Take or Pay – or is it really?

Title One:  Someone must pay


Title Two: It’s really complicated

I couldn’t figure out a great title for this note – Is it a tale of two cities (one that is growing and one that is not), or is it “It’s really complicated” or “someone has to pay.” I could just go with “My Head Really Hurts.”

By now, you have seen the press conference that Garland, Mesquite, Plano and Richardson held recently stating their case of why they have asked the Public Utility Commission (PUC) to intervene in how much they pay for water. Here is a link to the DMN article: http://www.dallasnews.com/news/environment/2016/12/14/garland-mesquite-plano-richardson-want-state-help-lower-rising-water-rates

Obviously, there is much more detail to the issue than what was presented. The information that Garland, Mesquite, Plano and Richardson presented is accurate and truthful for their situation. However, it does not address the needs and situation of the other nine cities or the history of the agreements.

First things first; what is North Texas Municipal Water District (NTMWD)? According to NTMWD, they sell water to more than 1.6 million people in 90 communities. Out of those 90 communities, there are 13 member cities who each appoint two board members to the governing body of NTMWD. The 13 member cities are:

  1. Allen
  2. Farmersville
  3. Forney
  4. Frisco
  5. Garland
  6. McKinney
  7. Mesquite
  8. Plano
  9. Princeton
  10. Richardson
  11. Rockwall
  12. Royse City
  13. Wylie

-You can learn more about the water district at www.ntmwd.com.

Take or Pay

You hear the term “Take or Pay” often, so what does it really mean? The short version is that a member of NTMWD is obligated, through contract, to pay for a set amount of water each year, whether the member uses it or not. That “minimum” amount is set as the greatest single year of use. To use Plano as an example, Plano used approximately 26 billion gallons of water in the year 2001. Since 2001, Plano has not used that much water, yet it is contractually obligated to pay for 26 billion gallons of water annually whether it uses it or not. This is the structure of NTMWD and what every city that is a member agreed to when they became a member.

Why is Take or Pay even in place? NTMWD is obligated to build the infrastructure to serve the water needs of communities. This includes water lines, pump stations, reservoirs, treatment facilities and manpower. Thus, if a city, such as Plano, used 26 billion gallons of water in 2001, NTMWD had to build the needed capacity to serve that amount of usage. In other words, NTMWD sold debt and spent large amounts of money to meet that need as well as obligated NTMWD to maintaining that infrastructure. If Plano reduces its usage, someone must pay for that debt as that infrastructure cannot be given back and still must be maintained.

The narrative being used in the press conference is some cities are paying for water their customers are not using and that it is unfair. That, in my opinion, is not an accurate description of what is taking place.  A more accurate narrative is those cities are paying for infrastructure they needed and used. Now that those cities are not fully using infrastructure that was built and has to be maintained, those cities feel that someone else should pay for the debt that was partially accumulated to meet their needs. I know that is blunt, but that is exactly what would happen if the contractual obligations are nullified.

The four cities asking the PUC to intervene were the favorable recipients of the NTMWD model during their rapid growth phases and now that the model is no longer favorable, those same cities are proposing to change the rules that they signed on to and place additional burdens on the other member cities.  This is a critical point: Nothing has changed. All the member cities signed very detailed contracts agreeing to NTMWD funding model and member city obligations. Those cities benefited from this system as they were growing. A stable water supply actually helped those cities grow and succeed just as it does for us. I spend much of my time explaining to our residents that we won’t run out of water, but the real question is how much would our taxpayers be willing to pay for that water? In other words, if our residents use excess water today, Frisco and NTMWD must build the infrastructure to pay for the water and the local taxpayer, as well as future taxpayers, will continue to pay for the infrastucture.

Frisco believes in local control and if our residents choose to waste water today, tax dollars will be used to pay for the water. We hope we have stressed the need to conserve to our residents and are always working on innovative ways to communicate the importance of doing all we can today to protect our future. All the cities in the NTMWD service area know exactly what their obligations are now and well into the future. The control and cost really belong in those communities, where it should be.

What can we agree on?

Let’s start with the things that we can all agree on:

  • The current system does not facilitate conservation of this valuable resource. You are paying for the water whether you use it or not. If a city does not encourage residents to use (waste?) water, it will not receive the needed revenue from selling the water that it purchased. Clearly, there is no incentive for those cities to conserve water.
  • Growing cities, such as Frisco, do not want to absorb the cost of the infrastructure and debt that was built to serve some of those cities now paying for unused water.
  • Even fast growth cities, such as Frisco, will one day be in the same situation. As a community builds out and, hopefully, continues to find ways to conserve this resource, a community may find that is paying for water it’s not using. Again, using the narrative above, it will continue to pay for and maintain the infrastructure that was built to handle its needs during peak growth. Frisco has already been in situations where it paid for water that it did not use. We will continue to encourage our residents to conserve water because it saves a valuable resource AND impacts their pocketbook.
  • NTMWD calculates its annual rate to all members based on the minimums in place. In other words, it is a stable revenue stream and the rates for all member cities are based on the annual revenue NTMWD receives. If that revenue in reduced in one area, it will be increased in another. If it is reduced for one costumer, it must be increased for another (or all).
  • Bond ratings are based on the ability of NTMWD to pay the debt. The model currently in place gives NTMWD strong bond ratings and allows NTMWD to continue to build infrastructure for many customers while getting us the best interest rates. Without a model in place that assures the agencies of the financial strength of NTMWD, then costs go up for all the communities.
  • Water needs will continue to increase in North Texas and additional water sources will need to be identified and added. A typical reservoir in Texas will take approximately 30-40 years to put in place. Significant investment will continue to take place.
  • Water rates for all members and customers of NTMWD have increased significantly over the last few years and they are anticipated to continue increasing.
  • Cities that must pay for water that they do not use are refunded the costs associated with treating and pumping the water that is not used by those cities.
  • 60% of the current population in NTMWD resides in those four cities (Plano, Richardson, Garland and Mesquite). Thus, those four cities have a majority of the population that NTMWD serves. While that will change over time, a majority of the system was built due to their growth and population.

So, what is the solution or is there a solution that is even needed?

Let me be clear, if I was the Mayor of one of the cities currently paying for water it was not using, I would use everything in my power to resolve that issue and lower the costs. There is no blame here – we all want to be efficient with our taxpayer dollars and keep costs down to our residents. Frisco wants to be at the table as we work on better ways our region can function. As the Mayor of one of the fastest growing cities in the U.S., I will also do everything in my power to make sure residents are protected from unfair rate hikes or unreasonable solutions addressing the needs of those of other communities at the expense of our taxpayers.

Frisco has been the leader in water conservation. We have implemented innovative new approaches to water conservation that have paid off and that are used as a model by numerous communities around the state and country. For example, every new home built in Frisco must have an evapotranspiration controller (also known as an ET or Smart Controller.) Frisco also operates our own weather station and weekly updates are sent to our residents. Even NTMWD has adopted parts of this model. We also offer free irrigation checkups and promote “water wise” habits. I have spoken at several water conferences discussing our innovative methods of conservation. I am also a Governor appointee on the Red River Boundary Commission that was formed to negotiated border issues with Oklahoma in direct relationship to NTMWD supply at lake Texoma. I understand the need for a stable water supply for North Texas and have worked directly with the EPA to help facilitate expansion of our system.

With the region in mind as well as working with our neighboring cities to help address their needs, Frisco has been willing to be at the table to explore modifications that help those four cities.

While there is no direct benefit to Frisco from changing the current model, our City Manager came up with a very creative financial model that would help those communities that were paying for water there customers were not using. The model involved using the growth in new cities (thus additional water needs) to reduce the minimums of those cities not meeting them. Unfortunately, this did involve a slight increase to the fast-growth cities such as Frisco due to NTMWD having projected revenue based on the combined minimums.

To easier explain the challenge: NTMWD was basically using the anticipated revenue from all the cities to set its rates. If revenue is lowered from projections by NTMWD, which our proposal would do, then rates would go up for all the communities.  Even with the increase in rates to our community, in our effort to reach a compromise, Frisco suggested this change. However, we could not get all 13 members of the NTMWD to agree to this change. Some of the fast growth cities felt that they should not be required to burden their rate-payer by subsidizing those cities that are not meeting their minimum while some of the cities not meeting their minimums want to completely get rid of their agreed to costs which would most likely mean having the other cities take on those expenses.

While a solution has not yet been found that is fair to all, I believe it is in the best interest of all the customers of NTMWD to continue working towards that goal. It will take some time, but I do believe a solution can be found. Involving the PUC in this internal contractual issue is, in my opinion, a mistake. It creates a situation of us against them. In this case, four cities that are not growing as rapidly wanting to change the rules that everyone agreed on and that will negatively impact nine other cities. With that said, I believe there are ways to address the concerns of the four cities while protected the rates of the other nine cities. The solution will involve compromise and a sincere desire to work together. No, it won’t be easy and the answer is not asking a state agency to intervene. Frankly, it is embarrassing to all involved that we have not resolved this and goes against our unified message that local control is always in the best interest of our residents.

All these communities are very successful and have created an atmosphere of amazing growth, job creation, quality of life and a great place to raise a family. After all, the innovation in our communities has been a model that entities have looked at from around the world.  TOGETHER, we must continue to work on conservation and making North Texas the best place to do business.

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