High on a wheat-colored slope on Powell Butte with sweeping views of east Portland, crews have carved a canyon big enough to swallow a building six stories tall and three city blocks long. They will eventually fill it with a reservoir for Portland's drinking water.

Four miles north, city contractors just finished building a luxury, earth-friendly house crafted to complement the 1950s ranch homes that line the block.

Who's on the hook for both projects? Portland water customers.

The reservoir and house help show why Portlanders pay the country's fifth-highest utility bill -- and why they're so upset about it.

Portland's combined average monthly sewer and water bill has jumped 83 percent in the past decade, far outpacing inflation and household incomes, and is projected to rise an additional 49 percent in the next five years. Because about one-fourth of the state's population, including many of the city's suburbs, gets water from Portland, rising costs could eventually affect other ratepayers, too.

A $1.8 billion wave of construction work, including the Big Pipe sewer projects, is the big driver of rising rates. But it's some small expenses, pennies compared with the Powell Butte reservoir, that draw customers' ire and raise broader questions about how the city spends ratepayers' money. People can accept that pipes and pumps, even if they cost $100 million, are necessary to deliver clean water and remove dirty water. They have a more difficult time understanding why they should pay $625,000 for a house.

, who oversees the

, defends the house and other side projects, which include public bathrooms and new offices for the Rose Festival. "They are part of a broader effort to promote Portland water, promote preservation and promote the Bull Run," he said.

Unlike

, the city doesn't have to justify to state regulators what it bills customers. The City Council, bound only by what's politically feasible, has endorsed the projects even though the Portland Utility Review Board, a watchdog group, has raised questions for a decade.

, a powerful Portland lawyer, said he's considering a legal challenge, contending that the city charter forbids spending on side projects.

And a former city official warns that unnecessary projects, such as the house, could weaken public support for the bigger, necessary projects. "At some point, there are limits," said

, the former top finance manager at the city's

which oversees sewers and stormwater drainage.

One big hole

The size of the

is hard to grasp until you stand next to it.

The hillside rolls out in mounds against a gray sky, and tufts of grass twirl in the winter wind. Then the ground vanishes, plummeting 60 feet to a rain-soaked gravel bottom that sprawls 370 feet across and 710 feet long.

Crews will pour the concrete for the tank this spring. Portlanders will pour money into the hole for years.

Anyone who has examined a city utility bill knows that sewer projects, namely the

, including the Big Pipe, have been the primary cause of growing rates over the past decade.

Now it's the Water Bureau's turn for a $378 million building boom, the biggest since 1962. The water projects, like the Big Pipe, have been ordered by environmental regulators.

The Water Bureau runs one of the country's simplest systems. It injects the water with chlorine and ammonia near its Bull Run reservoir near Mount Hood, then uses gravity to pipe it 30 miles into town where some of it is stored in open reservoirs.

The

wants Portland, among other cities, to more thoroughly treat its water and stop using the uncovered reservoirs, both to reduce the threat of contamination.

In addition to the Powell Butte tank, Portland will build two more large reservoirs so it can disconnect its open reservoirs at Washington Park and Mount Tabor by 2020.

How Portland ranks

The city’s average monthly combined sewer/water bill is the fifth-highest among the nation’s 50 most populous cities. Separated, Portland ranks No. 4 by residential sewer charges and No. 18 by water rates.

1.

Atlanta: $154

2.

Seattle: $135

3.

San Francisco: $108

4.

San Diego: $93

5.

Portland: $92

6.

Boston: $88

7.

Honolulu: $85

8.

Austin, Texas: $78

9.

Virginia Beach, Va.: $76

10.

Colorado Springs, Colo.: $68

Source: Black & Veatch Management Consulting

The trickiest project, though, is a $100 million treatment plant that federal officials have ordered the city to build where the Bull Run water flows into Portland's pipes. The ultraviolet plant would kill a potentially lethal parasite called cryptosporidium. But city officials are asking for a waiver,

.

At the same time, city engineers are moving ahead with the plant's design to meet an April 1, 2014, deadline. The timeline is so tight, bureau administrator David Shaff has a clock on his desk ticking off the seconds.

How does the city pay for all these projects? There's only one way: sell bonds that the city's water customers pay off with higher rates over 25 years, much like a homeowner's mortgage.

On top of the enormous construction work, sewer and water officials face climbing costs just to maintain century-old pipes and cover their payroll with rising health care premiums, pensions and wages.

The upshot: By 2015, typical Portland homeowners will have seen their monthly city utility rate rise from $42.58 to $116 in 15 years.

The growing bills have hit customers hard. Cameron J. Wiley, a 78-year-old retired radiologist from Southwest Portland, said: "We grew up thinking water is free. It is anything but that in Portland."

The Water House



There's no denying one fact about the Water Bureau's house: It's gorgeous.

Dubbed the

, it's designed to reach new energy-efficiency standards. Sunlight filters through towering firs to brighten the earth-toned exterior covered with recycled paints with names such as "Steelhead Gray."

Inside, the 2,119-square-foot home has hardwood floors milled from an old school gym floor. The windows are triple-pane. The countertops are recycled glass and concrete. Behind the main house, the city built a 600-square-foot guest house.

The Water House was Leonard's idea, one of several innovations he brought to the Water Bureau after he took charge in 2005 amid public outrage over a budget-busting billing system and plans to cap Mount Tabor's reservoirs.

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Leonard has built a reputation for using a direct approach to confront problems, such as

, while also occasionally stretching the rules.

At the Water Bureau, he started pushing creative projects to repair its image. Early on, he removed chain-link fences from unused and often vandalized land to create play areas he calls HydroParks. But other spending has riled critics:

- $60,000 a year to operate four downtown restrooms known as the

;

- $205,000 to

in the remote Bull Run watershed as a stopover for public tours;

- $1 million to

, Water Bureau-owned land in Clackamas County.

The spending amplifies decades of tradition. The council has often turned to utilities to pay for projects they like -- such as

-- but can't afford in bureaus with more restricted revenue sources.

But DiLorenzo, the attorney, said he has clients, whom he declined to name, who are considering suing the city over the spending. DiLorenzo said he is parsing the city charter, which says water funds "shall not be transferred to the general fund of the city, nor to special funds unrelated to the water works."

"From a moral perspective, it's just not right to apply these sewer and water funds to collateral uses," he said. "But whether it's illegal is another question."

If the bureau were a private utility, it would have to prove its expenses are "used and useful" to its mission, the standard used by state regulators. Some of the bureau's projects seem too far removed from water service to be charged to ratepayers under that standard, said Bob Jenks, executive director at the

, a watchdog group.

For example, PGE's Rose Festival sponsorship can't be charged to ratepayers and is instead paid by shareholders. But the city's ratepayers were billed to refurbish the former McCall's Restaurant building in Waterfront Park into Rose Festival offices. "The Rose Festival is great. I go to the parade regularly. But it doesn't seem like it's related to water service," Jenks said.

And the Water House?

Leonard launched the project when the bureau explored selling land it no longer needed near Glendoveer Golf Course on Northeast 140th Avenue.

The city normally sells to the highest bidder. But in this case, Leonard worried that a homebuilder would win and anger neighbors by cramming in two or more homes. Bonny McKnight, a critic of new housing in East Portland, lives across the street.

"I could imagine because of the size of it, not one house, not two houses, not three houses, but four narrow houses going up in a neighborhood of single-story houses that were built in the late 1950s, early 1960s," Leonard said during a City Council debate on the house in October 2009.

So Leonard pitched building the Water House, an idea he already had in mind. He argued that the house would win over neighbors and encourage builders to adopt green practices, reducing water use in the long run. The council endorsed the project -- five months after a

.

Neighbors are pleased. "It's a good indication of how bureaus can be better neighbors," said McKnight, who once ran for City Council against Leonard.

But the finances, which haven't worked out as well, show why critics say water officials should stick to what they know.

In October 2009, Shaff, the bureau administrator, told the council that the city would spend $200,000 on the house and sell it for $400,000. That sale price, he said, was the median value in the area. However, data from the Regional Multiple Listing Service pegged the median value in that ZIP code then at $211,000.

The city also had no budget for the house, said Tom Klutz, the bureau's project manager. Klutz put one together only after The Oregonian requested one in December, just weeks before the house was finished.

Klutz's budget shows the city's costs far exceeded estimates. The city expects to spend $625,367 on the house, including $413,060 on contractors and supplies, and $212,307 on staff time. Contractors donated an additional $154,016 in materials and labor, and city officials estimate the land is worth $105,000.

Though Shaff had told the council the sale price "will recover our costs and the value of the land that we are ultimately trying to dispose of," that seems unlikely now.

City officials plan to put the house up for sale in early 2012, but they have already outspent the rest of the nearby market. Real estate broker Tony Matic, who reviewed sale prices in the area, said the Water House would sell for well under $300,000, a loss of hundreds of thousands of dollars to ratepayers. Looking back, the bureau could have sold the bare land in 2008 for a small profit.

And it turns out that Leonard didn't need to worry about a builder cramming four homes on the lot. The zoning, which Leonard also oversees, shows the lot was big enough for just one home.

Last week, Leonard said the money and density worries were never his focus.

"Whether we could get the entire cost back was never the point," he said. "Our effort is to make a closer connection between the Portland Water Bureau and the community by demonstrating that a house could be built in a working-class neighborhood that utilized the latest energy efficient and conservation technology."

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