An L.A. company hopes that its scaled-down proposal for a water storage project in the Mojave Desert is small enough that environmentalists and politicians won't kill it as dead as they did last time.

But so far, there's little indication that may happen.

In fact, soon after Cadiz Inc. announced plans to store and pump water at a desert underground reservoir, U.S. Sen. Dianne Feinstein who played a key role in defeating a much larger version of the project in 2002 told the Business Journal that if the proposal by Cadiz risks environmental harm to the aquifer, she will use all her power to block it.

"I am deeply concerned," Feinstein said in a statement issued in response to a Business Journal inquiry. "Although I have not yet seen any formal proposal, I will be looking into this very carefully.

"If Cadiz intends to drain the water from under the desert, destroying the Mojave ecosystem, I will do everything I can to stop it," she said.

Her concern was spurred by the recent announcement by Cadiz that it was launching a smaller-scale version of a controversial desert water storage plan that collapsed seven years ago.

The recently announced $200 million plan, which if approved could begin in 2013, would have Cadiz storing water from the Colorado River in an aquifer underneath the company's land holdings in a remote portion of the Mojave. Cadiz would then release and sell the water as needed to four municipal water agencies and a private water supplier serving portions of four Southern California counties.

The announcement of the plan's revival sent Cadiz's stock soaring 45 percent to $12.50 per share.

Cadiz has several things going for it. For one thing, the project's backers point out that the state has a dwindling supply of water.

Also, the company is touting potential environmental benefits of its new plan. It would transfer significantly less water than under the previous proposal. And the company claims the project would reduce the need to pump water from the ecologically stressed San Francisco Bay-Sacramento River Delta region to Southern California.

What's more, Cadiz and its politically connected founder and chief executive, Keith Brackpool, have won support from Gov. Arnold Schwarzenegger and many Democratic elected officials.

"When it comes to water in California, it's all about politics," said Neil Berlant, portfolio manager of PFW Water Fund, who has tracked Cadiz for several years as an independent analyst. "Whether this project succeeds will depend on how effective Cadiz is at playing the political game."

But like the previous proposal, this plan is likely to face fierce opposition not only from Feinstein, who has been a champion of Mojave Desert preservation, but also from environmentalists. Their opposition helped sink the previous proposal seven years ago, and they contend the new plan would draw down the aquifer and harm the desert ecosystem.

"This appears to be mining groundwater from the aquifer system," said Simeon Herskovits, senior environmental attorney with Advocates for Community and Environment in Taos, N.M., who was the lead environmental attorney opposing the earlier Cadiz project. What's more, "because they would be removing moisture from the soil on the lake bed, it could cause tremendous air pollution problems from frequent dust storms."

Political lessons

The last attempt by Cadiz was a 50-year water deal with the Metropolitan Water District of Southern California that could have netted the company up to $1 billion.

Under that deal, Cadiz would have stored up to 1.5 million acre-feet of excess Colorado River water in its remote desert underground aquifer that could be released to the MWD in dry years through a $150 million, 35-mile pipeline built by MWD and Cadiz. The water would then flow through the Colorado River Aqueduct, which is owned and operated by the MWD, to urban customers.

But the plan became controversial because the company would also have been allowed to sell up to another 1.5 million acre-feet of native water from the aquifer to the MWD in any given year. (One acre-foot is equivalent to 326,000 gallons, enough to supply a typical household of four for a year.) Environmentalists contended that could drain the aquifer, cause a collapse of the desert floor and destruction of the ecosystem.

As he sought approvals amid mounting opposition, Brackpool cultivated an extensive network of political contacts. He donated more than $300,000 to the political coffers of then-Gov. Gray Davis and was appointed as Davis' chief water adviser. He also hired a number of high-profile consultants, including current Los Angeles Mayor Antonio Villaraigosa, who was then a former assemblyman and preparing his run for the Los Angeles City Council, and former U.S. Interior Secretary Bruce Babbitt. Susan Kennedy, who now serves as Schwarzenegger's chief of staff, was also a company consultant.

There were also financing concerns. Cadiz had assumed substantial amounts of debt for farming operations both on the property and elsewhere. As a result, MWD officials were concerned that Cadiz would not be able to fund its portion of the pipeline.

In October 2002, the MWD board narrowly voted to reject the project, crashing Cadiz's stock.

Tim Shaheen, Cadiz chief financial officer, said debt was no longer a significant problem after the farming subsidiary's assets were sold out of bankruptcy. The first substantial debt payments the company now faces aren't until 2013.

In its most recent quarterly filing, the company acknowledged it only has enough working capital to last 12 months. After that, Cadiz will need to raise money, seek loans or cut operating expenses.



Water shortages

Cadiz is hoping that the state's need for more water supplies will trump all other political and environmental concerns. In recent years, a series of agreements and environmental restrictions have put increasing amounts of water off-limits throughout California. A three-year statewide drought has further stressed water supplies.

"This is causing people to redouble their efforts and look for sustainable sources to add water to the grid," said Scott Slater, general counsel for Cadiz.

Outside analysts agreed that water shortages in California are a major difference between now and seven years ago.

"Cities and water agencies right now are very concerned about dire water shortages," said Larry Kosmont, an economic development consultant who served on the MWD board when the Cadiz deal first surfaced in the mid-1990s. "Water prices are going up everywhere and we're seeing mandatory conservation measures spreading. If there's a resource out there that can help defray some of this, you bet cities and water agencies will look at things differently."

Slater would not name the four municipal water agencies that have signed letters of intent with Cadiz, saying that information would become public as the environmental review process moves forward, perhaps as early as this fall. The four municipal agencies serve a total of 2 million customers, according to the Cadiz announcement.

The Los Angeles Department of Water & Power, the largest municipal water agency in the state, has not signed a letter of intent with Cadiz, a DWP spokeswoman said in an e-mail to the Business Journal last week.

The Cadiz announcement identified the sole private company in the deal as Golden State Water Co., which provides water to 1 million customers, mostly in Los Angeles, Orange and San Bernardino counties.

The water would be pumped through a 44-mile underground pipeline on a right-of-way that Cadiz recently leased from the Arizona California Railroad. The pipeline would connect to the Colorado River Aqueduct, where it would be transported to urban customers. MWD spokesman Bob Muir said the agency's board would consider a Cadiz proposal to move water through the aqueduct provided there is enough capacity and agreement is reached on a price.

Cadiz executives hope that the smaller draw-downs would alleviate some of the concerns from environmentalists.

"The massive withdrawals associated with the Cadiz/MWD plan were definitely a challenge," Slater said. "This plan has nothing like that."

The rise in the company's stock price is an indication that the plan looks promising to investors.

"This is a more reasonable project with more reasonable costs, so the markets have concluded that there's a much higher chance of this project going forward," said Ryan Connors, an investment analyst with Boenning & Scattergood Inc. in Philadelphia.

THE ISSUE

Cadiz Inc. is reviving a project that would provide water from an underground aquifer in the Mojave Desert to the L.A. area in drought years.

BACKGROUND

Cadiz's proposal was rejected years ago. But now there's a water shortage, and the revived project is much smaller.

THE NEXT STEPS

The company needs environmental approvals and an agreement with the Metropolitan Water District to use its aqueduct. Then Cadiz must negotiate with participating water agencies.

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