Arguments Against Purchasing PWCo and SWCo
We believe that the purchase of PWCo and SWCo will not serve the interests of the community. The Rim Country Water (RCW) group is misrepresenting the purchase price of the water companies and the cost of that purchase on the community. The RCW plan is based on the idea that hooking up additional private wells will meet our water needs. RCW has not provided any specific information on how much water those private well owners will actually provide. For an analysis of the RCW plan, go to this page. For the 2/29/2008 flyer in the Payson Roundup on why the RCW plan is flawed. Our arguments against the takeover of PWCo and SWCo are broken up as follows:
History
What will it really cost?
How will it be paid for?
How long will the purchase take?
How much water will there be?
Why is the K2 well a more effective solution?
Additional reasons against the water company takeover1. Strawberry will inherit the problems with Pine’s water supply
2. There will no longer be oversight on increases in water rates
3. There will no longer be oversight to keep development from out running the water supply
4. There will no longer be oversight on customer complaints
5. Having the water company run by a board that is hand-picked by RCW will not be in the best interest of the community
6. Water company operations will be less efficient
History
Another effort was made in 2004 to have the PSWID turned into a water district and have the two water companies be purchased. This effort consisted of a petition drive to have the community commit to a price tag of $12,120,000. This was supposed to cover the purchase of the two water companies, the Magnolia pipeline, and infrastructure restoration and water exploration.
The PSWID board at the time hired a consultant, Economist.com. They came up with a value range for PWCo and SWCo of $3,000,000 to $4,300,000 based on the 2002 ACC annual report. To pay for this, Economist.com indicated that there would need to be an immediate 30% increase in water rates, followed by 10% and 5% increases in later years. That petition effort failed.
Some of the same people that initiated that effort are behind the current effort to purchase the two water companies. The effort has been revived because a successful K2 well will remove any reason for the community to buy the water companies.
More details on that earlier effort can be found in these Payson Roundup articles:
Group wants to force sale of water companies (1/30/2004)
Letter to Editor: Petition initiated without representation (1/16/2004)
Consultant details water company buyout (1/13/2004)
Petitioners seek to oust water company (12/26/2003)
What will it really cost?
In their January 19, 2008 meeting RCW claimed that for $5,000,000 the two water companies could be purchased, connect the two deep wells in Pine, drill another deep well, and pay the legal fees. RCW has not made a written version of their plan available to the public, so we are relying on notes taken during the meeting. The claim was made that the cost of the two water companies (which includes the Magnolia pipeline) would be in the range of $1,200,000 to $3,600,000, with the cost likely to be towards the lower end.
We believe that RCW is understating the costs to enhance their ability to gain control of the PSWID board. RCW is claiming that the water companies have a value that is much lower than the value that was arrived at to support the water company takeover attempt in 2002. Updating that 2002 valuation to the 2006 numbers shows that RCW is even farther out of alignment with how the water companies are likely to be valued.
The Economist.com valuation estimated the 2002 value of both water companies as being in the range of $3,000,000 to $4,300,000 (the report can be viewed in the Pine library). This valuation did not include the Magnolia pipeline since it was separate from PWCo at the time. The Economist.com report calculated the combined value using three different methods:
- Asset Valuation Method: $3,347,930
- Cash Flow Method: $3,032,930
- Subscriber Value Method: $4,354,500
- Average Value: $3,578,453
The Economist.com report indicated that the Cash Flow method may not be suitable in this case and that the Cash Flow method requires additional adjustment for assets which they did not do. We are not going to use the Cash Flow method in the further discussion.
We have taken the Economist.com Asset and Subscriber valuations and updated them with the numbers from the 2006 annual report filed with the ACC, to account for the passage of four years, and to account for the transfer of the Magnolia pipeline to PWCo. The updated values are (follow the links to see how the valuations were updated):
- Asset Valuation Method: $4,657,147
- Subscriber Value Method: $6,144,000
- Average Value: $5,400,573
The RCW plan includes hooking the Milk Ranch and Strawberry Hollow wells into the distribution system and drilling another deep well in Pine. The costs for this portion of their plan would be:
- Milk Ranch Connection: $892,000 (based on Tetra Tech estimate)
- Strawberry Hollow Connection: $150,000
- New Deep Well: $500,000
- Total Cost: $1,542,000
Star Valley recently offered $1600 per connection to buy their water company. Using that number, the value of the PWCo and SWCo water companies would be $4,915,200.
None of these valuations include the 161 acre-feet allocation of Central Arizona Project water that belongs to PWCo. This represents the water that flows down Pine Creek. If the community ever wants to build a resevoir to store water in, this allocation will be required in order to fill it. We have not been able to determine an exact value for this, but we believe that it will increase the purchase costs by millions.
In addition, there are the costs of the legal fees needed to acquire the water companies and the costs of issuing the bonds. We estimate those costs will be $500,000 or more.
When you add all of that up, the mid range cost for the RCW proposal comes to $7,442,000. By the time that the company is valued three years from now at the end of the condemnation process, it could be much higher.
How will it be paid for?
If a domestic water improvement district (DWID) is formed, then anything that the board approves can be funded through a combination of property tax levies on all properties within the district, impact fees, and water rate increases.
RCW has stated that their plan can be covered by a $5,000,000 loan. They claim that they can get an interest rate on that loan in the range of 3.5% to 4.5%. A loan of $5,000,000 at 4% for 20 years has a yearly cost of $363,588. The total cost over the life of the loan is $7,271,764.
A loan for $7,500,000 under the same terms would have a yearly cost of $545,376 and a total cost of $10,907,645.
In 2005, together SWCo and PWCo generated $139,522 in cash flow (operating earning + depreciation). In 2006, the total was $376,448. In the years prior to 2005, the cash flow was negative.
If the water companies are purchased by the DWID, they will no longer have to pay property tax (although we all know Gila County will make that up on other properties). That would push the 2005 cash flow number to $196,256 and the 2006 number to $425,331. Averaging the two together you get $310,893.
With the addition of the 81 people on the waiting list, it is possible that RCW is correct that a $5,000,000 loan could be supported under the current financials. However, as we pointed out here, $5,000,000 isn't going to be nearly enough to really do what they claim they will. We believe that they selected the $5,000,000 as something they could claim could be done without impacting rates and then adjusted their other numbers to fit. We believe that they have done this to enhance the chances for their slate of candidates to win in the recall. Once they have control of the board, the real costs would become clear.
How long will the purchase take?
If the recall is successful in placing the RCW slate of candidates on the PSWID board, they will have to go through the following steps:
1. Convert PSWID to a Domestic Water Improvement District (DWID)
2. Hire financial and engineering consultants to perform a valuation of the water companies
3. Develop a plan to finance the purchase, along with the connection of the two wells, attorney fees, and other improvements
4. Negotiate the sale with Brooke Utility (We believe that given the animosity that RCW holds towards Brooke and the low prices being quoted by RCW that they will not be successful in arriving at a sale price)
5. Go through the condemnation process if a price can't be agreed to
We believe that it will take at least 9 to 12 months to get through the first four steps to a point where it is agreed that both sides can't agree on a sale price. Step 5, as discussed below, took the town of Cave Creek 24 months and would have taken 29 months if they had gone to trial. So it is likely that purchase would take 33 to 41 months to complete. Basically three years. That would be the first point in time that construction on connecting the Milk Ranch and Strawberry Hollow wells would begin.
With the K2 well, water could be available as early as June 2008. The process of purchasing the water companies could take three years or more. That means three more summers of hauling charges. Three more summers of water restrictions.
Cave Creek has spent several years trying to take over their privately owned local water company. In a special Town Council meeting held January 29th, 2007, the process that they had gone through was discussed.
The Cave Creek voters voted to approve the acquisition of the Cave Creek Water Company (CCWC) in 2002. Cave Creek negotiated for a couple of years trying to reach agreement on a purchase price. Cave Creek filed a law suit in April 2005 with the water company fighting to have the case dismissed. In the summer of 2005 they tried to resolve the case by agreement. By the end of 2006 they were unable to reach agreement, therefore serious adversary litigation started in February 2006. In November of 2006, the judge set a pre-trial conference for June 2007, with a trial likely in August or September of 2007. The trial would have been a jury trial where both sides present their basis for what they think the value of the water company is at the time of the trial. The jury typically returns some value between those two.
In November 2006, the judge ordered the two parties to try mediation. Both sides agreed to the mediated value and transfer was done in April 2007. The town of Cave Creek accepted this higher price because they feared that if the condemnation action went to trial they would be faced with the jury awarding an even higher purchase price.
So condemnation which ended with mediation took 24 months. Condemnation with a jury trial would have taken 29 months.
How much water will there be?
The purchase of the water companies will not create a single additional drop of water in the area. The RCW plan is to hook in the Milk Ranch and Strawberry Hollow wells as the source of additional water. RCW has claimed that there are 89 million gallons per year available from those wells. That works out to 169 gpm, not much different than what is expected from the K2 well. The owners of the Strawberry Hollow well have never provided production capability numbers to the public. The Milk Ranch well has never been operational, so there is no concrete information on it's sustained yield.
Neither RCW or the well owners have stated how much of their well's output they are actually going to be willing to provide. Are they going to provide 10 gpm? 50 gpm? 100 gpm? Without that information it is not possible to tell whether the RCW plan will actually result in the water shortages being resolved.
One of the part-owners of the Milk Ranch well has been very vocal in stating that he will never sell water to PWCo, but that he will sell water to a water district owned water company. The other well owners that have refused to negotiate with PWCo seem to have the same position. They are requiring that the community buy the water companies before they will give permission to access their water. We believe that they are using their water to leverage their own interests. We believe that once the community becomes dependent on their water that they will continue to do so.
In 2006 41% of PWCo and SWCo water came from private, outside sources. If the K-2 Well is not developed and instead we buy water from the Milk Ranch well and the Strawberry Hollow well, our dependence on private, outside sources of water will significantly increase.
The web site supporting the C.C. Cragin water project for Payson has this to say:
"Leasing water is a less desirable alternative to building the C.C. Cragin pipeline because it's incredibly expensive and doesn't allow us to be in control of our own water supply. The cost of leasing water will affect residents and businesses alike in the form of higher utility bills. If we don't own the rights to the water, then we are always at the whim of the lessor."
If it doesn't make sense for Payson to lease water, then it doesn't make sense for Pine and Strawberry to depend on leasing water to solve the water shortages.
An example of why that dependence is not a good idea is illustrated by the water deal between the developer of the Glen Eagle Condos and the Strawberry Hollow Well owners. The Strawberry Hollow well will supply water to this development and the contract says that either side can end the contract without cause with 30 days notice. What kind of leverage would conditions like that give the well owners over the community?
Why is the K2 well a more effective solution?
The K2 well is a more effective solution for the following reasons:
- K2 is much less expensive than the other options. The K2 well will cost $903 per connection. The RCW plan will cost $2306 per connection. Using the more realistic cost for the RCW plan, the cost is $3459 per connection.
- K2 can be providing water in the summer of 2008; three years before the takeover of the water companies can be completed and the Milk Ranch and Strawberry Hollow wells can be connected into the system.
- The water will always be available to the community. Relying on private wells means that the water could be stopped at the owner’s discretion.
- K2 well will provide substantial quantities of water; the amount of water that the owners of the two deep wells in Pine are willing/able to provide is not known
- There isn’t the need to buy the water companies in order to get permission from the private well owners to access the water
- ACC oversight of water rates, operation of the water companies, and the ability of the available water supply to support growth will continue. Operating under the lax water requirements of Gila County will recreate the water shortages in the future.
Additional reasons against the water company takeover
1. Strawberry will inherit the problems with Pine’s water supply
At the present time Strawberry is in a privileged water situation because PWCo. and SWCo exist as two separate entities. Under this arrangement Strawberry can enjoy water conservation stage 1 while Pine is in a water conservation stage 5. If the water companies purchase is completed, Pine and Strawberry will become a single entity in water matters. If Pine is in a water conservation stage 5 the same will be true for Strawberry.
2. There will no longer be oversight on increases in water rates
Currently all water rate increases must be approved by the ACC. The water company must present well founded justification for rate increases. The ACC staff carefully reviews all of the data that is presented and then makes a recommendation concerning the proper amount of the rate increase. Consumers are allowed and encouraged to comment concerning the proposed rate increase. If the water companies are purchased, the water users would have no voice in approving water rate increases. Water rate increases would not be inspected by an outside authority. The water district would be free to charge whatever the district decided.
In the RCW literature that was handed out at their January 19, 2008 meeting it states:
"Changes in usage rates and impact fees can occur annually or more often after a 30 day notice of a rate hearing held in the District."
This basically means that there is a meeting where people can complain about the rate increase and then they go ahead and do it. With the ACC oversight, they examine all of the expenses and determine which of those are "reasonable and prudent". Those that aren't are disallowed and have to be paid out of the water companies pocket. With a water district, they can easily pass on any excessive spending that isn't "reasonable and prudent". The only recourse to unfavorable actions by the board would be to vote them out at the end of their four year term.
3. There will no longer be oversight to keep development from out running the water supply
The ACC regulates the rate at which meters can be added to the water distribution network. The ACC has had a moratorium on new meters for the last several years because development has out run the water supply. This situation should be relieved with adequate K2 well production.
If the ACC oversight is removed, the oversight will fall to Gila County. Gila County allows for the designation of "seasonal use". The developer of a property designated as seasonal use is only required to show support for providing 135 gallons per day per lot over the entire year. A lot designated as "residential" has to show support of 250 gallons per day. (See page 37, paragraph .07 of the Subdivision Regulations, Gila County )
Seasonal use in the rim country means summer time, which is exactly the worst part of the water season. This is the time of year when a well that can average 135 gallons per lot over the entire year is potentially at its lowest output. There is also nothing that prevents a seasonal use lot being used as a full-time residence.
We do not believe that Gila County will be a good steward when the choice comes down to increasing tax revenues versus out growing the water supply. It is important that when fixing the water shortages that the potential does not exist for creating them all over again.
4. There will no longer be oversight on customer complaints
Currently customers of the Water Companies can call the ACC and register a complaint. The ACC then can make the Water Companies correct the problem. The ACC’s purpose is to act as an ombudsman which is defined as “one that investigates reported complaints (as from students or consumers), reports findings, and helps to achieve equitable settlements.” If the water companies are purchased, as an individual you would be on your own trying to get results for a complaint from a government run domestic water improvement district.
5. Having the water company run by a board that is hand-picked by RCW will not be in the best interest of the community
The current PSWID board is a group of individuals that decided to participate for many different reasons. Because of the varied experiences and view points that they bring with them, they are more likely to consider all aspects and all viewpoints when making a decision.
Having a board that is elected to support RCW's agenda means that only RCW's agenda will be considered when making decisions. We believe that the RCW has the same agenda as the developers and realtors that have added their support to the opposition of the K2 project and for the purchase of the water companies. We believe that that agenda is not in the best interests of the entire community.
6. Water company operations will be less efficient
Brooke gains operational efficiency by spreading employee's time across the four water companies that Brooke owns in the area. Brooke also gets better economies of scale in their purchases due to buying for all four water companies. These efficiencies will be reduced when the it is just PWCo and SWCo.
We haven't been able to determine yet whether employees of the DWID will be considered county employees and be subject to county pay scales and unionization. If they are, then it is likely that employee costs will go up.
PWCo and SWCo are run by people who have a lot of experience and knowledge about the current distribution system. Replacing those employees with new ones will result in less efficient running of the system day-to-day and add a learning cost to the operations.