West Lake Comes Out Swinging Against LCRA

At first blush, the fight between the Lower Colorado River Authority and the city of West Lake Hills could be fitted for a host of big guy vs. little guy clichés. And, indeed, the challenge that West Lake officials have mustered against the LCRA's pending sale of the city's wastewater line – and roughly 30 other water and wastewater facilities across Central Texas – smacks of the sort of stone-and-slingshot stuff that makes for a history's worth of lite cinema.

But then one recalls that West Lake Hills, Austin's wealthy suburban neighbor, is the protagonist. "Our city has had a history of legal battles with the developers and whatnot," says West Lake Hills Mayor Dave Claunch. "We're not at all afraid to go toe-to-toe with the LCRA."

The city's most recent legal maneuvers concern its drawn-out open records request for the LCRA's bidding process to decide who will win the rights to the sprawling set of water utilities. With that matter still ringing in the heads of LCRA officials, West Lake Hills is girding itself for a bigger battle. As part of a consortium of municipalities bidding against a set of private utility firms, West Lake Hills hopes eventually to acquire the rights to its own wastewater line. Claunch sees a direct buyout as a long shot yet believes the city will be able to wiggle its way out from underneath whatever entity ends up with initial control of the infrastructure.

West Lake Hills' relationship with the LCRA dates back to the late 1990s. "We have parts of our city that are tighter, more traditionally suburban neighborhoods," said Claunch. "A lot of septic systems started to fail in these neighborhoods, and residents went to the city and said, 'Can you help us?'" Around that time, the LCRA had come to an agreement with a series of Central Texas municipalities: If a city needed some portion of a drinking water or wastewater facility built or improved, the LCRA would do the work – West Lake Hills was told "at cost," according to Claunch – in return for ownership (and operations and maintenance) of the system. In this manner, the LCRA acquired 32 water systems that now serve about 125,000 thirsty Central Texans.

The LCRA declined a request for an in-person interview but did respond to a series of written questions. LCRA spokesperson Clara Tuma wrote that the organization took on "this long-needed, complex" West Lake Hills project "at the request of the City of West Lake Hills." Because of the city's sensitive location over the Edwards Aquifer recharge and contributing zones, she wrote, "the city's aging septic systems created environmental, economic, and development challenges that became increasing concerns for city leaders. Thus, centralized sewer was desired."

West Lake Hills got a wastewater line that serves roughly one-third of the small city. But according to Claunch, the numbers in the deal didn't add up. "What nobody realized ... was that cost was going to include a lot of their markups for general and administrative overhead, for development fees, for bond issuance costs," Claunch says, "all these things that at face value seem reasonable, but if we were able to dig into them – which we're not because they're not transparent – you'd see that there's just a lot of made-up numbers in there."

Claunch and West Lake Hills City Admin­i­strator Robert Wood say the costs eventually ballooned. "In our contract with the LCRA, if you allocate the individual costs over the next couple dozen years of the contract to each system, it's basically $40,000 in cost per household, per wastewater connection." Claunch says that the going rate for such things is between $500 and $3,000. Accord­ing to a white paper the LCRA provided, on the other hand, the eventual cost of building the system was more than $10 million, and initially the LCRA estimated the cost per connection as between $2,000 and $5,000.

The authority announced the sale of its water and wastewater utilities in November 2010. But by that time, West Lake Hills was already deep in the process of figuring out how it could get out from under the LCRA's thumb and had made two contract buyout offers, one at about $17 million and the other at $16 million. Both were rejected.

While the LCRA declined to provide the Chronicle an estimated value of the system until the bid process is complete, Bolton Real Estate Consultants, which the city commissioned to appraise its wastewater system, said the facility is worth just under $8 million – roughly half of the value of West Lake Hills' two rejected bids.

"LCRA's prior price negotiations with the City of West Lake Hills were based on the methodology used to sell the Brushy Creek Regional Wastewater System to the cities of Round Rock, Cedar Park and Austin as well as the sale of the Hutto Wastewater Sys­tem to the City of Hutto," the LCRA's Tuma wrote. "This approach is based upon paying off all debt and obligations associated with the assets plus the present value of the contracted management fees. This approach helps ensure that LCRA's other customers do not take on the costs incurred on behalf of any one system."

"They wanted all of their future profits over and above their costs," says Claunch. This all came, he says, before the LCRA formally announced that it was going to sell its water and wastewater systems. Claunch suggests that the rejection of the city's offer was about something else. "We're considered one of the plums in the system," he says. "We're profitable for them. A lot of the other systems are not. ... They wanted us in the package to sweeten the pot [for another buyer]."

The LCRA's board appears set to award the systems to a bidder at its Aug. 24 meeting. In addition to the consortium of municipalities, bidders could include what appears to be an Australian hedge fund, the infrastructure investment arm of Wall Street firm Morgan Stanley, and a Bastrop-based nonprofit, Aqua Water Supply Corporation. Because the process is secret, that list is something of a guess based on a list of firms that signed a confidentiality agreement in order to get bidding documents. There is no certainty that any of those firms have actually submitted a bid.

Though West Lake Hills signed on with the consortium of Central Texas municipalities set to bid on the systems, it isn't counting on winning that uphill battle. Claunch cites contractual provisions that, collectively, are somewhat singular for West Lake Hills – and could, he believes, rescue the city from any deal with a private firm. Moreover, he says, "The big ace up our sleeve ... is we have the power of eminent domain."

Translation? If West Lake Hills doesn't like who ends up with its wastewater system, the city will simply condemn it.