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HomeMy WebLinkAbout04/16/1991, 1A - WATER SUPPLY STATUS AND DECISION ON SHORT-TERM DESALINATION PROJECT (2) This report supercedL ay ADDENDLY . MEETING DATE: 11a°����i�v�[IiIII�Pl�lill city o� San tuts OBISPO April COUNCIL AGENDA REPORT aftZe ITEM NUMBER: I FROM: William T. Hetland, Utilities Director Gary Henderson, Utilities Engineer 6k 4u Sue Baasch, Administrative Analyst .; SUBJECT: Water Supply Status and Decision on Short-Term Desalination Project CAO RECOMMENDATION: None at present. Please note that rainfall/reservoir storage data in this report reflects status as of March 1, 1991, and does not take into account the March rains, run-off and increase in underground and reservoir storage. The forthcoming recommendation will be based on the latest information available prior to Council decision making. SUMMARY This report provides information in order for the City Council to make a "go/no go" decision on the desalination project. As of March 1, 1991, there was 4,828 acre feet of available water for the City's use. The groundwater production had stabilized and yielded around 1800 acre feet per year. This would provide water for the City until the fall of 1992, based on the current rate of water conservation at 45%. Staff has proceeded with the desalination project The basic project layout is about complete and the request for proposals for the reverse osmosis unit is almost finished. The project is being designed for 5600 acre feet per year with participation for the City of Morro Bay and the California Mens Colony. Comments on the Notice of Preparation for the Environmental Impact Study will be received March 29, 1991. Discussions with PG & E have been going smoothly regarding the lease of the project site and use of existing facilities. The project is estimated i to cost$2900 per acre feet or about $9.4 million per year or $46.9 million over the five year life of the project. If funded by rate increases only, this would result in a water rate increase of over 252% with single family bills going from an average $20 per month to $70 i per month. No staff recommendation is presented at this time because of the constantly changing nature of the water storage situation. I BACKGROUND At the November 27, 1990, City Council meeting, the status of the City water supplies was reviewed, and staff presented additional water resource options. Since desalination was the only non-rainfall dependent option, Council directed staff to begin the development of a short-term desalination project for the City. It was necessary to proceed with the development of the desalination project because of the time it takes for such a major facility to become operational. There was also a possibility that high winter rains and the subsequent runoff could replenish our reservoir storage. Council, therefore, asked staff to return in April after the winter rains, to provide an opportunity for review of water supply beforegiving a "go/no go" decision on proceeding with the short-term desalination project. In the interim, the staff was directed to proceed on the design of the desalination plant. The purpose of this report is to present the current water status of the City and to provide an update on the status of the desalination project.. _ / city o� san Luis osispo COUNCIL AGENDA REPORT Supply Status and Decision on Desalination Page 2 Status of Previous Council Recommendations Council took specific actions at the November 27, 1990 meeting regarding water policies and staffing and water supply projects. The status of those actions is listed below. Water Policies and Staffing 1. Water Policies - Council adopted a multi-source water supply policy. 2. Retain Contract Wastewater Reclamation Coordinator - the position has been advertised and interviews are currently being held. An appointment is expected i shortly. 3. Retain contract Water Projects Manager - the position has been advertised and interviews are currently being held. An appointment is expected shortly. j Water Supply Projects 4. Salinas Reservoir Expansion - per Council direction, this project is on hold until staff can contact north county communities to review the project feasibility. 5. Desalination - the status of this project will be reviewed later in this document. 6. Hansen and Gularte Creek-a consultant has been hired to perform the environmental review of the project. The draft report is expected by May, 1991. The City is currently measuring the creek flows to develop background data. WATER SUPPLY STATUS As of March 1, 1991, the City of San Luis Obispo had 7,533.19 of (acre-feet) G OU A PROD MOON ! of water in reservoirs, of which 4,828.19 a"RLU5 of was usable storage. Salinas Reservoir storage was below minimum pool at 1,605.0 of and therefore did not contribute to the City's usable storage. The City's share of Whale Rock Reservoir totalled 5,928.19 4 less i minimum pool of 1,100 4 equalling usable storage of 4,828.19 af. Groundwater well production (Figure 1) has begun to stabilize over the past oo few months. Currently, groundwater provides about 120 of per month to City 19MB Proftcdm customers. Though recent studies have ®� Ewa= . ®^�..e•� indicated the basin is in a temporary ®e.�. ®rwy�.p overdraft, the City has been Figure 1 Groundwater Production, investigating locations for new wells and July 1990-91 has begun negotiations for the use of several private wells. Staff is trying to ��02 "'�'' ►�O�III�P111 city of San tins OBISPO MMZs COUNCIL AGENDA REPORT Supply Status and Decision on Desalination Page 3 spread out the location of the wells to minimize potential local impacts and possibly increase yield slightly. Groundwater currently provides about 38% of the total water requirement of the City. Mandatory water conservation is still very effective as shown by the Water Water Conservation Report Card Conservation Report Card (Figure 2). 90/91 use compared to 1987 Base Conservation continues to be very high i with the month of February at 36% of the 1987 level. Water use was reduced by an average of 41% for the prior eight months. Conservation for the t, j year ending December 1990 was 44%. PROJECTED WATER SUPPLY a� I +M&O Op Oa rbr O.e Jn M w q wY H, Y,D The Total Storage Curve (Figure 3) is Pwowftcm�Crroa1nniLdy19M part of the City's Annual Water ®P&,f,,,,Wahl®won WWW OWiL Operational Plan and the key indicator the City follows in managing its water Figure 2 Conservation Report Card resource. i i It is a model to estimate the City reservoir water storage based on historical water use, reservoir data and available groundwater supplies. The curve also shows the different action levels at which increasingly stringent conservation measures are implemented. The Total Storage Curve shows if the City were to experience two more dry years similar to 1989-90, the reservoir levels will reach the minimum pool at both reservoirs in the Fall of 1992. This projection is the same as presented in November. It was the hope of all that we would obtain adequate rainfall this past winter. Unfortunately, that was not the case and our reservoirs are still very low. Based on our projections, a continuance of the drought could result in the City running out of water in the fall of 1992, unless additional water resources are developed. MULTI-SOURCE WATER SUPPLY PROJECTS The City has adopted a policy of developing a number of complimentary water sources. This will provide the greatest degree of flexibility in operation and safety of supply to the City. This policy has resulted in the City reviewing the following water supply projects. EXPANSION OF SALINAS RESERVOIR The City retained the firm of Woodward Clyde Engineers to perform a feasibility study for increasing the storage at the Salinas Reservoir. The study covered three basic areas; /-3 II� ��H;mtl1111�IpnUu�i��1► city of San 1U1S OBISPO sii% roUNCIL AGENDA REPORT Supply Status and Decision on Desalination Page 4 geotechnical and dam stability, TOTAL STORAGE FEBRUARY, 1991 ! hydrology and 35% CONSERVATION; 50% AFTER 8/91 costs, and permit requirements and 19- significant 17 environmental ' i s s u e s i i identification. ,� -++ The stability of the ' dam during an j critical soz earthquake and its 6. ability to handle a m a x i m u m probable flood was AUnk=nPool r e v i e w e d0. . t j , ' 71W ,� ,� Im T� ,� ,�, w, 719+ ,m, ,lam �� ,� ,m Numerous design PROJECTION WITH 1,800 AF WELLS concepts were used to evaluate the feasibility of C Original Projection -i*- Actual Level — Adjusted Model raising a n d widening the spillway including Figure 3 Reservoir Storage Model, February 1991 operable gate • alternatives, fixed Table I YIELD ESTIMATES, SAUNAS RES. barrier alternatives, and spillway Spillway Increase (ft) 10 20 modifications. The designs were evaluated on the basis of raising the existing spillway by Storage volume (al) 29,330 39,300 10 feet or 20 feet. Table I presents the yield i estimates with these modifications to the Total Yield (afy)* 750 1,650 spillway elevation, assuming coordinated . with cooperative use operation of Salinas and Whale Rock Reservoirs for maximum benefit. Raising the spillway would inundate additional areas behind the dam. This increased body of water would enhance both the fishery and the habitat for aquatic wildlife. It would also impact and require relocation of some of the existing recreational facilities around the reservoir. Water quality from the Salinas Reservoir would not likely change after increasing the level of the spillway. The initial environmental analysis has not indicated any significant environmental impacts that would preclude development of the project. Initial discussions with the State Water Rights Board indicate the City's water right permit would not have to be amended. Approvals would have to be obtained from the Army Corps of Engineers, the California Division of Safety of Dams, and the State Department of Health Services. ui��►�ill�tllllll��jll��ll city of san Luis oBispo COUNCIL AGENDA REPORT Supply Status and Decision on Desalination Page 5 This is a long-term project which is rainfall dependent. Total cost of the project would vary from $2.7 million to $7.25 million. This translates to an annual supply cost of $208 to $506 per af. Additional costs would be incurred for treatment and distribution. The project is currently being reviewed with north county communities before the draft environmental impact report and project design begin. i HANSEN AND G ULARTE CREEK Hansen and Gularte Creeks are two small creeks which run off the Cuesta Grade north of San Luis Obispo. The City obtained water rights on the creeks from private property owners in the early 1900's. This supply was used for many years by adding chlorine for disinfection and discharging the water into Reservoir #1. This practice continued until the State Department of Health Services required full treatment before the water could be consumed. A treatment system would require a package plant, new inlet transmission piping and control structure, chlorine feed system and contact basin, and a filter backwash recovery system. The total cost of this project is estimated to be $523,000 including 20010 contingencies and engineering. It is estimated the yield from these two creeks would be about 435 afy (acre feet per year). One option is to include the Firing Range Well in Reservoir Canyon in the treatment plant. This well has only been used intermittently because of problems meeting the State's turbidity requirements. By piping this water to the package plant, the total yield could be increased to approximately 560 afy. The environmental impact report is currently being prepared. STATE WATER PROJECT The State Water Project is a system of reservoirs, pumping plants, canals and pipelines, and power plants to deliver water from Oroville Reservoir and the Sacramento-San Joaquin Delta to the State's 30 water service contractors. To date it has been a reliable source for municipal and industrial contractors. San Luis Obispo County Flood Control and Water Conservation District has an annual entitlement of 25,000 afy in 1990. It is proposed this water would be delivered to San Luis Obispo together with Santa Barbara County's entitlement through the Coastal Branch of the California Aqueduct. It is estimated to cost $490/acre foot including treatment.The draft EIR for this project has been completed and undergone extensive public review. The public comment is now being reviewed by the Department of Water Resources and the final EIR is scheduled to be issued in the spring of 1991. An advisory election on the State Water Project will be held on April 9, 1991. i °AT41111111 1l11 city Of San tins OBISPO COUNCIL AGENDA REPORT Supply Status and Decision on Desalination Page 6 GROUNDWATER BASIN ANALYSIS The San Luis Obispo Groundwater Basin Evaluation was prepared by Boyle Engineering. The purpose of this study was to define the basin hydro-geology and to assess the City's current groundwater development program. Their conclusion is that during the period of i 1978 to 1990, the basin has not been in a state of sustained overdraft. The long-term i records indicate water levels do decline significantly during drought periods but the basin recovers quickly. j The estimated storage capacity of the basin is 23,900 af. This is essentially in agreement with the California Department of Water Resource's 1958 published estimate of 22,000 a£ The estimate of "sustained yield" of the basin is defined as the maximum quantity of water that is available from groundwater on an annual basis. Boyle estimates the sustained yield to be 5,900 afy. A large portion of the basin underlying the downtown consists of a relatively thin layer, characterized by wells of low to moderate yield (100 gpm or less). Higher yielding ground water zones exist in the southern portion of the City, with wells up to 1,000 gpm. However, this area is heavily irrigated for agricultural purposes with high competition for the groundwater. The current groundwater program uses six municipal wells and two or more irrigation wells. Approximately 40%, about 120 of per month, of current domestic demand is being � met from groundwater supplies. Four of the existing wells are now showing sharp declines in pumping water elevation and are being operated on a rotation basis. Based on the above analysis, the opportunity for additional well development within the City limits during the current drought is limited. The City is still pursuing the use of some private wells in order to spread out the wells within the basin and to obtain a site for relocation of the existing carbon filtration tanks. COASTAL STREAMS DIVERSION PROJECT The Coastal Streams and Storage Project is a joint project with the Whale Rock Commission and the City of Morro Bay. The project proposes a series of small seasonal dams on the three coastal creeks between Morro Bay and the Whale Rock Reservoir. High runoff flows during the winter would be pumped back to the Whale Rock Reservoir for storage. The study includes review of the environmental impact on the streams as a fishery and habitat. Due to inadequate runoff these past three years, the fisheries stream analysis has not been performed. The City contracted with Leedshill-Herkenhoff to review the project-in light of the City's current water resources and determined the direct benefit to the City of San Luis Obispo. Their analysis shows the City could receive from 60 afy up to 230 af. The limiting factor in the yield of the project for the City is a constraint in the Whale Rock pipeline. The cost of the project is $83 million and water supply costs range from $1,900 to $9,500 per l'� �r��1j i��IfIIfII�I�Nuj1���I1 city o� San WIS OBISpo A MiZe COUNCIL AGENDA REPORT Supply Status and Decision on Desalination Page 7 af. Additional costs would be incurred for treatment and distribution. Since the fisheries analysis has not been completed the project is basically on hold. However, due to the limited yield, the high capital cost and the high water processing costs, this project appears to have limited feasibility. However, a selected project, the San Bernardo Dam project, which might be a joint project with Morro Bay, may have greater feasibility and will continue to be investigated j NACIMIENTO RESERVOIR The Nacimiento Reservoir is owned and operated by the Monterey County Flood Control and Water Conservation District. San Luis Obispo County Flood Control and Water Conservation District has an agreement with Monterey County for 17,500 afy. About 1,300 j afy are used around the lake area, leaving 16,200 afy for distribution to other parts of the County. There are currently no specific allocations for the Nacimiento water to the other agencies in the county. The probability is that the North County will desire to retain a substantial portion of the available water. Due to the length of the supply line to San Luis Obispo and without other agencies to share in the project, the cost to the City could be quite high. There are no current estimates of cost for this project.. With the primary focus on the other water supply alternatives, water from the Nacimiento Reservoir will probably not be developed in the short term. i Monterey County has recently completed a study of additional water resources. A number I of the options involve Nacimiento Reservoir and these may provide the opportunity for joint i participation with other agencies. (Note: At their meeting of March 19, 1991, the City Council requested staff do additional work on Nacimiento Reservoir as a potential water supply.) TANKER DELIVERY OF WATER Table I1TANKERED WATER COSTS Term AFY 'Cost/AF In April, 1990, the City of Santa Barbara solicited 5 yr 2,500 $6,900 proposals to evaluate tankering of water for two 5,000 $4,000 contract duration possibilities: (1) a five-year 7,500 $3,200 duration with a commitment to purchase a minimum 13,600 $2,700 of 2,500 of of new water yearly for the first three 10 yr 5,000 $3,100 years and to purchase water thereafter on an as- 10,000 $2,500 needed basis; and (2) a ten-year duration with a commitment to purchase 2,500 afy for the first three 25 yr 10,000 $2,000 years and on an as-needed basis for the final seven * does not include capital costs years. The RFP further required the successful water supplier to be able to supply up to 5,000 afy for the full five or ten-year contract duration, if needed. The cost of the new water in the proposals being evaluated by Santa Barbara are presented in Table II. These costs do not include the cost to construct off-loading facilities, a requirement if the City of San Luis Obispo were to consider this alternative. The City's '� ��H►(�IIVIII�I' l���jl city o� san tins OBlspo COUNCIL AGENDA REPORT supply Status ano vecision on Desalination Page 8 treatment plant capacity now is only 11.5 mgd with a storage capacity of 4 mgd. Tankering is probably not viable as a source for a single city but may be as a regional source; with a long-term contract for 20,000 afy the cost might be down to $1,500 af. The volume of water required to make the option economically feasible appears to be much greater than the City needs. Importing water with tankers does not appear to be a viable quick, inexpensive drought relief measure; however, it might be viable as an option for long-term supply when compared with other options. Increased interest in the possibility of supplying tankered water has been expressed recently by some Canadian-based firms. i WASTEWATER RECLAMATION In the past, reclaimed water was not considered a cost effective water supply and subsequently was not included as a viable option in the water management plan. The changing environment in water resources, combined with the high quality water that can be produced by upgraded wastewater treatment facilities, has made reclaimed water a potentially cost effective and available water supply. Reclaimed water must now be considered a component of the overall water management plan for the City. In order to facilitate the development of wastewater reclamation projects, the City is interviewing for a program coordinator who would: - identify potential uses and users of reclaimed water, - evaluate each potential use based on cost and benefit to the City, - identify capital improvements necessary for installation of the required infrastructure, - explore available grants and loans for funding options, and - develop a pricing structure and accounts for the sale of the water. Program development will be coordinated with the completion of the wastewater facilities improvements to allow water reclamation to begin as soon as tertiary water is available. DESALINATION Most of the City staff efforts have been directed toward implementing a short-term desalination project. A city-wide working committee composed of representatives from Utilities, Finance, Community Development, City Attorney and Administration have been working on implementation of the desalination project since November. A Desalination Feasibility Investigation was prepared for the City by James M. Montgomery Engineers. The study concluded that the preferred project would be a short-term reverse- osmosis desalination facility located on Pacific Gas and Electric's Morro Bay Power Plant property. Attachment A shows the tentative project layout. A number of sites were reviewed as were different pipeline alignments. Costs and environmental issues were evaluated in the .g e d1�����IVIIIIIII��I �U�� city of San Luis OBISp0 COUNCIL AGENDA REPORT Supply Status and Decision on Desalination Page 9 final selection. The reverse-osmosis (R.O.) site is located east of the power plant in a location screened from the freeway and the bay. The seawater intake will be located in the PG&E intake structure on the Embarcadero. An underground pipeline will run to the power plant site and then above ground to avoid other utilities to the R.O. facilities. The finished water line will run from the plant site under the freeway at Main Street. It will then go up Radcliff Street and across open land to a connection into the existing Whale i Rock pipeline. Two waste lines leave the R.O. plant. One is for the brine which will be discharged to the existing PG& E cooling water line where it will go to the ocean at the PG&E outfall. The second waste line is the filter waste washwater discharge. It is proposed that the filter waste washwater be discharged to the Morro Bay - Cayucos Wastewater Treatment Plant. The project will be separated into two components, equipment vendor and conventional construction (site work, pipelines, etc.). Our consultants are currently preparing the "Request for Proposals" which will be issued by the City Council in mid-April to firms that specialize in reverse-osmosis desalination. The proposal will be to provide the financing, design, construction, operation and maintenance of the desalination plant for a five year period. The proposal will also include an option for extending the operation and maintenance contract for an additional five years. The proposal will include a buy out option that could be exercised during the term of the contract to allow the City to purchase the facilities. The off-site improvements (ie: pipelines, intake modifications, etc.) will be done by a typical public works contract. The plans and specifications are currently being prepared and this portion of the project is expected to be bid in November of 1991. This portion of the project will be financed by the City. PG&E Agreement The key to making the desalination project a timely and cost effective project is the initial siting of the project facilities and minimizing environmental impacts. Early on in the project PG & E indicated a willingness to assist the local communities during this drought. That assistance primarily has been in the form of making their Morro Bay Power plant facilities available for the desalination project It is currently proposed that the intake for the desalination project will be located in the cooling water intake for the Morro Bay Power plant The desalination plant will be located on the eastern portion of the power plant site. The waste brine from the desalination plant will be discharged into the power plant cooling water discharge line. Use of existing facilities, especially the intake and discharge lines, avoids several significant environmental impacts and provides significant cost savings. Negotiations are underway to formalize our agreement for use of the PG & E facilities. Since the project is viewed as a temporary emergency project, the term of the agreement will be five years. PG&E has indicated a willingness to extend beyond that term if the drought were to continue for more than five years. /- 9 ll city o� san tins OBIspo MaMs COUNCIL AGENDA REPORT Supply Status and Decision on Desalination Page 10 Project Participation Table III Desalination Project.Participation Currently, the City of Morro Bay and the California Men's Colony have indicated A enc Yield A that they would like to participate in the desalination project Table III lists the San Luis Obispo 3000 Calif. Mens Colony 800 level of participation that each agency has Morro Bay 1800 requested. The City of San Luis Obispo is Total 5600 requesting 3000 of and California Mens Colony 800 af. The City of Morro Bay has requested 1100 of with a peaking use of 1.6 million gallons/day. Meeting the pealing level requires plant capacity be sized at 1800 of for Morro Bay. Environmental Impact Report and Permitting The firm of NVoodward-Clyde Consultants (WCC) was hired to prepare the environmental impact report for the project The initial study has been completed and the Notice of Preparation was sent to review agencies on February 22, 1991. Comments on the initial study are due by March 29, 1991. The State Clearinghouse has assigned the following number to the project: SCH 91021084. After closure of the comment period, the project description may be refined or finalized based on agency and public comments. The draft environmental impact analysis will then be undertaken based on the revised scope of work Meetings have been held with various agencies involved in the project and several existing documents have been identified which will help in the review. Field investigations have also been performed along the pipeline routes to identify potential areas of concern. The draft EIR is expected to be completed in June of 1991. Comments on the draft EIR will be incorporated into the final report which we anticipate to be certified in August of 1991. WCC is also assisting the City in obtaining all necessary permits for the project and have made initial contacts with the various permitting agencies. The initial contacts will assist WCC and the City identify"key"permits as well as proper permit scheduling. Initial contacts with the Corps of Engineers indicates that a nationwide permit may be possible for the project Though this is only an initial indication, it would greatly simplify federal involvement in the project, as well as project compliance with the National Environmental Policy Act (NEPA). Schedule The project schedule requires a "fast-track" design approach. A detailed bar chart showing the key activities of the project schedule is shown in Attachment B. The Council decision dates are shown in Table IV. These dates are crucial to maintaining the project's �l� j��N�N city of San WiS OBISpo Mime COUNCIL AGENDA REPORT Supply Status and Decision on Desalination Page 11 Table IV City Council Decision Dates anticipated completion in July of1992. The Council approval of April 3, desalination vendor and the 3, 1991 Decision to Proceed with Design execution of the water supply April16, 1991 Approve Request for Proposals from agreement on July 2, 1991 is the R.O.Vendors and Amendment to JMM critical date for project Consultant Contract commitment. Prior to this date, the City can withdraw from the July 2, 1991 Approve Financing and R. 0. Vendor project; after that date, Selection and Authorize Execution of Water Supply Agreement withdrawal would be more difficult and expensive. August 20, 1991 Certify Environmental Impact Report October 15, 1991 Submittal of Plans and Specifications FISCAL IMPACT and Authorize Staff to Advertise for en The ewer desalination Bids for the Offsite Portion of the emergency Project plant will be privately owned and constructed, and operated December 3, 1991 Award Contract for Offsite Portion of under a vendor contract_ The Contract contract would require the July 1992 Project Completion vendor to deliver 3,000 of (San Luis Obispo share) of water annually to the City. .The preliminary unit cost is estimated at $2,900 per acre foot, which translates into an operating cost to the City of $8.5 million/year. The unit cost of $2900/afy is the result of repayment of the vendor's capital and operational costs: $1,300/afy - ($3.9M) is required to repay the vendor's operational and maintenance costs and $1,600/afy ($4.8M) is required to repay the vendor's capital costs. The City will construct the offsite improvements necessary to deliver the desalted water from the plant to the Whale Rock distribution system. The cost to construct these improvements are estimated at $3.5 million, a one-time capital expenditure which will be debt-financed over 20 years. The total cost of the desalination project is shown below. Per Acre Foot Per Acre Foot Annual Annual Capital Costs Operating Costs TOTAL VENDOR COSTS $1,600 51,3W 52,9(10 3,000 AF 3,0W AF Annual Annual Annual Capital Cost Operating Cost TOTAL (in millions) (in millions) (in millions) QTY COSTS 5375 S&S SUM / /+l 211l1city of San lues OBISPO MhMs COUNCIL AGENDA REPORT Supply Status and Decision on Desalination Page 12 Notes 1- The City's annual operating costs of S85 million is 3,000 of X$2,900 per of vendor charge. 2- Ile City's annual capital casts are the charges to debt finance S35 million over 20 years 3- If no water is being drawn from the Desalination plant because rainfall has filled the reservoirs,a standby charge will still be owed to the vendor for the term of the contract,to repay the vendoes capital costs and assure some level of return. For the purposes of the rate structure analysis below,rate of mum was calculated at 15%. The total annual cost for the desalination project is $8.875 million. For comparison purposes, this is greater than the City's combined operating budget for its Police and Fire Departments, which totalled $8.78 million for 1990/91, and is roughly one half of the general fund budget. Over the projected life of the project, the City would spend over $49 million. Water Rate Impact There are a number of options open to the City to finance the desalination project. The City is pursuing private financing, the possibility of obtaining government loans or grants, use of assessment district bonds, Mello Roos bonds, water rates and general fund subsidies. Final financing will be determined once proposals are 'received and a final contract is negotiated. (Attachment C presents financing information prepared by Evensen-Dodge.) Until the final financing arrangements are determined, staff has developed proposed rates increases assuming that project were to be financed totally from the Water Fund. In order to assess the cost impact the project would have on the City's Water Fund and its service customers, staff used the existing water rate model to determine the change in the current water service rates. Rates (see chart next page) were developed to analyze the impact of four potential water scenarios: (1) desalination plant fully operational; (2) desalination plant on stand-by, (3) No desalination plant and consumption at 65% of 1987 levels; (3) no desalination plant and consumption at 85% of 1987 levels. These rates were then used to determine what a typical single family residential bill would be. In each of the four scenarios, rates reflect costs for other water projects, listed below: 1. Debt service on the $7.6 million project to upgrade and expand the Water Treatment Plant to meet federal water quality standards ($7.635 million); 2. Design expenses for the construction of the Salinas Reservoir expansion ($850,000); 3. Annual costs to continue the maintenance and upgrade of the water distribution system to eliminate bottlenecks replace leaking water mains and assure fire flow requirements are met ($600,000/year). To arrive at the water rate increase necessary to generate the water fund revenue required to pay the Desalination plant annual operating cost of$8S million, beginning July 1992, and debt service on a capital expenditure of $3.5 million occurring in 1991/92, the following assumptions were made: 4111111111jlOCity of San 1UlS OBISPO VMze COUNCIL AGENDA REPORT Supply Status and Decision on Desalination Page 13 o Conservation would continue at current levels, so consumption would be 55% of 1987 per capita levels. o Continued reduction in other water fund revenues such as connection fees due to slowed building activity, and hydroplant revenues due to little or no hydroplant power generation. Under these conditions, the projected water rate increase necessary to create revenue required by the Water Fund would be 252% of current rates. The average use currently, under 359o' conservation, is 16 units per bimonthly billing cycle. The cost currently for 16 units is $19.10/month. With a 252% water rate increase, cost of water for 16 units would be $6733/month. This means that paying for the desalination project through the City rate structure would result in an increase of approximately a $50 per month or $100 per billing period. The following chart shows alternative water rate increases the City may experience, depending on consumption and development of the desalination project. Rate structure analysis under current and possible future water scenarios Typical Mo Cost Typical Mo Cost Percentage 16 units 25 units Increase (Current Avg) (Current Max) ■ CURRENT RATES-FEB 1991 0% $19.10 529.90 ■ DESALINATION PLANT FULLY OPERATIONAL 252% $6733 5105.40 ■ DESALINATION PLANT ON STAND-BY (Coat requited when rainfall raises reservoir levels to satisfy consumption,but City has vendor contract to pay. Consumption at 85%of 1987 levels.) 90% 536.35 556.91 ■ NO DESALINATION PLANT; (Consumption at 65%of 1987 levels.) 18% 522.44 535.13 ■ NO DESALINATION PLANT; (85%consumption) 0% 519.10 529.90 NOTLS L Under the current conservation program,25 units/per billing cycle is the ma>omum allowed use. 2. These rates could be stepped in over a two year period,since the revenue would be required in the summer of 1993. For example, under scenario number four?of no desalination plant and 65%consumption,the 18%rate increase oculd be implemented in two annual rate increases of 9%. The first alternative shows the rate increase of 25217o to fully fund a completely operational desalination facility. The second alternative shows that a 90% rate increase would be required, if the desalination facility was constructed and then placed on standby. This assumes that rainfall would add water to reservoir storage such that conservation would be relaxed and consumption would return to 85% of the 1987 base year. The third alternative ' shows that a 17% rate increase would be required to fund the current water program budget assuming the City's current target consumption rate (3517b conservation), even if the d���Ni�ll�ll�pnA►lI city of San Luis OBISPO COUNCIL AGENDA REPORT Supply Status and Decision on Desalination Page 14 desalination project was not constructed. The last alternative shows that no rate increase would be required, if the reservoirs returned to a level where consumption was 8517o of the base year and the desalination project was not constructed. RECOMMENDATION None at present. Please note that rainfall/reservoir storage data in this report reflects status as of March 1, 1911, and does not take into account the March rains, run-off and i increase in underground and reservoir storage. The forthcoming recommendation will be based on the latest information available prior to Council decision malting. Attachment A - Tentative desalination project layout Attachment B - Project Schedule Attachment C - Financing Options from Evensen Dodge, Inc. l—� ATTACHMENT "A" z Y- NN U �, o 3m O 1 v .'t F- w U : ? z W U O O 0 :' � U ILZZ �6• ��1 a� j Lu W O/ , = ax , ui O.�';t l fw rad CIL . . ,7 0 = tU .Y LU LU \W LLI UJ Z a < w qzz • 1 L ♦ \ 1 ^ MSS. " o w• wQ Zin � •J QG Oj QQZ z Im CLm LUx a 00 3 0660 o Ocr ✓ I � a rte:: o. m::... ww : m ml w w w cc 1 O Z <N — �1 ! imQU moa i ¢ � w ,p w O U i Z �I U. o S2 ♦ , w_ Q0 y y m xrs.: eJr W O U Q ` 0J♦ es. tn` ;r Lu LL w mak. as f- �Q CL LLW wcs PAClF7COCF.4A/ >. ,, cc o k V Q ATTACHMENT "B" m 3 1 Q gQ o 0 —9-- z U O O U m Q t ° LU h LF Lr _ ¢ mcc o U cc CL � O RE v ° y � W 0 Li w (7 z 42 Cq (n Cn .Q1 cu O � Q) � •U m � V JCIVI DI L-IJ-. I IG•+LC�'CIYJCIL UVU�C•' uU� 7.J I iuJn L ATTACHMENT "C" EVENSEN DODGE, INC. 1 1 N A N C I Ak L C O N S U L T A N T S MEMORANDUM TO: Desalination Working Group City of San Luis Obispo FROM: Timothy J Schaefer Senior Vice President DATE: February 13, 1991 SUBJECT: Financing Options Background The City of San Luis Obispo is currently experiencing its fifth year of drought conditions. The unique combination of the drought conditions in the west, but particularly in California, coupled with San Luis Obispo's coastal location presents opportunity and challenge as well as difficulty in dealing with recent and projected growth in the demand for water supplies from existing sources. It is unlikely that State water resources will be available to San Luis Obispo before 1997-98 with groundwater levels and stored water levels are as or near historic lows, the aty is currently rationing water to its users. Operating Revenues of the at�s Water Fund for -the fiscal year ended 6130190 declined moderately to S4.2 million from FY 898s S4.4 million. The City Council has directed City staff to fully investigate the basis on which the City could undertake desalination of Pacific Ocean water available at Morro Bay. The desalination plant and equipment is expected to cost approximately 520.0 million and will utilize reverse osmosis technology similar to that which will be employed by the City of Santa Barbara. The output requirement of the plant is estimated at 3,000 acre fleet, but could be expanded to 6,500 acre feet should other entities by invited to participate. The City has asked for our preliminary analysis of the financing and revenue requirements of such a project, and on January 30 an introductory session was conducted with City staff. It was the consensus of that group that the analysis of the capital formation process had to proceed quickly enough to permit James M. Montgomery Consulting Engineers, Inc. to incorporate financial standards into an RFP if private ownership was the desired course of action and to permit incorporation of desi&n standards into the RFP if the City elected to own the prolect.from its inception. It was further emphasized that timing was the essence of the process as the rainy season is drawing to a close and the project must be on line prior to next year. 222 South Ninth Stmt.Suite 3800 Mlnneapolls,MN 55x02 612/3311-3535 800/3265200 800/328.87D0 MN. FAX 612/33&7264 1-17 Capital Formation Options-Part I The city wants to determine where it will get the funds to build, acquire or cause the project to he huilt Though a strong preference for a fully it facility has bbceeen expressed, we have encuuragcd the City to exm= this method In the context of a 'normal" public works project so that the cost of delivering water from it can be more Accurately compared to projects that the City has undertaken in the past. We have assumed that the aty has no desire to operate the project through the Utilities Department,but would instead rely on some sort of output agreement as the hasu fnr financing it. Options,retailed The three options deemed to be most promising all involve the rate sector as operator of the facility. 7�vo of them contemplate the facility being owned by private interests and one contemplates puhlic ownership. Oprtnn i In a fully private transaction, the City would enter into a service contract for delivery of water. The construction and operation of the facility would be left entirely in private hands. A number of financing options would be available to a private vendor in these circumstances, but we have concluded that the option must likely to be employed would be that of a leveraged lease although some vendors may be capable of providing � equity (We also note that the vendor selected for the Santa Barbara project raised capital for that project through an offering of equity securities.) For a leveraged lease, an equity investment would be made by a passive, third- p" investor. This investor, usually a bank or leasing company, purchases the facility from the dcaigner/operator and concurrently entors into a lease with the owner, as lessee. The lessee becomes the user of the facility and is the party who executes the service contract with the City. Bach of the parties to the lease is a private entity. The City is not a party to the lease,only to the service contract. This method is advantageous because: 1) the lease is usually not capitalized on the es balance sheet—it preserves his borrowing capacity for other projects; 2) it often provides either higher or more predictable financial returns to the . uPcrdtur. 3) the funding sources (Le. banks, Ieasing companies, etc.) can efficiently handle large size transactions. The disadvanta$cs of this method include. 1) dependence un lessor's (banks, leasing companies) tax appetite as a key determinant of cost of capital; 2) lessor will rarely undertake projects of a speculative or entrepreneunal nature; 3) lesscc"intermediates"credit risk of the City. ppb10D5f2 Option 2 In this option, the city undertakes the design and construction of the facility and engages the vendor only to operate the facility Presumahly, the City could employ one or more of the following sources of capital for funding the project. (ranked in ascending order of relative interest rates) 1 General Obligation Bonds 2 Lease Revenue Bonds 3 Lease Debt 4 Mcllo-Rom CFD's We note that there has not been a thorough analysis of the tax law requirements byy bond counsel as to the potential threat to the tax-exemption on the bonds sFtnuld a long-term (5 year) contract be undertaken with a vendor. The vendor may design, construct and operate the facility for the City so long as the service agreement with the vendor meets the federal law restrictions to avoid the Debt heing classified as private activity bonds: • Term not longer than 5 years • Cancd&ble after 3 years • At least 50%of compensation must be in the form of a fixed fee Option 3 This option is identical to Option 1 except that the vendor's debt financing for the project takes the form of a twmhle private activity revenue bond issued by the CSty on behalf of the vendor. The financial benefit of this uption is that the interest on the debt is exempt from California income tax, thus causing the bond rate to be somewhat less than a fully taxable financin�gg assumed in Option 1. Also,the costs of issuance of this type of debt arc considerdbly less for a publicly held company since there is no registration requirement under the federal securities laws. Preliminary Capital CostAnalysic Whether the faality is owned by the City or the vendor, the City should expect to pay for borrowed capital which finances the facility. If the vendor borrows funds it will seek to include annual borrowing costs tri the service fees as a "pass through" cost. If the City borrows funds it will pay debt service on bonds it W issue. The table on pa e 5 shows the preliminary annual capitalization costs for tach of the 3 options. This coat analysis is preliminary and subject to legal review,vendor business preferences and the vendor's tax status. )1OD5l3 1 -19 .)CIYI UC-I.'JI 1 IU ... . Assumptions The annual capitalization charges for each option have been based upon the following general assumptions: 1. Project costs are $20 million and include design, construction, and financing costs. 2. The City delivers a notice to proceed to the vendor on July 1, 1991 and facility is placed in service April 1, 1992 (9 months). 3. Service agreement expires on April 1, 1997 (5 years from the date the facility is placed in service). 4. Financing sources: a. For private ownership (options 1 and 3) equity from the vendor or a third arty will finance 20% of project costs. The balance of project costs will be debt finance Return on equity will be in the form of reduced tax liability arising from rapid depredation(3 and 5 year) of most project costs. b. For the public ownership option (option 2) all project costs are debt financed and recovered in 5 years via debt service on bonds issued by the City. The table.on the following page displays the results of the analysis. as 1 L—�y V 1 �V4♦ 1 r�Ll'Id LAY LI\/V VL �1v �YV IA 1r a 0 v =11 DT- C� w � 9 9 � a U o W, veh� p O H H d! a O C � C C r.q N e� 0 ���/Cl As the table demonstrates the lowest annual capitalization charges are for the private ownership options due to the lower amount of debt, in spite of the higher interest rates. Some caution should be exercised before concluding that the private ownership arrangements are less expensive due to the following factors: L Residual value. At the conclusion of the 5 year service agreement with the vendor, the vendor will still own the facility. The City may purchase the facility on terms negotiated either at the commencement of the service agreement or after the service agreement has reached its termination. 2. E4uity. The amount of equity which is available from vendor or third party sources is dependent upon the tax position of the equity provider and federal tax laws. Some equity providers will require the City indemnify the equity provider for adverse changes in federal tax laws. The actual amount of equity can be determined in the vendor procurement process. Revenue Sources--Parr H The City has identified several revenue sources to pay for the operating and capital charges of the desalination facility. 1. Water rate increases. I Tax increases (voter approved) a. General Obligation Bonds: ad valorem property taxes b. Mello-Roos Bonds: special tax 3. General Fund Revenues Selection of the revenue source should consider the following: L Timinir the procedural requirements needed to make revenue available by April 1, 1992, the estimated date on which the project will be operational. 2. Equity: the imposition of the financial burdens on those parties which will use the water service or benefit from it in some inferential manner, and their ability and willingness to bear those costs. JCIV� 0T • (-I.-01 0.47 �.L . �n ✓✓L .r. n . 3. City financial condition: use of general revenues of the City for water purposes should consider reductions in other services so that long-term City financial conditions are not impaired and the City's credit rating is maintained. 4. Financing option: some financing options (general obligation bonds and Mello-Roos) carry additional revenue sources to pay for ae ital only (general obligation bonds or capital and operating llo-Roos) charges. Other financing options (vendor debt,P's)would utilize existing revenues of the City (water rates and general revenues). These revenue sources can be used for capital and operating charges. Condusions Privatization is not only workable but also may be the only available source of funding for the project if it is to meet the time constraints imposed by current conditions. Privatization will work.ifi 1) there is a firm commitment of capital by vendor/owners that assures the City of project completion; 2) strong guarantees of completion, performance and cost are secured by the City; and, 3) the execution of the privatized transaction is well throught out in advance of the execution of the service contract which becomes the backbone of the transaction. Public ownership is the next most desirable form of fund' the project because it affords the most easily understood, politically acceptable form of sponsorship in most cases. The public form of ownership may be at a disadvantage from the standpoint that implementation requires more time than the City's water users have to invest and that the longer term solution to the drought problem is probably not in desalination anyway. Other longer term, less costly sources of water can be developed. In this sense, the City may elect to shift the obsolescence risk to the private sector. Finally, we wish to point out that none of the financial analysis set forth in this briefing has estimated any liven level'of assumed residual value in the project. This key determinant is subject to several forces previously mentioned, including the tax appetite of the vendorloperator. The City should use caution in assuming the likely price at which it could acquire the facilities at the end of the five year term. Any determination of potential prices at which the City could exercise a purchase option would have to be subject to a competitive process in order to avoid any inference of an installment sale to the City. Recommended Course of Action 1. Determine whether the City wishes to own the facility at its inception or to acquire it at a future date. SENT BY: : 2-13-51 : 16:45 tvtNSLN UOUGc- ;W; o4tl 6 UV:; Y I Determine how the City would finance the capital costs if public ownership is selected. 3. Assuming the City desires to have a vendor construct, deliver and operate a desalination facility the Ci should begin the vendor procurement process with at RFVaQ. The solicitation should provide for City or vendor ownership (and the resulting financing options).' Additionally the Cityry should ask vendors to present proposals with the City purchasing the facrrity at the term of the service agreement. 4. Develop measurement criteria for determining the RFP respondents' financial capacity for developing and carrying the project over its five year life. 5. Develop a plan for educating the various shareholders in the water system about the relative merits of the proposed ownershipf5nancing option. 6. Prepare a writtenplan for implementing any required City financial support(other than trio service contract)for the project. 7. Determine the revenue source(s)to Pay Mr operating charge.& ppbioDS/8 ,..�ETING AGENDA DATE ITEM L nb J uismo ?treet Sari Luis Obispo CA 93,101 April 122, 1991 City Of _5ari Luis Obispc) Sari Luis Obispo 1_A 93401 e Att. Ron Gunin, i-,. yr,r Clear Rori, Nice going with the Fourth of July parade. Now I'm concerned about an approach to securing a consistent supply of water. Treat's not new or unique, 1 know, But from what I read, it seems like the engineers want to do some kind of project that thev've never done before. They maybe missing somethinq. Walking along San Luis Creek during the rain, watching all that water run into the ocean was unpleasant. Since the creek runs all year long, can't a diversionary darn be built down by the sewer plant which is designed to capture part of the flow? The water could then be pumped backwards through the water line and into Whale Rock. The City of Alarneda iii the fray area has a removable, inflatable oam for one of their creeks that is used when it rains to capture the excess run- off. The amount of rainwater in our storm drains is amazing. . Regards, O�•na�iaes Anion Q F� o CZ'CM iXL EACAO ❑ MMCHMP John 0. Wolcott O R7 DFiIE o1R APR 1 5 1991 La'? .} CITY CLERK r04N Luis OBISPO,0A WI&J � ,A TAHOMA RESOURCES P.O. Box 1138 • Cedar City, Utah • 84721 April 9 , 1991 (801) 865-0131 or 586-6899 Ron Dunin, Mayor City Hall ° San Luis Obispo, CA 93401 Dear Ron: As I watched the news these past few weeks, I thought about all the rain pouring down on California--especially on SLO Town. Memories of water rationing and exhorbitant penalties made me wonder if anybody else noticed all the water in San Luis Obispo Creek that ended up in the ocean. Remember my water-capture plan? If it had been in place, we could have stored that 50 million gallons that rushed through town. It would have been available for use during the upcoming dry months . I 'm going to try again to interest the City Council and an investor or two in my relatively inexpensive, simple water storage project . Can I count on you to back me? Sincerely, Gary F. ayer , Consulting Geologist PMST0: RECEIVED !C1;q ° A� 0M VA 0�MX 0 ME Clomp CITY.CLERK �OM DIR SAN LUIS OBISPO,CA C] MCMT TFAAI ❑ L Q{ �„fc READRLE