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Response to Member Questions

March 7, 2017

Dear Member/Customers,

We have received more inquiries regarding the recent rate increase and the Lampasas lawsuit. There were a lot of questions and comments dating back to the signing of the Lampasas contract in 2006 and how it relates to the rate increases today.

I want to start by doing the best I can to give some history dating back to before the contract was signed. The new legal team and I started learning the contract and its burden on Kempner Water Supply Corporation (KWSC) members in 2012.

At the time the contract was written, KWSC and Lampasas were both receiving their water from Central Texas Water Supply Corporation (CTWSC). KWSC, Lampasas and CTWSC conducted a study (KPA – Clay Roaming) on the current CTWSC water treatment plant production of water and found that it was going to be unable to provide enough water for KWSC to supply all the needs of the current members and future growth. KWSC went forward with starting the planning process for building the plant to ensurecurrent and future members would not have to worry about their water supply.

Before KWSC could borrow the money to build the plant from the Texas Water Development Board (TWDB), KWSC was required to revise its contracts with CTWSC and with Lampasas.  The contract between KWSC and CTWSC which was signed in 2005.  The contract with Lampasas was signed in 2006.

All was well until the KWSC plant went online in 2010. Suddenly, the subsidy started with KWSC paying 63% of the CTWSC operations and maintenance for the sole purpose of Lampasas. KWSC’s previous management conducted an independent report (Graves report) and discovered KWSC was to start paying for a large portion of the costs for Lampasas water.

A copy of the contract is available at our office for you to pick up if you would like to read the contract. I have been studying the contract for almost 5 years and still do not see where it says KWSC will be subsidizing Lampasas by 63% after their water treatment plant goes online. I may not have been here in 2006, but I have talked to enough board members present at the time of the signing to know that if they had known of the 63% subsidy, they never would have agreed to the contract. I have to say this contract is the most convoluted contract I have ever seen in my life and believe you will feel the same way when you read it.

KWSC supplies water in a 315 square mile rural service area covering portions of Lampasas, Coryell, Burnet and Bell counties.  This service area is35 miles from the source of the water, Stillhouse Hollow Lake. That means that KWSC has the additional capital and operating costs associated with great lengths of water mains and additional pumping and storage facilities.  Just the fuel cost for vehicles to traverse KWSC’s large service area is significant.  Compare these costs to a city which provides service within a relatively small footprint.

KWSC incurred the capital cost of purchasing facilities from CTWSC and costs for a new water treatment plant and large transmission lines. The rates include the debt service, and debt service coverage, for these facilities.  Also, KWSC is required, under the terms of the contract, to subsidize service to Lampasas, so costs are shifted from Lampasas’ customers to KWSC’s members.  KWSC has been involved, as a defendant, in several courts and regulatory proceedings by Lampasas and has been required to incur significant expenses relating to the defense of these actions.

KWSC’s directors, managers, and legal team are keeping the costs down although it is impossible to keep the costs from rising while budgeting for the subsidy to Lampasas required by the contract.  Remember Lampasas is also taking a potentially valuable portion of KWSC’s service area, the business park, away from KWSC without compensating KWSC for the loss. Any growth to KWSC is beneficial to keeping costs down.   A portion of KWSC’s debt paid for construction costs for facilities with capacity adequate to serve this area when the demand occurred.

The contract does allow KWSC to pass through cost increases in the price of water treated by CTWSC.   There again, that means KWSC will pay 63% of the increased costs even though this is of no benefit to KWSC members. Further due to the distance in transporting the water, there is water loss (all pipes lose some water), and under the contract, KWSC pays the cost of the water lost and cannot recover this cost from Lampasas.  Also under the contract, KWSC is responsible for the repair of the transmission mains and KWSC’s ability to recover this cost from Lampasas is limited. Lampasas’ interpretation of the contract says they (Lampasas) can choose the least cost of water each month by picking the CTWSC meter or their city point of delivery meters, whichever is lower that month. Therefore all water loss is paid for by KWSC. Kempner has found that it is necessary, from time to time, to use water from KWSC’s treatment plant to serve Lampasas, but under the court judgment, KWSC cannot recover this cost from Lampasas.

There is no “settlement” with Lampasas.  Under the trial court’s judgment, KWSC is not allowed to charge Lampasas for water from KWSC’s water treatment plant, and KWSC is complying with this order.  KWSC was also required to pay Lampasas back for the amount they paid for water going through their meters in the amount of $117,432.27 paid under protest. KWSC may also have to pay pre-judgment interest of $17,824.30, attorney fees and expenses of $333,563.00.   KWSC has not paid any portion of this amount because KWSC appealed the decision and filed a supersedeas bond.  If KWSC does not prevail in the appeal, KWSC will be obligated under the judgment to pay Lampasas $518,819.57 (includes an additional $50,000 in attorneys’ fees for appeal to the court of appeals) plus post-judgment interest at the rate of 5% per annum compounding annually until paid.

Our financials are all in good standing and meet all required laws that govern water supply corporations part of the rate increase is to generate the revenue required to satisfy the debt service coverage requirements on the TWDB loan and to borrow additional funds in order to pay for required upgrades and extensions.  .Our financial audit, required by law is available for you to view. Please feel free to come by and pick up a copy or you can download it from our website at www.kempnerwsc.com. 

Our board and management do take your membership seriously and look forward to seeing you at our membership meeting on March 23rd at 7:00 pm.

Best Regards,

Delores Atkinson, GM

Kempner Water Supply Corporation