ADMINISTRATIVE REPORT Date: September 16, 1996 File: 1.40.96.06 TO: Vancouver City Council FROM: Capital Plan Staff Review Group SUBJECT: 1997-1999 Waterworks Capital Plan RECOMMENDATION A. THAT Council approve the 1997-1999 Waterworks Capital Plan at a total cost of $74.1 million, including elimination of the 50% City funded subsidy for new water services for single-family homes and duplexes, effective January 1, 1997. CONSIDERATION As an alternative to A, the following options are submitted: B. THAT Council not approve elimination of the 50% City share of new water services for single family homes and duplexes and approve an additional $4.2 million in the 1997-1999 Waterworks Capital Plan for a total cost of $78.3 million. OR C. THAT Council make further reductions to the recommended plan, as outlined in Appendix B to this report, and approve the 1997-1999 Waterworks Capital Plan with funding totalling $63.85 million. CITY MANAGER'S COMMENTS The City Manager RECOMMENDS approval of A. COUNCIL POLICY Vancouver's water system operates as a utility, with all funding recovered through its rates and fees. City Council, under Charter authority, approves borrowing for Waterworks without submitting the borrowing to a plebiscite. In May, 1995, Council approved property owners funding 50% of the cost of residential connections for new single-family and duplex homes. Since the 1990 inception of mandatory residential fire sprinklers, these services were funded 100% by the City. Prior to that time, new services were funded 100% by the property owner. CityPlan, adopted by Council on June 6, 1995, proposed developing user-pay programs to reduce environmentally harmful actions. PURPOSE This report presents the Capital Plan Review Group s recommended funding level for the 1997-1999 Waterworks Capital Plan, along with alternatives for Council consideration. Two alternative funding options are provided in Consideration items B and C, although Council also has the option of setting the Capital Plan funding at any other level that it feels is appropriate. BACKGROUND Although Council approves the Waterworks Capital Plan separate from the overall Capital Plan, and without going to plebiscite, it is submitted along with the rest of the Capital Plans for convenience and context. Engineering Services presented a general review of the Waterworks Capital Program to Council on June 11, 1996. This review outlined the Department s submissions to the 1997-99 Capital Plan in the context of the Waterworks long range plan, and identified funding needs totalling $83.85 million in order to meet the long range plan objectives over the next three year period. This presentation was for information purposes only and no funding decisions were made. Comments from members of Council at that time were generally supportive of the Department s approach to planned infrastructure replacement, dealing with growth in demand through a combination of system expansion and demand management, and emergency preparedness. To deal with demand management, Council approved a recommendation to pursue permanent, region wide, sprinkling regulations with the GVRD. The detailed explanations of the needs, making up this $83.85 million submission, were then submitted to the Capital Plan Staff Review Group on July 26, 1996. The review group recognized that the Waterworks submissions were needs based, and that they represent important programs; however they also recognized that it is important to address the issue of affordability. DISCUSSION ENGINEERING SUBMISSION $83.85 million The plan submitted to the Staff Review Group by Engineering Services includes the following four categories: Ageing Infrastructure Replacement $43.5 million The water system has a replacement value of approximately $1.2 billion and an average life expectancy of 70 years. A replacement rate of 1.5% per year is necessary to maintain a steady replacement program and to limit the costs due to breaks, leaks and resulting damage. Addressing Growth $11.0 million A number of projects are planned which are intended to address existing pressure and fire flow problem areas in the City. These problems are due to historic and continuing City and Regional growth. Emergency Planning $20.3 million This category focuses on a continuation of the development of the Dedicated Fire Protection System (DFPS). It includes funding for construction of the third pump station at Kitsilano Point, as well as continuation of the construction of the DFPS pipeline system. It is anticipated that the system will be completed over the next two capital plans. The DFPS provides benefits on a day to day basis, as well as in the event of a major disaster, by upgrading the water supply available for fighting major fires in areas where building densities have increased the design fire demand beyond the capacity of the existing water system. The system allows the deferral of costly upgrading of the regular water distribution network, which would otherwise be needed to address this increased demand. This is a particular issue in Kitsilano. Engineering is assessing whether construction of the pipeline system in Kitsilano is a higher priority than completion of the downtown network, as described in the Capital Plan submission, and will report back prior to submission of the 1997 Capital Budget. This funding category also includes exploration of alternative emergency water supply sources, such as the Fraser River for fire suppression and groundwater aquifers for potable water. Customer Connections and Other Works $9.05 million The cost of new water services for single-family homes and duplexes are currently subsidized 50% by the City. Other works include short-notice watermain replacements prior to street repaving projects, Waterworks Operations building modifications, telemetry system improvements, engineering and site investigations, and miscellaneous and minor works. A summary of the submitted plan, along with three reduced funding options, is attached as Appendix A. At the Review Group s request, Engineering has prepared the attached list (Appendix B) of potential reductions and their impacts. The Review Group supports the order of priority presented in this list, although Council may approve any option in whole or in part. CAPITAL PLAN STAFF REVIEW GROUP RECOMMENDATION $74.1 million total Having reviewed the needs identified in the submissions, and also having given consideration to the issue of affordability, the Review Group has arrived at a recommended plan in the amount of $74.1 million, which is a reduction of $9.75 million below the submission level. The Review Group recommends that $4.2 million of this reduction be achieved by elimination of the current 50% City subsidy on the cost of installing new water services to new single family homes and duplexes. The Review Group s rationale for proposing elimination of this subsidy is based on the results of the CityPlan public process whereby concerns were raised about the changing character of neighbourhoods, loss of affordable housing, and the environmental impacts of new development. Construction of new single-family houses results in costs to neighbourhoods, the City, and region. Impacts can include the loss of more affordable character housing, increased waste resulting from demolition materials and broader regional consequences of locating low density housing close to City jobs. Given these impacts, there is some cause to question why it is appropriate to continue to subsidize the construction of new single-family houses. Consequently, the Review Group is recommending elimination of the 50 percent subsidy for new services for single-family houses and duplexes. This would achieve a $4.2 million reduction with no functional impact on the water system. It would place the cost of servicing new development on the builder. It would also result in all new water services being funded through connection fees, with the exception of new services required for the construction of secondary suites. These would continue to be funded 100% by the City because the construction of secondary suites is consistent with the goals of CityPlan, and the rationale provided above does not apply in these cases. A further $5.55 million reduction would be from the Addressing Growth section by deferring two transmission main upgrading projects. During the June 11, 1996 Waterworks Capital Plan presentation to Council, Council approved that the City pursue with the Greater Vancouver Water District (GVWD) the adoption of permanent lawn sprinkling regulations. If permanent watering restrictions are adopted regionally, along with other aggressive demand management measures, staff believe that these two transmission main projects can be deferred until the next Capital Plan without significant further service deterioration. This recommended plan represents an increase of $20.4 million (Appendix C) over the funding level for the 1994-96 Plan, with the major areas of increase being in Infrastructure Replacement and the Dedicated Fire Protection System (DFPS). The Review Group, in supporting the increase in the DFPS, were guided by two major factors. First, if the additional fire protection system was not provided in the Kitsilano area, alternative work would be required to maintain adequate fire flows for the existing distribution system, at a higher cost. Further, as the Citizen's Survey indicated, there is support among the public for expenditures to improve the City's ability to respond to disaster scenarios such as earthquakes. The increase in infrastructure replacement for the distribution and transmission systems, amounting to $17.75 million, reflects a significant increase in this work and gives recognition to the targeted replacement program of 1.5% per year. Arguably, the increase in this program might be deferred until later Capital Plans, with maintenance funds utilized to address leaks and emergency repairs. However, the Review Group notes that future Capital Plans beyond 1999 will address major initiatives for water transmission and storage facilities and the 1997-99 Plan may be the appropriate "window" for implementing this increase. FURTHER REDUCTIONS UP TO $10 MILLION If Council feels that the Waterworks Plan should be reduced further than the $10 million dollars recommended by the Review Group, a list of potential cuts is included in Appendix B. The impacts of these reductions are more severe, affecting levels of service, the long term stability of the infrastructure replacement programs, and associated costs due to breaks, leaks, and resulting damage. These reductions are listed in order of priority. If the full $10 million is removed, the resulting Plan would be $63.85 million. FINANCIAL IMPACT Waterworks capital expenditures do not effect general taxes, but do impact the water rates charged to customers. Figure 1 projects single-family water rates from 1996 to 2000 for the total $74.1 million plan recommended by the Staff Review Group. Metered water rates would increase by the same proportion. The top portion of the rate (in black) is due to the increase in this Capital Plan over the previous Capital Plan (increase of $20.4 million). The light grey area in the bottom of each bar represents the City portion of the single-family rate assuming continued capital spending at 1994 -1996 levels. This portion of the rate rises due to financing costs for past capital budget increases. The dark grey areas of these graphs show the increases due to GVWD projected water rates, as presented to the GVWD Water Committee in June, 1996. Figure 2 shows the projected water rates for single family homes in 1999 for the Review Group s recommended plan, as well as the other two options represented by Consideration items B and C of this report. Changes to the Waterworks Capital Plan have no effects on the water rate in the first year of the three year plan. By the third year of the plan (1999), the Staff Review Group recommendation would result in a $10 water rate increase, compared to current capital plan funding. For comparison, Consideration options B and C would result in a $12 and a $5 increase respectively. The greatest impact on Vancouver s water rates results from regional cost increases. The GVWD s historic and projected water rates are shown below in Figure 3. Their rates have quadrupled in the last 10 years, and are expected to almost triple in the next 10 years due to major water quality and supply improvements. As a result, there is little opportunity to smooth out water rate increases by deferring City work. Deferring needed capital expenditures will further burden future ratepayers, when their rates will also be higher due to regional costs. If Vancouver s water capital programs are substantially deferred now, water rates will increase more dramatically during subsequent Capital Plans. Recommendation A is proposed by the Capital Plan Staff Review Group as a suitable compromise between increasing water rates, and needed City water Figure 3 system capital works. * * * * *