$200 million at stake in this week's SDS talks; potential fees termed 'appalling'

Colorado Springs Utilities heads back to the bargaining table with the U.S. Bureau of Reclamation this week to negotiate water contracts that will be needed for the Southern Delivery System pipeline.

At issue are $200 million in potential additional costs that the federal government wants to impose on Utilities and its partners for storage and conveyance of water through Pueblo Reservoir.

Utilities contends the costs are unfair and much higher than what other water providers, such as Pueblo, are charged. “We should be treated fairly and equitably,” said Utilities' John Fredell, SDS project director.

Colorado Springs City Councilman and Utilities board member Sean Paige said the fees are outrageous.

“The whole thing is appalling,” Paige said. “The Bureau of Reclamation isn’t there to squeeze every dollar that it can from the city through these negotiations. They’re supposed to be helping us to come to an equitable arrangement to manage this water project.”

The federal agency has a methodology for determining the cost of water, said Jaci Gould, the bureau’s deputy area manager, in an e-mail. “Reclamation determines the market rate as the basis for the negotiation process. This process is used Reclamation-wide.”

Even some of Utilities’ critics have rallied behind the utility in the negotiations. “This is insanely greedy,” said retired landscape architect Walter Lawson. “ If a foreign country had done this to us we would rebel or go to war.”

The Southern Delivery System is a 62-mile pipeline that is expected to move water from Pueblo Reservoir to Colorado Springs. The first phase of the project is expected to cost roughly $2.3 billion in construction and financing costs over the next four decades. Utilities has said it needs the pipeline to ensure that it will have adequate water for the future.

Fredell and his team will face off against Bureau of Reclamation officials in a two-day session scheduled to begin 9 a.m. Thursday at Fountain Valley School of Colorado. The negotiations are scheduled to resume 8 a.m. Friday at the same location.

Like the previous two sessions, May 25 in Pueblo and June 15 in Colorado Springs, the public is invited.

Although public negotiations are a little like showing your cards to opponents in a high-stakes poker game, it’s the policy of the bureau to conduct negotiations in public, said spokeswoman Kara Lamb.

Fredell said it’s unlikely Utilities will begin construction on the pipeline before September. “We’ve got contracts ready to go. We’ve got contractors ready to go,” he said.

Before work can begin, the municipally-owned utility and the federal government have to reach agreement on costs associated with the storage and conveyance of water through Pueblo Reservoir, which is part of the Fryingpan-Arkansas Project.

The Fry-Ark Project is a water diversion, storage and delivery project that moves water from Colorado’s Western Slope to the Front Range. The Fry-Ark Project is owned by the federal government and managed by the Bureau of Reclamation, and it provides water to Pueblo and Colorado Springs, as well as other small towns, ranching communities and farms along the Arkansas River.

The Fry-Ark Project dates to the boom years after World War II, when community leaders in the Arkansas Valley realized they needed water for their communities to grow. Following a prolonged lobbying effort — which included the sale of golden frying pans — the project was approved by Congress in 1962 and signed into law by President John F. Kennedy, who flew to Pueblo to kick off the project.

In the ensuing decades, five dams and reservoirs, one federal power plant, eight tunnels and 12 conduits were built. The main water delivery vehicle is the Arkansas River, and the final reservoir in the system is Pueblo Reservoir, which can store nearly 300,000 acre feet of water. An acre foot equals 325,851 gallons of water, enough water to cover an acre with one foot of water.

The actual amount of water in the reservoir at any given time is dependent on weather and other factors. During dry years, lots of space can be available. During wet years, the reservoir can fill up, and water users might have to let their water spill down the river or move it to another facility. “When it’s not full, Pueblo Reservoir is a very convenient and cheap place to store water,” said Philip Reynolds , project manager for the Southeastern Colorado Water Conservancy District.

The conservancy district was created in 1958 to develop and administer the Fry-Ark Project. The district extends along the Arkansas River from Buena Vista to Lamar and along Fountain Creek from Colorado Springs to Pueblo.

From 1959 through 2007, El Paso County residents have contributed about $68 million in property taxes to the conservancy district, which uses the money to repay the federal government for construction of the Fry-Ark components and to maintain and operate the facilities. By contrast, Pueblo County has contributed about $18 million to the conservancy district, and communities east and west of Pueblo have contributed another $11.5 million.

During the Fry-Ark’s inception, officials hammered out a variety of principles to govern the project: Who gets to store water in the reservoir, how much water they can store, and the order in which the water users have to spill their water if the reservoir is full, among others.

Beneficiaries of the Fry-Ark, such as Colorado Springs, and other water providers, such as Aurora, can store water in the reservoir under what’s called “excess capacity storage contracts” — if and when space is available.

As a Fry-Ark beneficiary, Utilities has about 56,000 acre feet of “firm” storage in the reservoir. Through short-term excess capacity contracts, the municipally owned utility has increased its water in the reservoir by up to 20,000 acre-feet annually.

Some of that water is transported from the reservoir to customers through the Fountain Valley Authority pipeline; some of it remains in the reservoir as storage, and some of it is moved to other locations.

Now, with construction set to begin on SDS, the utility wants to enter into a long-term excess capacity storage contract with the Bureau of Reclamation to store up to 28,000 additional acre feet of water in Pueblo Reservoir. The contract would begin on Jan. 1, 2011 and run through December 31, 2049.

Utilities’ SDS partners — Pueblo West, Security, and Fountain — also want similar contracts to collectively store an additional 14,000 acre feet of water in the reservoir.

The Bureau of Reclamation has proposed that Utilities pay $75 an acre-foot to store and convey water in the reservoir, plus a 3.08 percent annual inflation adjustment.

By comparison, the Pueblo Board of Water Works, which entered into a 25-year contract with the bureau in 2000, pays $17.35 per acre foot to store and convey water in the reservoir and is not charged an inflation fee.

Aurora, which entered into a 40-year contract in 2007, is charged a little over $45 per acre foot and a 1.79 percent annual inflation fee.

Utilities officials have been taken aback by the disparity. “Setting a higher price puts an unreasonable burden on our customers,” Utilities said in a prepared statement. “Reclamation’s proposal would mean more than $200 million in additional costs for the SDS partner communities that will already face a doubling of their water rates to pay for this project.”

Utilities officials said the conveyance fees are particularly egregious because the utility is going to build a $30 million outlet, called the North Outlet Works, that will transport water through the dam to the SDS pipeline. “We’re paying money to build this thing. The bureau is proposing to have us pay to use it after we’ve given it to them,” explained Keith Riley, Utilities’ planning and permitting manager.

After the 2002 drought, everybody began storing as much water as possible, said Jay Winner, executive director of the Lower Arkansas Valley Water Conservancy District. “Since 2002, the world has changed,” he said.

The Bureau of Reclamation is not singling out Utilities, he said, adding that the federal agency has begun charging more for water throughout Colorado. “It’s like any other negotiations,” added the conservancy district’s Reynolds. “The Bureau of Reclamation has things that CSU wants, and CSU has things the Bureau wants.”

Colorado Springs Councilman Tom Gallagher, a frequent critic of SDS, said the excess capacity storage contracts are risky because they’re dependent on space being available in the reservoir.

Utilities officials acknowledged there is some risk, but said that the risks can be managed and that the benefits far outweigh those risks.

“Generally, the risk is greater during very wet conditions — when we have a lot of water supply available. When these conditions occur, we have the ability to move water into other storage space that’s available within our overall system,” Utilities said in an e-mail.

Gallagher also pointed out that from 2002 to 2006 the SDS project wasn’t considered viable without the expansion of Pueblo Reservoir. But increasing the size of the reservoir would require congressional legislation, and those efforts have failed.

“This is a squeeze play,” said Gallagher, who as a member of the City Council also oversees Utilities operations as a board member. “We get SDS built and Reclamation has to expand the reservoir. And Pueblo Reservoir is a horrible candidate for expansion because of structural flaws.”

Utility officials say that SDS’s viability is not dependent on enlargement of the reservoir. “Throughout this process, we have expected to use Pueblo Reservoir for SDS as it’s currently constructed and operated for storage purposes,” Utilities said in an email. “SDS demands can be met using our firm storage space in Pueblo Reservoir, along with the long-term excess capacity contract we’re currently negotiating.”