Selling water to the West Bench

[Michael Brydon]

BTW, I am not sure why you are using a future value dollar amount amortized over 50 years. I could say a more reflective value of the cash payment you offer would be to discount it back to it's inflation adjusted value at the time of contruction of the treatment facility....the time this discussion should have taken place

All my numbers are estimates of "net present value" as noted above. I don't see where you are coming up with "future value". Can you elaborate on this?

I am just being cautious with my community resources and it all sounds too much like a sales pitch in which the electorate is baffled with numbers and analysis they cannot understand and we will end up with the short end of the stick just as we did with the pool.

Yes, economic issues in local government are complex. I can see why normal citizens would not want to engage in discussions around complex issues such as this one, the OHA dormitory, economic development, the prison, and so on. But this is why you elect and pay representatives to do the thinking for you.

So where are the professional thinkers (actual and potential) in this debate? Do they share this fear that Penticton will always get the short end of the stick and thus should avoid all complex-sounding deals with shifty outsiders?

[Darkre]

Another huge issue that should be considered is the future value of water. Many experts are predicting that water is the next oil. That bulk water sales will be a huge revenue stream for those with excess capacity. How good would this deal look if this scenario actually occured? $150,000 per year is a drop in the bucket compared to the potential future value of this limited resource.

[Michael Brydon]

Another huge issue that should be considered is the future value of water. Many experts are predicting that water is the next oil. That bulk water sales will be a huge revenue stream for those with excess capacity. How good would this deal look if this scenario actually occured? $150,000 per year is a drop in the bucket compared to the potential future value of this limited resource.

As you may have read above, the West Bench has its own water licenses on Okanagan Lake. As such, the proposal is not to buy water from Penticton. The proposal is to buy filtration services from the Penticton water treatment plant. In this sense, the West Bench is "bringing its own water" to the proposed deal.

Also, I made a typo on the $150K figure in a previous posting. The West Bench's willingness to pay is closer to $130K/year (plus the $3.5M buy-in).

[Michael Brydon]

the proposal is not to buy water from Penticton. The proposal is to buy filtration services from the Penticton water treatment plant

Now that I think about it, it is probably worthwhile to consider an important economic difference between selling water and selling water filtration services. Water can be inventoried like any physical good; water filtration services cannot. In the moment that it takes you to read this sentence, a few seconds of excess water filtration capacity have been lost forever.

Water filtration capacity is thus a bit like passenger capacity on a jet flying from Vancouver to Toronto. Airlines hate empty seats because a seat costs pretty much the same whether it is full or empty. But once an empty seat crosses the country, that particular opportunity for revenue is lost forever. As a consequence, airlines use increasingly-sophisticated forecasting and yield management systems to try to minimize empty seats. What this means in practice for the rest of us is that different passengers end up paying vastly different amounts for the same flight (even in the same row). I am sure that some here will argue that "last minute" deals on airfares are "unfair". Interestingly, the owners of airlines don't see it that way...

[Michael Brydon]

Water is a finite resource, if Penticton sells 7% of it's capacity to the West Bench then there is 7% less water available for future developments in Penticton. Developments that would actually contribute tax revenue to this city. While Penticton has excess capacity now, there is no telling how much water will be needed 10-20 years down the road as more people move to this area.

Some interesting numbers are in the 2010 annual report for the Water Treatment Plant.

According to the report (page 21), the nominal capacity of the plant is 100 ML/day (although I have heard 85 ML/day used as a more realistic upper bound). The peak requirement in 2010 was 39.6 ML/day (or, conveniently, 39.6% of nominal capacity). The higest Peak Day on record was 2003, with 53 ML/day required (although this peak was the trigger for the city's Water Conservation Initiative). Average daily use in 2010 was 18.3 ML/day. According to the graphs on page 2, overall, annual treatment output has been relatively constant since 2001 whereas per capita demand has been dropping from about 1600 L/day/capita in 2001 to under 1200 L/day/capita in 2010.

We might reasonably expect per capita water consumption in Penticton to drop even more. After all, the average provincial per capita water usage is 426 L/day--this is less than 40% of the Penticton average! As much as 25% of Okanagan water consumption is lawns and shrubs so we clearly have some discretionary wiggle-room before we die of thirst.

But even if water usage in Penticton does not drop, demand would have to double before daily maximum usage (much of it discretionary) reached the practical capacity of the system. You can draw your own conclusions, but this kind of growth in the next couple of decades strikes me as unlikely. We are boxed in geographically, after all.

Penticton is free to hoard capacity if it wants, but it is important to recognize that hoarding has a non-trivial cost in foregone revenue.

[twobits]

the proposal is not to buy water from Penticton. The proposal is to buy filtration services from the Penticton water treatment plant

Now that I think about it, it is probably worthwhile to consider an important economic difference between selling water and selling water filtration services. Water can be inventoried like any physical good; water filtration services cannot. In the moment that it takes you to read this sentence, a few seconds of excess water filtration capacity have been lost forever.

First, I retract my earlier statment with regards to the future value. Upon revisiting your post I see the reason it did not make sense to me was because that was not what you were doing. Regardless, as to the above, you validly point out that it is filtraton capacity you are buying as WB has it's own water liscence. That is what concerns me because it is that capacity which is fixed and you want to lock in a portion of that capacity for 50 yrs. Is your 130k annual payment fixed or is it subject to increased operational or inflationary costs? Will we end up with a senario similar to your 20k annual payment for the community centre that after a few decades is no where near what an inflation adjusted contribution would be?

You repeatedly return to our excess capacity. We have excess capacity because that is how we build things....with the future in mind...not for the day. We also build for peaks, not averages. Just as we size storm sewers for the rare ten year storm, we sized our filtration capacity to provide for those peak summer days. Using the numbers you provided including the more realistic 85m/ld, 2010's peak day was already at 46% of capacity. The all time high day of 53m/ld was 62% of capacity which implies an excess capacity of only 38%. You ask for 7% leaving only 31%. I hardly call that a huge reserve. It would actually be somewhat less than 31% because your 7% load is a percentage of annual, not the peak demand you would experience in tandem with us. While per capita consumption trends may be moving downward, there is no gurantee it will continue. It may even reverse. I also fail to see a guarantee that future WB needs will not require more than 7%. I note that you chose to ignore my comment about WB possibly getting a sewer connection as well and what that would do to development densities on the bench and water requirments. If there were caps placed on usage, will you be back at the table in the future asking for more?

I find it rather offensive that you suggest we can just hoard our water if we want. We paid for and built the plant for our needs, not yours. This fact aside, no one even said NO.....just saying pay the real cost of service which includes revisiting the cost structure every year to ensure it is fair to the owners of the plant and not some sweet deal fixed for 50 yrs. Otherwise build your own and see if your own cost estimates still ring true a decade from now. When we reach our capacity in two or three decades, what is the capital cost requirement going to be for the 7% or more capacity that we gave up today. Do you know that the 3.5 mill contribution today will cover it? What would that forgone 7% allowed in housing within city limits contributing tax revenues year over year? How about a cost/benefit analysis of net incremental revenues generated from selling water filtration capacity compared to net incremental property tax revenues from a larger housing/population base.

Edit to add-Also no comment from you on WB's penchant for just buying a la cart services ie fire, community centre, library, water works maintainance.......but not contributing to the SOEC, parks, beaches etc etc that all WB residents also benefit and enjoy, both in personal use and economically from the business these assets and amenities generate. Do you know any WB residents that are employed as a result of these assets and amenities? Not just directly either. Any in the tourism industry that these assets support? Why don't you canvass/poll the WB residents on amalgamating and let's see if it is the residents who don't want to join or if it's the city's reluctance to take on the WB. While you are doing that I am going to lobby city hall to reduce my taxes for all the services that myself and family don't use and negotiate a price for the ones I want to use. Wish me luck.

[Giants Head]

Twobits...... Well said.

[spacecadet]

Haven't been on here in a few days and just struggled through all the posts. Thank you, Twobits for your last post. Correct me if I am wrong, but was it not the West Bench residents that voted against tying in with Penticton's water system? And I take exception to your comment, Mr. Brydon, about the 9-1-1 Dispatch service that went to a larger center. I believe that it was the Regional District that failed to keep up their end of the bargain in keeping technology up-to-date in the Penticton Center, which allowed another Center to do the job at a cheaper rate. And we all know that the City threw the bid. They wouldn't want to admit that they were totally inept in what they submitted, now would they? They shouldn't have been allowed to re-sharpen their pencils. I am sure that the Regional District is going to stick it to Penticton and we will be paying through the ying yang after so many years - ooops - of paying such a small price, so you say, for the service provided. Even though, I believe, that this was a contract freely negotiated between the two governments.

I personally can't wait for a chance to vote in a new Council that will look at all these issues objectively instead of making all their backroom deals. Maybe then you will have a better chance at a deal with the City on November 20th. But, really, why all this posturing when it was YOUR residents of Area "F" that resoundingly said NO?

[Darkre]

As you may have read above, the West Bench has its own water licenses on Okanagan Lake. As such, the proposal is not to buy water from Penticton. The proposal is to buy filtration services from the Penticton water treatment plant. In this sense, the West Bench is "bringing its own water" to the proposed deal.

Also, I made a typo on the $150K figure in a previous posting. The West Bench's willingness to pay is closer to $130K/year (plus the $3.5M buy-in).

Actually the West Bench will be buying water from Penticton. You yourself have stated what the water filtration capacity of the water treatment plant is. The water treatment plant can't treat more water per day just because more water is available to be treated.

The West Bench water license is only useful to Penticon if the city decides to twin some of it's water systems. However you have previously stated that if the West Bench wants it's water license back in the future they automatically take it so it would be irresponsible of Penticton to proceed with that expensive option when there are no guarantees for the city that they will retain the water rights.

Therefore it would appear that the water the West Bench can provide to Penticton in this deal have no real value.

[Michael Brydon]

You repeatedly return to our excess capacity. We have excess capacity because that is how we build things....with the future in mind...not for the day.

Perhaps a picture will help. I have superimposed Penticton's Water Treatment Plant (WTP) annual capacity on a bar graph of annual usage over time (capacity is the blue line at the top of the page). The page itself is from the WTP's annual report, which I referenced in a previous post.


I am having some trouble understanding the chain of events that will cause the bars at the bottom (actual water usage) to intersect the capacity line at the top. How precisely are the next 10 years going to be so different from the previous 10 years?

[Darkre]

Like twobits I am curious if there are an measures in this deal for inflationary increases, facility and equipment maintenance and upgrades? If the West Bench wants to buy into the water treatment plant should they not be a minority partner and share in all future costs Penticton faces in operating the facility?

If the Westbench purchases it own UV treatment facility would they not be faced with significant capital costs and upkeep to maintain that facility? Does the $12million 50yr estimate for the seperate UV treatment plant include the estimated maintenance and operational costs of owning such a facility? Are any staff needed to maintain and operate the facility?

[Michael Brydon]

Like twobits I am curious if there are an measures in this deal for inflationary increases, facility and equipment maintenance and upgrades?

All numbers quoted by me are "real" 2011 (versus nominal) dollars. That is, they assume 3% inflation per year for all O&M costs, including fees to the City of Penticton. Cost quoted for the RDOS UV plant included upfront capital, debt servicing costs, depreciation (straight line over 30 years) plus administration, wages, water meters, utilities (all inflated by 3% per year). This is the only way to do an apple-to-apples comparison of projects with very different cash flows over time.

More generally, there are two approaches to dealing with the decreasing purchasing power of money over such a long time horizon. One, as noted above, is to apply the Consumer Price Index to all recurring costs. But since the CPI has nothing to do with the actual cost of treating water, a better solution here is likely to tie the annual fee payable by the West Bench to the City of Penticton's water rates. Thus, if the City of Penticton increased its water rates for its residents by 15%, the annual fee for bulk water to the West Bench would also go up by 15%. Ditto if rates went down for some reason.

This is what the RDOS has proposed to the City of Penticton. There is no price risk to either party--it costs what it costs.

[twobits]

Fortunatly there are people inside city hall that don't agree with what you consider a "No Brainer" good deal. Pay what the city is offering or build your UV plant. Simple.
BTW, I'm not having much luck negotiating with the city on negotiating rates for just the selective services I use and want to pay for. They are telling me some funny stuff about community and how we all chip in to pull the cart for the benefit of all citizens. I protested, "but I havn't been to the beach in twenty years, I can't skate so the rinks do me no good,my arthritis doesn't allow me to throw a baseball, and my hearing is so bad I won't be taking in any concerts at the SOEC....why do I have to pay for all these things?" You know what they told me? If I didn't like it I could just move to the West Bench.

[Michael Brydon]

Fortunatly there are people inside city hall that don't agree with what you consider a "No Brainer" good deal.

Indeed. I have had disagreements with Penticton City Hall in the past. In 2004, I wrote in a letter to the Penticton Herald following the initial proposal of the SOEC:

I believe the arena proposal rests on some shaky assumptions and the decision process itself appears flawed. It is probably worthwhile to voice some concerns now given our history in this province of paying dearly for shaky assumptions and flawed decision processes.

I then wrote the following in The Herald in 2006 regarding the SOEC, which was really gathering momentum at City Hall and in the community. At that point, Penticton City Hall was projecting healthy profits from the facilty to subsidize other city programs:

[...] the city, not its operating partner, bears the risk of overly optimistic revenue projections. [...] it is clear that the SOECC will never spin enough cash to cover its costs. This is true whether the facility is financed by the city alone or with a private-sector partner (which invariably has a higher cost of capital and a shorter investment horizon). Unfortunately, no one seems willing to face up to the inevitable consequence of building such a facility: it will cost taxpayers money [...]

Of course, the facilty cost way more than the projected $30 million and the free "casino money" was not quite what City Hall said it was. Had the process been a bit more transparent, I think I would have been far more vocal. I also assumed that the RDOS would be involved in funding the SOEC as a regional project with contributions from rural areas. The decision not to include rural areas was made by Penticton City Hall, so it turns out I never had a dog in this fight.

In early 2007 I wrote the following regarding the new Performing Arts Centre (which City Hall assured both residents and the School Board would be lifting its curtain by 2009):

The decision for the local performing arts community then becomes whether to throw its support behind efforts to save the Pen-Hi auditorium or risk being left with no facility (other than the much-maligned Cleland Theatre). Little suspension of disbelief is required to imagine a three-act tragedy in which City Hall continues to make encouraging noises about a new performing arts centre, local arts groups stand by as bulldozers flatten the Pen-Hi auditorium, and, for one reason or another, City Hall’s vague commitment to a new facility never materializes in its capital budgets. Given the near certainty of continued pressure on the city’s financial resources, the performing arts community might want to consider hanging on to the Pen-Hi auditorium as a hedge against being left empty handed.

Keep in mind that all these statements were ex ante and based on standard economic analysis--nothing fancy, the same as what is being offered here. Quite frankly, I stand by my record of unsolicited suggestions to Penticton City Hall. But, as you point out, Penticton City Hall has its own way of doing things.

Maybe you are correct. Maybe I should just mind my own West Bench business.

[twobits]

Micheal, I see in todays Castanet news the touting of the 24 million upgrade to Penticton's sewage treatment plant and it's readiness for possible future connection to the WB and Sage Mesa. What was that about wanting only 7% of our water filtration capacity again? I am going to be a prophet like you were above with your vision for the SOEC and Pen Hi auditorium and predict you will hook into the sewer system only if it is at a dicounted rate. That will be because we have the excess capacity and some payment would be better than nothing......a no brainer right?