, and we deliver water to 24 retail agencies that actually deliver water to businesses and residents. And we do that through managing massive infrastructure. We actually import 72% of our water largely from the Colorado River and actually 10% from the largest desalinization plan in the Western Hemisphere. But we've spent quite a bit of time managing these assets so that we have safe and reliable water. And then just in terms of our governing structure, we were established by the state legislature in 1944, and we have 36 board members. That's right, 36 that have to bill consensus and make decisions on the biannual budget, the annual rate setting, et cetera.

(03:59)

But with all that said, just those characteristics all already proposes a challenge because you have 36 board members from all parts of the region have to come together with very opposing positions from, some are very rural, some are very urban. In fact, some of you probably have heard two member agencies have actually got authorization from the organization called Code to detach and it was approved, and they're going to take it to the voters in November, which will cause a little bit more turmoil for the San County Water Authority. But the good news is that Governor Gavin Newsome did sign a bill into law last week. That will prohibit, well, it will make it more challenging for a member agency to leave. It'll have to be a countywide vote. So with all that said, it just makes it that much more challenging to make significant decisions and the decisions that the water authority makes and what Metropolitan makes, and I'm sure Sam will share, we make 50 to a hundred, a hundred hundred and year decisions.

(05:06)

In fact, we're just now celebrating 20 years of the quantification settlement agreement that's been established for 20 years now, and that actually provides 50% of the water high priority water to the Colorado River. And that's been a significant agreement, multiple parties, but it's been huge success for the region again, and that was signed in 2003. And so basically starting really in 1990 when we only had 5% of our water that was outside of metropolitan, we really were beholden to that organization and we really wanted to have a diverse portfolio. Just like you have an investment portfolio, a debt portfolio, any kind of portfolio, you need to have diversity to mitigate risk. And so we've been able to have multiple sources of water and we have quite a few local supply development projects that are underway, but with all that level of investment, which are billions and billions of dollars, now we're faced with the concept, it's not affordable.

(06:08)

But the alternative, of course, is not having any water. But I can't tell that to my governing body of course, but as the finance director, it's just really hard to set the tone and make rates as low as possible, but then maintain my ratings. And for some of the smaller rating retail agencies, they don't have any debt or they have 5 million worth of debt. So they say, okay, you don't need the highest rating. Well, you don't have 2 billion worth of debt. And every rating drop is significant with the cost of capital and not just when we issue debt, but when we refinanced debt. And so it's an ongoing struggle to educate my board of directors. In fact, we had a turnover about 50% last year. So they're always coming and going, and it's actually becoming a larger platform for local residents to want to consider going into politics, to maybe even being a city council or a mayor.

(07:05)

And so they'll really be, they'll cause that tension to be even greater as we make and try to build consensus. But we did just appoint a new general manager and he's doing a great job. We just had a retreat of the board of directors and really they spent eight hours just learning the history of why all those decisions were made before then. So then we can start building consensus because we're still going to have to make additional 50 to 100 year decisions on how we set our rates so that it is affordable. And we can talk a little bit more about it as well. But one of the biggest challenges is the two 18 law in the state of California, which requires it doesn't allow for us to have low income water rates. And so we're challenged with setting rates to the lowest income population, which actually subsidizes everybody else. Right. And so is that equitable? Anyway, I can go on about all that, but I'll go turn it to Sam.

Sam (08:05):

Thank you Lisa Marie for Context Metropolitan is also a wholesale water agency, which spans from Ventura County in the north down to San Diego in the south from LA and Orange County on the coast to portions of San Bernardino and Riverside in the east. We serve over 19 million customers in our region. We've got hundreds of miles of pipes, we've got five treatment plants across the district. We move water and we help plan for the hundred year needs of the customers in our region. But to get to your question, Devin, I do want to acknowledge, and I'm thankful that Lisa mentioned the QSA, the quantification settlement agreement because we just commemorated its 20th anniversary last week, and that ushered in as Lisa Marie shared a major shift for Southern Californians, and it mandated that we live within our allocation of the 4.4 million acre feet from the Colorado River.

(09:17)

And for years, for those who aren't aware for years, the lower basin states have been able to use the surplus water not used by the upper basin states, which fueled our growth and our agricultural industry. They say that necessity is the mother of invention. Well, the QSA agreement between IID Metropolitan San Diego County Water Authority and Coachella Valley Water District set certain amounts, priorities and actions among the signatories, but more importantly, the Colorado River Water use 4.4 plan was developed over a 10 year period, I might add, to reduce California's use of Colorado River supplies by as much as 800,000 acre feet. How did we do that? Well, it was a broad collaborative approach that involved conservation water transfers from AG to urban canal, seepage recovery investments and infrastructure that made us more efficient with that finite resource that we have. Groundwater banking, conjunctive use programs, which is a combination of the use of surface and groundwater for AG and Desal, and not every entity used each of these tools, but certainly all collectively helped us achieve our goal.

(10:48)

So fast forward 20 years and Mother Nature says, no, I'm the mother of invention. And with that climate change really is the focus and it's mandating that we look at similar tools from a regional perspective to address what we see as a need under stressed climate conditions. And in our most recent 2020 RRP needs assessment, we see that as being as much as 300,000 acre feet of water by 2032 and 600,000 acre feet of water by 2045. Now, metropolitan is currently engaged in the development of a climate adaptation master plan for water, and that's where we are focused on certain themes. And the themes are resource reliability, system resilience, financial sustainability, affordability and equity. These are all key items of concern for our constituencies and our board. Now, our intentions are to map these themes to certain evaluative criteria and other planning or policy actions that at the end of the day will result in alternative portfolios of projects or programs to address this projected need and for our board to consider. So everything is on the table, at least for now, in terms of how we address today's and tomorrow's challenges. And you talked about one legislation that the governor signed of importance. I'd reference another one, and that's non-functional turf legislation that Metropolitan Co-sponsored, and that was significant. It's a significant win not only for the inherent benefits of conservation and demand management, but also because it's positioning us for the conversation that we know we need to have in the negotiations with the compact in 2026 on the Colorado River.

(12:58)

We are strongly considering WIFIA as a part of our finance plan as it presents a flexible cost competitive option to our revenue bonds, which helps us keep our leverage low and also our coverage metrics on our bonds at an appropriate level. And we're looking at creative investor participations, our partnerships not only with our member agencies, but potentially out state partners like the Central Arizona project and the Southern Nevada Water Authority for their investment. We might exchange supplies on the Colorado River, for example, and then we're researching Desal opportunities, which I know we'll talk to later. So I'll pause there.

Devin (13:43):

Thanks. Just following up a little bit on that, you've both mentioned the large number of board members that you have and the sort of unique challenges that may present in trying to, when you're trying to balance these short-term challenges like the drought with long-term resilience planning, can you tell us a little more about how that impacts your capital program planning and how you find board consensus?

Sam (14:11):

That is a million dollar question. It's a difficult problem for us to solve, especially since Metropolitan has a third of its board members turning over. So we have to educate as well to make sure that everyone understands the issues and the historical context. Besides that, our member agencies have different needs. They don't all have the same needs, and as such may not agree on what the solutions are, hence the climate adaptation master plan process that I mentioned and how it is about trying to focus in on what we see as the resiliency needs, the reliability needs. And so it's not necessarily what a particular pet project might be of importance to one board member or another, but really on how we solve the regional needs of the organization and get everyone to focus on that.

Lisa Marie Harris (15:10):

Yeah, I think for the water authority, and it's, I'm sure similar for MWD, it really is about education. It's about collaboration. It's also just helping to actually recruit or have board members consider the board seat if they're interested in the whole region. I know way before I got before a member of the water authority, the board actually was made up of what they called with water HOGs board directors that really cared about the whole long-term history and the prospective lifeline of the water agency. But again, now we have more short-term thinkers. And so the key is education. And again, like I said, we had a retreat a month ago. We're going to have another retreat in November and likely another retreat in March to really begin that education. And also we meet every month, and so I'm trying to have more educational sessions during my A&F committee.

(16:08)

I'm going to have a session just on bond covenants because some of them thought, well, why don't we just break the bond covenant so we can have lower rates? So you can't do that. And so it's hard to educate them while getting them to vote appropriately. So I'm liking to have educational sessions when they're not forced on a rate vote at the same time. So I'm going to have a session on bond covenants, bond disclosures, which I usually do anyway, but I'm going to add covenants to the discussion in February. I'm hoping to have just a discussion on ratings and the impact of a downgrade financially. And so I think the key is to really, because I think even if they're short term in mind, they don't want to inhibit their ability to get elected to a city council and be downgraded while being in leadership.

(16:58)

It can impact their immediate future. So the goal is to really take the time and educate not only in general board sessions, but also one-on-one sessions and build a rapport with the board of directors. I try to have one-on-one meetings and just help them have a sense of trust too. They have to trust us. And some of it is they distrust us because they think that we're trying to have scare tactics. If we tell them, if you don't raise rates and all these other financial impacts will occur because they really don't necessarily believe it. And so I think that's one of the key factors is that I know as a finance director, I have to help my board of directors almost have a sense of finance that I do. Now, they shouldn't have to have that, but that's the only way I think they're going to ultimately trust me.

Sam (17:50):

I would echo everything that you just said for Metropolitan.

Devin (17:55):

In terms of the challenges that you faced recently, which include the drought and conservation management and other things, and now you have rising interest rates. Can you tell us a little more about how your managing, again, your capital programs, your debt portfolio management approach, what are you doing to address some of these challenges as they're kind of coming up almost every year it seems like?

Sam (18:18):

I would say, well, for metropolitan after Diamond Valley Lake, most of our capital infrastructure has been for R and R rehab and replacement of our core system. Our primary financing tool is our revenue bonds, and we have a senior and a subordinate lien for that revenue bond program, and we have approximately 4 billion outstanding. Of that debt, 70 to 80% of it is fixed. The balance of that is floating rate debt and half of that floating rate debt is hedged with floating to fixed rate swaps. Historically met has not pursued federal grants or state grants for a lot of our projects. That's a shift for us where we had discussed with our member agencies who we had historically lead the charge with respect to grant funding. But because the stakes are so high and the costs are so great, I think there has been agreement that Metropolitan given our role to should take the lead in that effort.

(19:27)

And it's fared well for us because we were successful in getting 80 million for our demonstration project for the Pure Water Southern California project, which is our regional recycle project in collaboration with the LA County Sanitation District. And that's going to be the largest regional recycle project in the nation if approved by our board. But again, we would probably look at revenue bonds, but we're actually looking at other things as well. We're exploring non rate revenues like our existing property taxes on the state water project, potentially exploring or having the conversation about a new geo bond voter authorization and or new fixed charge authorizations. And that is also about the alignment of our fixed costs with our fixed revenues, which are out of alignment. Right now our costs are about 80% fixed and yet our revenues are just shy of 20% fixed. So that discussion is about trying to right size that and we're evaluating the potential benefits of advocating for potentially bringing back Babs or tax credit bonds, but that's more of a long-term strategy because I don't believe we have a speaker of the house as of yet.

Lisa Marie Harris (20:51):

Well, for the water authority, we have 2.3 billion outstanding debt. It's primarily fixed about 80%. The balance is commercial papers funded through a commercial through a letter of credit. And historically we've issued a significant enough debt to prepare us for the overall water resiliency that we have today. And the last 10 years that I've been at the water authority, I only have issued new money once because we've been able to use the existing debt that we've already issued or we used a lot of PAYGO funds and so we haven't had to issue a lot of debt. And now we're actually just maintaining our system. We have 310 miles of pipe, and so we have a long-term project to take 10 miles at a time and relying the pipes. And so that's really our main focus is asset management. And so I don't foresee us issuing additional debt maybe for maybe in 2027, 2028, but again, it'll be focused on asset management.

(21:56)

And we also are looking at our rate structure. We put together a rate team, we added a new fixed rate when the Desal plant was put online, and that took four years just to get an additional rate for Desal. And now with local supply development, because that's really one of the biggest challenges when our member agencies build local supply because then they buy less water and then we still have to recover the fixed costs of our system through all the infrastructure and operating costs. And so if there's a challenge, that's the biggest challenge is that our fixed revenue rate structure is not balanced as well. And so we actually we're in the two years of a new rate design and we're hoping by January of 2025 we can raise the fixed rate structure from 22% to 36%. But of course, some of our member agencies that are building large infrastructure, they want to roll off and roll on when they want and then they don't want to pay when they're rolling off.

(22:57)

And so they're going to be the biggest dissenters of that rate redesign. So it's going to be interesting to see how we get the balance of the board to win that vote. But the biggest vote is the city, and they have the majority, but some of the city's voters do know the needs to balance that fixed rate structure. But until the board meeting occurs, it's really interesting. It can go on for hours and you never know, and we're all calculating a staff, how's the vote going to go? We might win by 2%, but if we can just get 50%, then we got it. But every significant financial decision going forward is always going to be tough because the underlying philosophy is that the average rate payer really believes that water should be free, and that's just all over the country. I mean, I was in a panel in Chicago and I was fascinated how they're now having to refinance and rebuild their infrastructure.

(24:01)

And even though they have significant water, they now have to invest in the assets in place, and so they're going to have to raise water rates, maybe even equal to San Diego. But I think generally the general belief is when you talk to an average resident, because water comes from the sky, they think it's supposed to be free. And even though if it is coming from the skylight in Michigan, you still got to treat it. You can't just drink it from the ground. And so it's really fascinating, but I'll have conversations with my neighbors and I'll tell them, do you know it takes 300 miles of pipe to get water to your house? And then they say, well, then maybe we should have to pay for water. I said, absolutely.

(24:44)

But again, it's not just educating the board, it's educating our region because southern California is a desert. It is not even supposed to be water in southern California. So without all this manmade infrastructure, we won't have reliable supply. And we have a multi-billion dollar economy, 245 billion economy. We have a great university system. The military loves San Diego. They're never going anywhere. And so we have huge economic system, but in order for it to be successful, we have to have reliable water supply. And I think there really just needs to be a change in the narrative and we need to stop talking about is it affordable? But what does it take to make it that everybody in our human system to have water because it's not going to be free.

Devin (25:35):

One of the things I find most fascinating in this conversation is that what's taken most for granted is that when you turn on the tap, water's going to come out of it. And yet that's most expensive about water is that you're sure that it's going to come out of the tap when you get it. So how do you get that across both in a way in which your board reacts to it in a way, everybody in the local agencies who are actually doing the retail rates can do it. Ted, maybe you can talk with us about whether or not these resiliency challenges that we've been discussing and the affordability challenges and all of these other management issues that are really coming to the fore in the current situation, whether you see the occurring on a nationwide level as well too. Is it unique to California? How are issuers across the country really responding to this?

Ted (26:18):

Yeah, absolutely. So I started in water finance in 1996, obviously when I was 10 years old. So first I was a budget officer for a water utility. Then a couple of decades at a rating agency, they're subject matter expert wrote criteria built scorecards last few years now helping our clients navigate being able to tell their credit stories. So basically the only seat at the table I have not yet sat at is bond council sidebar. I'm not the Theodore Chapman from Chapman and Cutler. But anyway, that's kind of a long-winded way of saying that your number two is my number one. So assuming that I'm actually, I know my number two and I am not actually full of it, then yeah, obviously the answer is that California is not alone in this. There's nuanced differences, but the big picture challenges are really the same wherever you go.

(27:14)

And as an aside, the stuff that's looping over on the monitor, that's my doing. There's one guy in there, I'm just sort of waiting for somebody to raise their hand and go, can you explain that one a little bit more? There's actually a really good story behind that. That's a heroic story, not an awful story about the question of why shouldn't water be free? That was a main break that was coming really close to threatening some homes, and it was a pretty affluent neighborhood. I think it was like a suburb of for worth or something. This was a few years ago. This guy actually just dove in and tried to find the valve to try and contain the leak. So you would probably argue, I know he would probably like to be compensated for that, as heroic as it was. You talk about affordability challenges as an example.

(28:05)

I would say that actually water really is not unaffordable. I think that if you're looking at the folks that are at the lowest quintile or lowest quartile of the income distribution curve, life is unaffordable. Whether you're talking about, I don't know, daycare, transportation, water, electricity, housing, life is unaffordable. I don't know if anybody here has a pool. Let's just use that as an example. Typical pool holds about 15,000 gallons of water. You could fill that pool for under a hundred dollars. At most of these retail, any of their members still have relatively pretty affordable water. So you fill a 15,000 gallon pool with dirt. Just bear with me here, but let's say that that's about, I don't know, four or five dump trucks full of dirt. You would have to have, following the logic, you would have to have that delivered to your home just like the water is delivered to your home. I would challenge anybody to find even the fuel surcharge on one dump truck to be under a hundred dollars. So using that logic, you could say water is actually cheaper than dirt. It is dirt cheap.

(29:25)

Okay, keep in mind, I'm work shopping some new material here. But yeah, I mean, so any prudent utility manager anywhere in the United States, and I'm really lucky to be surrounded by a couple of them right now. They do look at the drought trends and they see, well, in any given year in part of the country, you can see it up here, I think I took a snippet of last week's drought monitor. There's going to be a portion of the United States that is in some level of drought, whether it's moderate to just extreme noticeably absent last week, state of California, I am based in Dallas. Dallas is full of red, full of bright red. But that's just the way kind of things go. But prudent utility managers are thinking, well, you know what? This might not just sort of be like, eh, it's just that time of year thing.

(30:12)

It could be this is getting worse, it's getting longer. What are we going to do? So you start looking at other challenges like alternative water supplies. We've got Desal obviously in Southern California. There are others. Granted, not everybody is Irvine, but to their credit, they managed and messaged their alternative supply really well. Some of the naysayers are like, Ew, that's toilet to tap. They're like, Nope, it's direct potable reuse DPR. I personally like certified, but it's all in the messaging. It's all in the risk management. So I mean, again, if you look at big picture, yeah, I mean the challenges are very similar kind of across the board, but I think if you look at Lisa Marie mentioned the rating implications of that. So having been a rating agency analyst for a couple of decades, I can tell you that utilities do take that very seriously.

(31:13)

But if there were, I guess it was like 2020 or 2021, the rating agencies actually started those that track the ESG stuff, and I'm not talking about what's being reported in your rating reports, but if there was a rating change that was attributed to an E and S or a G, they are now tracking that saying which bucket? If it is relevant to material, which bucket the ES or G? Did it fall in two thirds of the time when there is a rating change? It's actually the governance, the management and governance. So if you look at what can we do as utility managers, as finance people, you tell your credit story, you do risk management, you prioritize your CIP, you try and make it apolitical and talk numbers. You say, well, utilities often do like a run to fail. It's more so in the electric, not as much in the water, but it's like this needs to be priority number one. Yeah, maybe we can get by another year or two without this project, it's still a priority, but maybe not as much of a priority. That's what we're seeing the really successful utilities do. Because programs, whether you're talking about drinking water, whether you're talking about clean water, which is full of all kinds of unfunded mandates, yeah, I mean, I don't want to say misery loves company, but the challenge is that these folks are dealing with are very real. They're very common, and they're very much all over the United States.

Devin (32:35):

So one way of potentially mitigating some of these, the impact of drought on water supplies is desalination. And I've been privileged to work on the Poseidon plant as bond council for the last decade and saw that get finance put into place in a way in which most of the construction and operation risk was shifted to the private sector and not onto the water authority. Can you tell us a little bit how that project came together, how it's, we recently completed a financing for the expansion of the intake. How is it partnering with the private team running that, and tell us a little bit about your experience with it recently.

Lisa Marie Harris (33:17):

Sure. I mean, the Desal plant is the largest Desal plant in the Western hemisphere. It did begin under the leadership of Carlsbad, the city of Carlsbad, and they really didn't have the proper infrastructure in terms of staffing and resources to get it done. And so then they asked the water authority to take over the construction of the project. But I'll tell you, it was 20 years in the making. It was not an easy project. And one of the one saving graces was that the water authority did make a decision to have a risk transfer. We wanted all the risks because it was an unknown territory. Most of the Desal plants are in Israel or Australia. They're not in the United States. And so we really didn't have a model in the United States to follow. And so the one thing we made a decision was was to transfer the risk to the third party, which was Poseidon, and it's managed through what's called a water purchase agreement.

(34:15)

And the agreement is this thick. I mean, there's so many details in that agreement that had to be negotiated. And the one risk that the water authority did undertake was the risk of electricity. And that's a significant risk, especially this year because our SDG&E costs were like 10 million more than we had anticipated. But nonetheless, the risk transfer has served the water authority. Well, two years ago, there was an algae bloom and the plant wasn't able to operate for three or four months. And essentially under the water purchase agreement, we're the sole off taker of the water. So we're not responsible for any of the debt service to the debt or any of the operations. We're just responsible to buying the water. So if Poseidon can't deliver the water, then we don't have to pay for the water that we're not going to get, and then they have to eat those costs, which could go on for months, which had happened during the algae bloom.

(35:16)

But even for the new intake project, it was, I think just 200 million. It took almost a year. I mean, it's really hard to work. We're a private entity because they're all about profit and they're very greedy. I'm just going to tell you, and it's so hard to work on the other side of the table. We have to protect the rate payers. I have to try to have the lowest cost possible, whereas they'll bring in all these FA's from foreign countries and think they're going to get paid millions of dollars, and any FA in here don't get paid millions of dollars on a deal. But those are the kind of things that I had to negotiate, and they were really angry too. And so it was just a really hard process, but it was really well worth it. It was so many entities involved because again, to mitigate the risk, it wasn't on our balance sheet.

(36:09)

We wanted to have it be a tax exempt financing. So we went through the treasurer's office, and that was several hundred thousands of dollars as well. And Devin was the bond counsel he knows. And so that wasn't cheap. And then we also, we did get a WIFIA alone, and that was helpful. The water authority had never got a WIFIA alone before. So that was really helpful. That's really nice cost, cheap of capital. But there was also an equity component that the company pays, but we also pay through the cost of water, and that's really high price capital, but that's what it took to get the deal done. And it was so every conference call was maybe 50 people on the call, all kind of players from all different places. But at the end of the day, we know we have a reliable source of water.

(36:57)

It's a 10% of our water portfolio. And now when we have too much water, everybody complains because they have to pay for water even though we have plenty of water. But because we're going to get back in a drought again and we'll have that Desal plant and then people will be comfortable again. But it is just really an interesting industry to be in. I mean, it's been the hardest job I've had in my career. I worked at San Francisco Airport, I worked for the state treasurer. I worked for the county. But working in water to me is by far the hardest industry to work in.

Sam (37:34):

Well, from Metropolitan, we were considering a study on Desal options. But after hearing you talk, I'm not sure this study go forward.

Lisa Marie Harris (37:47):

It's not for the faint of heart.

Sam (37:48):

It's not. It's not. But seriously though, we recognize that this is an important tool in the toolbox that there are many options for us to consider in trying to meet our resource needs going forward under Climate Stressed Alternative. And we also recognize that D South specifically has its challenges with respect to the environmental NGOs, right? Case in point, the Huntington Beach Poseidon project that didn't get approved, but there's light at the end of the tunnel here. I think hopefully because the State Water Resources Control Board did approve the Doheny Desalproject, at least conditionally. And that is a project that Metropolitan actually participated in review, but that's only five MGDs. So it was too small for us to participate in, but it has an option to increase up to 15 MGDs, and that is an option where Metropolitan could participate, where it would make sense.

(38:54)

So what makes that project different from the Huntington Beach project is one, it's smaller and the environmental factors that are important to the NGOs really aren't as severe, but they also use the different technology called Slant Wells, which goes under the floor bed and actually gets water through pipes that are perforated underneath the floor bed so that the impact on marine life isn't as great. So that's promising. We're looking at in this study, brackish desal, seawater Desal project implementation, which has the components of partnership opportunities, project delivery costs and revenues, as well as integration and storage. And then lastly, it's about technology scan, looking at the current universe of technology and what other technologies might be out there. And one thing that's really exciting right now is something out in what's called the photic zone of the sea. The pipes would actually go much lower than where they might be under normal Desal options. And the pressure at that level is sufficient enough to push the water through a membrane and extract the salt water and have it dissipate at that level without any significant environmental concerns. So it's promising, and it certainly would use less energy, which is one of the big elements that makes Desal more costly. So again, we think that everything is on the table to consider at this point as we get the information to evaluate.

Lisa Marie Harris (40:43):

And I would add, in order to undergo a Desal plant, you also have to consider all the regulatory requirements. I mean, they just make up them as they go. It seems. And you need to have a team of folks, which I'm not that knowledgeable in it, but we have a whole water resources regulatory department, and they spent, that's what they do. They spend time negotiating and ensuring that all the requirements, even for a small intake system that we met those requirements, we had to change the screens so that these little tiny little sea animals wouldn't go through to meet the water regulatory requirements. So you have to have a whole cadre of staff that are highly knowledgeable about all the regulations and then managing the cost of those regulations. I mean, Devin, you could probably speak to that.

Devin (41:35):

Well, one theme that I'm hearing, and I think it's interesting, is the importance of the environmental aspects. When you first developed this, I mean, the reason that you had to replace the intake in the screens was that the Carlsbad plant was co-located at a natural gas power plant. And was it, its intake was coming from the cooling offtake of that. So the fact that the water was already in use and the environmental impact was not as significant, perhaps as a true greenfield kind of development at the time that that happened, I think that was also a significant issue. So sort of finding the right side and finding the right technology and finding the right balance before the project gets undertaken, I think is a good piece of advice here. Know this, I want to leave time for questions for the audience because you have a unique opportunity here with folks on the stage. Are there any questions from the audience for the panel?

Audience Member 1 (42:31):

Just to get perspective on the, how much more cost than compared to additional?

Lisa Marie Harris (42:40):

I don't know off the top of my head, but it's probably round double.

Sam (42:44):

Yeah, I looked at this. It's around $3,000 per acre foot, and I think our standard rates is in the 2000 low 2000 range.

Lisa Marie Harris (42:59):

So it's not cheap, but it is reliable.

Devin (43:02):

And again, when you turn on the tap, you just assume it's going to be there. That's what that technology gives you. Any other questions? For our panelists?

Audience Member 2 (43:17):

Comment, I appreciated all conversations. If people are upset, call me (Inaudible) Guarantee that you're going to find.

Lisa Marie Harris (43:50):

Yeah, and she's the CFO of East Bay mud.

Audience Member 3 (43:57):

About the desalination. You had mentioned that those plants are primarily located outside the us, but if we want to invest in more of that infrastructure, but we still need to buy American products or American infrastructure source products, is there any American companies that are doing that? And I guess my second question is are there other water agencies, especially on the western coast looking at desalination as a long-term option for supplying our water?

Sam (44:32):

Do you want to take that? I can probably answer the second one from my team in Water Resource Management, Oxnard, Santa Monica, Palos Verdes, Dana Point, which I mentioned earlier in Oceanside, are all locations which we think are potentially qualifying sites that's worth exploring, at least in the Metropolitan District with respect to companies, American companies that are doing this. I think some exist, but I don't think that they're at the level of the international companies that have developed this technology and operational expertise, which is why they're leading it.

Ted (45:24):

And to piggyback on that, I mean EPA has granted some waivers with BABA. It's not like an absolute, you don't even have to worry about that anymore. They're not doing Jedi mind tricks with that stuff. But I think also it's probably worth mentioning that EPA periodically and most recently about a month ago, does this thing called the drinking water Needs assessment survey. They report numbers to Congress saying this is how much the industry needs just to maintain existing assets over the next 20 years. And typically in those surveys, it's just the brick and mortar already in the ground. It's not prospective for growth purposes or water supply enhancement projects. It's just the pumping, the distribution, the meters and the treatment and so forth. So that number is probably a low ball. Congress is probably not getting the full picture. So new asset replacement is not really in that survey. So I think there's probably the point there's a lot more that EPA and Congress and some of the other makers and legislators could do to help support these folks.

Devin (46:32):

I think that's all we have time for today, but please join me and thank you the panelists for the time here.