That the City Council and Utility Authority authorize the City Manager/Executive Director to execute an agreement with California Domestic Water Company (CDWC) for the purchase of 125 shares of common stock currently owned by CDWC in an amount not to exceed $15,250 per share, for a total estimated cost of $1,906,250.

On November 18, 2022, the CDWC Board of Directors authorized the sale of 375 shares of common stock to existing shareholders at a price of $15,250 per share. CDWC is the wholesale water producer/supplier for the majority of the water used in La Habra, providing more than 65 percent of the total amount of water used by La Habra customers each year.  Over the past three fiscal years, La Habra has purchased an average of 6,042 acre-feet per year from CDWC to support water demands of approximately 8,800 acre-feet per year in the La Habra community. The City of La Habra is currently the second-largest CDWC shareholder, currently owning 2,455.25 common stock shares, equivalent to 3,560.11 acre-feet of water, and an additional 912.85 Class A Preferred Stock shares, equivalent to 692.83 acre-feet of water, for a total of 4,252.94 acre-feet of entitlement water in Fiscal Year 2022-2023. Each share entitles the City with the right to purchase a prescribed amount of water, as determined annually by the Main San Gabriel Basin Watermaster.

The annual water entitlement for CDWC Common Stock has varied from 1.25 to 1.90 acre-feet per share depending on water availability in the Main San Gabriel Basin. The current water allocation per common stock share is 1.45 acre-feet for Fiscal Year 2022-2023. Class A Preferred Stock currently has an entitlement value of .75898 acre-feet per share for Fiscal Year 2022-2023, and its valuation has been relatively consistent year-to-year.  Based on the number of Common Stock shares, Class A Preferred shares, and Lease shares that the Authority currently owns or has under contract to lease, La Habra will have the right to purchase up to 4,268.89 acre-feet of entitled water during Fiscal Year 2022-2023.  The average cost for an acre-foot of water purchased via the City's ownership of CDWC Common Stock is currently $406. The average cost for an acre-foot of water purchased via the City's ownership of CDWC Preferred Stock is currently $291.

The City's annual water demands of 8,800 acre-feet per year exceeds the volume of water that it can purchase through CDWC entitlements by approximately 4,550 acre-feet each year. The City offsets a significant portion of this 4,550 acre-feet with an additional 2,200 acre-feet of water it produces from the La Habra Groundwater Basin, at a cost of approximately $200 per acre-foot. The balance of approximately 2,350 acre-feet is comprised of either imported water purchases from MWD (approximately 600 acre-feet per year) at an average cost of $1,209 per acre-foot, or additional non-entitlement water purchases from CDWC (approximately 1,750 acre-feet per year) that are in excess of the City’s entitlement supply at an average cost of $1,174 per acre-foot. If approved by the City Council/Authority Board, the purchase of 125 additional shares of CDWC common stock will help reduce the City's reliance on more expensive imported water.

There is no impact to the General Fund for the purchase of these additional CDWC Common Stock water shares. There are sufficient unencumbered water fund reserves to pay for the purchase of 125 shares of CDWC Common Stock at a total expense of $1,906,250, therefore it will not be necessary to issue bonds or borrow for the purchase of these additional shares.
 

The purchase of 125 shares of CDWC Common Stock will provide the Authority access to additional entitled water through CDWC, and will help reduce either the amount of water purchased from CDWC that is currently in excess of entitlement, or reduce the amount of imported water purchased from MWD.  If this stock purchase is authorized, staff estimates that the Authority will save approximately $142,350 per year in water purchases, based on current assumptions, compared to the current cost of having to purchase that same amount of water from CDWC in excess of entitlement purchases or imported water purchased from MWDOC. Based on current share pricing and water allocation, the Authority is estimated to "break even" on this investment in approximately 13.5 years, after which the Authority will realize net annual benefits from this transaction.

The most recent significant purchase of Common Stock by the City was in December 2019. At that time, the Authority authorized the purchase of 99 shares of CDWC Common Stock at $15,250 per share for a total purchase price of $1,509,750. The funds for that purchase were allocated from available water fund reserves at that time.

Due to the continuing need to provide safe, secure and sufficient water to its customers, the Authority will likely hold these shares of Common Stock for the foreseeable future. Once the return on the initial investment is realized, the additional CDWC Common Stock shares will provide the City with access to lower cost entitlement water well into the future, as well as helping to maintain the City's position as the second-largest shareholder in the CDWC.

It should be noted that, although the City’s ownership of water shares and water stock through CDWC has provided the City with a reliable source of high quality, treated groundwater from the Main San Gabriel Basin, the amount of water available to the City from this source is highly dependent on the groundwater levels in the Basin. Although CDWC’s wells are positioned in advantageous regions of the Basin and are currently producing consistent and reliable volumes of water, the Basin Watermaster routinely measures groundwater levels and will annually adjust the amount of water that each shareholder is entitled to in order to protect the Basin’s long term health and capacity. This could mean that, in the event of a multi-year significant drought, the amount of entitled water the City has access to via its ownership of water rights and shares through CDWC could be reduced significantly. If this were to occur, it would significantly alter the cost benefit assessments of current, prior or future purchases of CDWC common shares, preferred shares, or direct purchase of water rights in the Basin. This would also mean that the City would have to replace the reduced entitled water from CDWC by either producing more water from the La Habra Basin, if possible, or purchasing much more expensive imported water through MWD, assuming that water from MWD is even available. This is a risk factor, considering that the State of California has reduced water deliveries from the State Water Project in the past, and is currently in negotiations with the Federal Government and several western states for water deliveries from the Colorado River Basin. It is unknown how these negotiations will impact future water availability through MWD.

Despite these concerns, staff still believes that the benefit of purchasing additional capacity for entitled water through CDWC outweighs the potential risk of having these shares provide less water in the future compared to historical levels.