Departments of Finance & Utilities
Reference: Utility Rates & Construction GMP Presentation
To: Mayor Gregory Mills and Members of City Council
Through: Michael P. Martinez, City Manager
Prepared By: Catrina Asher, Director of Finance
Scott Olsen, Director of Utilities
Date Prepared: January 23, 2024
PURPOSE
To provide Council with information on the Water and Wastewater funds, including project updates, 2024-2025 proposed rate and fee changes, and on the next phase of the Water Treatment Plant which includes a contract amendment for construction based on 100% design.
PART I - PROJECT UPDATES
BACKGROUND
Water Fund
Since 2021, the water fund has completed approximately $77.7 million in projects, including capital improvements, capacity expansions, and repairs and maintenance to the existing system. Projects completed include:
- South Adams Interconnect pump station which allowed for the purchase of supplemental treated water from the South Adams County Water & Sanitation District;
- Completion of the 2MG Elevated Water Storage Tank;
- Design of the Lutz Reservoir, which will allow for storage of non-potable water;
- Design for the replacement of more than 20,000 linear feet of water lines in future years;
- Design for the installation of more than 1,000 linear feet of new water lines in future years;
- Construction of more than 1,000 linear feet of new water lines throughout the City.
- Acquisition of water rights;
- Design and construction of portions of the new Water Treatment Plant, including foundation work and ordering of long lead items (materials and equipment that require extended time to receive);
Wastewater Fund
In 2023, the City restructured the buy in agreement with Metro Water Recovery by using a combination of reserve funding and financing to pay off the Metro buy in agreement at 2023 rates. This action saved the City and its wastewater customers an estimated $68M over 42 years.
This restructuring and payoff occurred in June 2023 and flows were transferred to Metro Water Recovery in July 2023. As of the end of 2023, the City’s wastewater treatment plant has been decommissioned and termination applications for all permits related to the treatment of sewage have been submitted.
Future Capital Projects and Repairs & Maintenance Plans
The Water Fund Capital Improvement Plan includes an estimated $329 million in projects from 2024-2033. These include completion of the Municipal Service Center, construction of Lutz Reservoir, continued water line replacement design and construction and water rights acquisitions, completion of the new Water Treatment Plant, and many other smaller projects necessary for the expansion and maintenance of the water operations.
The wastewater fund has no plans for significant capital projects as all treatment activities are now provided by either Metro Water Recovery or the Town of Lochbuie. It is important to note that the City maintains ownership and maintenance responsibility for the sewer collection system.
CRITERIA BY WHICH COUNCIL MUST CONSIDER THE ITEM
This portion of the report is informational and no decisions are being requested.
FINANCIAL IMPACT
The financial impact of the past and future projects are factored into the financial models for the funds. This portion of the report is informational and no decisions are being requested.
PART II - 2024 USAGE RATES PROPOSAL
BACKGROUND
The City reviews user rates annually and utilizes the services of professional consultants to ensure rates are set using methods that are compliant with laws and regulations and also to ensure best practices are being utilized. The City currently utilizes the services of Stantec, a global consulting firm with expertise in utility rates and financial analysis.
For the 2023 rate analysis performed by Stantec, which forms the basis for the water rate proposal in this report, staff requested that Stantec review water rates, including the residential water rate tier structure, usage rates, and impact fees.
Wastewater costs and rates are less volatile than water costs and rates, and therefore the analysis for these rates was performed by staff.
Water Fund
Residential tier structure
The tier structure refers to various usage levels and rates applied. The City’s tier structure has been in place for at least 10 years with a minor update in 2018.
When reviewing the City’s water rate tiers, staff’s priorities were to ensure that the lowest tiers support affordability for customers with low water usage throughout the year and to incentivize water conservation by compressing the higher usage tiers.
When evaluating Tier 1, staff reviewed average winter water usage which eliminates the volatility of irrigation season and would be a reasonable estimate of the base amount of water necessary for most residential customers. This amount was between 3,500 and 4,000 gallons per month. To ensure all customers have access to affordable water for basic needs, staff recommends increasing the Tier 1 threshold from 3,000 to 4,000 gallons per month. This will cause some customers to experience a decrease in the water portion of their utility bills.
When evaluating higher usage tiers, staff considered residential summer usage levels and recognized that few customers were breaching tiers 3 and higher in the current structure. Our higher users put capacity strain on the system and rates for higher usage levels should reflect that strain. Additionally, the current structure does not incentivize water conservation.
Staff is recommending compressing Tiers 2-5 to better reflect the impact of high usage and to incentivize those who conserve water during irrigation season.
The current and proposed tier structures are represented in the following table:
|
Column1 |
Current Structure |
Proposed Structure |
|
Tier 1 |
0 - 3,000 |
0 - 4,000 |
|
Tier 2 |
3,001 - 20,000 |
4,001 - 10,000 |
|
Tier 3 |
20,001 - 30,000 |
10,001 - 20,000 |
|
Tier 4 |
30,001 - 40,000 |
20,001 - 30,000 |
|
Tier 5 |
50,001 or more |
30,001 or more |
Water Rates
Water rates are the primary funding source for the water fund and are necessary for funding ongoing operations, including repairs and maintenance of the current system. Growth related revenues (impact fees) are not an allowable funding source for operational costs and other revenue sources for the fund are very limited due to TABOR requirements. Therefore, it is important that rates are maintained at levels that fund operational costs.
The City has been impacted by the effects of inflation on operating costs, just as other businesses and utilities have been. While inflation has risen, water rates have remained fairly steady. When evaluating rates and costs, the common comparison is the Conusmer Price Index (CPI). However, the water fund in particular has a number of construction projects, including repairs and maintenance, which follow more closely with the Production Price Index (PPI) for non-residential construction.
The following chart uses water rates, CPI and PPI in 2015 as a baseline (set at “1”) and shows how all three have changed over the past 10 years, including the current 2024 water rates.
As shown in the chart, water rates decreased in 2020, were reset in 2022, and remain at that level today which is closely in line with rates as they were in 2017. During that same time period both CPI and PPI have increased considerably.
The other key financial metric considered in rate setting is operating revenues compared to operating expenses, both currently and in the future. By considering the future state of the fund, we can recommend rate changes that smooth the impacts of increases and avoid causing rates to increase or decrease rapidly.
The following chart shows a comparison of operating revenues and operating expenses from 2019 through today as well as projected financial results for future years. Operating revenues should always be trending up, in line with operating expenses. You’ll see that operating expenses increase in future years which is due to a combination of significant water line replacements (system maintenance), as well as increased operating costs when the new water treatment plant begins operating. As the plant will be providing a higher level of treatment than previously (including treatment for PFAS and water softening), operating costs will increase.
The water rate increases factored into the chart include a 7% increase effective April 1, 2024 and anticipated increases of 6% in 2025 and 5% annually thereafter. Rates will continue to be reviewed annually and adjustments will be proposed to Council as needed.
It is important to note that the proposed increases impact the water base charge and the water usage rate. It would not be applied to other fixed fees.
Wastewater Fund
The City’s wastewater is processed by either Metro Water Recovery or the Town of Lochbuie. The rates the City pays to those processors are set by the processors annually and may differ from each other. Therefore, staff’s recommendations for rate changes for wastewater are separated by customers served by the two processors.
The City’s wastewater rate history is outlined in the chart below, with 2015 being set as a baseline of “1”. When the City decreased utility rates in 2020, the decrease applied to wastewater rates. However, the rate reset in 2022 only applied to water rates. Wastewater rates have remained at the decreased level from 2020.
Wastewater Rates - Lochbuie
The Town of Lochbuie voted in November 2023 to increase rates by 3%. Staff are recommending that the fixed fee and usage rates for customers served by Lochbuie be increased by that same amount of 3% and that future rate increases be indexed to the Town of Lochbuie’s approved increases.
Wastewater Rates - Metro Water Recovery
Metro Water Recovery has increased rates several times in recent years while the City’s rates remained flat or decreased. Most recently, Metro Water Recovery approved an increase of 7% for 2024. Staff are recommending an increase of 7% plus an increase of 3.5% to account for prior year Metro increases that were not reflected in the City’s rates. Staff recommend indexing future rate increases to increases approved by Metro and that a 3.5% annual “catch up” increase be approved for 2024-2026.
It is important to note that the proposed increases impact the wastewater base charge and the wastewater usage rate. It would not be applied to other fixed fees.
Overall Rate Impact
The following tables show the estimated impact on a total utility bill for a customer that utilizes 4,000 gallons (average winter consumption) and a customer utilizing 15,000 gallons per month (average summer consumption with 4,000 winter quarter average wastewater consumption). These examples are for customers serviced by Metro Water Recovery.
The customer using 4,000 gallons per month would see an effective increase of 3.5%, or $2.74 per month on their bill. The customer using 15,000 gallons per month would see an effective increase of 6.5%, or $8.85 per month on their bill.
The following chart represents an average utility bill for the City compared to neighboring communities. This is based on 15,000 gallons of water usage (summer) and 4,000 gallons of wastewater (average WQA) for a customer serviced by Metro Water Recovery. As noted in the table, the City’s rates will keep our utility charges below average and lower than many of our neighbors.
CRITERIA BY WHICH COUNCIL MUST CONSIDER THE ITEM
Rates have been developed with input from professional consultants with expertise in this industry as well as cross-departmental collaboration between the Utilities Department, Finance Department, and City Manager’s Office/Budget Team. Rate proposals comply with applicable regulations regarding the use of various types of revenues.
FINANCIAL IMPACT
Rates proposed are necessary to maintain the fiscal stability of the utility funds and to ensure projects can be completed as needed.
PART III - UTILITY IMPACT FEE PROPOSAL
BACKGROUND
Impact Fees are fees charged to developers/builders at the time of permitting and are intended to fund projects that expand the City’s capacity to provide services to the new development. This aligns with the City’s historic preference that “development pays its own way”. Impact fees are explicitly prohibited from being used to fund ongoing operational costs.
Impact fees are evaluated every 3-5 years, or if there are substantial changes to the future capital improvement plan. In the case of the Water and Wastewater Funds, there have been significant changes to the future financial plans for the funds and therefore the impact fees being charged have been reassessed and are proposed as follows:
Water Fund
Staff utilized the services of Stantec to evaluate the impact fees being charged for the Water Fund. The primary driver of impact fees is the cost to expand a system or expand the provision of services. Because of the long-term nature of these projects, they require substantial planning and the accumulation of financial reserves. In order to ensure the City is planning appropriately and adequately funded for future projects, staff have considered anticipated projects for the Water Fund spanning 15 years into the future. This increases the number of projects being considered in the fee calculation and allows for the accumulation of reserves so that adequate funds are in place for future needs. Additionally, notable increases in the cost of projects over the past several years (as reflected in the PPI shown earlier in this report) have impacted the financial needs of the fund.
The proposed impact fees for water also consider the recent updates to fee-in-lieu charges, as approved by City Council in December 2023, to ensure that project costs are not being accounted for twice. For this reason, staff and the consultant are proposing two impact fees: one for developments that have provided water dedication and one for developments that have paid a fee-in-lieu of water dedication.
The proposed impact fees are as follows:
Wastewater Fund
The wastewater fund currently charges impact fees based on those set by the processors (Metro Water Recovery and the Town of Lochbuie). Those fees are passed directly to the processors to fund system expansion.
Additionally, the City charges an impact fee of $837 per single family connection. As the City will no longer be processing wastewater and will have less need for expansion, staff recommends repurposing this as a connection fee at the same amount. This fee would cover the costs the City incurs for connecting a new customer, including materials, staff time, etc.). This change from an impact fee to a connection fee would have no impact on the cost of development.
CRITERIA BY WHICH COUNCIL MUST CONSIDER THE ITEM
Impact fees have been developed with input from professional consultants with expertise in this industry as well as cross-departmental collaboration between the Utilities Department, Finance Department, and City Manager’s Office. Fee proposals comply with applicable regulations regarding the use of various types of revenues.
FINANCIAL IMPACT
Fees proposed are necessary to maintain the fiscal stability of the utility funds and to ensure projects can be completed as needed.
PART IV - WATER TREATMENT PLANT CONSTRUCTION CONTRACT
BACKGROUND
In early 2022, City Council provided staff direction to move forward with the design and construction of a new water treatment plant, including water softening treatment processes. The City contracted with Brown and Caldwell to design the new water treatment plant. The City also moved forward with a Construction Manager at Risk contract (CMAR) with Garney Construction to complete Phase 1 construction of the new facility. The main impetus for the design and construction of the new plant is: 1) to comply with the Colorado Department of Public Health and Environment (CDPHE) discharge permit related to the discharge of brine from the current Reverse Osmosis (RO) treatment process; and 2) to expand capacity for future growth.
A groundbreaking ceremony for construction was held in July of 2022, as design of the facility reached 60%.
Design Background and Update
Design of the new 20 million gallon per day facility was completed in November of 2023. The facility will include several treatment processes including biological denitrification, pellet softening, greensand filtration and granular activated carbon (GAC) filtration.
Biological denitrification will remove nitrate from the source water, which was one of the main reasons for constructing the RO plant in the 1990s. This treatment process is typically used at wastewater treatment facilities and will be implemented for the first time in the State of Colorado at Brighton’s water treatment plant. Pellet softening will be implemented at the plant to reduce the hardness of the water and remove manganese. Greensand filtration, a process currently used in conjunction with RO at Brighton’s water treatment plant, will be implemented to further remove manganese, microorganisms and iron from the source water.
GAC filtration was added to the plant design due to the rising concerns and anticipated regulations related to PFAS in drinking water. Brighton found a unique opportunity to be able to add a process to the treatment plant that was already in design to ensure compliance with state and federal PFAS regulations. Many other jurisdictions throughout the nation are struggling to find funding to design and construct facilities to remove PFAS. Some of these jurisdictions have found themselves in unfortunate financial situations having recently constructed new water treatment plants without PFAS removal capabilities.
The CDPHE provided their approval of the final design for the water treatment plant in November of 2023.
Construction Update
Following the groundbreaking ceremony in July of 2022, Garney Construction began work on mobilization and site preparatory work. For such a large project, this effort can take many months and thousands of staff hours. Since completion of mobilization and preparatory work, Garney has been working on construction of the foundations for several of the new facilities that make up the new treatment plant. If you drive by the facility or view updated aerial imagery in the City Manger’s Weekly Update, you will see the large amount of concrete that has been placed and large construction vehicles moving about the site.
To date, 250 of the approximately 1,400 days of construction have elapsed, 9.3% of the earned value (dollars spent) has been completed, 6,600 of the total 17,000 cubic yards of concrete have been placed and over 66,000 labor hours have been completed without incident!
The facility is expected to move into the final construction stages in Q4 2026 and into start up and commissioning in Q1 2027. The facility will be treating and providing water to all our customers for the Summer of 2027.
Phase 2- Guaranteed Maximum Price (GMP) Contract Amendment
The Phase 1 contract for the Water Treatment Plant between the City and Garney Construction was signed in August of 2022 for $50,755,402. The Phase 1 contact allowed for mobilization, site grading, early procurement of long lead items and limited foundation work to commence prior to a final design being completed. As set forth in the Phase 1 contract, a contract amendment would be proposed for Phase 2 (GMP) following submittal of a complete plant design. A complete plan set allows the construction manager to provide pricing and seek competitive bids from subcontractors.
Garney Construction submitted the final GMP cost to the City in December of 2023. The GMP submitted to the City was $167,271,845. In an effort to ensure the Project Team was delivering the most cost-effective product, a large value engineering effort was undertaken. Brown and Caldwell, City staff, Garney Construction, Carollo (City’s Owner’s Representative) and numerous subconsultants/subcontractors made minor adjustments to the project to realize a savings of $2,002,621.
The cost to construct Beebe Draw Raw Well D was included in the Scope of Service for the Phase 1 contract with Garney Construction. The City has accounted for this project as a separate line item in the Water Fund budget, and therefore, this cost has been removed from the cost to construct the Water Treatment Plant in the table below for clarification purposes.
**Beebe Well D is budgeted separately, but included in Scope of Services
The Phase 2 (GMP) contract amendment is for a total of $114,513,822. Please refer to the table below for a cost breakdown of this total.
** Includes Beebe Well D
Project Contingency
The Guaranteed Maximum Price moniker reflects the price that is guaranteed to the City is the price given for the Scope of Services in the contract. This does not mean that the project is without risk to the parties to the agreement. Garney Construction assumes the risk that they did not include pricing or included inadequate pricing to cover the Scope of Service in the contract. The City assumes the risk of unforeseen changes to the Scope of Services. To account for this risk, a contingency in the amount of $15,000,000 has been included in the City’s project budget. This contingency is not included in the Phase 2 contract amount because Garney is not guaranteed this amount of money and would require a contract amendment in order to access those funds.
The Owner’s Representative (Carollo Engineers) has subcontracted with Canterbury Construction Management Services (CCMS) to provide input on this contingency to the City. The project contingency suggested by CCMS has evaluated three types of project risk: 1) systemic; 2) project-specific; and 3) escalation.
As another means of overall project cost control, the City has opted to maintain control over the majority of the budget associated with project risk. Garney Construction will have to request and justify use of project contingency funding, and requests will be vetted by the Owner’s Representative team. However, the Phase 2 contract amendment proposes to allow Garney Construction to control a $2,000,000 contingency. Any unused portion of this contingency remaining at the end of the project will be split 50/50 between the City and Garney Construction. This contractor-controlled contingency has been proposed as an incentive for Garney Construction to control the cost of the project since Garney will benefit financially from not using the project contingency toward construction.
Cost Review
CCMS has also performed an independent cost review of the GMP on behalf of the City to ensure further cost control. CCMS has concluded the following in its review of the GMP submitted by Garney Construction:
- The lump-sum CMAR fee is reasonable and below the contractor’s fee submitted on several other similar projects;
- Rates used in Garney Construction's Basis of Estimate are reasonable; and
- CCMS recommends moving forward with the Phase 2 (GMP) contract amendment as presented in Garney Construction’s Basis of Estimate.
CRITERIA BY WHICH COUNCIL MUST CONSIDER THE ITEM
The GMP submitted to the City has been deemed reasonable and appropriate by professional consultants working on behalf of the City of Brighton. Strategies and innovative project approaches have been implemented at all levels to ensure cost control. It is in the best interest of the City of Brighton utility customers to move forward with the Phase 2 (GMP) amendment to the Garney Construction CMAR contract as presented. Approval of such an amendment will allow for compliance with CDPHE regulations and provide water supply for the continued growth of the City into the future.
FINANCIAL IMPACT
Adequate funding for the Phase 2 (GMP) contract amendment has been included in the budget and financial models for the City.
Attachments:
- Presentation
- Utility Rate Sheet - Current
- Utility Rate Sheet for April 1, 2024 based on proposed rates