City of Fort Collins Water Supply Requirements
The issue of water supply requirements has been the subject of great interest to your Fort Collins Area Chamber. City Council is scheduled to consider a favorable adjustment to the cost of water within its utility service area at a work session on October 8. While a reduction may seem welcome, it’s not clear whether the City is starting with the right number. But what is WSR? Is this the same as a water tap fee? And what do allotments have to do with any of this?
Water supply requirements (“WSR”) relate to the raw water the city utility needs to acquire and hold in storage for subsequent delivery to the treatment facility in anticipation of projected demand. A water tap relates to the maximum capacity of treated water a customer requires based upon the proposed land use. Allotment refers to the process of assigning a threshold for water use before excess use charges kick in, primarily for older non-residential properties.
Allotment will not be discussed further here, though it shows up alongside WSR in staff presentations and should not be dismissed. It will result in higher utility costs for a limited number of businesses.
Tap fees undergo periodic adjustments to reflect the costs of operating and maintaining treatment facilities, pipes and other equipment that carries water to your home and business. There are no material modifications proposed under that fee schedule.
WSR, on the other hand, is the subject of much discussion as it relates to the potential replacement and enlargement of Halligan Dam. Whereas the cost of securing the right to use an acre-foot of water went from $6,500 in 2017 to $68,200 in 2024, the cost to use that water (rates) is expected to increase between 4-6% annually over the next decade.
The issue, then, is equity. The Utility department believes the current dam is in need of replacement. Rightfully, this is a cost that should be borne by ratepayers as new customers cannot be held financially responsible for existing deficiencies under state law. Additionally, the City seeks to expand its capacity to accommodate 8,200 acre feet for water rights it holds but can’t store, plus additional rights it anticipates to meet future demand at full build-out of its service territory. The cost of developing additional storage capacity and water right acquisition should be borne by new service requests – i.e. WSR fee.
However, it is entirely unclear whether Utility staff has allocated these costs appropriately due to the methodologies employed to derive WSR pricing options presented to Council at its work session on July 9. While the cost of dam construction is presented, there is no break-out for the cost of replacement separate from expansion.
Furthermore, there are two pricing options: one based upon the market value of water rights held in portfolio ($110,700 per acre foot), the other tied to original cost ($63,800 AF). The second option is further adjusted for inflation, plus a 30% contingency factor for potential construction and water acquisition cost overruns and a 20% “safety factor”. The safety factor essentially means the City will acquire and store 20% more water than actually needed in the event of drought or other circumstances that may limit the water harvest over an extended period of time.
Your Chamber believes the market value of water rights, inflation adjustments and a contingency factor are all unrelated to the incremental, proportional demand placed upon the system as the result of a new service request. When new service is permitted and paid for, the City is not relinquishing its water rights, but merely authorizing the user to buy the water that flows through their meter. To establish a fee commensurate to the cost of taking ownership of the water rights without transferring those rights is concerning and on its face has no apparent correlation to the cost of raising a dam.
The second approach, recommended by staff and generally supported by Council, starts with the weighted average cost[1] for all the water shares held by the city, with each tranche adjusted upward to reflect inflation from the date of acquisition to the present. Again, this does not appear reasonable for many of the same reasons as noted above; rate and fee payers have already purchased the asset with no intention of selling water at a profit to new users.
A 30% construction contingency appears excessive, given the sole responsibility of the WSR fee payer is for additional storage capacity, rather than financial liability for the entire project. The construction budget is characterized by Utility staff as having sufficient contingencies built in, while the number of water shares still needed is nominal.
At its October 8, 2024 work session, City Council will discuss a potential reduction to the WSR to reflect reallocation of certain Halligan project costs to ratepayers. The proposal would reduce the cost of an acre foot of water from $68,200 to $63,800. Though positive, the impact of dramatically higher water supply costs over the past 6 years has and will continue to weigh heavily on the economic health of our community.
To put a finer point on this issue, the Halligan Dam project, which your Chamber supports, has a total budget of $308M. This figure incorporates approximately $68M in contingencies. In dividing that number by the 8,200 acre-feet in additional storage, the cost to rebuild and raise the dam height is equal to $37,561 per acre foot. How, then, is it even reasonable to discuss an incremental impact fee that is nearly twice the cost of replacing deficient infrastructure?
It is both economically sound and fiscally responsible to expect new water users to cover the expense of expanding infrastructure to meet the additional demand it represents. A pricing policy that conflates new service with the sale of water rights appears to challenge the notion that municipal services are not motivated by profit. Council would be well-advised to consider both the mechanics of establishing the correct price for water, as well as the optics of how that number is derived.
[1] According to the City of Fort Collins Water Utility Department, the weighted average cost for water held in its portfolio is $1,982.
Source: Fort Collins Area Chamber
July 25, 2024