Accept the Bull Run Treatment Projects 2024 Annual Report
In fulfillment of the requirements of Resolution 37309 (Bull Run Watershed filtration plant to treat drinking water), the Portland Water Bureau hereby submits the attached annual report, which highlights the current project status of the Bull Run Treatment Projects for filtration and corrosion control.
The Bull Run Filtration Projects (Filtration) and the Improved Corrosion Control Treatment (ICCT) Project are needed to protect public health and comply with federal safe drinking water regulations. The attached report demonstrates that the Water Bureau is meeting Oregon Health Authority (OHA) compliance milestones for these projects.
In 2022, the Water Bureau implemented ICCT to reduce potential lead levels at customers’ taps. In fiscal year (FY) 2023–24, the bureau successfully optimized treatment for lead with this improved corrosion control and is now in full compliance with the EPA’s Lead and Copper Rule.
In FY 2023–24, the Water Bureau completed the design for the Filtration facility and pipelines.Land use applications in both Multnomah and Clackamas counties were approved, and the bureau began initial construction work.
The attached report details additional progress and notable milestones for the Bull Run Treatment Projects. This includes continued expansive and inclusive efforts on outreach, fiscal management and cost control efforts, emphasis on maximizing equity in contracting, and using project values to guide decisions.
Official Record (Efiles)
Impact Statement
Purpose of Proposed Legislation and Background Information
The purpose of this legislation is to allow Council the opportunity to review and accept the Bull Run Treatment Projects 2024 Annual Report to Council. This report informs Council of progress made over the 2023–24 fiscal year.
The Water Bureau is responsible for delivering the Bull Run Treatment Projects, which include the Improved Corrosion Control Treatment (ICCT) Project and the Bull Run Filtration Projects (Filtration). These projects will protect public health and bring the City of Portland into compliance with federal drinking water regulations—the Lead and Copper Rule (LCR) and the Long Term 2 Enhanced Surface Water Treatment Rule (LT2). The Water Bureau has two compliance agreements with the Oregon Health Authority (OHA) that establish schedules for complying with the LCR and LT2. In April 2022, the Water Bureau successfully met the ICCT Project’s OHA compliance deadline. September 30, 2027, is the final compliance deadline for Filtration, which includes both the planned water Bull Run Filtration Facility Project (Filtration Facility) and Bull Run Filtration Pipelines Project (Filtration Pipelines).
Together these projects will provide multiple benefits to the nearly 1 million people currently served by the Water Bureau, including protecting public health, improving water quality, and enhancing water system reliability.
In April 2022, the Water Bureau brought ICCT online at our Lusted Hill Facility to further reduce potential levels of lead at customers' taps. Since then, the Water Bureau has gradually increased the pH and alkalinity of Bull Run water to make it less corrosive to lead and other metals found in some home and building plumbing. The OHA has confirmed that our corrosion control treatment for lead is optimized, bringing the Water Bureau in full compliance with the Environmental Protection Agency's LCR.
Once complete, Filtration will remove Cryptosporidium and enhance the Bull Run water supply’s resilience to potential water quality impacts from fires, landslides, large storms, and other future risks.
The Annual Report to Council is one way the Water Bureau shares progress with the community and City Council. The 2024 annual report is the seventh Annual Report to Council; the first was submitted in June 2018.
Previous key Council and government actions related to the Bull Run Treatment Projects:
- May 2017: OHA approved the Water Bureau’s schedule to implement ICCT.
- June 2017: City Council held a work session on the variance revocation and treatment options, including comparative costs.
- August 2017: The Water Bureau provided additional analysis to City Council, and Council approved Resolution 37309 to submit a compliance plan for design and construction of a filtration facility.
- September 2017: City Council authorized the design contract for the ICCT Project (Ordinance 188620).
- December 2017: The Water Bureau signed a bilateral compliance agreement with OHA that requires the filtration facility to be operational by September 30, 2027.
- June 2018: The Water Bureau submitted the first Annual Report to Council.
- August 2018: City Council held a work session on Filtration.
- August 2018: City Council authorized use of the alternative contracting method Construction Manager/General Contractor (CM/GC) in connection with the Filtration Facility Project (Ordinance 189146).
- August 2018: City Council authorized the program management contract for Filtration (Ordinance 189147).
- December 2018: City Council authorized Resolution 37402 choosing the location, technology, capacity, and procurement method for the filtration program.
- June 2019: The Water Bureau submitted the second Annual Report to Council.
- October 2019: City Council authorized the acquisition of 1.87 acres of real property (Ordinance 189749).
- November 2019: City Council approved Resolution 37460 that set priority values, expectations, and a recommended option to guide the design and implementation of Filtration.
- November 2019: City Council authorized the design contract for the Filtration Facility (Ordinance 189778).
- April 2020: City Council authorized the Water Bureau to acquire certain permanent and temporary property rights necessary for construction of ICCT through negotiation or the exercise of the City’s eminent domain authority.
- April 2020: City Council authorized water revenue bonds to finance water system capital improvements and refund water revenue bond to utilize Water Infrastructure Finance and Innovation Act (WIFIA) financing (Ordinance 189922).
- June 2020: The Water Bureau submitted the third Annual Report to Council.
- July 2020: Report to Council recommending award of a CM/GC contract and guaranteed maximum price (GMP) for construction of the ICCT Project.
- December 2020: City Council authorized the design contract for the Filtration Pipelines (Ordinance 190242).
- December 2020: City Council authorized use of the alternative contracting method CM/GC in connection with the Filtration Pipeline Project (Ordinance 1900245).
- February 2021: The Water Bureau signed a WIFIA agreement with the Environmental Protection Agency.
- March 2021: City Council authorized purchase of two acres of real property (Ordinance 190322).
- June 2021: The Water Bureau submitted the fourth Annual Report to Council.
- July 2022: The Water Bureau submitted the fifth Annual Report to Council.
- December 2022: City Council authorized the Water Bureau to acquire certain permanent and temporary property rights necessary for construction of the Bull Run Filtration Projects through negotiation or the exercise of the City’s eminent domain authority (Ordinance 191094).
- June 2023: The Water Bureau submitted the sixthAnnual Report to Council.
- June 2023: Report to Council recommending extension of contract with Brown and Caldwell, Inc for program management and support.
- June 2023: Report to Council recommending award of a CM/GC contract and GMP1 for construction of the Filtration Facility.
- June 2023: Report to Council recommending award of a CM/GC contract and GMP1 for construction of the Filtration Pipelines
- July 2023: City Council authorized the Water Bureau to construct the Filtration Facility in two phases with two GMPs (Ordinance 191368).
- July 2023: City Council authorized the Water Bureau to construction the Filtration Pipelines in two phases with two GMPs (Ordinance 191369).
- March 2024: City Council authorized the Water Bureau to amend Ordinance 191094 to acquire certainpermanent and temporary property rights necessary for construction of the Bull Run Filtration Projects through negotiation or the exercise of the City’s eminent domain authority (Ordinance no. pending).
- March 2024: City Council authorized an emergency contract for arborist services (Ordinance 191665).
Financial and Budgetary Impacts
The attached Bull Run Treatment Projects 2024 Annual Report to City Council does not create, eliminate, or re-classify any positions now or in the future.
The Water Bureau has finalized GMP2 negotiations with the CM/GCs for the Filtration Facility and Filtration Pipelines, which provides greater certainty about the anticipated costs to build the filtration facility and pipelines. Hearings Officers in both Multnomah and Clackamas counties approved the Water Bureau’s land use applications related to the filtration facility and pipelines; however, these approvals came with numerous conditions of approval that will require additional funds to implement. Current program funding needs have increased to $2,134,000,000 due to several factors, including schedule compression, market capacity, labor shortages and labor wage increases, and continued escalation and supply chain issues, especially for some materials and equipment.
The program funding includes:
- Final costs for the ICCT Project
- Final GMP2s for the Filtration Facility and Filtration Pipelines
- Other WIFIA-eligible costs, such as indirect and financing costs
- Contingency and allowances for land use conditions of approval and other known and unknown project risks
During negotiation of GMP2s with the CM/GCs for the Filtration Facility and Filtration Pipelines, the Water Bureau considered value engineering and cost savings proposals that could be implemented without sacrificing water quality and resilience goals.
Securing a WIFIA loan with a very low interest rate is another key step the Water Bureau has taken to maintain water rate affordability while making these important long-term investments in the future of the Bull Run water system. Information about the program funding has been shared previously through the project website, fact sheet, and briefings to interested parties, and in response to media requests.
With the approval of the GMPs, the 10-Year Capital Improvement Plan will be adjusted to absorb the additional costs. Updates to the 10-Year Capital Improvement Plan will be made in the FY 2024–25 Mayor’s Proposed Budget. There is no impact to water retail rates. Funding for Filtration is from a combination of net proceeds from revenue bond sales, a low-interest Environmental Protection Agency WIFIA loan, water sales revenue, and other construction fund revenues such as system development charges.
Community Impacts and Community Involvement
There are no new impacts to the community. The annual report provides updates on continued community outreach and involvement over the fiscal year. The Water Bureau is considering the full spectrum of impacts to neighbors, Indigenous peoples, underrepresented communities, low-income customers, and ratepayers.
Since 2017, the Portland Water Bureau has been working to keep the community informed and engaged using multiple communication tools, including monthly e-newsletters, utility bill inserts, the annual water quality report, project videos, and social media. This fiscal year, the Water Bureau performed extensive outreach to local contracting and workforce community groups including the National Association of Minority Contractors, National Association of Women in Construction, LatinoBuilt, Portland Youth Builders, Oregon Tradeswomen, and others.
100% Renewable Goal
Accepting the annual report does not increase or decrease the City’s total energy use, nor does it increase or decrease the City’s renewable energy use.
Although the new water filtration facility and pipelines are anticipated to increase the City’s total energy usage, the project team is working within several sustainability-oriented frameworks, including the Green Building Policy, LEED, and Envision, to reduce energy needs and use greener energy alternatives where possible. Both holistic sustainability opportunities and specific design and operational opportunities have been identified to support the City’s energy-efficiency goals when possible, such as designing the Filtration Facility and Filtration Pipelines to continue gravity operations.
Financial and Budget Analysis
Brief Context
GMP2 results in a $300 million increase in FY 2025-26 and FY 2026-27, $150 million each year.
For the sake of comparing projections, the pre GMP2 numbers will be referenced as the “Requested” and the post-GMP2 numbers will be referenced as the “Proposed.” This naming convention is based on what the bureau knew at the time it submitted the FY 2024-25 Requested budget and what they know now as the City enters the FY 2024-25 Mayor’s Proposed phase of budget development.
Strategies
The bureau is pursuing several strategies to account for the GMP2 price increase above previous estimates. They are as follows:
- Pursue a second Water Infrastructure Finance and Innovation Act (WIFIA) loan
The bureau plans to pursue a second low-interest federal WIFIA loan if Council approves the GMP2s, which will fund 49 percent of the increase to the filtration project – roughly $325-350 million.The bureau has been in contact with WIFIA staff and they have encouraged the bureau to apply for a second loan for the filtration project. The bureau anticipates the application process will be easier since the project has not changed, and the loan would be to help with project cost increases. While these resources are not guaranteed at this time, the bureau appears optimistic they can secure a second low-interest federal WIFIA loan.
The bureau has already received one low-interest (1.89%) federal WIFIA loan for $727 million. These loans help reduce the costs for ratepayers to build the treatment facility, saving Portland at least $247 million in repayment costs.
- Rebalance the Capital Investment Plan (CIP)
Bureaus are required to provide five-year CIP to CBO and to the public. Because of the magnitude of rising costs related to GMP2, part of the bureau’s strategy to mitigate its impact to their CIP is by rebalancing their CIP at the ten-year level.
The bureau has updated their 10-year CIP since getting GMP2. At the time of the FY 2024-25 Requested Budget, the 10-year CIP was $2.43 billion dollars. As of March 13th, the 10-year CIP has been raised to $2.58 billion.
After taking the second WIFIA loan into account, the bureau plans to delay work related to upgrading their Distribution Main system portfolio and slow down implementation efforts related to the Seismic Plan Improvements portfolio to offset the remaining $150 million increase across FY 2025-26 and FY 2026-27.
- Distribution Mains Project: The bureau planned to spend $261.2 million over the Requested 10-year CIP and now plans to spend $217.2 million over the Proposed 10-year CIP.
- Seismic Plan Improvements Project: The bureau planned to spend $150 million over the Requested 10-year CIP and now plans to spend $28.8 million over the Proposed 10-year CIP.
- In total, the Distribution portfolio planned to spend $558.5 million over the Requested 10-year CIP and now plans to spend $408 million over the Proposed 10-year CIP, a $150.5 million reduction.
Delaying these projects does not affect water system operation and the system will continue to be maintained, though the tradeoffs to meet regulatory compliance compared to delay seismic plan improvements brings inherent risk. CBO notes that customer rates would notably increase above what is previously forecasted (see below) if the bureau did not decide to reprioritize and realign its CIP as described above.
- Rate Stabilization Account
The bureau has a Rate Stabilization Account (RSA) within the Water Operating Fund to smooth retail rate increases over the financial planning period. This account is one of the bureau’s key tools to meet its financial planning objectives which includes maintaining financial stability and predictability for itself and the public. It is worth noting that the bureau planned to draw from the RSA to mitigate the cost of the filtration project before GMP2 was finalized.
The bureau has plans to make transfers to the Water Fund as well as make transfers from the RSA over the next ten years. Factoring for these adjustments over ten years, the RSA is projected to have an ending balance that is $51.8 million lower in FY 2033-34 than previously planned. The ending balance for the RSA was projected to be $216.4 million in the Requested and is now estimated to be $164.6 million in the Proposed. Further draws on the RSA are possible, but not advisable given that its use as stated keeps the bureau within its forecasted rate increases. The RSA helps demonstrate to creditors that the bureau has sufficient liquidity to maintain a strong credit rating and ensure debt service coverage meets planning standards. Further the RSA is an available reserve to address unforeseen requirements. CBO affirms that mitigating the increased expenses associated with GMP2 with the RSA is an appropriate and justified use of the account.
Similar Projects
The bureau has done research to compare initial cost estimates versus the eventual GMP with other municipalities embarking on similar projects, though scale varies. The bureau has looked at projects to expand or upgrade water and waste water infrastructure in California, Florida, and Minnesota and have seen an average increase of 44% between initial cost estimates and their respective GMP arrangements. This indicates that market conditions have impacted projects across the country, including some local comparisons. The cost estimates for this project were developed and scoped across multiple fiscal years, so the gap between cost estimates and the GMP are not surprising given the current economic and labor construction environment.
Affordability
The bureau is pursuing a second WIFIA loan and realigning its CIP because it intends to keep rates within the forecast of future rate increases provided to Council each year. Not only is the bureau required to have a five-year CIP, but they are also required to project future year rate-increases for customers that balances their operating and capital needs. Below is a table of the bureau’s projected rate over the next five years – unlike the previous analysis where the bureau has made changes between the Requested and Proposed, the bureau is not planning on revising forecasted annual rate increases as a result of GMP2.
Fiscal Year | Rate Increase |
FY 2024-25 | 7.9% |
FY 2025-26 | 8.1% |
FY 2026-27 | 8.1% |
FY 2027-28 | 8.1% |
FY 2028-29 | 8.1% |
City Council is responsible for setting water rates and has historically been willing to support rate increases, which helps the bureau make longer-term financial plans. These increases inform the bureau’s ability to balance their operating expenses and their CIP.
Assuming no unknown increases to operating costs and assuming actual rate increases is consistent with the rate forecast, the bureau plans to increase rates annually by 8.1% through FY 2030. Afterwards, the bureau projects an annual rate increase of 4.5% after FY 2030.
Finally, the bureau remains committed to its its robust suite of affordability programs to assist low-income customers in paying their bills. There are no planned reductions to affordability programs as a result of the GMP2 price increase.
Relative Risks
CBO notes that the cost of the project can still increase even after receiving and approving a Guaranteed Maximum Price. Change orders, which are common in large construction projects, are possible. Change orders are a written amendment to an existing contract after the effective date that alters the work, the contract sum, or the contract time. These can arise for many reasons, including unforeseen challenges related to the work site, or rescoped needs from the bureau. Per best practice, the bureau has $103.8 million set aside in contingency for the filtration project to cover these costs.
Overall, CBO is supportive of the bureau moving forward with the revised filtration project costs and believes the bureau has taken the right steps to 1) maintain their projected annual rate increase forecast 2) minimize financial risk and 3) to ensure the bureau’s core operations continue despite realignment of its CIP.