Archive for Wednesday, December 24, 2008

Council sets water demands for negotiations

December 24, 2008

The De Soto City Council ended its latest discussion on the city’s water utility future with agreement on two points.

The council doesn’t want to give up the city’s water rights, and it doesn’t want water availability to handcuff the city’s chances of landing a large industrial opportunity.

Faced with the constant financial drip of operating a patched-together water plant at the Sunflower Army Ammunition Plant that’s core dates to the early days of World War II.. The council is considering two options: Renovating the Sunflower water plant to make it more reliable, or entering into an agreement with Johnson County Rural Water District No. 6 to purchase water from the city of Olathe.

The two concerns surfaced when Mayor Dave Anderson queried council members on why they would ask city water customers to renovate the Sunflower water plant at twice the cost needed for a wholesale water purchase agreement with the city of Olathe.

The mayor was referring to a report city engineer Mike Brungardt and city financial consultant Jeff White produced for the meeting that estimated renovating the Sunflower plant would require an initial year rate increase of either 30.44 or 31.5 percent (depending on the financing method used) compared to a 15.87 percent or 18.56 percent rate increase for a wholesale agreement. Estimated rate increases averaging or percent would be needed for the Sunflower renovation and or percent for the wholesale agreement.

Council members Betty Cannon, Tim Maniez and Ted Morse said a renovated Sunflower kept the city in control of its destiny and would preserve the city’s current water rights.

“We cannot give up the water rights,” Morse said. "That is something sacred."

Their pro-Sunflower plant view was bolstered by a report that it produces better water than Olathe’s state-of-the-art plant in 16 of 19 tests for such things as metals, chemicals and hardness.

Councilman Mike Drennon said he shared his three fellow council members’ concerns but overshadowing that was the city’s already high rates, which he said where twice those of Gardner or Shawnee, and the extra cost of the Sunflower renovation. His worry was that some of De Soto’s existing industries would relocate because of the cost of water, he said.

It is estimated the city would save $166,000 if it purchased rather than produced water. The cost of purchasing water from Olathe, plus the wheeling charge Olathe would ad for use of the new waterline is estimated at $2.70 per 1,000 gallons. The city’s cost this year to produce 1,000 gallons was $3.14 a gallon.

Anderson also favors partnering with the water district to purchase water from Olathe. The cost of renovating the Sunflower would create too great a hardship on ratepayers, he said. Anderson said he was also concerned that future city councils would have to use property taxes to help pay off debt when water department revenue proved inadequate.

That possibility was based on a report by city financial advisor Jeff White, who suggested the city should finance either of the two options being considered with a mixed use of a state-available revolving loan and general obligation bonds. Although water department revenue would be dedicated to pay off the bonds, general obligations bonds would back up that source with mill levy support if water department revenue proved inadequate.

The mixed would allow the city to take advantages of the lower rates offered by the 20-year state revolving loan and the longer 30-year debt retirement schedule of general obligation bonds, White said.

Both plans assumed the city distribution cost would be equal. That wasn’t quite true, Larkin Group engineer Tony O’Malley said water lost from breaks would be more expensive because it would cost the city $2.70 pre 1,000 gallons to replace if purchased and only $1.21 per gallon should the it be replenished by water processed at Sunflower.

One other factor that would add costs to a wholesale arrangement would be the need to preserve the city’s water rights by keeping active four wells in field south of the Kansas River by producing water for Olathe.

Brungardt’s analysis found the extra costs associated with the Sunflower site diminished as water use increased and that phased in improvements at Sunflower would reduce the upfront rate burden.

But the bottom-line remained the wholesale agreement was the cheaper of the two options, Brungardt said.

The agreement with Olathe being discussed would have that city selling De Soto water at the same rate it charges its domestic customers, which have historically been 1.5 percent per year.

Although Olathe would have to show cause of any rate increase, it was conceivable Olathe could pass on a large hike by hiring a number of employees and putting in a new process, Brungardt said. But he added the same hike would be applied to all customers within Olathe.

Still, one De Soto resident in attendance, Bob Garrett, said Olathe saw the agreement as solely a business agreement and didn’t care about De Soto. He said he didn’t trust that city not to raise the cost of water to De Soto once the city was without another supply.

Anderson said he didn’t share those fears and the council wouldn’t agree to any contract that didn’t protect the city.

It was agreed at the meeting the city needed to retain the Sunflower water rights ceded the city in settlement ending a city lawsuit against Sunflower Redevelopment LLC and the state. That demand would be part of any agreement with Olathe, as would assurances Olathe would fulfill an extraordinary demand De Soto might need to an economic development opportunity.

Should Olathe be unwilling to work with De Soto on those points, there would be no choice to go with the Sunflower option, it was agreed.

The council endorsed O’Malley’s suggestion the city should at least be a co-owner of the waterline so that it didn’t lose its considerable investment when the initial agreement expired.

O’Malloy made that point during a presentation on the possibility of the Sunflower water plant serving a regional water authority. Under such a scenario, De Soto and the other partners in the regional authority, would jointly own the Sunflower water plant as a non-profit 501 (c) corporation.

Each participating entity would have a voting representative on the authority who would help that jurisdiction preserve local authority in water decisions, O’Malley said.

Potential partners O’Malley suggested were Sunflower Redevelopment, Johnson County Water Districts No. 6 and 7 , the cities of Eudora and Baldwin, and Douglas County Water District No. 4.

The city would have to “beat the bushes” for partners, O’Malley said

Unlike the other two options under consideration, a regional approach would require the city postpone its water infrastructure needs for a number of years as it determined there was enough interest from other jurisdictions, or the beat-the-bushes effort O’Malley proposed.

The council was silent on the proposal last Thursday.

In addition to the added contract demands for an Olathe contract, the council also asked staff to look at the rate consequences of using interest from the city’s $2 million electrical utility fund to offset some of the annual $166,000 capital cost of the Sunflower plant.

Should the city council make a decision in the coming months, there was a possibility funds from an economic stimulus package President-elect Barrack Obama is proposing could help pay for the improvements, Brungardt and White said.

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