Colorado Springs’ $400 million Eastern Wastewater System Expansion (EWSE) – which all CSU ratepayers started paying for in January of this year – is the subject of a seven-page letter from attorney and former Colorado State Sen. Bob Gardner, forwarded to my inbox from a source. It was addressed to Colorado Springs City Council and the Utilities Board – those are the same people, by the way. It alleges that Norwood Development Group, which owns the majority (18,000 acres) of Banning Lewis Ranch, was contractually responsible for the cost of the EWSE, and that Utilities may have illegally passed the cost on to ratepayers in breach of both city ordinance and the 2018 Banning Lewis Ranch Amended and Restated Annexation Agreement with the City. It does not state who hired Gardner to write the letter.
The opening of the May 13 letter reads:
Council President Crow-Iverson and Members of Council and Board Chair Donelson and Directors of CSU:
A Colorado Springs Utilities (CSU) commercial ratepayer has retained our firm to investigate the facts and circumstances concerning CSU’s undertaking of the obligation to finance and construct the eastern wastewater system expansion, the cost of which is estimated to be in excess of $400 million. Upon completion of our inquiry, our client has requested that we make recommendations to them concerning appropriate legal action, including a potential ratepayer class action, for redress of any impropriety surrounding this undertaking by CSU.
To be transparent, I had been looking into this story for the Colorado Springs Independent just before businessman Kevin O’Neil, one of the developers behind the Karman Line annexation, and his partner JW Roth decided to sell the paper on April 24 of this year. O’Neil’s Chief of Strategy, Andy Merritt, had passed along information on their concerns about EWSE. I did find it unusual (at the very least) that there was so little transparency around CSU’s decision to make ratepayers fund the project.
Needless to say, massive infrastructure projects like EWSE are incredibly complex. The details of its financing history alone have been difficult and time-consuming to wade through. I have watched dozens of hours of Utilities Board and committee meetings, spoken to dozens of people involved in the matter including senior staff at Utilities, and have filed many Colorado Open Records Act (CORA) requests. Given the research I’ve done, when I read Gardner’s letter, I felt it worth drawing attention to a few of his contentions and checking his facts based on what I know.
1). Banning Lewis Ranch is the primary beneficiary of the EWSE.
BLR encompasses 24,000 acres of ranchland that was originally annexed into Colorado Springs in 1988, was sold to Norwood in 2014, and of which Norwood’s 18,000 acres is still undeveloped. It’s hard not to look at the massive swath that stretches to the Springs’ eastern edge and not see BLR as the primary beneficiary of EWSE, no matter what Utilities says. They argue that improvements to the system, which is one of the few remaining four-service (gas, water, electric, wastewater) utilities in the country, benefit all users and ratepayers. They also argue that because the existing wastewater infrastructure is nearing capacity, and because CSU is constructing the Horizon Utility Campus substation near the airport on the east side, that CSU itself needs this wastewater expansion to happen before the system reaches capacity. However, as CSU itself notes, EWSE will eventually serve as many as “225,000 people,” most of whom will be residents of Banning Lewis Ranch. They also argue that it could serve the proposed 6,500-home Karman Line development. However, Karman Line is the subject of a June 17 annexation referendum in which Springs voters will decide whether the development can proceed, and it appears to be a long shot for passage.
2). The costs for EWSE should legally be borne by the developers, not the ratepayers.
It’s unclear to me whether this is strictly true. The 2018 BLR Amended and Restated Annexation Agreement clearly states that, “In accordance with City Code, CSU shall be responsible for the construction of centralized water and wastewater treatment facilities needed to serve the Property.” Historically, developers have always paid for wastewater expansions to serve their developments despite the fact that CSU always constructs infrastructure for gas and electric. There is no precedent for CSU undertaking a wastewater project of this size or expense, or even anything close. Of several small wastewater projects CSU has built at ratepayer expense, none cost more than $500,000.
3). The EWSE will “cost each residential customer $3 per month and commercial ratepayers much more on their utility bills. The cost to each residential customer will increase to $12 per month after five years, and a corresponding increase for commercial customers will also occur, presumably continuing until the debt associated with the project is repaid.”
According to CSU Chief Financial Officer Tristan Gearhart, the ratepayer cost for EWSE is an additional 5.5% per month per year of their wastewater bill beginning in 2025. The total amount each ratepayer will have paid after the five-year period is $365, and the ongoing wastewater charge to each residential customer at the end of those five years will be just over $10 per month more than it is now. CSU provided the chart below to explain ratepayer expense per billing cycle per year:
CSU has built cost recovery methods into this project. Some of the expense may be borne by Norwood as the developer, but that part is unclear. What is clear is that the majority of cost recovery will come from homebuilders who buy the lots and then pass the expense along to homebuyers. Those recovered costs do take inflation into consideration and have built-in interest, which begins to compound when the first part of the EWSE is completed in 2030. However, those recovered costs will not be directly returned to ratepayers but used, says CSU, to offset future rate increases. Additionally, that cost recovery is contingent on development happening at a pace they do not control, because development will happen at the market’s pace and at Norwood’s discretion. CSU estimates that 75% of costs will be recovered within 30 years, but there is no guarantee. And myriad factors that influence the pace of development could affect cost recovery long term.
4). Even if they don’t construct it, Norwood is “obligated both by contract and by ordinance and regulation to bear the costs of EWSE.”
This point of Gardner’s raises perhaps the biggest question of all because CSU has its own rules and regulations, which they claim supersede city code and the Amended Annexation Agreement. One of CSU’s rules, which dates back to Dec. 31, 2005, states:
If Utilities determines that extension of a wastewater collection system is in the best interest of Utilities to protect wastewater service to existing Customers, allow for the continued development within the service area and provide benefit to the entire service area, Utilities may, at its sole discretion [emphasis ours], design and construct the wastewater collection system located outside the boundaries of the unserved or undeveloped land. Utilities will recover the cost to design and construct such facilities, with interest, through a Recovery Agreement charge from the property Owner(s) or developer of unserved or undeveloped lands prior to connection to such facilities. Utilities may implement a Recovery Agreement charge to collect the cost of the facilities in advance of its construction. Advance Recovery Agreements are limited to Utilities’ designated projects to the extent Utilities determines, at its sole discretion.
There are many “at its sole discretion” clauses in the Utilities Rules and Regulations, so this rule related to wastewater isn’t unique. And again, CSU argues that the EWSE is not of primary benefit to Banning Lewis Ranch, but to the whole system. They also point out that the original plan was to build a new wastewater treatment plant on the southeast side of town, and that the costs for that would have been higher and borne entirely by ratepayers without cost recovery options. The EWSE, on the other hand, will return wastewater to the Las Vegas Street Wastewater Treatment Plant, thus allowing CSU to save additional costs on water rights that can be recycled into the drinking water system.
For Bob Gardner – who said he couldn’t disclose who his client is – it’s a matter of whether Colorado Springs Utilities has the authority to undertake any infrastructure project “at its sole discretion” when other other legally binding contractual agreements like the Amended and Annexation Agreement are in place.
“Can Utilities decide to do a project? Yeah!” said Gardner. “Utilities says that they have a right to build it, and I’m not saying that, absent city ordinance or the Banning Lewis Ranch Amended and Restated Annexation Agreement, they could do this [at their sole discretion].”
I reached out to Norwood, The O’Neil Group, Councilor/Utilities Board Chair Dave Donelson, and Councilor/Utilities Board Finance Committee Chair Nancy Henjum for comment. As of press time, only Nancy Henjum had replied; she declined to comment.
