This is the third installment of a four-part series
The mid-years: 2005 to 2008
By John Perry
In 2004 the City signed a 20-year contract with ECO Systems Corporation to design, build and operate the Ground Water Recovery Plant (“GWRP”). The operation phase was for a fixed price of $1.1 million per year (plus a cost of living escalator). ECO Systems was to produce 4800 acre feet (AF) of water, maintain the facility and fix any defects that might appear. The City thought it carried little risk as special insurance purchased by the City would pay off the $35 million bond owed to the San Juan Basin Authority (SJBA) if the contractor defaulted on the contract and the project would be terminated.
Due to record rainfall during the winter of 2005/06 the GWRP generated its design standard of nearly 4800 AF of water, but in 2006/07, things began to go badly. Under the contract, ECO Systems was required to drill 8 wells to supply the GWRP with enough water to produce to its design capacity, but two of the wells drilled were not viable and the contract required the City to cover the cost of drilling any additional wells. The City Council voted against drilling the 2 additional wells, instead relying on just 6 wells to supply the water needed to operate the GWRP. This was a costly mistake since the GWRP barely produced to capacity even with record rainfall.
The decision to supply less water than what was needed sealed the fate of the GWRP. The contractor could not be penalized for failure to meet the design output and the City was forced to purchase water from the Metropolitan Water District (“MWD”) to make up the shortfall. This cost the rate payers millions of dollars and during the period 2002 to 2008, water rates increased by 71.58%. In 2006/07 the region suffered a severe drought which produced less than 3 inches of rain. The water table dropped severely and caused contaminates to concentrate in the ground water, placing an extra load on the GWRP. The contract specified that if contaminates exceeded the agreed level the City would absorb the extra costs to process the water through the GWRP.
In March 2007, the City was notified by the OC Health Department that a gasoline additive, “MtBE”, had leaked from two Chevron stations in the area, contaminating the water table. Although the contamination was below the health hazard level, the City Council insisted on shutting down the wells until Chevron could devise a satisfactory solution. After much political posturing and threatened lawsuits, the City settled with Chevron for about $3.1 million (not including legal fees); far below what the City claimed it lost during the shutdown.
By 2008, the City and ECO Systems were in constant disagreement over the lack of output from the GWRP and the extra charges for processing water. Subsequently, the City and ECO Systems agreed to terminate ECO’s operation of the GWRP even though the company was in default and had breached the contract according to a memo written by Cindy Russell. At that point, the City could have implemented the default clause in the contract, causing the insurer to pay off the $35 million bond. Instead, the City chose to pay ECO Systems $2 million to walk away. The City Council’s decision to continue the project on its own by assigning the operation to the newly formed Utilities Department stuck the ratepayers with colossal bond debt and operating expenses for a plant that costs nearly 3 times more for water than if they purchased it from the Metropolitan Water District.
Stay tuned for the final chapter which outlines the operation of the GWRP from 2008 to present and the impact on City finances.