Response to Arguments Against PSWID
There are a set of arguments being made against the K2 well development that are about whether the actions that the PSWID board has taken are appropriate. The agreement that has been negotiated between PSWID and PWCo can be found here: K2 Well Agreement. The first amendment can be found here: First K2 Well Amendment. The responses are provided for the following arguments:
- The agreement violates the Arizona constitution [Updated: 3/07/2008]
- PSWID board is exceeding their charter
- Strawberry’s water needs are not adequately represented in the agreement
- Agreement is too favorable to PWCo and PWCo can’t be trusted
- K2 is not a good use of taxpayer money
- Conflicts of interest on the PSWID board
- PWCo will not be able to support the debt associated with K2
- The K2 site is insufficient collateral for the $300,000 of capital
- Peer reviews of the HWRC hydrology report were not made available to the entire PSWID board
- Vote to send letter of support to ACC was not done properly
1. The agreement violates the Arizona constitution [Updated: 3/07/2008]
This argument against the K2 well is based upon the sentence in Article 9, Section 10 of the Arizona constitution that reads: “No tax shall be laid or appropriation of public money made in aid of any church, or private or sectarian school, or any public service corporation.” PWCo is a public service corporation.
The ACC legal staff has provided an analysis of whether the agreement violates the Arizona constitution and has found that it is not in violation. Their conclusion is:
“Staff believes that the application to encumber assets meets all of the criteria of the relevant statutes. PWCo can afforded to reimburse the District its investment up to and including the $300,000 authorized. The application should be approved.
The money being invested by the District, if it indeed has been raised through the District’s taxation authority, would constitute an appropriation of “public money” as the term has been defined by the Arizona Supreme Court. However, the terms of the agreement between PWCo and the District by which the money is to invested, distributed, and returned to the District clearly indicate that PWCo will not receive any advantage over any other public service corporation, whether through the District’s choice to contract with PWCo in the first place, or through the terms by which the transaction could eventually unfold. Therefore, the transaction does not constitute an appropriation of public funds for the aid of a public service corporation.”
The ACC staff issued an additional brief on 2/29/2008 which responds to the claims of the brief that was filed by RCW and also makes the case that the ACC has no jurisdiction to decide the constitutionality of the agreement between PWCo and PSWID. The summary from the brief states:
"The Commission has ordered PWCo to locate additional water sources. PWCo has arranged to do just that, and on a very large scale. The potential public benefits of the K-2 well are significant. Success could mean the end of water hauling charges for PWCo ratepayers. That alone should be sufficient to tip the scale in favor of approving the agreement. The arguments that are being advanced against the agreement are to the benefit of a small group of developers, and against the overwhelming need of the public for more water. In making this decision, the Commission should simply weigh the denial of this application against the tidal wave of complaints regarding water hauling that are certain to arise this coming summer, if K-2 is not on line. The choice is clear. This well agreement offers huge potential and very little risk to PWCo. The Application should be granted."
The PSWID board consulted with the Gila County Attorney as to whether the K2 agreement would be in violation of Section 9, Article 10. The Gila County Attorney's position is that the agreement is not in violation.
The lawyers for PWCo and PSWID that helped to negotiate the agreement are both very experienced in water and public service corporation law. They believe that the agreement does not violate the Arizona constitution.
Those that make the claim are not all that sure that the Arizona constitution is being violated. In the statement that they included in their recall effort it states: "Furthermore, the contract may violate the Constitution of the State of Arizona.". If they really believed it, they wouldn't have hedged by saying "may violate".
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2. PSWID board is exceeding their charter
This claim is that the PSWID board is exceeding their charter by participating in the K2 test well.
The PSWID mission statement is as follows:
The PSWID Board's mission is to represent the interests of the communities and to secure long term and reliable sources of water for the communities. To accomplish this we are to:
1) Investigate current and potential sources of water as well as the costs associated with maintaining or expanding present and potential sources.
2) Formulate a plan or plans for improving present water sources of the communities.
3) Formulate a plan or plans for funding such improvements.
4) Implement and formulate plans as necessary to provide long-term available water to communities.
The K2 well falls within items 1), 3), and 4) of the PSWID charter.
PSWID is a government body formed under the Arizona Constitution and given responsibility for developing long term water resources for the community covered by the district. It is, however, not authorized to be the distributor of that water. Therefore, to bring the benefit of its water development efforts to the community it must work in partnership with the authorized purveyor of water for the community, PWCo. To disallow this partnership would prevent the PSWID from completing its constitutionally authorized mission.
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3. Strawberry’s water needs are not adequately represented in the agreement
The agreement states that: “Water from the Project in excess of the needs of PWCo will be made available to SWCo.” The argument is that SWCo should be guaranteed some portion of the K2 water.
There should be excess water available for at least several years as the K2 well is projected to be sufficient to cover the growth in water consumption for the next five to seven years.
The agreement was made before Strawberry encountered their first water shortages last summer and is focused on solving the water problem in Pine. PWCo customers will be paying the full cost of the K2 development.
We have no objection to amending the agreement to provide a guaranteed portion of the water to Strawberry in proportion to the K2 development costs that are paid by SWCo customers.
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4. Agreement is too favorable to PWCo and PWCo can’t be trusted
This argument is that there are too many ways for PWCo to get out of the agreement and that PWCo can not be expected to honor the agreement.
PWCo is going to do what is in their best interest, like most any other company. PWCo had a choice of whether they participated in the negotiation of the agreement and they determined that it was in their best interest to work with PSWID to find a solution to the water shortages. PWCo found it in their best interest to sign the final agreement and to invest the money in obtaining ACC approval.
A successful K2 well gives PWCo more water to sell and more profit because they are selling more water. A successful K2 well satisfies the demands that the ACC has made of PWCo to resolve the water shortages in Pine. A successful K2 well means that PWCo will not have to spend as much time dealing with angry customers.
In any successful business deal, the interests of both sides need to align. PWCo interests and those of the community align on this issue. The future can’t be predicted, but the interests of both sides will remain the same.
There are several termination clauses in the agreement:
- PSWID may terminate at any time prior to the expenditure of PSWID funding if it determines that the K2 well completion will exceed two years from the signing of the agreement.
- PWCo may terminate if the ACC fails to approve the agreement within 180 days of submission or conditions the approval on terms and conditions unacceptable to PWCo.
- PWCo may terminate if PSWID does not provide the agreed to funding.
- PWCo may terminate if PWCo will not be able to secure funds for construction under reasonable terms and conditions, provided that this reason is no longer grounds to terminate once the escrow account is funded by PSWID.
- PWCo may terminate if the cost is not warranted based upon an Estimated Sustainable yield of less than 150 gpm.
- PWCo may terminate if the cost of completion is more than $1,300,000, unless otherwise approved by PWCo.
- PWCo may terminate if PWCo has a reasonable basis to conclude that the ACC is not likely to include the costs of the K2 well in the PWCo rate base.
Clauses 1 and 2 protect both sides against delays in the K2 well project. As we all know, time is money and these clauses reflect that if the K2 well can not be developed within a reasonable period of time that effort should be ended.
Clause 3 protects PWCo if the PSWID backs out on their side of the agreement. Clause 4 and 6 protects PWCo from situations where the costs grow beyond what has been planned. Clause 5 protects PWCo from having to invest a significant amount of money in a well that doesn’t provide enough water. Clause 7 protects PWCo from having to pay for a well that it can’t recover its costs on.
Some of these clauses are based on very clear things (Clauses 2, 3, 5, and 6). Some of the clauses are based on judgment calls (Clauses 1, 4 and 7). These have the potential to be abused, but we believe that both sides have operated in good faith and that they will only be utilized as a last resort when the conditions of the clause apply.
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5. K2 is not a good use of taxpayer money
This argument is that taxpayer money should not be spent on the K2 well.
The K2 well does not require any additional taxes to be collected.
There is no more important issue for Pine-Strawberry than water. Water significantly impacts the quality of life and the economic value of the area. An adequate and reliable water supply is a big plus for all residents in the area, whether they are customers of PWCo and SWCo or not.
Over the years, PSWID has been studying the water problem and its solutions. The time for study has been completed and now the action to put a solution in place has been taken. The PSWID has more than $430,000 that has been collected through property taxes for the purpose of working to establish an adequate and reliable water supply for the two communities. Using this tax money for the purpose it was taken for is a good use of taxpayer money.
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6. Conflicts of interest on the PSWID board
There have been two claims made related to conflict of interest by board members. One has to do with the purchase of water storage tanks from PWCo by Mr. James M.Richey. The other that a former board member, Mr. John Breninger, has become PWCo's project manager for the K2 well.
Mr. Richey purchased the water tanks prior to being a board member. The three tanks had been declared hazardous and had been condemned by Gila County. Mr. Richey purchased them for $1000. Gila County later bought the three tanks. Two were scrapped and the third was moved next to the landfill and contains non-potable water for fire-fighting.
Mr. Breninger was not a board member when the K2 project was negotiated and approved. As a board member, Mr. Breninger had worked on an earlier proposal for PSWID to develop and own a $3,000,000 well. In that proposal, the K2 site was identified.
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7. PWCo will not be able to support the debt associated with K2
This argument is that the expense that PWCo will take on for the K2 well will be more than PWCo can support. No specific information is given as to why PWCo would not be able to support the debt.
The revenue to PWCo will increase with the K2 well due to increased sales of water to existing customers and the addition of new customers. PWCo has said that the debt can be supported and the ACC staff has agreed.
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8. The K2 site is insufficient collateral for the $300,000 of capital
The agreement says that if PWCo terminates the development the K2 well, that the ownership of the K2 site property, along with the water rights, will be transferred to PSWID. The claim is that this property is not sufficient collateral for that amount of money.
The $300,000 that PSWID is providing is not a loan, so the concept of collateral does not apply. The transfer of the property is to give PSWID the option to further develop the site if that is deemed to be reasonable.
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9. Peer reviews of the HWRC hydrology report were not made available to the entire PSWID board [Updated: 1/29/2008]
PSWID commissioned the hydrology report provided by Highland Water Resources Consulting, Inc. (HWRC). PWCo paid for three independent peer reviews of the HWRC report. Since PWCo paid for these three peer reviews, they are the property of PWCo. PWCo shared the three peer reviews with the two PSWID board members that were negotiating with PWCo. These board members reviewed the peer reviews and provided a summary of the peer reviews to the other board members.
The claim is that by not sharing the full peer reviews with the other board members that the vote for the K2 project was done without all information being available.
The peer reviews confirmed the main points of the HWRC hydrology reports. There is no significant information in the peer reviews that differs from the HWRC report. (See Hydrology for more details)
The PSWID chairman's report from November 2007 explains more about the responsibilities of a board member who is assigned a task.
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10. Vote to send letter of support to ACC was not done properly
The claim here is that the vote that was taken in the October PSWID board meeting on whether to send a letter to the ACC supporting the K2 well was not conducted properly. At that meeting the chairman, Gary Sherlock, was out of state and attended by phone. He passed the chairmanship of the meeting to Barbara Hall and she conducted the meeting. The chairman does not vote on matters unless there is a tie. The vote to send the letter was 3-2. It is claimed that the vote would have had a different result if Mrs. Hall had not been chairman and been able to vote.
In the November PSWID meeting, Mrs Hall stated that she would have voted in support of sending the letter, so the outcome would have been the same regardless of who acted as chairman at the October meeting.
In any case, whether the letter was sent or not doesn’t make any difference. The ACC has made it clear in their hearings on the encumbrance that while they will be polite and take public comment, it has no bearing on the final decision that the ACC takes on the encumbrance. The letter has no more weight than all the other public comment.
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