City Council Regular Meeting


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  12.B.       
Meeting Date: 09/16/2020  
From: Daniel Gho

RECOMMENDATION
Receive report and provide direction on options detailed in the report.
DISCUSSION
This report updates the City Council on Local Water Project (LWP) operations and provides options for to reduce operation costs or increase revenue. 

Background
The Pacific Grove Local Water Project (LWP) dates to 2010 when the City realized use of potable water for irrigation of the Municipal Golf Course and El Carmelo Cemetery was unsustainable.  

The City envisioned a water treatment facility to convert waste water to non-potable water irrigation uses. In February 2015, a design-build Request for Proposals (RFP) was issued to bring this concept to fruition.

On August 7, 2015, following a competitive RFP process, the City initiated a Design Build (DB) Agreement with PERC Water. The project was funded by a $2.4 million California Prop 13, Safe and Reliable Water Sources construction grant and a $5.2 million 1% State Revolving Fund Loan.

On November 18, 2015, the City issued a  Design Notice to Proceed (NTP) formally initiating the project.  The DB Agreement scope of services included permitting assistance, final design engineering, construction, start-up, commissioning and passage of acceptance testing for the 0.25 million gallon per day (mgd) recycled water treatment plant. 

Construction of the plant commenced in the summer of 2016.  In January 2018, construction concluded and authorization for the use of recycled water was granted by the Central Coast Regional Water Board. The LWP facility can replace up to 125 acre-feet of irrigation demand per year with non-potable supplies; demands which were previously met by California American Water Company (Cal-Am). 

In the summer of 2017, as construction of the LWP came to a close, the City issued a Request for Proposals (RFP) for Operations and Maintenance (O&M) of the facility.  In November 2017, after a competitive proposals process, the City entered into a 5 year O&M agreement with PERC Water to operate the facility.  

Current  Operations
PERC Water commenced operation of the facility, under the O&M agreement, in January 2018. Since 2018, the plant has successfully produced and sold reclaimed water to irrigate the Municipal Golf Course and the El Carmelo Cemetery.  In 2019, the use of the reclaimed water expanded to the Point Pinos Lighthouse.  The LWP site also houses a truck fill station which is utilized by City contractors and vendors like the street sweeper. 

Below is a summary of  water sold since the plant began operations: 
 


Acre Feet of Water Sold per Calendar Year
Location 2018 2019 2020  (Jan - July)
Golf Course 80.23 77.09 34.79
Cemetery/ Lighthouse 14.28 17.1 10.00
Truck Fill  1.3 1.52 1.18
Total  95.81 95.71 45.97
 

Water currently produced at the LWP is billed to users at a cost of  $.017 cents per gallon.  This cost is based on the lease agreement between the City and CourseCo, and has been applied to the other parties purchasing reclaimed water.

The LWP has also created potable water entitlements by offsetting the use of potable water. The water entitlements are now for sale through the Community Development Department and can be used for a variety of purposes. 

Unfortunately since operations commenced in 2018, the LWP has not generated a profit. Operations and maintenance expenditures have exceeded water sale revenues, primarily due to the lack of volume of reclaimed water sales. An in depth analysis of the revenues and expenses for the LWP enterprise fund has been presented in the preliminary Fiscal Year 2019/2020 Financial Update prepared by Administrative Services Director Hannah.

Options
Increasing the volume of reclaimed water sales is no easy feat. The City is constrained by steep capital costs associated with extending underground infrastructure to expand reclaimed water use to additional sites.  With existing infrastructure limitations and financial obligations in mind,  City staff has examined 5 options that can be harnessed to potentially reduce operation costs or increase revenues. 

Option 1: Perform an Energy Audit
Operating the plant at full capacity results in notable energy consumption and fees. Despite the fact that the City receives the best possible energy rate available from Central Coast Community Energy, fees and energy consumption are high due to the type of equipment required to convert wastewater to non-potable water. 

An energy audit would allow the City an opportunity to identify equipment inefficiencies. Once identified adjustments could be made to lower energy consumption and associated expenses. Although an energy audit is a costly endeavor, anticipated to cost over $30,000, it could provide the City with actionable items to reduce energy costs in the near term and throughout the plant's 27 remaining years of useful life. 

Despite potential benefits, an energy audit is not recommended at this time. The benefits derived from the energy audit can be potentially obtained through leasing the site at a cost borne by the lessee, described in greater detail in Option 3.

Option 2: Renegotiation Lease Agreement with CourseCo  
The City has initiated discussions with CourseCo, to potentially amend the current lease terms. The current lease contains the following language associated with the sale of water: 

“For the first 27.2 million gallons supplied per water year (October 1 – September 30) upon the Golf Course, Tenant shall pay actual costs billed by California American Water Company, or the City of Pacific Grove, or any other purveyor for sub-potable irrigation water to the Golf Course or properties located at 77 or 79 Asilomar Avenue, up to a cap of $443,332 per year for such water. Effective each September 1st this cost cap shall be increased by 2%.”

The City is in the initial stages of discussing a potential increase to the cap, thereby increasing the existing $0.17 per gallon cost for reclaimed irrigation water produced by the LWP.  As discussions progress, any amendments will come before the City Council for final approval.  Renegotiation of terms with CourseCo is a viable option to increase LWP revenues. 

Option 3: Lease the LWP Facility 
The City could opt to lease the LWP facility. Leasing could result in a number of financial benefits including: upfront lease payments that can be harnessed to repay the loan, transfer of maintenance, operations, and capital improvement costs to the lessee, and the potential for expansion of sales opportunities.  

Pursuing this option would require the City to undergo a formal competitive bidding process including the release of a Request for Qualifications (RFQ) or RFP and review/ranking of submittals.  Production of an RFP/RFQ would be contracted out to a planning firm that specializes in water reclamation, as the City does not have the technical expertise to draft a document that includes the necessary specifics on the treatment plant, current operations, lease parameters, environmental regulations, and permitting.  It is anticipated that production of an RFP would not exceed $35,000. 

Leasing the LWP facility is a desirable option as it produces benefits for the City and a future lesse. The City has already been approached by an infrastructure and asset management firm that expressed interest in leasing the facility. This interest indicates that pursuit of a competitive leasing process may result in interest from a broad range of qualified firms. 

Option 4: Transition to In-House LWP Operations
The City currently operates under an O&M agreement with an operator at a specified monthly fee.  The City could transition to in-house operations. This would require retaining staff with the requisite level 3 certified wastewater operator certification to operate the plant.  In house operations would yield significantly less labor cost than the monthly contracted O&M fees, but the City currently does not have the expertise to operate the plant. 

Due to the significant effort associated with employee recruitment and retention, staff is not recommending pursuit of this option at this time. 

Option 5: Do Nothing
The City could continue current operations without any modifications.  If no additional options are explored, the LWP fund will continue to operate in a deficit. Doing nothing is not advised.

Staff Recommendation  
Staff recommends simultaneously pursuing Option 2, (renegotiating the lease agreement with CourseCo) and Option 3 (leasing the LWP facility). 

Renegotiating the lease with CourseCo to increase the irrigation water cap could increase revenues on each gallon of reclaimed water sold.  This option could produce immediate revenue benefits upon enactment. 

Retaining the services of a planning firm to assist the City with production of an RFP/RFQ for leasing the LWP facility would come at minimal cost. Issuing an RFP,  does not commit the City to enter into a lease agreement, but gives the City the ability to assess interest, feasibility, and revenue of potential leasing options.  
OPTIONS
Options discussed within the contents of the report.  
FINANCIAL IMPACT:
There is no fiscal impact associated with this report. Should the City Council recommend exploration of pursuit of any of the above noted options, a cost assessment will be performed and appropriate levels of approval, in accordance with the City’s purchasing policy and Municipal Code, will be obtained.
  
GOAL ALIGNMENT: City Asset Stewardship: Repair, maintain and improve City assets, including streets, sidewalks, sewer systems, buildings, and parks and trails.
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