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Rate Methodology

 


Financing

 

The North Texas Municipal Water District does not utilize property taxes or any other form of general taxation as a revenue source.  Its revenues are generated by the services it provides to the cities.  Therefore, it has been necessary to develop effective contractual relationships in order for the District to be able to issue bonds to finance the development of projects needed to provide its services.

 

Contracts

 

The State of Texas has authorized contracts between local governments that allow water providers to issue contract revenue bonds to finance projects.  These contracts require the water provider to receive sufficient revenues from the cities it serves to pay the debt service and operation and maintenance costs of the provider’s system.  The cities must then charge a sufficient amount to cover not only the provider’s cost, but the cost of operating their own systems.  These contracts must be approved by the Attorney General of the State in order for the water provider to issue bonds.

 

Contract Minimums

 

Contract minimums assure bondholders that water providers will generate sufficient revenues to satisfy their financial commitments and have been accepted in the bond market for many years.  Contract minimums are also utilized by water providers to determine the proportional share of cost to be paid by cities and can be established in many different ways such as fixed volumes, maximum day usage, annual average usage over several years, or the previous highest annual usage.  The cost allocation method that the District and cities have agreed to utilize is the previous highest annual usage method.  This method is generally referred to as the maximum annual demand method.  In contractual terms, it is referred to as minimum annual demand.

 

Minimum Annual Demand

 

The minimum annual demand is the greatest annual demand that a city has historically placed on the District’s system.  The District has been required to provide the raw water, treatment plant capacity, pipeline capacity, and pump capacity to meet this demand.  Under the minimum annual demand method, the city that created the demand on the District’s system is required to pay its fair proportional share of the increased cost to develop, operate and maintain supplies and facilities.  This method ensures that the city that created the demand on the system pays for that demand.

 

Allocation of Cost to Cities

 

The Board of Directors appointed by the cities has the responsibility to see that services are performed in accordance with the contractual relationships and laws of the State of Texas.  In fulfilling this responsibility, the Board approves an annual budget that is based on meeting the needs of the cities minimum annual demand requirements.  The budget is proportioned among the cities based on each city’s minimum annual demand.

Should a city consume a greater volume of water than its minimum annual demand, the excess water is purchased at the variable cost for electrical power and chemicals required to produce the additional volume of water.  This excess volume of water escalates to the full cost the following year as part of the minimum annual demand requirement.  This is fair as the District has budgeted for the minimum annual demands to be produced in the current year.  Therefore, the additional volume only requires the District to incur the variable cost of operations (power & chemicals) during the current year.  The variable cost charged to the cities allows the cities to benefit from the larger sales in their systems that year.  In future years, the additional volume must be reserved in capacity for each city.

 

In recognition of the effects of periods of heavy rainfall and water conservation efforts, the District has established a rebate program.  Should a city consume less than its minimum annual demand, the Board of Directors generally rebates back to the city the variable cost of operations (power and chemicals) that were budgeted but not incurred to meet the city’s actual consumption.

 

Does a City Pay for Water It Doesn’t Consume?

 

Periods of extreme rainfall can cause a city to not fully utilize its minimum annual demand requirement.  As a result, it may appear that a city is paying for water that it didn’t consume.  Yes, it is true that a city must make payments to the District while it isn’t consuming up to its minimum annual demand requirement.  However, one must realize that these payments are required in order for the District to meet its debt service obligations and to continue to maintain the existing system.

 

Making payments to the District while consuming less than the minimum annual demand requirement is similar to the payments required of a homeowner.  When the homeowner is away on vacation, he/she must continue to pay the mortgage and ensure that maintenance of the home continues.

 

One must also realize that if a city didn’t participate in a regional system and it operated its own reservoir, treatment plant and transmission facilities, during periods of excessive rainfall or should a major industry not consume expected volumes of water, it would still be expected to pay the debt service on its facilities, keep the personnel to maintain and operate the facilities and continue to develop a program of capital investments to meet its demands for future normal or dry years.

 

What Happens if the Current Minimum Annual Demand Method is Changed?

 

If one accepts that the annual budget is the appropriate amount to be spent, then a change in the method of determining minimum annual demands only changes "who pays what amount".   This is the concern with a change to the current method.  If all minimums are reduced proportionally, the rate would be proportionally increased and the cities would all pay the same amounts.  However, if the methodology changes the relationship of the minimums to each other, then one city will pay more and another city will pay less.  In reality, each city has contracted to pay its proportional share of the cost.

 

Conclusion

 

Each city manages the volume of water it uses through its policies and ordinances.  Cities which actively encourage water conservation reduce their demand on the District's system.  Uncontrolled, a city's usage accelerates the District's construction programs to meet artificial growth caused by fluctuating demand.  Through conservation, awareness and the wise use of water, major capital expenditures can be delayed which will minimize the impact of future rate adjustments.

The philosophy of the District’s Board of Directors over the years has been to provide a high-quality, reliable water supply in the most cost-effective manner to the cities.  Due to a variety of factors including rate of growth or maturity of a city at any one point in time, some cities will benefit more or less than others at that instant in time.  However, over the long-term, each city should receive relatively equal benefit from a regional system.