NEGOTIATING NEGOTIATING WHOLESALE WATER WHOLESALE WATER SUPPLY AGREEMENTSSUPPLY AGREEMENTS

Presented byPresented byDAMON R. TALLEY, KRWA General CounselDAMON R. TALLEY, KRWA General Counsel

GERALD E. WUETCHER, PSC Attorney*GERALD E. WUETCHER, PSC Attorney*AtAt

WATER PERSONNEL TRAINING SEMINARWATER PERSONNEL TRAINING SEMINARPUBLIC SERVICE COMMISSIONPUBLIC SERVICE COMMISSION

December 10, 2008December 10, 2008* None of the views expressed in this document necessarily reflect the views of the Kentucky Public Service Commission or any other official or employee of the Kentucky Public Service Commission.

PREPARING THE PREPARING THE SOILSOIL

GUIDING PRINCIPLESGUIDING PRINCIPLES

SPECIFIC CONTRACT SPECIFIC CONTRACT PROVISIONS PROVISIONS

QUESTIONSQUESTIONS

“Give me six hours to chop down a tree and I will spend the first four sharpening the

axe.”

PREPARING THE SOIL

Ratchet Down the RhetoricRatchet Down the Rhetoric

Separate the BullsSeparate the Bulls

Shuttle DiplomacyShuttle Diplomacy

““Cooling-Off” PeriodCooling-Off” Period

GUIDINGGUIDING PRINCIPLESPRINCIPLES

ExampleExample

Be Up FrontBe Up Front

No SecretsNo Secrets

No SubsidyNo Subsidy

PerceptionPerception

RealityReality

Fundamental FairnessFundamental Fairness

CommunicateCommunicate

CommunicateCommunicate

CommunicateCommunicate

Share InformationShare Information

No SurprisesNo Surprises

Example:Example: HCWD No. 2 HCWD No. 2

& City of Elizabethtown& City of Elizabethtown

Be CreativeBe Creative

SPECIFIC CONTRACT SPECIFIC CONTRACT PROVISIONSPROVISIONS

Hot TopicsHot Topics

Not Exhaustive ListNot Exhaustive List

OwnershipOwnership

ControlControl

AccessAccessContinuedContinued

Master MeterMaster Meter

Testing Testing Who Pays?Who Pays?

Advance NoticeAdvance Notice

Both Parties PresentBoth Parties Present

Share Test ResultsShare Test Results

MaintenanceMaintenance

ReplacementReplacement

Master MeterMaster Meter Cont.Cont.

CPICPI Great:Great: City’s Retail RatesCity’s Retail Rates

Bad:Bad: Wholesale CustomersWholesale Customers

KRA Withdrawal FeesKRA Withdrawal Fees

Automatic Rate Adjustment Automatic Rate Adjustment MechanismMechanism

FormulaFormulaCost of Service StudyCost of Service Study

Allocated CostsAllocated Costs

Streamlines PSC ApprovalStreamlines PSC Approval

Use Readily Available Use Readily Available InformationInformation

Automatic Rate Adjustment Automatic Rate Adjustment MechanismMechanism

Don’t Say:Don’t Say:Seller agrees to supply all of Seller agrees to supply all of Buyer’s requirementsBuyer’s requirements

Buyer agrees to buy all its Buyer agrees to buy all its water from sellerwater from seller

Do Say:Do Say: Specify maximum quantitySpecify maximum quantity

QuantityQuantity

Good:Good: Monthly Amount (30,000,000)Monthly Amount (30,000,000)

Better:Better:Daily Amount (1,000,000)Daily Amount (1,000,000)

Best:Best: Gallons per Minute (700 Gallons per Minute (700

GPM)GPM)

Perfect:Perfect: GPM at each delivery pointGPM at each delivery point

Quantity . . . MaximumQuantity . . . Maximum

EnforcementEnforcementProblemProblem

GPM at each delivery pointGPM at each delivery point

Charge Penalty:Charge Penalty: 10% up to 25%10% up to 25%

Buffer (e.g. 10% Over Maximum)Buffer (e.g. 10% Over Maximum)

Seller can waiveSeller can waive

Seller not obligated to furnish extra Seller not obligated to furnish extra waterwater

Quantity . . . MaximumQuantity . . . Maximum

Minimum Purchase Minimum Purchase RequirementRequirement

Take Or Pay ProvisionTake Or Pay ProvisionSeller:Seller: DesirableDesirable

Buyer:Buyer: Undesirable except . . .Undesirable except . . .

Critical if Seller is expanding Critical if Seller is expanding facilities to benefit Buyerfacilities to benefit Buyer

Quantity . . . Quantity . . .

InitialInitial

Method for Calculating Future Method for Calculating Future Rate AdjustmentsRate Adjustments

RatesRates

Initial RateInitial RateDon’t pull it out of the airDon’t pull it out of the air

Needs to be Cost-basedNeeds to be Cost-based

Why?Why?PSC won’t approve itPSC won’t approve it

KIA Grant/Loan AgreementsKIA Grant/Loan Agreements

Basis for future rate adjustmentsBasis for future rate adjustments

RatesRates

Rate Adjustment ProvisionsRate Adjustment ProvisionsGood for Buyer:Good for Buyer:

Can’t raise wholesale rate without Can’t raise wholesale rate without raising retail ratesraising retail rates

Amount of wholesale rate Amount of wholesale rate increase cannot exceed the increase cannot exceed the amount of retail rate increaseamount of retail rate increase

Great protection .. . But PSC Great protection .. . But PSC won’t approvewon’t approve

RatesRates

Contract Formula or MethodologyContract Formula or MethodologyWhat is the “Rate”?What is the “Rate”?

Formula Formula

oror

Calculated amount Calculated amount (e.g. $2.00 per 1,000 (e.g. $2.00 per 1,000

gallons)gallons)

Rates . . . AdjustmentRates . . . Adjustment

Frequency:Frequency:

Review and calculate annuallyReview and calculate annually

Adjust as necessaryAdjust as necessary

Rates . . . AdjustmentRates . . . Adjustment

Guiding Principle: Share Guiding Principle: Share InformationInformation

Provide information voluntarilyProvide information voluntarily

Avoids suspicionAvoids suspicionBuyer can gain access by other Buyer can gain access by other means:means:

Open Records RequestOpen Records RequestFOIA (Federal Law)FOIA (Federal Law)PSC Data RequestPSC Data Request

Access to RecordsAccess to Records

TerminationTermination

DroughtDrought

Coordinate Conservation Coordinate Conservation MeasuresMeasures

Water Shortage Response Water Shortage Response PlansPlans

Curtailment of ServiceCurtailment of Service

Why?Why?Buyer needs time to adjust its ratesBuyer needs time to adjust its rates

Public Utility: File PWA with PSCPublic Utility: File PWA with PSC

Municipality: Utility Commission/City Municipality: Utility Commission/City Council ApprovalCouncil Approval

How much Time:How much Time: 60 days 60 days

Coordinate ImplementationCoordinate Implementation

Advance Notice of Rate Advance Notice of Rate AdjustmentsAdjustments

Consecutive SystemsConsecutive SystemsMonitoringMonitoring

Customer NotificationCustomer Notification

Disinfection By-Products (DBP)Disinfection By-Products (DBP)Stage 1 Rule:Stage 1 Rule: 401 KAR 8:510401 KAR 8:510

Stage 2 Rule:Stage 2 Rule: (Approval (Approval Pending)Pending)

Water QualityWater Quality

ChecklistChecklist

Borrower / Buyer must pledge Borrower / Buyer must pledge contract to RDcontract to RD

RD Form ContractRD Form Contract

Independent Third Party ReviewIndependent Third Party Review

MediationMediation

ArbitrationArbitration

PSC will decidePSC will decide

Dispute ResolutionDispute Resolution

Many Other Issues . . .Many Other Issues . . .

QuestionsQuestions