Memorandum CITY OF DALLAS ove October 9, 2017 "© The Honorable Mayor and Members of the Dallas City Council seer Agenda Item No. 14 ~ October 11,2017, Council Agenda ‘The purpose of this memorandum is to brief you regarding Agenda Item No. 14 on the October 11, 2017 agenda. ‘This item was briefed in executive session on May 17, 2017. The tems of the- selement have not changed sinee the executive session briefing. This tem authorizes seilement ‘of the City's pending lawsuit against the Sabine River Authority (SRA) over the Lake Fork water supply contract and authorizes an amendment to that water supply contac. Background and of Dis The City and SRA signed a water supply contract for Lake Fork water in 1981 (The “Contract Under the Contract, the City is entitled to 74% of the dependable yield of the lake (131,860 acre. feet per year, of which 120,000 acre-feet can be transferred to the Trinity Basin) and pays 74% of the annual operations and maintenance expenses as a service charge, The initial term of the Contract expired November 1, 2014 and the Contract automatically renews for successive 40-year terms unless the City terminates it. Section 6.02 of the Contract states the compensation to SRA for the renewal terms “shall be determined by mutual agreement.” When the City and SRA. were unabie to agree on compensation, SRAs Board of Directors se arate of $0.5613 per 1,000 gallons ‘0n October 9, 2014, increasing the cost of Lake Fork water by approximately $24 million per yea. igation ‘The City filed a petition for review at the Public Utility Commission (The “PUC"), An administrative lave judge ordered the City to pay into an eserow account, on an interim basfs, the entire and full additional amount requested in the new rate set by SRA (The “Escrow Account). The Escrow Account had a balance of $68,687,430 as of September 30, 2017. The City filed « lawsuit against SRA in Travis County. The tral and appellate courts ruled against the City on Jurisdictional grounds. ‘The City filed a lawsuit against SRA’s board of directors in Orange County. SRA intervened and filed a claim against the Cty for breach of contract. The trial court ‘led against the City in its attempt to have the contract claim dismissed for lack of jurisdiction That ruling is on appeal and the remainder ofthe ease is pending. “Pits Ci at Was Drs Vat an PreOctober, 2017 ‘Agenda lem No, 14 ~ October 11, 2017, Council Agenda ‘Settlement Terms ‘The City is proposing to settle all litigation between the parties. The primary terms are 1. Water Rates. Section 6.02 of the Contract governing compensation will be amended. The ‘new compensation scheme is retroactive to November 2, 2014, and govern this and all future renewal periods a The City wll pay SRA’s posted in-basin water rate for 120,000 acre-feet of water per year on a take-or-pay basis. This rate is approximately half of the rate demanded by SRA upon expiration ofthe contract b. The City will pay SRA’s posted ovt-of-basin rae fora minimum volume of ‘water per year that increases according toa schedule. For 2018, the City will pay the out-of-basin rate on 48,000 acre-feet, and the minimum volume increases by 2.000 acre-fet each year. In 2054 ‘and afterward, the City will pay this rate for 120,000 ac-A I'he City uses mote than the scheduled ‘minimum in a year, the Cty will pay this rate based on actual volume used, The rates adjust annually by a percentage equal to the average municipal ‘bond rate for long maturities, eapped at 5.5% per year. 4. The City will continue o pay its pro rata share ofthe service charge but the percentage willbe lower because the Cty is assigning certain water rights to SRA (see 2 below), 2. Water Assigned to SRA, The City will assign its rights to 11,860 acre-feet of water per year t SRA. Under curtent law and existing permits, the Cty is prohibited from diverting this, Water to the Trinity basin. This water was previously sold to Energy Future Holdings Corp. which is now closed and in bankruptcy. Therefore, these water rights have very limited value tothe City and cannot be used by the City for city customers. This assignment reduces the City’s pro rata service charge because the charge will now be calculated based on 120,000 acre-feet of water instead of 131,860 ac-t. 3. Release of Escrow. The City will release the Escrow Account to SRA. SRA will debit the «eserowed funds: (a) for the retroactive compensation for November 2, 2014 September 30,2017, using the newly-agreed rates, and (b) monthly beginning October J, 2017, forthe ammount to be paid to SRA going forward using the newly-agreed rates, until the escrow is exhausted. The City and SRA will divide the interest earned on the Escrow Account. When the Escrow Account is exhausted, the City will stat paying the water rates described above on a monthly basi. 4. Tansport of SRA Water. The City will transport up to 20,000 acre-feet of SRA's water Per year from Lake Fork (o Lake Tawakoni using the City’s facilities including the pump station and pipeline. SRA will pay the electric power cost of transporting this water. Instead of 2October 8, 2017 ‘Agenda lam No, 14 ~ October 11, 2017, Council Agenda transporting, the City may elect to provide SRA up to 20,000 acre-feet of water from Lake ‘Tawakoni and replenish the Tawakoni supply with SRA’s Lake Fork water. The “joint use” provisions of the Lake Fork and Lake Tawakoni water permits will allow the Parties to account for these uses in a manner that maximizes efficiency. SRA may also propose infrastructure improvements tothe City's facilities to increase capacity, to be constructed by SRA atts expense, and the Cty may init discretion approve or reject such proposals. 5. Centsinty for furs water supply. ‘The current contrat requires that renewal terms “shall bbe determined by mutual agreement”. This resulted in significant litigation expenses and tuneertainty over the future cost of water supplies, and even brought into doubt the continued Availability of a major water supply source for Dallas and the North Texas region. This provision Will be replaced with an automatic renewal that establishes an exact methodology to determine payments going forward Ze Lamy E. Casto City Attoney| € ——Te.Bondas Oy Manager ‘ety Bae, Cl Sa be ly Mara je Ay ea Cay apr "Del. Cy ht Werks: ee, i dpe 3