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"The full importance of an epoch-making idea is often not perceived in the generation in which it is made…A new discovery is seldom fully effective for practical purposes until many minor improvements and subsidiary discoveries have gathered themselves around it." So wrote Alfred Marshall the noted British economist in his "Principles of Economics" more than 100 years ago¹. Many today are unaware or question whether desalination, an historically expensive technology that has been used to supply drinking water for more than 35 years, is an epoch-making idea. Yet as this technology and its application continue to experience a combination of minor improvements and subsidiary discoveries while population pressures and demand for tapping the vast resources of the oceans continues to grow. Further, while the global privatization trend of the last part of this century is undoubtedly an epoch-making event, the broader public in the U.S. (where over 90% of water supply is owned and financed by public entities) remains largely unaware of the benefits that private ownership of water treatment systems offers.

One thing seems certain, when the 25 million-gallon per day (94.6 million-liters per day) Tampa facility goes into commercial operation in 2002 and turns seawater into potable drinking water for the people in the Tampa Bay Region of Florida (at $1.71/Kgal - $0.453/m³; the lowest cost ever realized) there will be a host of communities around the U.S. and world scrambling to take advantage of the private ownership structure which provides for this virtually untapped source of reasonably priced, environmentally non-intrusive, and drought resistant water supply. And by that point an idea that is largely unknown may well become an epoch-making event.

Three years ago as part of developing a Master Water Plan for the Tampa Bay Region of Florida, Tampa Bay Water (the regional water authority) in cooperation with the regional water regulatory agency (Southwest Florida Water Management District – SWFWMD) began considering procurement of seawater desalination as a source of alternative water supply for the region². The purpose of the Master Water Plan, which was adopted in November of 1998, is to develop new sources of water supply to meet demands of new population and commercial growth and comply with a mandate to reduce use of groundwater supply to mitigate further environmental damage. To meet population growth and mandated requirements Tampa Bay Water, which currently withdraws 158 million gallons per day (mgd) from the Floridan Aquifer, must reduce withdrawal to 90 mgd by 2008 while developing approximately 85 mgd of new water supply.

In deciding which new water supply projects to pursue, Tampa Bay Water set the following criteria for new water sources:

• Diversified and sustainable
• Limited new groundwater (reduced total groundwater withdrawal)
• Drought resistant
• Reasonably priced

While desalination was originally perceived to be too expensive, in the final analysis Desalination fared well within these criteria against competing projects and was selected as one of the main means of creating new water supply. Tampa Bay Water elected to procure desalinated water supply by an unconventional method for the water industry in the U.S. -- a build, own, operate, and transfer (BOOT) procurement process. The rationale was two-fold; to harness the creative energy and talent of the private sector available in this specialized area and transfer the majority of the risk in undertaking such a large project, while at the same time maintaining an appropriate level of control over water supply. To implement this process, Tampa Bay Water retained the consulting firm, PB Water, a division of Parsons Brinckerhoff Quade and Douglas. PB Water assisted in developing the request for proposal (RFP) and managing the evaluation of the competing proposals.

The procurement formally began when a request for qualifications (RFQ) process short-listed six teams. This was followed by issuance of a non-prescriptive request for proposals (RFP) for a facility that would initially provide 20-25 mgd, expandable up to 50 mgd of desalinated water supply. Tampa Bay Water agreed to purchase the water under a 30-year contract and left selection of site, technology, process, delivery point, financial structure, and guaranteed pricing to the competing teams. This unique procurement structure implicitly encouraged creativity which was key to realizing such break-through pricing.

Proposals from five developer teams were submitted, carefully evaluated and in March of 1999, a team led by Poseidon Resources³ and Stone & Webster Engineering Corporation⁴ emerged at the top of the selection process in which leading, multinational firms offered various site options, technology options, and financial structure options. The Poseidon/Stone & Webster team proposal included a site and process design that was the best technical and environmental option, the most innovative financial structure, and offered the lowest 30-year life cycle price.

Poseidon Resources and Stone & Webster Engineering Corporation established a project company, S & W Water, LLC and entered into a 30-year take-or-pay Water Purchase Agreement (WPA), with Tampa Bay Water on July 19, 1999. The WPA is a contract which specifies that the project company develop, finance, design, build, own and operate a 25 MGD seawater desalination facility. This will be the largest facility of its size in the western hemisphere and the project represents a unique combination of proven technology, innovative financing, and shared use of utility infrastructure which produced break-through pricing while providing risk transfer away from the public.

There are three key aspects of the project that support the break-through price; 1) sound contractual structure, 2) shared use of infrastructure, and 3) reverse-osmosis technology advancements.

Contractual Structure:

The 30-year fixed price contract obligates the company to provide water at a nominal unit price of $1.71/kgal first year or $2.08/kgal 30-year average. The unit price includes the cost of developing, financing, permitting, building, owning, and operating the system; and a 42-inch diameter 14-mile pipeline to deliver the product water to Tampa Bay Water’s distribution system. After the first year, the price of water is adjusted monthly based on a specified set of indices that closely match inflation of the various components of price. Pricing is based on a common set of interest rate and financing cost assumptions including a 31.5-year term (1.5 year for 18 months of construction) and will be adjusted at financial closure for conditions which exist at that time.

The project incorporates the type of traditional, non-recourse project finance structure similar to that utilized in other infrastructure industries. The project company is 90% owned by Poseidon Resources and 10% owned by Stone & Webster

Engineering Corporation. The $95 million capital cost of the facility will be funded with a 10% equity contribution from the owners and 90% debt.

The leveraged structure is a key component of the pricing. S & W Water, LLC will raise the debt from the tax-exempt capital markets and, if required, through institutional lenders.

Pursuant to the agreement executed July 19, 1999, the company will provide 25 mgd of water by December 31, 2002 and meet defined water quality standards. If the company does not meet the water quantity and quality requirements, Tampa Bay Water and hence its ratepayers do not pay. Tampa Bay Water is not at risk (including payment of debt service) if the water provider fails to perform. Supporting the obligations of the Water Purchase Agreement are a fully wrapped engineering, procure, construction (EPC) contract with customary construction performance bonds, stringent performance test requirements, a operation and maintenance agreement with an operational period performance bond, and business interruption and property insurance.

The contractual structure is unique in several ways; 1) it provides water supply at a guaranteed cost to Tampa Bay Water for 30-years thereby, eliminating ratepayer exposure to rate spikes and many other risks (i.e. schedule, construction, operation) that would normally be borne, 2) on a normalized basis (salinity, temperature, quality, and cost of capital) the water produced by this facility will be the lowest priced desalinated seawater in the world, and 3) it incorporates a project finance structure which eliminates any recourse to the public agency while preserving its borrowing capacity for other activities.

Plant Process & Design:

The plant will be built in southern Hillsborough County of Florida next to the Tampa Electric Company’s (TECO) Big Bend Power Station. The plant will use Reverse Osmosis (RO) process technology. For this location, RO technology is optimal to meet the water quality requirements and environmental concerns at the lowest unit cost. Technological advances in the past ten years have drastically improved the quality of RO membranes. Today, membranes on an equivalent unit basis are cheaper and last longer; they are also more efficient thereby requiring less energy (energy costs are the most significant operating cost item in the price desalting seawater).

The source water will be drawn from the cooling water discharge stream of the power plant. In the first stage of the process 43-mgd of seawater will pass through a pretreatment system consisting of gravity filters and cartridge filters to remove suspended impurities. Then the filtered seawater will be pumped through the RO membranes, which are at the heart of the process. The membranes are long, cylindrical tubes filled with fibrous membrane that act as pressure filters and separate the unwanted molecules from those comprising the elements of potable drinking water.

The 25 mgd of high purity drinking water produced by the plant will be pumped to Tampa Bay Water’s system for blending and distribution. The resultant 17-18 mgd of seawater concentrate byproduct will be combined with the 1.4 billion-gallons per day of cooling water from the power plant to be discharged into the receiving canal and eventually to the Gulf of Mexico. Current plans call for the plant to be expanded to a 35-mgd facility in 2007.

Another key component to the unique nature of the process and resultant pricing is that the project takes of advantage of the synergies available through co-location with a coastal power plant. This allows the project to use intake and discharge systems already in place, thereby reducing the need for new systems and making the project environmentally compatible. It also means that no new high voltage power lines need to be built. Finally, the 14-mile pipeline to the intertie into the TBW system is co-located with the electric transmission lines, thereby eliminating the need for relocating existing structures.

The project represents a progressive way of procuring water and provides many benefits to Tampa Bay Water and its ratepayers. The process has received intense interest locally, nationally, and internationally. At financial closure, which is expected to occur in November of 2000, the project will be the largest privately developed and financed drinking water project in the U.S.:

• The non-traditional procurement method resulted in lower unit costs than previously experienced anywhere else in the world;
• This non-traditional, drought proof source of water will likely become a more viable solution for coastal communities;
• The benefits available by using existing infrastructure available through co-location with power plant are significant.

The project financial structure closely resembles the project finance structure used effectively in developing large infrastructure projects in other industries. There are vast resources within the private sector and capital markets extremely interested in supporting financial structures as developed for the Tampa project. Whether procuring new water supply using a structured finance approach and implementing the "minor improvements and subsidiary discoveries" by private industry that has made such break-through pricing possible turns into an epoch-making event is to be determined; but an epoch-making idea is in hand, and being implemented now.