Report 2000-115 Summary - April 2001
Central Basin Municipal Water District
:Its Poorly Planned Recycled-Water Project Has Burdened Taxpayers But May Be Moving Toward Self-Sufficiency
HIGHLIGHTS
Our review found that the Central Basin Municipal Water District (district) poorly planned its recycled-water project because it:
- Overstated the project's potential for self-sufficiency by ignoring lower projections when estimating future revenue.
- Failed to gain firm purchasing commitments before building the project.
- Still relies on $3 million in annual standby charges.
- Currently distributes water costing $1,395 per acre-foot compared to $431 per acre-foot for imported water.
RESULTS IN BRIEF
When the Central Basin Municipal Water District (district) started its recycled-water project (project) in 1991, it presented projections to taxpayers indicating that the project would be self-sufficient after three years and would no longer depend upon the so-called "standby charge," an assessment levied on property owners. The district used high imported water rate projections of up to $2,200 per acre-foot in fiscal year 2019-20 to determine the project's recycled-water revenues. By ignoring lower projections, it overstated the project's potential for self-sufficiency. An acre-foot of water is almost 326,000 gallons, enough to meet the needs of two average families for one year. The district also failed to properly evaluate the project's financial risks and did not obtain firm purchasing commitments from local water retailers and their customers before constructing its distribution system. In doing so, it ignored the advice of the State Water Resources Control Board, which told the district to obtain customer contracts for the use of 50 percent of the system's planned capacity and letters of intent from customers for the remaining 50 percent. The district's 1991 cash flow projections yield a positive net present value of $48 million. The use of more conservative imported water rate projections and sales assumptions results in negative net present values ranging from $2.1 million to $9 million.
More than nine years later, the district is still assessing its taxpayers $3 million a year in standby charges, revenue that is essential for the district to meet debt payments related to construction of the project. The financial problems it faces-flattening water rates and customers who refuse service-have been exacerbated by the district's choice to hold its recycled-water rates steady even when imported water rates have increased. Today, with sales volume for the project at 43 percent of the initial projection of 8,500 acre-feet, the district's cost of distributing the recycled water amounts to $1,395 per acre-foot, based on total costs of $5 million. This exceeds its revenues, excluding the standby charge, of $505 per acre-foot-an average of $255 per acre-foot from existing customers and $250 per acre-foot from Metropolitan Water District of Southern California (Metropolitan) rebates for distributing recycled water. It also exceeds the $431 per acre-foot that Metropolitan charges for its imported, non-interruptible water.
Recent decisions suggest that the district has become more mindful of the necessity to move the project toward self-sufficiency. For example, in 1998 the district suspended work on an expansion project when its economic analysis showed the cost of recycled water would be $826 per acre-foot, which exceeds the cost of imported water at $431 per acre-foot. It has instead turned its attention to potential customers who, because they are near the project's existing distribution system, could be connected for recycled-water service at relatively low construction costs. If the district is successful in adding identified customers along its existing pipelines and negotiating a pending agreement to sell water to a neighboring district, it could reduce the project's cost per acre-foot to approximately $684. Nevertheless, it is important to note that, even if the district were able to add all these customers and deliver 8,100 acre-feet of water annually, it still would suffer revenue shortfalls of $1.8 million per year at current recycled-water rates, excluding standby charges. Moreover, unless it implements a long-term plan to fund its reserve to replace aging facilities, the district may be forced to issue additional debt, thus prolonging the assessment of the standby charge.
RECOMMENDATIONS
To achieve self-sufficiency for the recycled-water project, the district should:
- Continue to study the feasibility of raising its recycled-water rates to increase revenues from customers and to reduce reliance on general taxpayers.
- Continue to reject project expansions that do not improve the project's cost-effectiveness relative to alternative water sources.
- Execute binding agreements with potential customers for at least 50 percent of expected water deliveries before undertaking large capital projects.
- Establish sufficient reserves for future system replacement costs.
The district agrees with most of our recommendations. Ironically, it disagrees with much of our analysis that established the basis for the recommendations. However, the district's response contains numerous incorrect or misleading statements. Our comments on the district's response begin on page 53.
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