Lake Powell pipeline costs can be covered, audit says, but critic wonders if this pricey ‘boondoggle’ is needed

(Leah Hogsten | Tribune file photo) A new audit shows southern Utah water districts will be able to cover the costs of building the Lake Powell pipeline, but hefty fee, water rate and tax increases will be needed.

A new legislative audit has concluded Washington County water bosses will likely be able to generate sufficient revenue to pay the massive costs of building and operating the proposed Lake Powell pipeline, but only through large fee, rate and tax increases and if the county triples its population during the next 50 years.

While offering an optimistic picture, the audit outlined several areas of uncertainty that could have a “significant impact” on whether the county covers all the project’s actual costs in a timely way. The document pointed to many holes in state law that raise questions about when and if the county would have to repay the state hundreds of millions of dollars in related costs beyond the estimated $1.4 billion construction tab, which could soar to $2.4 billion by 2025.

The Washington County Water Conservancy District’s “ability to repay the state, especially in the first 15 years, will largely depend on how the state structures the repayment terms and conditions,” states the audit released Tuesday in the Utah Legislature’s audit subcommittee. “In addition, the final costs of the [pipeline], costs of other water projects the district has planned, and [the district’s] ability to increase rates will affect its ability to repay the state.”

The 140-mile line would divert 86,000 acre-feet of the Colorado River across southern Utah each year to Sand Hollow Reservoir through a 69-inch pipe to feed the mushrooming St. George metro area. About 4,000 acre-feet, or 5% of the flow, would be offloaded in Kane County. The Washington district is developing 21 other water projects, representing another $700 million in potential obligations.

The audit did not study whether Washington County actually needs the water, nor did it judge the reliability of the state’s cost estimates. Pipeline critics contend that proponents have gotten both wrong, arguing Washington County can meet its future water needs through conservation and by tapping water currently assigned to agriculture.

They also contend the pipeline’s bills could far exceed the state’s estimate. A recent analysis conducted by the Utah Rivers Council looked at Colorado Springs’ construction of a smaller pipeline in 2016.

Extrapolating that 50-mile line’s $12.5 million-per-mile cost, the Lake Powell pipeline would cost $1.75 billion. But the Utah pipe would move more water through a bigger pipe over a greater elevation gain and feature several hydropower components, driving up the project’s tab to $3.2 billion, not including financing costs, the study concludes.

“This $3.2 billion price tag is a bombshell that kills any claim this project can be repaid by local residents," the council’s executive director, Zach Frankel, warned in an Aug. 14 news release.

“The only way the district can repay it is if you extend the life of the loan to 85 years, which is ludicrous,” Frankel added in an interview. “Most water projects are financed to 30 years. Fifty years is generous; 85 years is absurd because you are paying so much interest.”

District officials, however, contend Frankel “grossly overinflated” the Powell pipeline costs by using inappropriate comparisons with the Colorado Springs pipeline. The most serious error arose from the assertion that the Colorado pipe cost $12.5 million per mile, “more than double the actual cost of the pipe components,” according to John Fredell, who oversaw the Colorado construction and now manages the Powell project.

The state already has spent $38 million on engineering, design, permitting and environmental reviews. The project is undergoing reviews by the Federal Energy Regulatory Commission and other agencies. Construction is expected to begin between 2023 and 2028 and would take five years to complete, according to audit supervisor August Lehman.

Population gains are central to the audit’s conclusion that the pipeline could cover its bills, Lehman told the audit subcommittee Tuesday. Auditors cite Kem C. Gardner Policy Institute projections that Washington County’s population will jump from 173,000 to 509,000 by 2065.

Auditors anticipate per-capita use would drop between 15% and 25% in response to planned rate hikes. Critics counter that demand could drop by far more than that, judging from what has happened elsewhere. St. George water rates are 30% to 85% less than those in other desert cities, such as Tucson, Ariz., which has seen per-capita water use drop dramatically in the face of rate hikes.

“The auditor ignores the market," Frankel said. "There is no way they could increase [wholesale water] rates 357% and see a drop in use of only 25%. If water use drops through the floor, then so do the revenues used to repay Utah taxpayers.”

He contends that if Washington County residents reduce water to the level of Tucson residents, the pipeline would not be needed.

“The pipeline is an unnecessary boondoggle," Frankel said, “that will tragically burden Washington County residents with pain and anguish.”

The district intends to raise the money for the project through big hikes in fees imposed on new residential construction, along with increases in property taxes and water rates.

The water district has spelled out a plan to boost impact fees by $1,000 annually from $7,417 through 2026, reaching $15,448; increase wholesale water rates $0.10 annually from the 2016 rate of $0.84 to $3.84 per 1,000 gallons; and up the property tax rate of 0.0648% to 0.1% by 2025 from a tax base currently valued at $19 billion.

Already saddled with some of the state’s highest impact fees, second only to Park City’s, the Washington water district is designing fee hikes to cover three-fourths of the project’s costs.

“These fees are vulnerable to recessions,” Lehman cautioned, while the planned tax hike would translate to $50 a year on a typical home.

The audit’s biggest question mark concerns $500 million in bond costs. It is unclear from state law if the water districts in Washington and Kane counties must cover those, Lehman said. Nor is it clear whether they can defer some construction costs, enabling them a longer repayment window.

Auditors recommended the Legislature enact measures to clarify water districts’ financial obligations. Otherwise it would be left up to the Utah Board of Water Resources to resolve these questions for the Powell project.

In its formal response to the audit, the Washington County district said it was already setting aside money for a $200 million down payment on the project and is creating a fourth revenue stream in the form of a monthly surcharge on each water connection. This stream would offset future revenue deficiencies.

“As the LPP project continues to progress, additional efforts will be made to reduce cost, such as value engineering the final design and breaking the project into multiple components to allow local contractors the opportunity to competitively bid services,” wrote Ron Thompson, the district’s general manager. “We are committed to managing and reducing expenses to minimize borrowing costs and potential financial impacts to taxpayers.”

He also argued the project’s bond costs should not be included in the districts’ repayment obligations — as has been the case with other state-supported water projects in Utah.

“The state has a tradition of offering loans at a subsidized or low-interest rate,” Thompson wrote. “Given these well-established traditions, it’s unclear why the LPP would be subject to different conditions that would complicate funding for a project that would benefit the state.”

One subcommittee member pressed Thompson on why residents of northern Utah should be on the hook for the project.

“Water raises everything and everyone uses it,” Thompson replied. “In the state’s model, it’s an investment, and they get their money back. They get the jobs it creates and the revenue it generates.”

The district asserts that the pipeline will support sales and income tax revenues in excess of $20 billion between 2026 and 2060, supporting 102,000 jobs, 106,000 businesses and $9 billion in personal income.