10/18/2007 9:42:00 PM Auction turns recycled water into income
Aqua Capital buying up water rights in Texas
The Daily Courier
Aqua Capital Management LP, the Omaha, Neb.,-based water resource investment and management company that negotiated the price-floor agreement for the effluent auction in Prescott Valley, has been buying water rights in Texas.
Aqua Capital bought permits for 6,159.4 acre-feet of water in the San Antonio-based Edwards Aquifer Authority, said Roland Ruiz, authority spokesman. Edwards serves an eight-county region across South Central Texas with about 7 million people.
Aqua Capital Chief Executive Officer Dave Penrice declined to say why his company has been buying water rights in Texas and why it negotiated the price-floor agreement with the Town of Prescott Valley.
"The Town of Prescott Valley is a town we provided a solution for" by negotiating the terms of the auction, Penrice said. "I am not at liberty to discuss our intentions, out of respect to the town."
Penrice continued, "We are investing in managing our water resources. I cannot comment on what we are going to do with that water."
Referring to Aqua Capital, Prescott Valley Town Manager Larry Tarkowski said, "I don't know what their business plan is. I know they are going to work with the end user" who will buy the effluent credits.
Ruiz said, "We've seen a trend here where entities, whether they be individuals or companies, are investing in the water market. There is a water market here in our region for groundwater. We've seen in 10 years the value of that water escalate."
The value of water jumped from about $3,500 per acre-foot two years ago to $5,500 on Monday, said Luana Buckner, an Edwards authority board member and general manager of the Medina County Groundwater Conservation District, about 30 miles west of San Antonio.
"The water market here has gone crazy," Buckner said.
Buckner said Aqua Capital and other companies are buying water rights and holding them as an investment.
She said Edwards officials see water as being a commodity as though it traded on the stock market.
"That is exactly how (water) permits are traded," she said.
Buckner said the State of Texas established the Edwards authority to create a market for the water while also encouraging conservation and protecting endangered aquatic species.
Water usage faces heavy regulation, Buckner said. And like the Prescott Active Management Area, Edwards exempts private wells for homes from groundwater monitoring.
"There is no groundwater district in the state of Texas that regulates like Edwards does," she said.
Treating water as a commodity encourages conservation by letting the price rise "to the highest and best use," said Ronald Lacewell, assistant vice chancellor and professor of agri-economics at Texas A&M University in College Station.
"It is still all subject to you having the water rights and the rules well established," Lacewell said. "I do believe that the market will operate. It is a question of establishing a market right."
A Prescott economist who belongs to the Citizens Water Advisory Committee, a watchdog group, agrees with Lacewell.
"I understand that water has some characteristics," John Danforth said. "I still have some strong bias toward using market prices as a basis for allocating water."
Danforth said developers will build homes, with or without water marketing.
"All I am arguing for is we want to have a more prudent level of growth," he said.
PRESCOTT VALLEY - The Town of Prescott Valley hopes to turn effluent (recycled water) into a commodity - and raise as much as $53 million to pay for importing water - by conducting an auction Oct. 29 and 30.
The auction also would make more water available to support 12,000 additional homes in Prescott Valley, according to Clay Landry, managing partner of Westwater Research LLC of Vancouver, Wash. The town hired Westwater to market the auction to potential bidders.
Town government officials, such as Town Manager Larry Tarkowski and Assistant Town Attorney Colleen Auer, have stressed the uniqueness of using an auction to sell effluent as if it were a commodity.
"We are doing something that no one else has done," Tarkowski said earlier this week.
He said prospective bidders must submit $1 million in earnest money and fill out paperwork by 2 p.m. today. If no takers meet the deadline, the town will sell the effluent interests to Aqua Capital Management LP, an Omaha, Neb.,-based company that negotiated a price-floor agreement with town officials.
The town will auction off interests for a total of 2,724 acre-feet of effluent that its sewer plant generates. The town will use proceeds from the sale to pay for its purchase with the City of Prescott of the Big Chino Water Ranch near Paulden and for building a pipeline to take the water to Prescott and Prescott Valley.
The successful bidder, in turn, may sell the interests to developers, or other "end users," who need to obtain a certificate of assurance for a 100-year water supply from the Arizona Department of Water Resources.
"We made that determination that they could produce that much effluent," said Sandy Fabritz-Whitney, assistant director for water management for ADWR. "Every few years the department has to review that (figure) to make sure that (population) growth is keeping up with the projections" of effluent. "Our determination is that they could potentially produce that much effluent."
ADWR requires subdivision developers within 500 square miles of the Prescott Active Management Area to obtain a certificate.
ADWR's regulatory framework creates an "artificial scarcity" of water, Tarkowski said. He described the auction as being an "AMA-driven scenario."
The auction culminates nine months of talks between the attorneys for the town government and Aqua Capital Management. The negotiations led to a price-floor agreement in which Aqua Capital would pay $19,500 per acre-foot of effluent while outside bidders would have to offer a minimum of $22,500 per acre-foot.
The town initially planned the auction for this past November, and the sole qualified bid came from Aqua Capital. Town officials blamed the housing slump for the lukewarm interest a year ago.
The new auction creates more flexibility, enabling the successful bidder to buy interests for 1,103 acre-feet instead of all 2,724 acre-feet at once. It also reduced the minimum bid price from $30,000 per acre-foot.
The new auction "more accurately reflects the business model of the end user," Tarkowski said.
"We will find out Friday at 2 o'clock," he said. "We will discover that the change of approach was successful in attracting competition, but it's a big 'but.' This time after learning from our previous attempt we have created an insurance policy, which is the price-floor agreement."
Landry, of Westwater Research, declined to say whether any others have expressed interest in taking part in the auction.
"We are sort of in the final phase," he said. "I think it is best if we just wait."
Landry said Westwater has marketed the auction by running advertisements in the Wall Street Journal and other national financial publications.
Under the terms of the price-floor agreement, the town would pay a "break-up" fee to Aqua Capital if another company prevails.
The successful party may buy all 2,724 acre-feet interests at once, or buy 1,103 acre-feet interests and the remainder later on.
The agreement requires the buyer to pay 25 percent of the sales price within 30 days of the auction and make the second payment - also 25 percent - when a builder obtains the certificate from ADWR, Tarkowski said. The buyer has to pay the remainder of the sale price when the town issues a building permit.
However, if the buyer does not use or market all 2,724 acre-feet of effluent by 2032, they revert to the town, Tarkowski said.
Tarkowski said the auction serves the public interest.
"Our job is to make sure that this community has the water portfolio available so that they may choose whatever destiny those (town) councils and future citizens desired," he said. "Our job is to make sure that they are not constrained by having a lack of resources. That is not just water resources."
