2. NEGOTIATING WHOLESALE WATER SUPPLY AGREEMENTS Presented by DAMON R. TALLEY, KRWA General Counsel GERALD E. WUETCHER, PSC Attorney* At WATER PERSONNEL TRAINING SEMINAR PUBLIC SERVICE COMMISSION December 10, 2008 * None of the views expressed in this document necessarily reflect the views of the Kentucky Public Service Commission or any other official or employee of the Kentucky Public Service Commission.

3. PREPARING THE SOIL GUIDING PRINCIPLES SPECIFIC CONTRACT PROVISIONS QUESTIONS

4. “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” PREPARING THE SOIL

5. Ratchet Down the Rhetoric

6. Separate the Bulls

7. Shuttle Diplomacy

8. “Cooling-Off” Period

9. GUIDING PRINCIPLES

10. Example Example Be Up Front Be Up Front No Secrets

11. No Subsidy No Subsidy Perception Perception Reality Reality Fundamental Fairness

12. Communicate Communicate Communicate Share Information Share Information No Surprises

13. Example:HCWD No. 2 Example:HCWD No. 2 & City of Elizabethtown Be Creative

14. SPECIFIC CONTRACT PROVISIONS Hot Topics Hot Topics Not Exhaustive List Not Exhaustive List

15. Ownership Ownership Control Control Access AccessContinued Master Meter

16. Testing Testing Who Pays? Who Pays? Advance Notice Advance Notice Both Parties Present Both Parties Present Share Test Results Share Test Results Maintenance Maintenance Replacement Replacement Master Meter Cont. Master Meter Cont.

17. CPI CPI Great:City’s Retail Rates Great:City’s Retail Rates Bad:Wholesale Customers Bad:Wholesale Customers KRA Withdrawal Fees KRA Withdrawal Fees Automatic Rate Adjustment Mechanism

18. Formula Formula Cost of Service Study Allocated Costs Streamlines PSC Approval Use Readily Available Information Automatic Rate Adjustment Mechanism

19. Don’t Say: Don’t Say: Seller agrees to supply all of Buyer’s requirements Buyer agrees to buy all its water from seller Do Say: Do Say: Specify maximum quantity Specify maximum quantity Quantity

20. Good: Monthly Amount (30,000,000) Good: Monthly Amount (30,000,000) Better: Daily Amount (1,000,000) Better: Daily Amount (1,000,000) Best: Gallons per Minute (700 GPM) Best: Gallons per Minute (700 GPM) Perfect: GPM at each delivery point Perfect: GPM at each delivery point Quantity... Maximum

21. Enforcement EnforcementProblem GPM at each delivery point Charge Penalty:10% up to 25% Buffer (e.g. 10% Over Maximum) Seller can waive Seller not obligated to furnish extra water Quantity... Maximum

22. Minimum Purchase Requirement Take Or Pay Provision Seller:Desirable Buyer:Undesirable except... Critical if Seller is expanding facilities to benefit Buyer Quantity...

23. Initial Method for Calculating Future Rate Adjustments Rates

24. Initial Rate Don’t pull it out of the air Needs to be Cost-based Why? PSC won’t approve it KIA Grant/Loan Agreements Basis for future rate adjustments Rates

25. Rate Adjustment Provisions Good for Buyer: Can’t raise wholesale rate without raising retail rates Amount of wholesale rate increase cannot exceed the amount of retail rate increase Great protection... But PSC won’t approve Rates

26. Contract Formula or Methodology What is the “Rate”? Formulaor Calculated amount (e.g. $2.00 per 1,000 gallons) Rates... Adjustment

27. Frequency: Review and calculate annually Adjust as necessary Rates... Adjustment

28. Guiding Principle: Share Information Provide information voluntarily Avoids suspicion Buyer can gain access by other means: Open Records Request FOIA (Federal Law) PSC Data Request Access to Records

29. TerminationDrought Coordinate Conservation Measures Water Shortage Response Plans Curtailment of Service

30. Why? Buyer needs time to adjust its rates Public Utility: File PWA with PSC Municipality: Utility Commission/City Council Approval How much Time: 60 days Coordinate Implementation Advance Notice of Rate Adjustments

31. Consecutive Systems Monitoring Customer Notification Disinfection By-Products (DBP) Stage 1 Rule:401 KAR 8:510 Stage 2 Rule:(Approval Pending) Water Quality

32. Checklist Borrower / Buyer must pledge contract to RD RD Form Contract

33. Independent Third Party Review MediationArbitration PSC will decide Dispute Resolution

34. Many Other Issues...

35. Questions