Diving Into Water - part six: the expenses we are facing

the why behind increasing rates

Photo by Gilles Rolland-Monnet on Unsplash

In my last post, I said I would get into the rate increases. I was wrong! When I started looking for information about what council had to consider I realized there was more to share. Nothing is cut and dried here and I want you to have all the details of this complex topic. Here’s the next piece of the puzzle written as I watched a 2023 presentation to the council regarding the 2024 budget where the raise in water rates was included. I had to decide if I should work on my taxes or write this. Tough choice. I hope you did something more fun like organizing your sock drawer or cleaning your oven.

WHAT’S AFFECTING COSTS?

Aging infrastructure - should be replaced at or just before the end of its useful life - we have a lot of infrastructure that falls into that category. Note this is not unique to Lafayette.

Cost escalation - goods and services needed to provide water are increasing in cost.

Changes in the reliability of our water supply, such as changes in snowmelt/ runoff timing and more variable precipitation. By the way, 80% of the precipitation in Colorado falls on the Western Slope, and 90% of the water in Colorado gets used for agriculture.

Growth - more people = increased need for services.

Old iron water pipes rust and break requiring public works staff to dig up streets for repair. Cha-ching.

Changes in demand - Summer peak use keeps extending, as more water is used earlier and later in the season for outdoor irrigation.

RAW WATER STORAGE - WHAT WE HAVE AND WHAT WE NEED

The city currently uses about 5000 acre-feet of water per year. An acre-foot is roughly a football field covered with a foot of water. We have about 5100 acre-feet of storage space, so about one year’s supply.

You can imagine that if we have a serious drought we could be in trouble because we only have enough water stored to get us through a year. Public Works Director Jeff Arthur says a three-year supply of 15,000 acre-feet would be more appropriate.

Adding together all of the pending water projects that are currently planned or in the works would get us to about 14,000 acre-feet. You can see them here I have also included them at the bottom of this piece. This would be close to the quantity of water staff says we need on hand to serve our current population. Due to climate change and increased temperatures leading to more outdoor irrigation Director Arthur thinks we should probably be aiming for 18,000 acre-feet of storage. He says if you factor in growth we should probably be in the ballpark of 22,000 acre-feet of storage.

WATER TREATMENT - ANOTHER BIG TICKET ITEM

Back to that outdoor irrigation. When we think of treating our water so we can safely drink it we might not connect that to summer watering. But of course, all the water that comes to our homes has been treated so the water we use outside is the same as that which we drink inside. That means during the summer when water usage is at its peak the water treatment plant is cranking, as we see with electricity and air conditioners at that time of year. I’ve never thought of it in these terms before. I think of the amount of water being used but not the extra processing that has to happen. Director Arthur explains “Water plants are built with separate treatment ‘trains’ so that you can still meet demand with one train out for repairs, but we currently need every part of the plant running full tilt on a peak day.”

Peak water use in the summer due to outdoor irrigation is around 10 million gallons a day. A million gallons is around three acre-feet, so three football fields with water 10 feet deep per day with an increasing number of days at that usage. Our water treatment plant is aging but it can hit that amount if everything is running smoothly. But if anything breaks during peak demand there is very little time to fix it because there are no extra trains ready to roll in and take over.

Earlier I mentioned wear and tear of equipment. During the presentation to council Director Arthur mentioned what he called a recent catastrophic event, with the backup generator (required by the state) failing causing staff to rent one at $5000 a week until a fix could be found or a new generator was purchased. He also mentioned situations where holes had to be cut in the roof of the plant to lower down parts for emergency repairs.

Staff would like to add about 10 million gallons a day to the treatment capacity of the plant. Director Arthur said this would leave some room for growth. He said new tap fees from growth could pay for that and that it also provides more reliability for current customers. However, he said they don’t know what could be in the future regarding new regulations. Our plant uses conventional treatment methods. There could be unfunded mandates at the federal level that require modernizing technology. This already happened at the water reclamation plant.

RED FLAG ALERT!

Having watched the city for as long as I have I see big ole’ red flags when I see any talk of using future development to fund anything. Rooftops don’t pay for themselves, saying they could pay for those improvements to the treatment plant overlooks all the other impacts growth has on city services, from water to police and fire, the roads, the library, the rec center, and so on. It’s kinda part of why we are here in the first place, isn’t it?

MAJOR WATER UTILITY EXPENSES IN OUR FUTURE

In 2023 I shared a list of city commitments for water-related projects. I later followed up with Director Arthur and he gave me an updated list of each project, its purpose, and expected cost. See below for his explanation. You can also read about them in this post. Hint, it’s a huge amount of money! I’ve seen cost estimates of over $100 million. Way more than the money coming into the water funds could have covered. Hence the rate increases. Keep in mind our fund was only bringing in about $10 to $11 million a year when staff began to analyze the water situation.

This chart shows you what the payments for the projects look like on top of normal operating costs.

WHAT WE HAVE TO PAY FOR

I got a description of all the water projects from a 2020 council presentation conducted by Director Arthur and other staff members. I shared that with you in a post in May 2023. A few weeks later Director Arthur kindly updated the information and numbers for projects on that list when I followed up with him. Here’s what he wrote.

If you don’t want to bounce around from post to post here is a combined version of that information.

Director Arthur: Most of these numbers have changed since 2020.  Not all of them have gotten worse . . .

From the 2020 executive summary:

“The City’s estimated outstanding costs for water supply projects is approximately $143M (not including the substantial dollars spent to date).

Major water supply projects include: NISP $87M

Windy Gap Firming $6M ($600,000 debt service to be paid annually over 30 years = $18M total)

Goose Haven Reservoir Complex Expansion $47.5M

Gross Reservoir Expansion $2.4M

When considering debt financing, a rough rule of thumb is that a $1M bond requires $100,000/year in debt service payments. As with any other types of debt, the total amount paid is substantially more than the construction cost due to interest payments.”

From the 2020 executive summary:

GOOSE HAVEN RESERVOIR COMPLEX EXPANSION - INCREASE STORAGE

“Goose Haven Reservoir Complex Expansion

This project involves construction of additional storage capacity at the City’s Goose Haven Reservoir Complex located on SH287 near Jasper Road. The project does not involve “new” water and instead is intended to increase the City’s ability to utilize existing water rights. Under current conditions, there are scenarios where the City has rights to divert additional water from Boulder Creek, but is unable to do so because of lack of storage. A component of the Goose Haven project is the development of a water rights “exchange” that would allow the City to expand its ability to divert water from Boulder Creek through managed discharge of treated effluent from the City’s Water Reclamation Facility. This concept involves construction of an additional reservoir at Goose Haven, a 7-mile pipeline, two pumping stations, and a secondary disinfection system. While the project will have substantially higher operating costs than other water sources, requires substantial new infrastructure, and will only be functional during a limited range of scenarios, it was previously determined to be a viable project.

The Goose Haven Reservoir Complex Expansion remains in various stages of planning, design, financing, and construction. The assumptions previously used to determine costs/benefit focused on creating a perceived inexpensive water source to expedite the pace of development in the City and do not reflect actual City costs. Further, the project involves an unconventional construction contract that reduced the City’s payments during the initial construction period, but requires a significant cash outlay upon completion, including approximately $16M in remaining construction costs and a required dedication of water rights to the construction contractor currently estimated at $15M (or equivalent cash payment to the contractor). The construction of infrastructure required to support the exchange component, including construction of the reuse pipeline, pump stations, and disinfection facility, has been delayed pending development of a funding strategy.”

Director Arthur’s 2023 update:

Goose Haven Reservoir Complex Expansion $47.5M

This project has a very unusual contract and payment structure.  The City made an arrangement where a company is operating a gravel mine on the property and will convert the excavations into reservoirs at the conclusion of the mining.  The contract included a cap on annual payments, but requires that the balance be paid upon substantial completion (unlike a conventional bond where the project could continue to be paid off after completion).  Substantial completion is expected in 2025.  We are continuing to look at options to reduce the amount due in 2025 and the financials presented at the workshop were based on a substantially lower number.  I’m thinking the $47.5M may also have included the associated reuse pipeline from the water reclamation plant to Goose Haven.  The information that was recently presented proposed debt financing for the pipeline (about $2M/year for 20-years) which helps reduce the near term rate impacts. 

From the 2020 executive summary:

NORTHERN INTEGRATED SUPPLY PROJECT (NISP) - INCREASE SUPPLY

NISP Website

“Similar to Windy Gap, NISP is a proposed regional project led by Northern Water. NISP involves construction of several major reservoirs and pipelines that will divert and capture water from the Colorado River and deliver it to communities on the Front Range. As a partner in the project, the City is assessed for costs associated with design and permitting on an ongoing basis. Current estimates are that the City’s share of actual construction will be approximately $67M. This level of cost would need to be financed with an annual debt service payment of approximately $6.7M annually for 30 years. An additional $20M in costs for pipe infrastructure to deliver NISP water to the City is also anticipated.”

Director Arthur’s 2023 update:

Major water supply projects include NISP: $87M

JA: We are planning to debt finance NISP.  Current estimates are in the ballpark of $7M/year for 30 years.  $7M per year of additional cost is still huge in a fund that currently only brings in about $10-11M per year.  NISP recently got it’s federal permit, but most recent reservoir projects have had years of litigation (and associated construction cost escalation) and large settlement payment.  We need to plan for as early as 2025, but there is a good possibility that this project will hit at a later date at a higher cost. 

From the 2020 executive summary

WINDY GAP FIRMING PROJECT - IMPROVE RELIABILITY

“Similar to the Goose Haven project, the Windy Gap Firming Project represents an effort to improve the reliability of water supply from an existing source. The Windy Gap project diverts water from the Colorado River basin and delivers it to the front range through much of the same infrastructure used to deliver C-BT. The size of the actual Windy Gap Reservoir is such that it has not been able to provide a reliable yield. The firming project involves construction of a new reservoir called Chimney Hollow that will allow additional storage during wet years that can then be delivered to the front range during dry years. The City had initially planned to fund its share of project construction through a one-time payment of approximately $6M in 2020. Based on the lack of a clear financial plan to fund the city’s overall water needs, the City recently signed an agreement to finance the project over 30-years with an annual debt service of approximately $600,000.”

Director Arthur’s 2023 update:

Windy Gap Firming $6M ($600,000 debt service to be paid annually over 30 years = $18M total)

JA: I’m thinking this number was before the project was financed.   The project was group financed and interest rates in 2020 were much, much more favorable than the rule of thumb noted below.  Our annual debt service on Windy Gap is actually $200k/year for 30-years. 

GROSS RESERVOIR EXPANSION - INCREASE SUPPLY

From the 2020 executive summary:

“Gross Reservoir is owned and operated by Denver Water. Denver Water is currently pursuing the permitting and legal processes to significantly expand the reservoir to help meet its long-term water supply needs. In partnership with the City of Boulder, the City of Lafayette negotiated an agreement in which Denver Water will provide capacity in the expanded reservoir to support in-stream flows in South Boulder Creek and delivery of water to Baseline Reservoir during winter months. The City’s participation in the Gross Expansion involves a relatively small amount of water and a relatively minor expenditure, but was determined to be of unique strategic value in supporting the City’s overall portfolio. Construction costs are estimated at approximately $2.4M.”

Director Arthur’s 2023 update:

Gross Reservoir Expansion $2.4M

JA: This is still correct.  We have a final payment of $1.2M in 2024.

From the executive summary:

When considering debt financing, a rough rule of thumb is that a $1M bond requires $100,000/year in debt service payments. As with any other types of debt, the total amount paid is substantially more than the construction cost due to interest payments. 

Director Arthur’s 2023 update:

JA: This is a fairly old rule of thumb and isn’t indicative of the extended period of low interest rates we’ve experienced.

JA: Water Treatment Capacity – This one isn’t on the list above.  The City's water treatment plant is close to maximum capacity which is problematic for reliability and not just growth.  If something breaks (which things regularly do) during peak summer months, there is very, very little window to get it fixed.  Water plants are built with separate treatment "trains" so that you can still meet demand with one train out for repairs, but we currently need every part of the plant running full tilt on a peak day.  We have been using $25M as an estimate for a new plant and/or expansion of the new plant, but are in the process of commissioning a study to better understand options and costs.  If the City bonds for the plant (which is typical for that type of project), tap fees assessed to new customers over the life of the bond could be used to help pay the annual debt service.

I hope that’s helpful.  I’m happy to discuss or answer any questions.

My next post will finally get into the rate increases!