Even as it was raising water rates by 10 percent for the fiscal year that started Friday, the city of Henderson was receiving news that could lead to nearly as big of an increase next year.
Word came in late June from the office of Rep. G.K. Butterfield, D-Wilson, that language favorable to the Kerr Lake Regional Water System would not be in the 2006 Water Resource Development Act, and the U.S. Army Corps of Engineers set its long-delayed price for a water storage contract with the city, the managing partner and majority owner of the water system.
The two items are related. The legislative language would have allowed the city and the corps to base their water storage contract negotiations on prices from the 1970s, when the two sides first entered an agreement to allow Kerr Lake to be used for drinking water. Instead, the corps is basing its monetary demands on current costs.
The Corps of Engineers wants $3,455,197 for the water storage contract.
The corps came up with that figure through a water storage reallocation study that estimated the water system’s share of the expense of building Kerr Lake today and setting aside 20 million gallons per day for the water system. Under the forthcoming contract, the corps will agree to store that amount of water in the lake for the city’s use. As a practical matter, nothing the corps does will change, and the city will continue to draw water as it has since the original water withdrawal agreement went into effect May 30, 1974.
The only thing that will change, aside from contract wording, is the money the water system pays the federal government.
The current contract calls for the water system to pay based on how much water it draws, not based on how much water the corps is storing for the system in the half-century-old flood-control reservoir. Henderson pays $9.60 per 1 million gallons the water system uses, which at the current level of demand should come to about $20,000 this year.
Henderson’s new annual cost will be roughly 10 times that amount at $221,174 if the city accepts the corps’ proposal, according to Assistant Manager Mark Warren. He supplied that figure in a written answer to one of council member Elissa Yount’s budget-related questions last week.
Warren based that number on a 30-year payment plan at an interest rate of 5 percent. He said that to pay that expense, the Regional Water System would have to raise the rates it charges customers by 5 percent, and Henderson would have to charge its water customers 9 percent more.
That 9 percent increase for city residents would come on top of the 10 percent hike that went into effect Friday to help balance the budget. Henderson still has below-average water rates for North Carolina municipalities, although the city’s sewer rates are high.
Another jump in water rates is possible to support the $21 million expansion of the water plant to a capacity of 20 million gallons per day. The City Council voted June 6 to move ahead with that project, and the regional partners could approve putting out a request for bids this month.
Dean Ramsey of engineering firm EE&T produced a worst-case estimate of a $3.34 increase in the average monthly water bill for Henderson residents in late 2007 or 2008 to pay for the new water plant.
The wild card in projecting water rates is the demand for Kerr Lake water. The more the Regional Water System sells, the less it has to charge per gallon to cover costs such as the corps contract and the plant expansion. Those expenses are fixed, meaning they don’t increase as the system produces and sells more water.
Ramsey told a meeting of the regional water partners in April that each 500,000-gallon increase in water sales produces a profit of $180,000 now. He estimated that the water system could pay for the plant expansion without any increase in regional rates by increasing sales to 11.634 million gallons per day by 2007-08.
That figure exceeds current demand estimates by 47 percent, and sales are down in the past couple of years because of the loss of major industrial customers, such as Harriet & Henderson Yarns in Henderson and Lenox China in Oxford.
Uncertainty about the water-use forecasts and about the Corps of Engineers’ contract demands led Yount to vote against moving ahead with the water plant expansion.
Colleague John Wester, the top advocate of the water plant expansion as the chairman of the council’s Public Utilities Committee, said Yount was wrong to want to wait for answers to every possible question regarding the expansion. He said it’s impossible to know everything when making decisions about the future.
The council was not completely in the dark about the Corps of Engineers’ proposal. At the April meeting of the regional water partners, former plant director Mike Hicks said the corps had given him a ballpark range of $4 million to $5 million for the storage contract.
The two sides should have created a water storage contract, instead of the withdrawal agreement, back in the 1970s, which is why the city has argued that costs in effect then should be the basis of negotiations now. The city says it was the corps’ mistake not to create the proper contract 31 years ago, so the city shouldn’t be penalized.
According to a seven-month extension of the withdrawal agreement the city and corps signed at the end of May, the 1974 contract “contemplated that it would continue in force and effect until a new contract providing for water supply storage space was executed, or for a period of 30 years from its effective date, whichever occurred first.”
The 30 years came and went, and the two sides signed a one-year extension in May 2004. That proved not to be enough time, so they added seven months to the deal at the end of May. All the while, city officials and their Washington lobbying firm, the Ferguson Group, worked to get congressional help to keep the contract cost down.
Butterfield’s staff was fighting to get language in the Water Resource Development Act that “would have allowed the community to continue to get its water at a very favorable rate,” said Ken Willis, a spokesman for the congressman.
But that language never made it into the bill before it reached the House floor last week.
“The House Committee on Transportation and Infrastructure’s Subcommittee on Water Resources and Environment had more than 30 similar requests from across the country and decided against allowing any of them,” Willis wrote in answer to questions sent by e-mail. “Instead, communities will have to negotiate a market rate with the Army Corps of Engineers. Unfortunately, it’s unlikely that this will be changed.”
That puts the onus on the city to win favorable terms from the Corps of Engineers. The two sides agreed in the current contract extension to work “with all due diligence” to complete the water storage contract by Dec. 31.