Memorandum

City of Lawrence

Utilities Department

TO:	David Corliss, City Manager Cynthia Wagner, Assistant City Manager Diane Stoddard, Assistant City Manager
FROM:	Mike Lawless, Assistant Director of Utilities
CC:	Dave Wagner, Director of Utilities Toni R. Wheeler, Director of the Legal Department Philip Ciesielski, Assistant Director of Utilities Beth Krishtalka, Assistant to Director
Date:	10/04/2011
RE:	Proposed Agreement with Douglas County Rural Water District No. 2 for the Treatment and Transmission of Water and the Sale of Water

Please include the following item on the City Commission Agenda for consideration at the October 11, 2011 meeting:

Authorize the Mayor to execute the agreement with Douglas County Rural Water District No. 2.

Background:

Rural Water District No. 2, located generally in southern Douglas County both east and west of Highway 59 (hereinafter “the District”), is organized and established pursuant to K.S.A. 82a-612 et seq. for the purpose of operating a water supply distribution system to serve water users within the District’s area. The City and the District entered into the first agreement on December 29, 1981, a subsequent agreement on June 8, 1999 for the treatment and transmission of water from the City to the District, followed by the current agreement dated February 16, 2010. A copy of the existing agreement is attached. Under the February 16, 2010 agreement, the City provides for the sale of water in addition to sale of water treatment and water transmission. In addition, it removed meter limitations contained in previous contracts.

City staff and District representatives have been negotiating an agreement to reduce the rate of return on investments used in the calculation of the billing rate and to ensure the City will be the exclusive supplier of water to the District.

Status

The significant or new terms of the proposed agreement include:

Issue	Description
Exclusive Supplier of Water	The City will be the exclusive supplier of water to the District for the first 15 years with the City supplying at least 50% of the District’s water for the last 5 years of the contract.
Contract Quantity	The City agrees to treat and deliver a maximum quantity of water of 125,500,000 gallons per year. The City and District agree that the quantities per year will be established for 5 years. Each January the District will update projections and include an additional year. This is unchanged from the previous contract. In 2010, the City treated and transported 34,762,888 gallons of water for the District.
Maximum Day and Maximum Hour Demands	The capacity factors established in the City’s water rate model will be used to calculate the maximum day and maximum hour demands that the District cannot exceed. The District will be charged a surcharge, per 1,000 gallons, for the quantities used in excess of the calculated maximum day and/or maximum hour quantities. This is in addition to the regular billing rate. The surcharges would not be implemented until the City’s water system maximum day reaches 80% of the treatment capacity or by providing the District notice in January of any year.
Sale of Water	The City agrees to sell water to the District over the term of the Agreement to supplement the District’s allotment through the District’s agreement with the Kansas Water Office, unless the Kansas Water Office reduces either the District’s or the City’s allotment, or both, from the Clinton Reservoir. The amount of additional water the City agrees to sell the District represents less than 0.35% of the City’s total allotment and/or rights for water. City staff believes the sale of this small amount of water will not adversely affect the City’s supply of water to serve the City’s needs during the term of the Agreement. This is unchanged from the previous contract.
Billing Rate	The Agreement provides that the 2011 rate is $3.64 per 1,000 gallons. The City will provide a credit for 2011 sales to the District for water sold up until the approval of the agreement. If or when the City sells water to the District, the District will pay the City’s average cost for raw water from all sources. The raw water cost would be in addition to the applicable billing rate for the treatment and transmission of the water. Beginning in 2012, the District’s billing rate increases at a rate no greater than the percentage rate of increase assessed to residential water customers within the Lawrence city limits using 3000 gallons per month.
Rate of Return on Investment	The agreement gradually reduces the rate of return on investment used in calculating the billing rate from 7% in 2011 to 4% in 2014. After 2014, the rate of return will be based upon the average interest rate of the latest water and sewer revenue bond issue.
Demand Contract Charge for Early Termination of Agreement	Since the City will make significant investment in its water infrastructure over the term of the Agreement to ensure the City can deliver the water and satisfy its contractual obligations to the District, the District will pay the City a certain sum if it terminates the agreement early. The sum agreed upon is equal to the total revenue paid by the District to the City for the three years immediately preceding the effective date of the termination of the agreement. Since the District has made a commitment to purchase water exclusively from the City in the first 15 years of the agreement, the City will pay the District a certain sum if the City terminates the agreement with less than sixty months notice. The sum agreed upon is equal to the total revenue paid by the District to the City for year immediately preceding the effective date of termination.
Conservation Measures During Water Emergencies	This provision requires the District to adopt, observe, and enforce conservation measures that achieve equivalent results of the water conservation measures imposed on Lawrence water customers during water emergencies. This is unchanged from the previous agreement.
Term	The Agreement expires on Dec. 31, 2031.

Request

Staff requests the City Commission authorize the Mayor to execute the agreement with Douglas County Rural Water District No. 2.