After seeing total costs, EWEB chooses ‘prudent’ capacity for 2nd water plant

Presenter: The EWEB Board of Commissioners gets its first look at total project costs for a second water treatment plant on the Willamette. At the Aug. 4 meeting, CEO John Hairston: 

John Hairston (EWEB, CEO): I’m John Hairston, CEO and general manager of EWEB. We’re seeking the board’s direction on the water system investments that we’re planning to make. 

And we plan to discuss the investments, priorities behind the water capital improvement plan, the tradeoffs and what’s being deferred, the financial pressures this plan puts on the utility, and the levers available to manage those pressures.

I want to begin by providing some context and situational overview for the board and the public. First, water rates are not in line with the cost of service that we’re projecting. Since 2016, the water-specific consumer index—CPI measures—has risen 55%. EWEB rate increases for water services over the same period were about 40%.

Now, staff and the board worked pretty diligently to keep water rates low for customers, including five years of no rate increases between 2017 and 2021. However, the scale of the capital investment required means we need to increase our revenues to support the needed investments.

Many other utilities have already increased their rates to account for the required water system investments. Now, I would like to say that we need to play some catch-up, but obviously you still want to keep your rates low. So we want to make the right investments at the right time to achieve our intended goals.

As we discussed last month, EWEB needs to establish a second source of water to overcome water system challenges. And most importantly, we need the ability to be able to take our existing plant offline for required maintenance.

And we are also coming up with big deadlines related to water rights and permitting and they are putting timeline pressure on our actions.

Across the industry, project costs are escalating due to larger economic factors outside of our control. Risks to the system are growing, which compel us to act I think a lot quicker than probably we would like, but it’s necessary.

Additionally, I think it’s worth emphasizing that federal support for generational projects like this has faded away over the past few decades.

Federal capital funding is down from about 50% to 60% in the 1970s and 80s to just about 7% today. This is putting more pressure on local communities than ever before. And all of this is happening against the backdrop of a need for affordability. 

Now, our core responsibility is to keep the power on and the water flowing. Our customers are consistently ranking affordability and reliability as their top priorities. But there is an inherent tension between the two.

We know that every dollar of investment eventually shows up on our customer bills, and we must consider the community’s realistic ability to afford what we’re asking them to pay.

This year’s electric and water plans include deferring about $100 million in large infrastructure projects, spreading out or delaying work where it’s safe to do so, specifically to soften the impact or the rate impacts to our customers.

Now, while the water utility has deferred where they can, the Willamette treatment plant is an investment that we cannot avoid. It is something that we absolutely have to do.

Last month, staff presented a detailed comparison of four different treatment plans, ranging from 10 (million gallons per day) to 30 MGD capacity, including preliminary construction estimates. And following an in-depth discussion, the board provided preliminary direction to the staff to pursue the 30 MGD plan.

Since then, staff has taken the next step in the process, completing a more detailed cost analysis, incorporating overhead inflation, consulting time, and other costs to arrive at total estimated project costs for two treatment plant capacities—19.4 MGD and 30 MGD.

Last month we presented preliminary construction costs in today’s dollars: $337 million for the 19.4 MGD and the $392 million for the 30 MGD.

Now those numbers have not changed since last month. Our updated numbers account for inflation overhead and the cost of EWEB and consultant labor to develop conservative all-in project costs of $431 million for the 19.4 MGD and $488 million for the 30 MGD.

Now, as noted, overhead is an existing EWEB cost that is already part of our budget. Per policy, overhead is allocated to this project the same way it would be for any other of our capital projects. And there is over $100 million in contingencies and inflation assumptions in both estimates.

And this is a buffer for uncertainty in the scope, estimating accuracy in case the actual costs are more than currently estimated.

And consistent with prior years and standard practice, the budget and the long-term financial plan are built based on total estimated costs.

Prior to this meeting, we completed an initial evaluation of financial health metrics for both the 19.4 MGD and the 30 MGD plants, which both meet project goals. What we found is that both plants will create a strain on the water utility, but the 30 MGD plant strains them more. That’s because the strain is driven by the amount borrowed. The larger the project, the greater the borrowing required.

I think of it like buying a house. A bank might approve you for a $1 million mortgage. But just because you qualify doesn’t mean you should tax yourself to purchasing a house of that amount. And doing so would leave you out of room to handle anything like a job loss, medical bills, a new roof. 

And I think really the same principle applies here. It’s really a choice of whether we want to mortgage our future ability to meet maybe unseen needs or unforeseen needs.

But the 30 MGD plant would put the water utility at the very top. Even though we can still afford them both, it still puts us at the very top of our borrowing limit, giving us less flexibility for other capital needs, including an emergency or cost that we can’t predict yet.

Now, with that in mind, considering the total cost of their impact on EWEB financial metrics, staff has recommended pursuing the 19.4 MGD option as it is the most prudent investment to meet the project goals.

Management tonight is really seeking the board’s direction. We want to make sure we get the direction from you before we move forward on developing specific scenarios. And with that, I will turn it over now to our chief operating officer of water, Karen Kelley.

Karen Kelley (COO): Balancing reliability and affordability can require difficult choices, and the plan includes $36 million in projects that are deferred three to five years.

This required careful consideration of how projects interconnect and are sequenced. For example, since the new Willamette treatment plant will allow you to deliver water to base-level reservoirs without crossing a river, we were able to push out two river crossing projects to later in the plan. 

This is the kind of tradeoff staff have worked through project by project. The plan isn’t based simply on what can be delayed, but what we can responsibly delay, given how the whole entire system functions together.

We have said this before, but it bears repeating. The Willamette treatment plant is the single most important investment that we can make for the water utility to defend against future risks, and that is why we are recommending allocating the bulk of the funds in the 10-year CIP for its completion.

This investment will impact rates, but it will also bring immense value to our community and it is an investment worth making. And now I’m going to hand it over to Deborah to talk about the initial rate trajectories and financing options moving forward.

Presenter: With more about the CIP, the capital improvement plan, EWEB Assistant General Manager and Chief Financial Officer Deborah Hart:

Deborah Hart (EWEB, CFO, assistant general manager): We’ve identified a revenue requirement increase of 19.75% over each of the next three years, and the revenue requirement remains elevated through 2031 before dropping off sharply in 2032.

As noted, the Willamette treatment plant is a critical legacy investment for this community that requires rate increases beyond what was implemented in the past. 

However, it is important to reiterate General Manager Hairston’s earlier point, that rates are artificially low as we have not kept pace with the rate of inflation in the industry.

If rates had mirrored inflation, we would be at $53 dollars today, $8 higher than where we’re at. Additionally, water rates are currently among the lowest in the region.

The average residential customer using 9,000 gallons per month (which is typical of a single family home with moderate outdoor usage) pays approximately $1.50 a day for water. Lower-use customers, such as those living in an apartment with no outdoor water use, pay about $1 a day for water.

At the end of the 10-year CIP, the average single family household would pay approximately $3.40 cents for 300 gallons of water a day, about a penny per gallon.

We recognize that most of our customers pay for both electricity and water. And so it makes sense to look at the total bill impact. As noted last month, we made deliberate deferrals and committed to future efficiencies and savings on the electric side to arrive at a rate trajectory that is more in line with the Board’s rate guidance.

As a result, the 2027 electric revenue requirement is 3.5%. Because the water utility makes up a smaller share of the average customer’s total utility bill, even a large percentage increase on the water side translates to a more modest impact when the two bills are combined.

The combined bill increase for the average residential customer, using 9,000 gallons of water and 1,600 kilowatt hours of electricity, is projected to be approximately 6.2%.

And so I’m going to turn it back over to General Manager Hairston,

John Hairston (EWEB, CEO): Right. Thank you team. And so, we came in to this with the direction from the board to vet a 30 MGD plant from the last board meeting. We’ve done so. We have identified some challenges that we wanted to bring to your attention and make a recommendation we felt was better in line with where we thought we needed to go as a utility.

So with that, we are looking for input from you on not only the direction on the size of the plant, but also some of the financing strategies that we’ve presented today.

Presenter: EWEB Commissioner Sonya Carlson:

Sonya Carlson (EWEB, commissioner): At our last meeting, I was cautious around moving to the 30 (MGD) as well. 

So with the change in the costs in the additional look, which I appreciate, the staff went back and did, I know that these are massive projects and this is not the end-all. It will change as we get more information throughout. 

But I am supportive of moving to the 19 (.4 MGD) over the 30 (MGD), especially because we don’t know if we can get water rights for the 30 and we don’t know what those costs are either.

So I appreciate the opportunity to be more conservative and go with the 19. 

Presenter: Commissioner John Barofsky:

John Barofsky (EWEB, commissioner): I think that the discussion we had last month was a responsible discussion. And I think that with the information that we had, and looking forward for what might be best for our community, the 30 million gallon was an option that presented itself as something that long-term would have been good.

I think now that we’ve seen more of the actual financial impacts and some of the other information that we’ve gotten, I also agree that I think 19.4 is probably the direction that we should go. And I think it shows our ratepayers and our community that we are looking out for the long-term stability of our community’s water system and trying to do everything that we can.

And last month, we thought that we could really reach for the stars and do what was best for the community. Upon further look, we realized that, okay, that isn’t obtainable at us at this point. 

So, I really do wish we could build a 30 million gallon one and try and pursue the water rights and all of those things. But the way that it’s presented to us, I don’t think we’ll be able to at this point. 

So I would move forward with building the budget on 19.4 million gallons.

Presenter: He later addressed the rate options: Should EWEB customers pay higher rates for a shorter period of time, or spread out smaller increases and pay more over a longer period. John Barofsky:

John Barofsky (EWEB, commissioner): I think the question that they’re asking us is, is 19.75% palatable for three years. So that’s $9 first year, $10 more the second year, $13 more the third year. And then it drops down to $7 the fourth year after that.

So basically we’re talking $40-in-four-years increase to it. So that’s almost doubling our water rates in four years. That’s the question that I look at. 

And am I comfortable with that? No. Sometimes things aren’t comfortable when we’re sitting in these chairs. And we have to balance our community’s needs against, you know, two different things.

I absolutely understand the affordability and the people that this is going to affect the most. And yet I also know that there’s 200,000 people that are going to need water in this community for the next 100 years. And so making that balanced call is really tough.

Presenter: Commissioner Tim Morris:

Tim Morris (EWEB, commissioner): At our last board meeting, I remember bringing up off-ramps of going with a 30 megagallon and I didn’t expect it to come one month later, of what a potential off-ramp looks like. But I agree with Commissioners Barofsky and Carlson.

I think we were seeing what it looks like to build a project that is resilient, is looking to help support our community for future environmental impacts and natural disasters, and also being prudent with what we’re spending today.

I also see that last conversation as a positive thing and us moving in this direction as we’re acknowledging the importance of the water treatment plant, we’re putting our faith and support in staff.

And I think that’s exactly what we’re doing right now as well, if we move forward with the 19.4, is that we’re still putting our faith in you in completing this project, in considering all the options that are there.

So I would support the 19.4 moving forward. I think it makes sense to me. It is upgradable and or can be developed in the future—just to add on, once we get to that point of being able to continue moving towards a 30 megagallon. But, yeah, I think we’re all rowing in the same direction here. 

I know the Oregon Legislature right now is facing a huge crisis on the Medicare / Medicaid that they’re obligated to pay, that there’s a huge funding gap that’s also in line with some of the other economic issues that have come forward with grocery prices, affordability, and housing. 

And so right now with low-income families in mind, having that high ask now is something that I find concerning,

I think that a smoothing over time, scaling up rather than scaling down, has the ability to also help support families that are on those low-income programs like SNAP and LIHEAP, but also those who are on Social Security that don’t get their fixed income updated multiple times, you know. So that’s where I am thinking at the moment.

Presenter: Commissioner Mindy Schlossberg: 

Mindy Schlossberg (EWEB, commissioner): I really appreciate the staff’s ability to quickly get us updated budget numbers, because oftentimes it takes a while to do that. So thank you for the work that went into that.

I also support going for the 19(.4 MGD) capacity plant for all the reasons that have already been said,

In terms of the financing strategy priorities. I support the pay-as-you-go kind of model instead of pushing things out. And I feel like we have in the past made a lot of decisions because we don’t want to burden customers with increasing rates and things like that.

And then we kind of get in trouble. It ends up not being so great for us because then we have to play a lot of catch-up later. And I don’t want to do that with this project.

So whichever the best kind of pay-as-you-go—and that’s what I support. 

We’re deferring $36 million worth of work. Do we have an estimate of what that will end up actually costing us? Because every time we defer, everything costs more, right? 

Presenter: John Hairston:

John Hairston (EWEB, CEO): I will say a lot of it has to do with what we think the rate sensitivity will be for our customers.

You know, we’ve talked internally. For me, it was important that we try to stay under that 20% range. If we do blend in additional projects, we’re going to go over that.

So it’s a combination of looking at what we think the affordability, the perception of our customers will be, having to go above that 20% range for a number of years versus staying slightly under that, deferring projects that we’ve looked at that we believe we can defer without any real big impact detriment to the system. 

But we have to do them and we will do them. But nonetheless, if we can push them out, dampen the rate impact. That’s what we were considering when we sat down and went through these things.

Presenter: One commissioner expressed concern that some projects would be delayed. EWEB Commissioner John Brown:

John Brown (EWEB, commissioner): I live north of the river. I represent everybody north and east of the river. We get our water from 40th and Patterson and College Hill. So if we don’t harden those crossings, if we have this catastrophe, everybody north of the river, how are they going to get their water?

You’re putting 28,000 people at risk of not having water, because we don’t want to do either Knickerbocker or the one on the ground and everything else. 

We represent geographic portions of the city and I got to go to bat for everybody in Wards 4 and 5, and I’m going to bat for them. 

To me, that’s not acceptable, because I don’t think we should be put at a much greater risk than 80% of the rest of the community that everybody, South Eugene and south (of the river), they get the new treatment plant and they get water and they get resiliency and we don’t.

So how do we work through that? I’m just planting that seed because it’s going to come up again. How do I tell the people in Wards 4 and 5 that, ‘Sorry, our water lines are all broken because we didn’t fix them because everything has to cross the river.’

Presenter: EWEB CEO John Hairston:

John Hairston (EWEB, CEO): Are you referring to a sequencing issue? Because we will harden those systems. But we have them pushed out just to be able to manage some of the costs that we have budgetwise, but it will get done.

John Brown (EWEB, commissioner): All right. So I think a consensus is that 19.4 is it for the capacity at this time… 

I would just like to say we’re talking about the financial impact here with no federal assistance. We’ve got a legislature and leadership now that is trying to spend $350 million putting new seats in a basketball arena. And to me, that’s not a priority.

And you know, we talk about communities getting behind things. If our community got behind this to our elected officials and said, ‘We need help because this is a huge lift,’ this is the type of thing that I think community support needs to get behind. 

But we need help and we need to cut some of these costs down because for me, I could care less what the seats in the Moda Center are like. I’m really concerned about whether or not we have a second water source and whether or not we protect this community. 

We need some heavy lifting with our elected officials and community support to get behind this thing, because this is going to affect every one of us, it’s going to hurt.

People are not going to water lawns. Consumption is going to go down, MWMC’s (Metropolitan Wastewater Management Commission) rates are going to go down because we’re not going to be dumping all the water into the system, the whole thing is going to go down.

And we’ve got a fixed-rate commodity, you know, it costs so much to pump up 10 million versus 20 million. It’s going to cost us more.

And so I’m hoping that we can get behind our legislature and our elected officials to get us some help. And I don’t care if it’s $5 million or $50 million or, you know, whatever, but I think we need an effort to do that.

Presenter: One month after asking staff to look at the costs for 30 million gallons a day, the EWEB board chooses the more prudent option, and will look at rates for a 19.4 MGD water treatment plant on the Willamette River.