The Capistrano Insider

About that Private Water Company ...

Capistrano leaders a few years back investigated merging with other water agencies, and a bit of work was done in consideration of a possible deal with South Coast Water (which serves Dana Point). That deal, by the way, went south when it became clear Capistrano residents would pay much more for water because of SCWD concerns over infrastructure, among other issues.

At that time, however, a few criticized City Hall for not considering a private water supplier.

Here's a story today that highlights some of the reasons I'd heard why the council chose not to. (In a word, profit.)

According to the OC Register, the parent company of some private water suppliers reports double its profit this year -- and is asking for water-rate increases.

Here's the piece.

Careful What You Read -- and What You Believe -- About Water

The Common Sense folks continue to rant about the water rates and San Juan Capistrano's groundwater recovery plant.

Take what they say with a grain of salty water from the sea, at least.

First off, the city does not lose the rights to the groundwater recovery plant. Everybody at every meeting I've sat through, from those at our own City Hall to those at the San Juan Basin Authority, say the contracts clearly call out for the city controlling the plant for generations.

There's also no evidence the GWRP was built for Rancho Mission Viejo, other than the suspicions of a cadre of folks who seem to think the Ranch is some sort of bogeyman and want to blame the Moiso family for everything from traffic to water rates.

Next, water rates are high. Everywhere. Has our Utilities Department run as efficently as it could have? Maybe. Maybe not. We'll see what the $55,000 audit finds.

But what frustrates me about the leaflets left on some of the homes in Capistrano is the complete lack of (accurate context). Water rates are high in Capistrano, but no more so than in our surrounding cities, despite what you might have read in the leaflet.

The reason? Water users in neighboring cities pay a monthly water bill, just like we in Capistrano do. But, unlike us, customers of South Coast Water District (Dana Point) and Moulton-Niguel Water District (Laguna Niguel) pay an additional usage fee on their property tax. That's not for bond repayments, that's just part of the water bill added onto the property taxes.

San Clemente in June raised its water rates 12.7 percent. In a survey of nine South County water agencies, the average water bill was $99 a month. Capistrano's was $102. We're more expensive than San Clemente, cheaper than South Coast.

Water's expensive, and getting more expensive everywhere. All of that said, the Los Angeles Times today has a pretty good piece about (more) anticipated cost increases from the Metropolitian Water District (MWD) which pretty much provides water in Southern California to anyone who doesn't have their own supply.

Here's a couple of paragraphs:

Agency officials predict that the double whammy will boost the aqueduct's energy costs, which amounted to nearly $49 million last year, by 80% over the next decade.

...

The MWD imports 40% to 60% of the Southland's water supply. Rising energy costs are one of the reasons the district has increased its wholesale rates to Southern California water agencies 75% in the last six years and will continue to raise them, executives say.

You can see the entire story here.

Bottom line: On top of uncertainities in the water supply -- smelt in the Delta, Colorado River water going elsewhere -- MWD has been buying electricity at cut-rate prices (unlike the city of SJC) and will have to start paying more.

Capistrano's GWRP operations have certainly been spotty over the past few years, but officials have been saying it's working now. They've got a handle, they say, on the technical challenges.

But one challenge not met by the city that we must face: Resisiting the urge to judge a long-term investment against today's standard. It's difficult to accept in this "make me happy now" world, but the real value of the GWRP may not be known for decades, if not generations.

Download GWRP Lease agreement 2002

About Capistrano Water Rates and Privatization ...

Water rates, and Capistrano's increases, have been a sore subject around town the last year or so. (Without getting into the practicality of the raises, let's note previous City Councils refused to raise water and sewer rates for more than 20 years.)

But it's not just a Capistrano issue. The city of Placentia has seen crowded City Council chambers recently over a proposed increase there, too. Placentia has a contract -- open ended, somehow -- with Golden State Water Co.

From a story in OC Register:

PLACENTIA – Residents concerned about another double-digit increase in their water bills filled the Council Chambers on Monday night, some of them asking the City Council to look into dumping the publicly-traded Golden State Water Co., which has provided the city water for decades.

The City Council called the meeting with representatives of Golden State Water so the public could ask questions about the proposed rate hike under consideration by the California Public Utilities Commission.

Many residents have criticized the proposal, noting that the state has approved other 20-percent-plus rate increases in recent years for Golden State Water, and charging that such an increase is a way for Golden State to recoup profits that otherwise would be lost because customers have conserved more water than expected.

Golden State Water officials told the crowd that the increase is necessary to keep pace with the costs of labor and benefits, maintaining facilities and lines, and spending $11 million to replace an antiquated billing system.

...

If the state approves Golden State's proposal, water company officials say, the average residential customer would see a monthly bill increase from $47.23 to $58.82, a hike of nearly 25 percent.

***

Best I can tell, the average Capistrano water bill is $60.54, projected to to up to $64.24 in 2013. Golden State also serves Cypress and Stanton.

Here's the entire Register story.

Oh, this might be a good place to note that Utilities Director keith Van Der Maaten starts his second week on the job this week. He had a Utilities Commission meeting last week, on Tuesday, where officials and residents were crawling over details of the Capistrano's groundwater recovery plant.  I didn't hear it directly, but I understand his quote was something to the effect of "I've gained 30 years of experience in two days."

Fitch Downgrades Capistrano's Bond Rating

  story posted at www.thecapistranodispatch.com

Fitch Downgrades San Juan Capistrano Pub Fin Auth, California's Rev COPs to 'A'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings downgrades the following San Juan Capistrano Public Financing Authority, CA's (the authority) outstanding revenue certificates of participation (COPs):

--$36.5 million revenue COPs to 'A' from 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The downgrade to 'A' from 'AA' reflects a dramatic weakening of the city of San Juan Capistrano's (the city) financial profile including the depletion of unrestricted cash reserves, costly and delayed remediation of water contamination, and insufficient net system revenues to meet annual debt service requirements.

--Liquidity is expected to remain negligible for at least the next several years, providing limited operating and capital flexibility.

--The Rating Outlook is Stable because debt service coverage is projected to improve with approved rate hikes, reduced operating expenses from decreased imported water purchases, and a receipt of the first installment of a disbursement pursuant to a settlement agreement related to water contamination.

--The debt profile is elevated and likely to increase further.

--Rates are affordable, providing room for projected increases.

--Demographics are healthy with high wealth levels and unemployment below state and national averages.

KEY RATING DRIVERS:

--Ability of the city's groundwater recovery plant (GWRP, or the plant) to operate at or near full production, alleviating costly imported water purchases.

--Improvement in debt service coverage and financial flexibility.

SECURITY:

The certificates are secured by installment payments made by the city to the authority. Installment payments are a special obligation by the city, secured by a pledge of and first lien on the net water system revenues.

CREDIT SUMMARY:

A number of factors contributed to the rapid deterioration in the system's financial position. The city completed construction of a GWRP in fiscal 2005, which was built to reduce the city's reliance on imported water to meet area needs. The plant has been operating at only one-half production for over two years due to various factors, including methyl tertiary butyl ether (MTBE) contamination at plant wells. Consequently, operating expenses, which had been projected to decline with decreased water purchases, actually increased by 8% and by another 5% in fiscal 2009 and 2010 respectively. The operating expense increases were not counterbalanced by increased water sales. Instead, two years of wet weather, when water sales were reportedly at a 20-year low, led to a 13% and 4% decline in operating revenues in fiscal 2009 and 2010, respectively.

The housing collapse compounded the decline in system revenues, resulting in a 25% drop in developer fees from fiscal 2009 to 2010. Thus, debt service coverage (DSC) levels, which had averaged 3.2 times (x) over the fiscal 2006 to 2008 period, fell to 1.8x in fiscal 2009 and dropped precipitously to 0.2x in fiscal 2010. Unrestricted cash was also drawn upon in fiscal 2009 and entirely depleted by fiscal 2010 to cover capital expenditures and debt service payments.

Fiscal 2009 rates were kept in place for most of fiscal 2010 (i.e. rate hike was 0%), but were raised by 13% in February 2010 with the adoption of a five-year rate package (overall fiscal 2010 rate increase was 5.4%). Rates were increased by an additional 18% for fiscal 2011 (effective in July 2010), resulting in a cumulative rate increase of 27% for fiscal 2011. In conjunction with the rate package, council approved future automatic rate adjustments to pass-through any rate increases imposed by the Metropolitan Water District of Southern California (MWD). The city currently purchases 70% of its water from MWD, in contrast to planned purchases of about 50% with full GWRP operating production.

A settlement agreement between Chevron Corporation (rated 'AA' by Fitch) and the city to address the cleanup of groundwater contamination that contributed to the poor performance of the GWRP was reached on March 7, 2011 after long delays. The city has received $1.5 million in disbursements from the company, and expects to receive an additional $50,000 in fiscal 2011. While the city's forecast assumes no disbursements from Chevron beyond fiscal 2011, successful and timely completion and proven effective operation of a granulated active carbon (GAC) facility at the contaminated well site entitles the city to an additional $1.6 million in settlement funds. The city expects to complete construction of the GAC treatment system in July 2011. The GAC facility is expected to remove the MTBE contaminant, thus allowing the GWRP to operate at full production and help reduce purchases of costly water from MWD to historical levels.

The rate hikes and settlement monies are expected to improve the system's financial profile for fiscal 2011 and beyond, with DSC currently projected at 1.7x in fiscal 2011 and similar levels over the five-year forecast period. However, delays that prevent the city's GWRP from operating at full production to alleviate costly imported water purchases could negatively affect results beyond the current fiscal year. The level of adopted rate hikes is not expected to replenish reserves for at least several years, affording the system little operating flexibility.

The city's current five-year capital improvement plan (CIP) totals $29.3 million. However, given the system has no cash reserves available and surplus revenues will not be sufficient to meet projected annual capital costs, projects will need to be deferred until cash reserves have been restored and/or debt will need to be issued to meet current five-year capital needs. Issuance of additional debt will cause already high debt ratios to escalate further. Debt amortization is average.

The water system serves approximately 11,000 customers, including about 1,000 users outside of the city limits. Customer growth has been modest at 1.0% annually over the past five years. San Juan Capistrano (general obligations rated 'AAA' with a Stable Outlook) is located 60 miles north of San Diego, within one mile of the Pacific Ocean and 60 miles south of Los Angeles. The city is largely a residential, suburban community with residents commuting to jobs in the Orange County, San Diego, and Los Angeles areas. Area wealth levels are 50% and 70% above state and national levels, respectively, and the 8.1% unemployment rate as of January 2011 is below state, county, and national levels.

When it Comes to Water, is Private Better?

There's been some talk lately at our weekly Coffee Chats about whether the city should sell off its water works to a private operator. Much of the talk centers around the city's $65 million in bond debt because of water services and whether the Ground Water Recovery Plant has ever worked as well as it should ... And of course, water rates have gone up in recent years.

The city counters that the groundwater plant WAS operated by a private firm, and then it produced brown water and the rate increases are necessary because the city hadn't hiked them in decades and pipes and pumps are literally falling apart beneath our feet.

And when the study and South Coast Water District (which serves Dana Point) talked about a merger, South Coast leaders were pretty adamant that the first thing they'd do would be to raise Capistrano's rates even more, again because we have infrastructure issues and no savings account to pay for them.

There might be some advantages to privatizing, but there's no guarantee about rates. This from Ventura:

California American Water Co.'s 21,000 customers in Ventura County may see their base rates jump, by 46 percent in some cases, if the California Public Utilities Commission approves increases proposed by the utility.

 

The investor-owned utility, which serves western Thousand Oaks, Newbury Park and Las Posas Estates, is seeking to raise revenues 8.08 percent this year, 5.92 percent in 2012, 5.81 percent in 2013, and 4.18 percent in 2014, according to its rate increase application.

 

It would translate into increasing revenue by $2.2 million this year, $1.8 million in 2012, $1.8 million in 2013, and $1.4 million in 2014.

 

The additional funds would offset increases in operation and maintenance costs, replacing infrastructure such as water lines and improving information systems for customer service, according to mailers sent to customers.

 

The proposed rate increases to generate the additional revenue do not include any jumps in the cost of water that Cal-Am purchases from Calleguas Municipal Water District for its customers. Any increases in water costs would be directly passed through to customers, said Brian Barreto, Cal-Am's external affairs manager.

 

For the average residential water customer, their base rates this year could increase by 45.88 percent if the application is approved without changes. Dollar-wise that would mean a customer with a inch meter, using 2,200 cubic feet of water a month, would see the current rate of $59.79 a month increase by $27.43, raising the rate to $87.22.

Click here to read the full story.