Good morning Mr. Kurtz,
Please find attached DWSD's proposal for continued service to Flint and Genesee
County. Within the hour I will also send a power point file that provides a summary level
presentation of the proposal.
I look forward to answering any questions you may have and supporting the conversation
between you and Mr. Orr over the next few days.
Sue
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Sue F. McCormick, Director
Detroit Water and Sewerage Department
735 Randolph, Room 506
Detroit, Michigan 48226
Office (313)224-4701
Fax (313)224-6067
[email protected]
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Crry of Detaon 738 Raxpois STREET
Warr ann Srwreace Drrasmuent Dereon, Miciucan 48226-2830
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April 24, 2013
Ed Kurtz, Emergency Manager
City of Flint
1101 South Saginaw Street
Flint, Michigan
Dear Mr. Kurtz,
I am pleased to offer this Water Supply proposal for continued long-term water supply service to
the City of Flint and Genesee County. DWSD is committed to becoming the provider of choice
for Water service in Southeast Michigan and looks forward to the opportunity to partner with the
City of Flint/Genesee County as the region moves forward. The proposal herein offers Flint the
immediate opportunity for a 45% reduction in the cost of water supply saves the Flint/Genesee
region over $900 million dollars as compared to the KWA alternative over the 30 year contract
period.
On December 20, 1965, the Cities of Detroit and Flint entered into a Water Service Agreement
(Agreement) for the City of Detroit Water & Sewerage Department (DWSD) to provide treated
water to Flint and for Flint to provide DWSD water to other areas of Genesee County. That
Agreement had a 35-year minimum and an indefinite maximum term and is currently in effect.
There has been one Amendment to that Agreement dated July 18", 1990. That amendment
addressed a Flint request to reduce the minimum consumption requirement in the agreement by
changing “Article 8 (A and B)”. This amendment resulted in significantly lower costs to Flint.
All other provisions of the Agreement remained unchanged. For over a decade the cities of
Detroit and Flint have been in discussions for a successor Water Service Agreement to replace
the Agreement currently in place. During the course of those discussions many different service
alternatives have been considered but the cities have been unable to agree on terms that would
allow their current Agreement to be replaced by a successor water service agreement.
In recent months, via a process largely governed by the State of Michigan, DWSD has proposed
a number of alternative approaches for long-term water supply to the Flint/Genesee region.
During a meeting with the State on April 19" a process and schedule was outlined that provided
DWSD the opportunity to deliver a final proposal to Flint for continued service to the
Flint/Genesee region. The proposal herein provides a public/public partnership approach in
response to the water service requirements set forth by Flint / Genesee County / KWA as of
April 22, 2013 (attached).
The following discussion and exhibits are designed to present the highlights of our submittal, and
specifically respond to the points set forth in the request. In summary, our proposal reflects a
public/public partnership approach with Flint that is designed to launch a cooperative
arrangement toward solving water supply challenges in the Flint/Genesee region in a manner that
best meets the interests of Flint and is equitable across the DWSD service area. Our proposed
approach is responsive to the specification and has direct benefits to Flint/Genesee. Notably:
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« Provides Flint, as partner with a capacity share in the Lake Huron Water Treatment Plant,
the advantage of treatment costs calculated from a facility that has a lower cost of
production compared to DWSDs other treatment plants; this capacity obligation is
secured by a contractual obligation to successors and assigns;
e Effectively negates the distance and elevation factor that exists in the current rate
structure to Flint, calculating transmission costs based on the line from the Lake Huron
plant to the Baxter/Potter connection;
e Provides redundant (back-up) water supply at the Imlay City Pump Station and reflects
fair recognition that Flint will provide a level of "reliability" on its own that DWSD
currently provides to other wholesale customers, through construction and ownership of
redundant transmission from the Imlay pump station West to Baxter/Potter or other point
of connection as determined by Flint further maximizing Flint’s interest in ownership of
assets.
Highlights of our proposal:
Contract Structure — It is proposed that Flint would enter into a public/public partnership with
DWSD that would reflect more input into and control over system investments and cost
variables, The contract between Flint and DWSD would include "purchased capacity rights" in
the "Lake Huron System" (defined below) based on the specific demands in an Exhibit B to the
new contract, presumably the demands would be those included in the specifications attached.
This is consistent in nature to DWSD’s model contract that has been in place since 2008.
Revenue Requirement Responsibility — Limited to the costs associated with the "Lake Huron
System", which includes the Lake Huron Water Treatment Plant and Intake and the transmission,
pumping and storage facilities between the Lake Huron Plant and the delivery to Flint at the
Baxter/Potter connection. Baseline revenue requirement data (including operating budget, rate
of return, etc.) are identical to those developed for all other wholesale customers. No other
DWSD costs will be allocable to Flint.
Proposed Rate Structure — Revenue requirements for the Lake Huron System will be recovered
through a fixed monthly charge to recover allocated capital revenue requirements, plus a
commodity charge to recover annual operating expenses. A separate fixed monthly charge is
recovers the allocated “emergency standby” capital revenue requirements.
Redundancy Solution - Emergency backup supply is provided to the Imlay pump station, with
the associated standby charge. A second transmission water main from the Imlay City Pumping
Station west to either the current connection at Baxter/Potter roads or to another location to be
determined by Flint, as necessary to meet the full redundancy requirements specified is assumed
for comparison purposes. To maximize Flint’s interest in ownership, it is proposed that this line
will be constructed by Flint or KWA, and owned and operated by Flint or KWA. No costs
associated with this transmission line are included in the proposed rate structure summarized in
Exhibit 1. For the purposes of comparison of alternatives we have included an estimated annual
revenue requirement for constructing such line, and these costs are reflected in the projections
summarized in Exhibits 2 and 3. The costs for the second line included herein are consistent
with those identified by TYJT in a follow-on effort to their report dated February 2013 on the
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"twinned" line approach. Should Flint decide that it is not their preference to own this new
transmission line, DWSD is receptive to other approaches, including DWSD financing and
ownership.
Representation on the DWSD Board of Commissioners - DWSD is receptive to this concept and
will pursue modification of the current governance structure to accommodate it.
Rate Increase "Guarantee" - DWSD proposes a guarantee that the capital portion of the Lake
Huron System rate structure (the fixed monthly charge) will not increase for the life of the
contract, unless additional capital investment is made in current and future Lake Huron System
facilities. The only project in the current Capital Improvement Plan for the Lake Huron System
is replacement of one low lift pump that is included in the fixed cost calculation. (Throughout
this proposal the O&M escalation for the various revenue requirements are consistent with those
applied in the TYJT evaluation conducted for the state.) In addition to the governance
representation noted above and additionally through contractual treatment as a "partner" in a
Lake Huron Operating Committee (proposed to have two Flint representatives and two DWSD
tepresentatives) Flint will have a level of control of such investments, and therefore a level of
control over future capital revenue requirements included in the Flint rate structure. At Flint’s
option, an independent audit of the Lake Huron System costs can be requested annually and
conducted by a mutually agreed upon firm and at a mutually agreeable cost.
Capacity - Flint will be entering a unique partnering agreement, initially purchasing capacity
rights of 40 MGD in the Lake Huron Facility. The initial contract capacity would be set at 40
MGD per the specification. In addition, the contract will provide a reopener process every five
years during which KWA may increase the contracted demands. DWSD will then allocate costs
to Flint based on the new capacity requirement in the same manner as the initial allocation. This
provision will accommodate potential growth in the KWA region without requiring Flint to
encumber the full cost of projected future demands in early stages of the contract.
Proposed Rate Calculation
The annual revenue requirements are calculated (using FY 2013-14 as the baseline) as those that
are allocable to the Lake Huron System. For purposes of this proposal, the Lake Huron System
is defined as including:
The Lake Huron Water Treatment Plant and related structures (intake, etc.)
The 120” water main from the Lake Huron Plant to the Imlay City Pumping Station
The Imlay City Pumping Station and related structures (reservoir, etc.)
The 72" main from the Imlay City Pumping Station to the connection to Flint at
Baxter/Potter Road
The Flint relative shares of the allocated Lake Huron System revenue requirement are based on
the specifications provided by Flint. Capital costs have been allocated based on relative max day
demands (for the plant) and peak hour demands (for the transmission facilities). Operation and
Maintenance expenses have been allocated based on relative average day demands for all
facilities.
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The rate structure proposed herein recovers the allocated FY 2013-14 revenue requirements. All
capital revenue requirements are proposed to be recovered through a fixed monthly charge. All
operation and maintenance revenue requirements are proposed to be recoverable through a
commodity rate applied to actual water purchases. An "average unit cost" per Mcf has been
calculated based on the specification provided to illustrate the total revenue requirement
expressed as a unit cost of projected water sales.
The analytical results of the proposal are illustrated in the attached table (Exhibit 1). Page | of
this table shows the calculation of the proposed rate structure for FY 2013-14. As mentioned
above, the fixed monthly charge associated with current capital costs of the Lake Huron System
(shown on Line 1) will never increase so long as the purchased capacity requirement stays
constant. Changes to the fixed monthly charge can increase only with (a) additional purchased
capacity through the contract re-opener process (permissive to Flint), or (b) additional
investment in Lake Huron System facilities for which Flint has both partnership input at the
operating committee level and governance representation on the Board.
Page 2 of Exhibit 1 provides background to the rate structure calculation and illustrates the
allocation of FY 2013-14 revenue requirements associated with the Lake Huron System facilities
to Flint based on the contract demands set forth in the specifications document. It also illustrates
the calculation of the emergency standby charge. This charge is designed to reflect the
reservation of one day’s worth of average daily capacity in the portions of the DWSD
“backbone” (treatment and major transmission) system from which Flint will not receive
“regular” service - and in which it will not be a “partner”.
TYJT’s report on the City of Flint Water Supply Assessment from February of this year included
a number of tables and charts that compare revenue requirements to Flint under various
alternatives. Attached herein is an updated Table 6.1 (Exhibit 2) which compares the cumulative
annual cost of each option from the TYJT report with the new proposal included. We’ve also
included an Exhibit 3 which is similar in format to Figure 6.1 in the TYJT report. However the
data in this exhibit is a bit more inclusive, as it accumulates ALL of the annual utility costs for
the KWA service area. DWSD submits that these exhibits illustrate the comparative advantage
of DWSD's current proposal to the KWA proposal, and demonstrate the significant cost
advantage provided with the innovative public/public partnership approach we are proposing.
In the nature of an executive summary or overview, we have submitted a companion power point
presentation that calls out many of the significant features of this proposal. This is firm offer that
is available with the rate season beginning July 1, 2014, however we remain open to discussion
and negotiation.
Best regards,
SpDh lane
Sue McCormick, Director
Detroit Water & Sewerage Department
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Specification Sheet for Evaluating Water Service Options to
Flint and/or KWA/Genesee County (KWA/GC) Service Area
Issued: April 22, 2013
Purpose: The purpose of this document is to 1) clarify the water service requirements so that
DWSD may submit a proposal responsive to the current requirements of Flint and/or KWA/GC
and 2) provide a framework for a comparable and equitable analysis of water service proposals