To: Honorable Mayor and Members of Town Council
From: Mark Marlow, P.E., Director of Castle Rock Water
Tim Friday, P.E., Assistant Director of Castle Rock Water
Through: David L. Corliss, Town Manager
Title
Discussion/Direction: Extraterritorial Services Agreement at Bell Mountain Ranch [unincorporated rural residential subdivision south of Town limits]
Body
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Executive Summary
Bell Mountain Ranch Metropolitan District (the District) owns and operates the water system that serves the Bell Mountain Ranch (BMR) community, a subdivision of 321 single family lots in unincorporated Douglas County located contiguous to the Town’s southern border. The District has approached the Town to provide water service through an extraterritorial agreement. This has been an ongoing conversation between the Town and the District for almost a decade and, in 2019, District representatives reviewed various options to solve ongoing issues with running a small community water system and decided that connecting to the Town’s system would be the best option.
Currently, BMR operates two Denver Basin groundwater (non-renewable groundwater) supply wells and an ion exchange water treatment process to remove iron and manganese. In order to continue this process, BMR would have to make significant investments in the treatment process in order to comply with Colorado Department of Public Health and Environment (CDPHE) regulations regarding the byproduct of the treatment process. More specifically, ion exchange results in technologically enhanced naturally occurring radioactive material (TENORM) in the residual waste. CRW produces similar residual waste, but is capable of managing the material in accordance with CDPHE requirements. New regulations will be promulgated in January 2021 which will make it even more difficult for BMR to comply.
In addition to the regulatory challenges, BMR does not have access to a long term renewable water supply, only non-renewable groundwater. BMR recognizes the importance of a long term renewable water supply and connection to the Town will provide this renewable supply.
Extraterritorial agreements are common for water utilities and can provide additional economies of scale, which if done properly, can substantially benefit existing rate payers. The Town currently has one extraterritorial agreement to provide water service to the Macanta development (f.k.a. Canyons South). A ten percent extraterritorial service charge is in place for this development. CRW proposes to serve BMR through a similar extraterritorial agreement described in more detail below.
History of Past Town Council, Boards & Commissions, or Other Discussions
CRW presented the concept of an extraterritorial agreement to the Water Resources Committee in November 2013. The WR Committee was receptive to this idea and CRW continued to work with the District on draft terms for a service agreement.
On October 6, 2020, CRW presented draft terms to the WR Committee and received a favorable response.
Discussion
BMR is a platted subdivision zoned - Planned Development Nonurban (PDNU) - in unincorporated Douglas County and is contiguous to the Town on the Town’s southern boundary (see Attachment A - Site Location Map). The subdivision originally was platted for 305 single family homes and currently includes 305 occupied homes within its boundaries. An additional 16 home sites have been added bringing the total to 321. BMR operates its own public water system, but has struggled with water supply and water quality issues over the years, and more recently is under the gun to solve a compliance matter related to water treatment residuals. Representatives of the District have met with CR Water staff numerous times over the past seven years and requested that the Town consider options for connecting BMR to the Town’s water system. They have considered other alternatives to solving water quality issues, including upgrading their existing water treatment system, but that will not solve their long term water supply issue.
The draft terms being contemplated for this extraterritorial agreement are summarized as follows:
• Agreement will be exclusive to BMR (321 homes and 2 irrigation taps) and will be perpetual;
• BMR residents will become CR Water customers subject to the same rates and fees plus a 10% extraterritorial surcharge;
• System development fees will be recovered over a 30-year period at an interest rate of 2.54% (CRW’s current average carrying cost of debt), BMR would be assessed at 2020 system development fees;
• System development fees will be partially offset by the depreciated value of contributed assets plus the value of excess groundwater rights at $2,500/acre foot (AF);
• Town will acquire additional property in BMR at fair market value for future expansion of the existing Bell Mountain Ranch Water Treatment Plant (BMRWTP) and for installation of raw water pipelines from additional wells to the BMRWTP;
• BMR will pay for the infrastructure required to connect their system to the Town’s (see Attachment A) and the cost will be rolled into their debt to be paid to the Town. Town will manage design and construction of connection;
• Based on approved 2021 rates and fees, estimated total monthly bills for BMR customers will range from $142 to $277 and average $185. This includes a fixed monthly charge of $129 for system development fees, debt service, fixed monthly charges common to all CRW customers and a 10% surcharge. Individual bills will depend on actual usage and final terms and will be adjusted annually based on CRW rates and fees as approved by Council;
• All groundwater rights and fixed assets comprising the water system will be deeded to the Town. BMR will relinquish all control over the BMR water system;
• Town will own, operate, maintain and replace (as necessary) the water distribution system in BMR as part of CRW’s service area. Customers in BMR will be customers of CRW and subject to the same rules and requirements for water service as other customers of CRW, including all water conservation requirements;
• CRW will administer customer accounts, read meters on a monthly basis, and send bills directly to customers on a monthly basis;
• The District will be required to adopt CRW’s rules and regulations, rates and fees on an annual basis to ensure that enforcement of the rules and regulations, rates and fees can be implemented by CR Water;
• Water supplied to BMR will not be returned via sanitary sewer; hence, there is a loss of use of the large majority of this water. However, the water rights to all irrigation and septic return flows will be retained by CRW; and
• Once the agreement is fully executed, CRW will immediately own and operate the system. CRW will have the option to improve and expand the plant as deemed necessary to serve the Town’s needs or could take the plant offline indefinitely once the connection to the Town’s system is fully operational.
Some of the advantages and disadvantages to providing extraterritorial services to BMR include:
Advantages
• Economies of scale (for both parties);
• Improved water age for the Town on a long, dead end line;
• Potential revenues above cost of service from water sales to a wholesale customer (10% surcharge on system development fees and all rates and fees worth over $2.6M over 30 years);
• Regional economic and social benefits by connecting a non-renewable groundwater-reliant community in Douglas County to a renewable water supply;
• Preservation of the Town’s non-renewable groundwater supplies by eliminating aquifer usage near Town borders by surrounding communities;
• Additional assets that could benefit existing Town customers including a water plant easily expandable to 1.3 million gallons per day (MGD) which is almost 1 MGD more than needed to serve BMR as well as additional non-renewable groundwater rights and well supplies (some already owned by CRW) in the area that can be connected to the plant; and
• Real property across from the existing water plant that could be used to build a larger future water plant for service to the broader Town.
Disadvantages
• Town loses benefit of return flows because BMR uses septic systems for wastewater disposal.
Budget Impact
By serving BMR, the Town would have increased operating expenses that would be offset by corresponding revenues. Rates and fees would be charged at 110% of the adopted rates and fees as established by municipal code (13.12.040 Extension of services outside municipal boundaries) unless approved otherwise by Town Council. The cost to serve BMR should be borne by the District and should not be subsidized by any other ratepayers. Therefore, applicable system development fees need to be collected as part of the agreement so as not to place any financial burden on the existing customers. As part of our analysis, CRW retained Stantec to conduct an independent review of retail service to BMR, and they agreed with the approach proposed above to recover the costs of connecting BMR customers as retail customers (see Attachment B for a copy of Stantec’s technical memorandum). CRW also retained Burns and McDonnell (B&McD) to review BMR’s existing assets and evaluate the options for improving and expanding BMR’s existing water plant (see Attachment C).
Staff Recommendation
Connecting BMR to the Town’s water system as retail customers through an extraterritorial agreement is feasible. Under the draft terms presented above, the Town will be made whole for extending water service to BMR and will benefit through economies of scale and acquisition of additional water supply and treatment assets that will benefit existing customers. CRW recommends proceeding with developing an extraterritorial water service agreement based on the terms described in this memorandum.
Attachments
Attachment A: Site Location Map
Attachment B: Independent Review of Retail Service to Bell Mountain Ranch
Attachment C: Independent Review of Existing BMR Assets and Expandability Revised 10/16/2020