Selling water to the West Bench

[Giants Head]

Michael.... You say in an earlier post that the RDOS maintains the water system on the West Bench. Why is it that I see City of Penticton crews and trucks up there doing all of the maintenace on the system?

[twobits]

Michael.... You say in an earlier post that the RDOS maintains the water system on the West Bench. Why is it that I see City of Penticton crews and trucks up there doing all of the maintenace on the system?

Because they pay the city via contract to do so. Just another a la carte item to buy that is considered essential and must be paid for vs enjoying a miriad of other services without having to pay for them.

[Michael Brydon]

You still didn't answer my question though, and I know its a tough one: If Penticton were to sell bulk water to Westbench, wouldn't that be like "reducing" prices to the Community Centre Pool for Westbench residents?

I did not respond to the analogy about the pool earlier because it was not immediately obvious to me that it was relevant. After all, the West Bench is not proposing to build an alternate pool. Also, I was busy watching my kids play hockey and my wife is already all over me for spending too much time on this...

But now that I think about the pool analogy a bit more, I see that it exactly illustrates the point about the counter-intuitive economics of high fixed-cost/low marginal-cost infrastructure. Here is the deal: Once the decision is made to build a pool, chlorinate the water, heat the building, hire life guards and so on, the cost of operating the pool is largely independent of the number of people using it. Say there are 100 people using this pool this morning and next week, 90 of them decide to do something different with their Sunday morning. The number of users will have dropped by 90% and the amount of revenue earned by the city from pool user fees will have dropped by 90% but the cost of running the facility will not change (unless the manager sends some lifeguards home early, but this is a drop in the bucket relative to the total cost and you get the overall idea). A community pool is a perfect example of high-fixed cost infrastructure.

The question for every community with a swimming pool is thus the following: What price should be charged for admission? Since it does not actually cost anything to let one additional person swim in the pool, communities have enormous flexibility in setting a price (that is, the community cannot actually “lose” money, even if it lets someone in for free). On the other hand, if the city sets is price too high, people will choose to do other things and the city will lose an opportunity to earn revenue (which is important given the high cost of the facility). So back to the question: what price should the City of Penticton charge for people to use its pool? One seemingly obvious answer is that the city should recoup its cost of running the pool. That is, the pool should be “run like a business” and a “fair” price should be charged.

This approach turns out to be pretty naïve. The cost of running a pool generally exceeds the aggregate willingness of residents to pay to swim. For example, the City of Penticton’s total cost for the Community Centre pool (in 2008, prior to the upgrade) was $1.6 million per year. The total revenue from admission fees was $517,000 per year. In other words, user fees covered about a third of costs. In order for a community to build such a known money loser, the taxpayers in the community have to agree to cover the other two-thirds from general taxation. This means everyone in the community pays for the pool, regardless of whether they ever step foot in the facility. Not surprisingly, not all communities are keen on such an arrangement. Earlier this year the Town of Princeton and the surrounding Area ‘H’ rural area both voted NOT to move forward with a new Princeton Aquatic Center.

The City of Penticton would have to increase the price of admission to the Community Centre pool significantly if it decided to run the pool “like a business”. The current fee of $5.80 for an adult would have to be bumped up to just over $19/visit for the city to recoup its costs at current participation rates. But, of course, few people would pay $19 to swim and the number of tickets sold would decrease. This would require an even higher ticket price to cover costs (which don’t drop as attendance drops), and the spiral would continue. It should be pretty clear that the city could easily end up with exactly zero pool users and zero revenue if it committed itself to a pure “cost recovery” strategy. Not surprisingly, the managers of community recreation facilities across the world don’t do this. Instead, they try to find a price that maximizes revenue. The absolutely critical thing to note is that this revenue maximization price is completely independent of the cost of the facility. In the case of the Community Centre pool, the revenue-maximizing price depends only on the willingness of people to pay for swimming. And people’s willingness to pay for swimming depends critically on the availability and relative attractiveness of other activities. Indeed, demand for the pool is so low in summer months when the lakes are an attractive substitute that the city has considered shutting down the pool (it can save some, but not all costs, if it drains the pool, turns off the lights, lays-off staff, and locks the door).

So to answer your question: Should West Bench residents receive a discount for using the pool? The answer is clearly yes—we ALL receive a “discount” for using the pool in the sense that our user fees fall far short of the average cost of providing the facility. The City of Penticton cannot charge a higher user fee because, if it does, people will find other things to do with their time and money, revenue will decline, cost will stay the same, and the taxpayers in the community that decided to build the pool will be worse off. No community elects people to make them worse off.

[As an aside, the logic is the same for non-resident users. The City of Penticton has every right to charge users who do not pay taxes in Penticton a higher fee to use the pool and there are frequent calls in the local papers for the city to do exactly that. Pool staff could even use postal codes to differentiate between tourists and villainous free-riders from Penticton’s rural fringe. Please recognize the flawed economics of this solution, however. If the surcharge was high enough, West Bench , Kaleden and Naramata users would find other uses for their time and money and the same outcome would obtain: the City of Penticton and its taxpayers would see the cost of their pool remain about the same but see their overall user fee revenue decline as rural users stopped coming. This would necessitate either higher taxes to cover the shortfall or an outright pool closure. Not surprising, most jurisdictions with this kind of “amenity spillover” choose to welcome the incremental user fees from non-residents.

The only way around this situation is to bring the rural areas in as full participants before the pool is built (that is, to get the assent of taxpayers before committing them to an ongoing stream of payments). Penticton chose to do this in the early 1980s when building the Community Centre and thus the West Bench (but not Naramata and OK Falls/Kaleden) voted to contribute proportionally to the cost of the facility. The contribution rate was set at $20,000 per year, which was big money for a facility that cost just over $1 million. However, the City of Penticton did not include an inflation clause (oops!) and thus Area ‘F’ is still paying exactly $20,000/year towards the Community Centre.]

Now what does the Community Centre pool have to do with the water system? Recall the issue above: The City of Penticton cannot charge swimmers (residents and non-residents alike) the “fair” cost of swimming because swimmers have freedom of choice and many alternatives to swimming. They can choose not to swim and (say) spend their money on bowling instead. However, the City of Penticton CAN and DOES charge Penticton residents the full cost of the water system because Penticton residents have no alternative sources of treated drinking water. Laws prevent residents within city limits from opting out of services precisely because doing so would trigger an upward price spiral (as in the pool example above) and eventual collapse of the utility.

West Bench residents are outside city limits and have more freedom of action on the water issue. Due to geography and historical accident, they have their own government, their own water licenses on Okanagan Lake, and no obligation to purchase water treatment services from Penticton. And, as it turns out, the lake water available to West Bench residents is cleaner than the lake water and creek water available to Penticton residents. So, counter intuitively, the West Bench can build a whole new treatment system at a cost lower than Penticton’s “fair” cost of filtered water.

In the same way that none of us is willing to pay $19/visit to swim in the Community Centre pool (even though that is a “fair” price), West Bench residents are not willing to pay the City of Penticton more than $X dollars for water (where $X is the cost of the standalone UV alternative). This should not come as much of a surprise to anyone.

So what should Penticton do about this? In economic terms, this is just like a pool example above: Penticton’s costs of treating water are largely fixed. It can earn $X in revenue by selling water to West Bench or it can earn nothing by refusing to do so. It is that simple: Roughly $7 million over 50 years or zero.

I hope this long posting helps

[Michael Brydon]

Do you really feel that in the foreseable future, I.H. will not change the goalposts on things like turbidity standards? If you are certain, then why not build your UV plant and not bother trying to forge another deal with Penticton for bulk water.

No one knows what IHA will do in the future but it is important to recognize that changes to water quality standards do not simply come out of the blue. They are a response to major and obvious problems, such as beaver fever in Penticton or e. coli in Walkerton Ontario. IHA's standards are simply the standards set in the Guidelines for Canadian Drinking Water Quality, which are similar to the guidelines set by the US Environmental Protection Agency. These standards and rules are not nearly as capricious as some seem to believe. So no, I do not believe IHA will change its goalposts. Keep in mind that my parents and my kids drink this water.

You said that UV was the cheapest route, so why would you even suggest going to bulk water and burden the WB populace with higher costs?

When I cross the bridge over the river channel, I leave Penticton and enter Area 'F' of the Regional District of Okanagan-Similkameen. However, my wife works in Penticton. Two of my three kids go to school in Penticton and all three play minor hockey (at a stiff cost, as I am sure you are aware) in Penticton. We spend out money (mostly) in Penticton.

The invisible boundary aside, I feel like a Pentictonite. Many rural residents do. And we all benefit when Penticton benefits and suffer when the city runs into a financial rough patch.

I have been given the responsibility to help make a decision about the future direction of water for the West Bench and I take this responsibility very seriously. So let's recall the alternatives and the expected outcomes for Penticton and the West Bench:

RDOS stand-alone treatment option:
Expected cost to the West Bench over 50 years (2011 dollars, 6% inflation, 3% interest): $12 million
Expected payments to the City of Penticton:$0

Bulk water purchase from Penticton:
Expected cost to the West Bench over 50 years (2011 dollars, 6% inflation, 3% interest): $12 million
Expected payments to the City of Penticton:$7 million

When I look at this, I have to tell you that I see a complete no-brainer for the City of Penticton. But when I read the messages in this discussion board, I see nothing but opposition to a deal with the West Bench! I need to understand where this opposition is coming from. The last thing I want to be involved with as a part-time politician is a completely stupid decision--a missed opportunity for a clear win-win. But yet, we seem to be headed in that direction. Can someone explain it to me?

[XT225]

Thanks for answering the questions, Michael. Not exactly what I expected but if its what you believe, thats fine. I would also listen to what twobits has to say; he is an expert in economics (I'm serious; the guy/gal knows a h_ll of a lot about financial matters). If the WB residents rejected tying into the Penticton water (and I have heard that included looking after the aging infrastructure) why would they be interested in JUST bulk filtered water? Would they not have to pay for the water now AND the repairs/upgrades that might be necessary in the future? If so, they shouldve voted YES in that referendum. Its not rocket science. There appears to be a group of WB residents that simply oppose joining penticton in any way shape or form. These are the people that you need to change their minds. I came across a good post from almost a year ago; this issue came up and very few people particpated in the forum, including you. I believe darkre had some good points:

West Bench says No to joining the Penticton water supply
by Darkre » Dec 12th, 2010, 1:43 pm

The residents on the West Bench voted 247-154 against paying the $2.5million buy in to receive water from the Penticton Water Treatment Plant. The West Bench Irrigation District did a horrible job of explaining the issues to the residents there. Only now that the vote went against the proposal will the WBID get estimates fo the neccessary improvements to their water system. It should be interesting to see what the costs for upgrades will be for the West Bench, especially if they will need to upgrade their treatment plant to meet the new minimum water treatment standards as set out by our government. Residents should have known the costs of both options heading into this vote.

http://www.castanet.net/news/Penticton/ ... ch-says-no

This however is a Win for Penticton. Sharing our limited water supply with an area that does not contribute taxes to Penticton was never an ideal situation. If the upgrades to the WBID prove to be too expensive to proceed the residents there may be forced to ask for Pentictons help on the matter once again. At which time I hope Penticton presents the residents of the West Bench 2 options. The more expensive option of joining our water supply with theirs which will see their water rates rise $800 to around $1400 per year, or for the West Bench to join Penticton, contribute taxes to Penticton and to pay the exact same water rates that Pentictonites pay.

[Michael Brydon]

If the WB residents rejected tying into the Penticton water (and I have heard that included looking after the aging infrastructure) why would they be interested in JUST bulk filtered water? Would they not have to pay for the water now AND the repairs/upgrades that might be necessary in the future? If so, they shouldve voted YES in that referendum.

Um, who said we were not doing the upgrades to the West Bench system? The issue of treatment is separate from the issue of distribution upgrades. The RDOS will address both in the coming year using grant money and borrowed funds.

[XT225]

If the WB residents rejected tying into the Penticton water (and I have heard that included looking after the aging infrastructure) why would they be interested in JUST bulk filtered water? Would they not have to pay for the water now AND the repairs/upgrades that might be necessary in the future? If so, they shouldve voted YES in that referendum.

Um, who said we were not doing the upgrades to the West Bench system? The issue of treatment is separate from the issue of distribution upgrades. The RDOS will address both in the coming year using grant money and borrowed funds.

Yes, but what a previous poster said was that if WB had voted YES to the hookup to Penticton Filtered water, then Penticton would've taken care of the Infrastructure AND given you great water. Now you have to pay for both. Its too complicated; Im bowing out of this one. You take care of your own water; I'm with twobits on this one. Sounds like the NO voters now have serious regrets.

[Michael Brydon]

Thanks for answering the questions, Michael. Not exactly what I expected but if its what you believe, thats fine.

Yes, I do believe in standard economic analysis; I have a bit of a weakness in that respect ;-)

Please keep in mind that the West Bench is not the only jurisdiction on the planet considering UV water treatment. 90% of New York City's drinking water will soon be provided by new UV-only plant (see below; from About.com):

New York's largest disinfection facility will be ready by 2012 [...] when finished it will have the capacity to process up to 1.5 billion gallons of drinking water daily. The size of this UV disinfection facility plant is 10 times larger than any previous one built-in the world. Located in Mount Pleasant, N.Y., and costing more than $1.4 billions, it will supply more than 90% New York's drinking water. [...] Following EPA's Sage Drinking Water Act and the Filtration Avoidance Determination, NYDEP, began building this new facility, instead of building a water-filtration plant, estimated at $8 billion in 2001. An ultraviolet disinfection facility uses physical process instead of chemical process to produce safe drinking water. UV water treatment is considered more ecologically friendly than chlorine treatment.


Note the cost difference ($1.4B UV versus $8B filtration). The US EPA's "Filtration Avoidance Determination" process is similar to IHA's "Filtration Deferral" process. Interestingly, the other 10% of NYC's water comes from the Croton Watershed, which has lower source water quality requires filtration (the largest single construction contract in New York history-ouch!).

See also a 2009 article in Scientific American on UV water treatment

[XT225]

Are you certain that the U.S.A. has the same standards for water treatment as in Canada? This is important in believing an article from New York and comparing it to WB. You didnt say whether or not WB would use chlorine as well as UV in a new system. I noted a couple of comments from the readers of that article that you sent a link to; were rather interesting:

I have to admit I am skeptical about the UV technique. Over ten years ago I worked for a company that tried to develop this technology. After years of research they gave it up because they found that, while the UV killed something like 99% of the types of microbes, it did not kill some of the most common and most harmful ones. According to the people I talked to, the use of UV did not even reduce the amount of chlorine needed. After carefully looking over the article, I notice that there is no claim anywhere that the need for chorine is eliminated or even reduced. I cannot help wondering if these installations actually do something better or if the companies making them just have good salespeople.
Fred Reiff05:02 PM 2/3/09
I found this article misleading and inaccurate. Having more than 40 years of wide ranging experience in drinking water quality, disinfection, and environmental health with the World Health Organization/Pan American Health Organization, Global Environmental Monitoring, and the U. S. Public Health Service, I feel qualified to comment.
The article implies that chemicals should be done away with in water treatment. This simply is not feasible. They are essential for treatment of almost all surface water supplies and even some groundwater supplies.
Ultraviolet light (UV) is very effective in killing or inactivating waterborne pathogens but it cannot completely replace chlorination as a method of disinfecting water. The article fails to mention that the New York water system will be using a combination of UV and chlorine disinfection. EPA rules require systems utilizing surface water to maintain a sufficient residual level of chlorine to help protect treated water all the way to the tap. This is necessary for several reasons when primary disinfection is accomplished by ultraviolet light.
Even though the UV will kill pathogenic microbes passing through the UV unit, it has absolutely no effect on pathogens that enter the system subsequent to the UV exposure. There is considerable potential for pathogenic organisms to enter an aging water distribution system (such as serves New York) during drops in pressure or during ruptures and repairs, or even through clandestine cross connections to a contaminated water source.
Also UV does not preclude re-growth of organisms that might pass through the UV units due to weak or burned out UV lamps, build up of deposits on the quartz sleeves, or otherwise causes of inadequate exposure. I have personally investigated facilities that relied only upon UV disinfection and found pathogenic re-contamination or re-growth no more than a few meters past the UV units.
The article also implies that chlorination causes cancer. The reality is that it is high doses of some of the disinfection by products that might possibly cause cancer but when kept below the levels set by EPA standards, which have incorporated ample safety factors, there is very low risk that there will be such a deleterious effect. The levels should of course be kept as low as possible, but it is imperative to balance the risk of proven microbial infection with the theoretical risk of cancer when dealing with drinking water disinfection.
New York City should be commended for the combination of UV disinfection and chlorination to assure the safety of its drinking water. Fred M. Reiff

ps: I have a UV treatment system on my hot tub at home and believe you me....I still have to use a heck of a lot of chemicals (chlorine or bromine) to keep the water safe. Oh...and I have a good "filter" on it too. UV alone is useless in my opinion (and I don't "Drink" the water; only soak in it).

[Michael Brydon]

Yes, but what a previous poster said was that if WB had voted YES to the hookup to Penticton Filtered water, then Penticton would've taken care of the Infrastructure AND given you great water. Now you have to pay for both. Its too complicated; Im bowing out of this one. You take care of your own water; I'm with twobits on this one. Sounds like the NO voters now have serious regrets.

Remember when the City of Penticton lost the 9-11 dispatch contract to the larger dispatch center in Kelowna? Many people in Penticton suggested that Penticton should be given another opportunity to "sharpen its pencil" and rebid. This is a bit like that.

Last fall West Bench voters rejected an "extraterritorial service" deal proposed by Penticton that would have cost residents roughly $15 million over 50 years (this is an expected net present value; it includes all capital and operations costs plus borrowing costs and inflation). The RDOS has since taken over the West Bench water system on behalf of its residents. Our consulting engineers reckon we can build a standalone UV treatment system and do the necessary distribution upgrades for closer to $12 million, so the City of Penticton bid is high.

Not wanting to needlessly duplicate existing infrastructure, however, the RDOS has given the City of Penticton an opportunity to sharpen its pencil and rebid. What Penticton stands to lose if the West Bench builds its own standalone water treatment system is about $3.5 million upfront and $150,000 per year in fees. Let me restate the economic issue: It would cost the City of Penticton almost nothing to earn this additional revenue.

So forgive me if I am having some difficulty understanding all the complaints in this forum about free-riding rural neighbours. We are trying to buy services from the City of Penticton at market price. We are trying to hand Penticton millions of free money that can be used to pay down debt, reduce taxes, whatever. But all of a sudden it is all "too complicated"? Either the City of Penticton is open for business or it is not.

[XT225]

This sounds more like a political issue between the city and the RDOS than something that should be discussed on here with us neophytes. Way over my head; twobits or someone more intune with economics can take over. Too bad it wasn't ready as another referendum for Nov 19th. I have work to do. Asta la vista.

[Michael Brydon]

You didnt say whether or not WB would use chlorine as well as UV in a new system.

Oops sorry I should have made this more clear. Modern UV treatment systems still use chlorine (although the amount varies). There has to be a chlorine residual in the distribution system.

The comments you refer to seem to be focusing on the chlorine reduction issue. My point in posting this information is merely to address some of the UV scepticism. If UV treated water is deemed a reliable alternative to filtration for tens of millions of New York residents, I tend to think it might work for the West Bench (as it is working right now for Naramata).

[Michael Brydon]

This sounds more like a political issue between the city and the RDOS than something that should be discussed on here with us neophytes. Way over my head; twobits or someone more intune with economics can take over. Too bad it wasn't ready as another referendum for Nov 19th. I have work to do. Asta la vista.

If the issue is too complicated for a politically-oriented discussion group, I am not sure a referendum is the way to go! Isn't that a recipe for a random outcome?

Alas, there is no referendum so the folks you elect to Penticton City Council in November are going to be dealing with this issue.

[XT225]

This sounds more like a political issue between the city and the RDOS than something that should be discussed on here with us neophytes. Way over my head; twobits or someone more intune with economics can take over. Too bad it wasn't ready as another referendum for Nov 19th. I have work to do. Asta la vista.

If the issue is too complicated for a politically-oriented discussion group, I am not sure a referendum is the way to go! Isn't that a recipe for a random outcome?

Alas, there is no referendum so the folks you elect to Penticton City Council in November are going to be dealing with this issue.

Ok, Michael and I DID appreciate all your comments. Re City council..a lot of us think you will be working with a completely NEW set of people after Nov 19th, right from the top down. Your being elected by acclamation means you COULD be the top dog in the RDOS very soon, should you want it.

[twobits]

Very interesting spin with the community pool analysis. Looked good in print anyhow. It is hardly the same analysis however. To go swimming or not may well be based on a price point. To have water or not is not and I am persoaly not willing to price discount our future capacity for a short term capital cost cash injection. 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.

Ponder me this, what will Penticton's current excess capacity be worth in revenues derived from user fee's and parcel taxation that is only available if we have the capacity to provide. You speak of taking only 7% of capacity as well. What will the WB's percentage of capacity be in 20 yrs if you also negotiate a sewer servicing agreement and the density doors are suddenly swung open? I bring this up because these things must be considered just as you pointed out "ooops they forgot to inflation index the 20k annual community centre payment" and three decades later, you make the same paltry payment without any guilt. Why don't you apply a future value calculation to these payments and pony up? As a matter of fact, if the city is going to enter into a bulk water supply agreement, perhaps they should make it a condition of reopening that sweet deal. Any councillors reading?

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. If you want water, fine. Just be willing to pay the actual cost of service and also be willing at some future date to chip in the forgone income that would be realized from taxation when the WB's usage becomes the tipping point of Penticton's total capacity. And yes Micheal, many of us will likely be on the other side of the grass by then but our children won't and I don't want to sell them out now.