By Shawn Raymundo
The San Juan Capistrano City Council on Tuesday, Feb. 5, opted to table a decision on which agency to begin negotiations with in regard to the proposed transfer of the city’s water utilities.
Following a motion from Councilmember Sergio Farias to delay moving forward into the negotiations phase with one of the agencies vying to take over the city’s Utilities Department, the council voted unanimously in favor of holding off until its Feb. 19 meeting.
Citing the level of public input the council received during the meeting, as well as all of the assessments surrounding the proposed annexation of the city’s water and sewer services, Mayor Pro Tem Troy Bourne said more time is needed before making a decision.
“I really value some of the comments we got tonight. I think some of them were really insightful. I think that I can spend a few more days thinking and processing some of this stuff,” said Bourne, a first-term councilmember.
Bourne did add the caveat that while the council could benefit from taking a few more days, there’s been a considerable amount research done already, and the city will be able to learn more new information only when it enters the negotiation phase with one of the agencies.
“I think we’ve done a lot of research here, and until we’ve taken a step down one path and at least start to investigate and do some of that further due diligence … that we’re not going to get closer to a decision,” Bourne said. “So I’m comfortable in the very near future making this decision, but maybe take a few more days to process what we heard tonight.”
Moulton Niguel Water District (MNWD), Santa Margarita Water District (SMWD) and South Coast Water District (SCWD) are contending to absorb San Juan Capistrano’s Utilities Department. Currently, each of the three districts provides some sort of services to the city.
Because of increasing costs and the difficulty of providing water and wastewater services, the city has been looking to transfer its Utilities Department to another agency since 2016. In April of that year, the City Council voted to enlist the help of the Orange County Local Agency Formation Commission (LAFCO) to look into restructuring options under the Municipal Service Review.
This past October, LAFCO completed the review, which evaluated the three agencies’ compatibility with the city, the city’s water utility infrastructure and the city’s potential to improve its financial condition.
During the meeting, city staff and representatives from the three agencies gave presentations on the proposed transfer. The council also welcomed several citizens to speak on the issue.
Public comments varied between shows of support for each of the three agencies, while some, including Clean Water Now founder Roger Bütow, urged the council not to go into negotiations yet.
Calling the water transfer proposal a complicated issue, Bütow told the council it should hold a public workshop meeting prior to selecting an agency for negotiations. In a letter he submitted to the council before the meeting, he pressed the council to also consider a shared services approach in which two of the agencies work together to provide water and sewer services to the city.
“The City has placed an unfair, onerous time burden upon its own citizenry by also limiting their ability to properly assess what a concept like Shared Services represents, let alone the volumes of augmenting, granular data,” Bütow wrote.
During South Coast’s presentation, Director Dennis Erdman touched on a shared services approach, stating that water district has offered to work with Santa Margarita on projects to provide domestic and recycled water. Should the city decide to select a larger agency, Erdman also said, South Coast would endorse Santa Margarita.
“We believe that selecting a successor delivery service provider who has a history of demonstrating a strong commitment to local water is your best choice,” Erdman said. “Both Santa Margarita Water District and South Coast Water District offer that experience.”
Currently, the two agencies are working with San Juan Capistrano on the San Juan Watershed Project, an endeavor that includes many other agencies and nearby cities to capture local storm water runoff. When completed, the Watershed Project will provide 5.6 billion gallons of reliable water for 50,000 families each year. The project is also expected to utilize the city’s Groundwater Recovery Plant.
“We believe that South Coast Water District would be able to successfully partner with Santa Margarita Water District in offering groundwater treatment experience and plant operations experience on behalf of the city’s Groundwater Treatment Plant,” Erdman said.
Councilmember Derek Reeve acknowledged the public’s concerns on the transfer of utilities and how that will impact water rates. But, he noted, in order to get answers, the council needs to go into exclusive negotiations.
“That doesn’t necessarily mean that’s our final selection,” Reeve said, adding that the city “has to go to that next level. And there’s a lot of questions–good questions–that people brought up. But we have to go into the next negotiation stage to really form that better picture.”
According to Ken Al-Imam, the city’s chief financial officer, when the council does decide on an agency to negotiate with, that phase of the water annexation process is expected to take approximately six months to complete.
“The negotiation-application phase is very robust,” he said to the council.
Following a negotiation phase, a LAFCO commission will then review and analyze the potential successor agency’s application for consideration. When the commission makes a determination, a 30-day reconsideration period is initiated, allowing for “any person or affected agency” to file a request with LAFCO for amendments to the determination, according to a city report.
Once the reconsideration period is over, the next phase is a protest period, which must last no fewer than 21 days or more than 60 days. During this phase, registered San Juan Capistrano voters and landowners will have a say in the matter.
“If less than 25 percent of registered voters within the service area and less than 25 percent of landowners within the service area object to the proposed annexation, the annexation proceeds as planned,” the city report explained.
However, if there’s a 50-percent objection, the proposal will have to be placed on a ballot and put to a city-wide vote. And, the city also notes, that “if more than 50 percent object, then the annexation cannot proceed in the form presented to LAFCO.”
The Financial Benefits
Al-Imam said without an annexation, the city’s water ratepayers can expect to see significant increases.
According to LAFCO’s fiscal assessment, San Juan Capistrano’s ratepayers currently pay higher rates compared to ratepayers under other service providers. Since 2014, the average monthly rate per household has gone up by 16.2 percent, with residents currently paying a monthly average of $146.
In 2014, the Dispatch reported, City Council had approved a 5 percent increase in water bills for each of the five subsequent years.
LAFCO’s assessment also noted that annexing the city’s water utility department “is likely to improve the overall financial condition of utility services within” San Juan Capistrano.
“Annexation to an alternative service provider offers the potential for cost savings due to economies of scale,” the assessment states. “These savings could help to stabilize utility rates and support the funding of capital improvements.”
And despite costly litigation and refunds the city paid to customers who overpaid for water under the previous tiered water rates, San Juan Capistrano’s financial conditions continue to improve, the assessment states.
“However, any number of adverse conditions could reduce (the city’s) ability to fund needed improvements,” LAFCO reported.
How much in savings the city and ratepayers can expect to see from the divestiture of the utility department couldn’t be estimated, LAFCO explained. However, such savings would most likely be achieved if the city selects a larger agency such as Moulton Niguel or Santa Margarita.
Examining the Successors
Moulton Niguel General Manager Joone Lopez highlighted the water district’s strengths, including its financial fortitude, customer care and innovation. She pointed to the agency’s AAA credit rating from both Fitch Ratings and S&P.
During the state’s most recent drought, Lopez said, Moulton Niguel didn’t have to comply with the statewide mandates that restricted watering to two days a week. She explained that based on reports submitted to the state outlining the agency’s management and pricing structure, its customers were able to avoid those watering restrictions.
Moulton Niguel’s efforts were “superior, according to the (State Water Resources Control Board), than what (the state was) proposing,” Lopez said. “So we were able to compare what it would’ve been for two-days-a-week watering versus what we were doing, and since we were doing better, we were only one of two agencies in California that were exempted from that.”
South Coast President Bill Green pointed to the agency’s experience and success in being a successor agency. Green also said the agency believes in investing in capital improvement plans and local infrastructure, pointing to projects such as the San Juan Watershed Project.
“South Coast Water District has a proactive long-range CIP or maintenance program,” Green said. “We average $10 (million) to $15 million annually in our CIP, keeping up on our infrastructure.”
Santa Margarita Water District General Manager Dan Farons reiterated South Coast’s sentiments, noting that the agency, too, has a commitment to investing in capital improvements, which help bring down operating costs – an approach they intend to bring to San Juan Capistrano.
“We live a culture of efficiency,” Farons said, later adding that “if asked, we could confidently take over operations today.”
According to LAFCO, Moulton Niguel supplies limited water services in areas of the city that include Hidden Creek Estates and Hamilton Oaks Winery, as well as areas along Camino Capistrano, Rancho Capistrano and Peppertree Bend. Santa Margarita has a contract with the city to provide meter reading services while South Coast handles sewer services for more than 140 parcels within the city.
All three of the water districts “have proven to be outstanding service providers, each in their own arena,” LAFCO’s infrastructure assessment found.
In the assessment, Moulton Niguel is described as being a “highly responsive and well-managed agency” that has a low rate of customer complaints. The district was also credited for using predictive modeling.
Santa Margarita, according to LAFCO, “maintains excellent system integrity with a low rate of leakage and breaks and substantial water reserves that greatly exceed standards.” And South Coast “has a low rate of water loss that is indicative of a top performer, met fire flow standards at 100 percent of sampled hydrants, and aggressively inspects its wastewater system.”
In terms of being able to manage the city’s water, LAFCO noted several key differences among the agencies.
The size of operations and population that South Coast Water District serves, as well as its staffing levels, are most similar to San Juan Capistrano, according to LAFCO. South Coast’s headquarters is also closer to the city, allowing it to respond faster to complaints and emergencies.
South Coast also has the most experience when it comes to being a successor agency, “which may make the transition of services from the city to itself more seamless,” the report stated.
“Despite these advantages and similarities, if named a successor agency, SCWD would be taking on operations that would immediately double its own size,” LAFCO reported. “Taking on a system of a similar size would have an effect on SCWD’s resource capacity as it works to accommodate the City’s water and wastewater systems, which already require additional maintenance to improve their integrity.”
“The existing size of the City and SCWD exponentially increases the amount of effort that would be required for reorganization. An agency with larger operations, (which) is already capitalizing on economies of scale, may have greater capability to integrate the City’s operations into its own, making for a more suitable successor agency,” the report further explained.
LAFCO’s assessment stated that Moulton Niguel “appears to be in a better position” to operate San Juan Capistrano’s water utilities, because its current “system size, served population, and water reserves are significantly larger than those of the city.”
“MNWD has demonstrated that it is a highly responsive agency that is equipped to address issues that may come with systems that require additional attention to improve their integrity, such as the City’s systems,” according to LAFCO.
The assessment explained that Moulton Niguel also has a history of absorbing utility departments, “which will promote a smoother restructuring process.”
As for Santa Margarita, LAFCO reported that the agency also “serves a greater population and operates significantly larger water and wastewater systems than the City, with extensive water reserves.”
“SMWD already provides services to the City in several capacities, including delivery of imported water through its South County Pipeline, a contractual relationship with the City for meter reading and emergency services, and delivery of recycled water,” the assessment stated. “Concentrating ownership and control of such critical infrastructure in the hands of the service provider increases supply reliability and economies of scale.”
LAFCO summarized that even though South Coast had the most in common with San Juan Capistrano’s operations and services, the comparable size is likely to hinder the consolidation and double the agency’s demand.
“Becoming a part of a larger well-managed organization with additional capacity has a higher potential of benefiting city residents,” the assessment stated. “An agency, such as MNWD or SMWD, will be able to extend its operational and service efficiencies to cover the much smaller San Juan Capistrano service area without sacrificing much of its own capacity.”