City of Hamilton/Haldimand County Supply of Water Agreement (FCS14048) WARD(S) AFFECTED: City Wide PREPARED BY: John Savoia (905) 546-2424 Ext

CITY OF HAMILTON CORPORATE SERVICES DEPARTMENT Financial Planning and Policy Division

TO: Mayor and Members General Issues Committee COMMITTEE DATE: June 18, 2014 SUBJECT/REPORT NO: City of Hamilton/Haldimand County Supply of Water Agreement (FCS14048) WARD(S) AFFECTED: City Wide PREPARED BY: John Savoia (905) 546-2424 Ext. 7298 SUBMITTED BY: Mike Zegarac General Manager Finance and Corporate Services SIGNATURE:

RECOMMENDATION (a) That the City of Hamilton enter into an agreement with The Corporation of Haldimand County (“Haldimand”) for the continued supply of potable water to Haldimand which incorporates the following terms and conditions:

(i) initial term of the agreement will be for 20 years, effective August 1, 2014, with a potential renewal of two additional ten (10) year periods on the same terms and conditions unless otherwise agreed to by the parties; (ii) water consumption will be billed on a per cubic metre basis at the following rates:

2014 to January 1, 2019 and thereafter 2018

Monthly Water

Consumption Rate Block Rate($/m3) (m3)/metered ($/m3)

account

Hamilton Water Rate + 10% 3 1 0 - 62,500 m $ 1.94 Operating Surcharge + 15% Return On Investment Hamilton Water Rate + 10% 2 > 62,500 m3 $ 1.46 Operating Surcharge (iii) fixed daily water charges based on the size of the water meter will be billed at the same rates that from time to time the City of Hamilton charges to its water consumers within the City of Hamilton; (iv) early termination by either party will require no less than ten (10) years notice.

OUR Vision: To be the best place in Canada to raise a child, promote innovation, engage citizens and provide diverse economic opportunities. OUR Mission: WE provide quality public service that contribute to a healthy, safe and prosperous community, in a sustainable manner. OUR Values: Accountability, Cost Consciousness, Equity, Excellence, Honesty, Innovation, Leadership, Respect and Teamwork SUBJECT: City of Hamilton/Haldimand County Supply of Water Agreement (FCS14048) (City Wide) - Page 2 of 11

(b) That the Mayor and City Clerk be authorized and directed to execute, on behalf of the City of Hamilton, all necessary documentation to implement recommendation (a), all with content acceptable to the General Manager of Finance and Corporate Services and General Manager of Public Works, and in a form satisfactory to the City Solicitor;

(c) That the fees and charges relating to Haldimand County and The Regional Municipality of Halton be removed from the City of Hamilton Water and Wastewater/Storm Fees and Charges By-law No. 13-325 and Waterworks By-law No. R84-026, as those water rates are to be negotiated and imposed through agreements entered into between the City of Hamilton and the appropriate municipalities;

(d) That the City Solicitor be authorized and directed to prepare all necessary by-laws, for Council approval, in order to implement recommendation (c).

EXECUTIVE SUMMARY The purpose of Report FCS14048 is to seek approval from Council to enter into a new agreement with the Corporation of Haldimand County (“Haldimand”) for the continued supply of water to the northern boundary of Haldimand.

Hamilton currently supplies water to Haldimand via a water main extension along Highway 6 to a single delivery point at the Hamilton-Halidmand boundary to supply the communities of Caledonia and Cayuga.

It is important for both Hamilton and Haldimand that the terms and conditions of the water supply arrangement be identified in a written agreement, administered and billed in a consistent manner. It is also in the interests of both parties to provide assurances around the supply and delivery of water to Haldimand. As with all external water supply arrangements, Hamilton staff strive to ensure that Hamilton ratepayers will not be adversely affected by the proposed new agreement.

In 1994, the former Regional Municipality of Hamilton-Wentworth (“Hamilton-Wentworth”) entered into a supply of water agreement with the former Regional Municipality of Haldimand-Norfolk (now Haldimand County) for the supply of water on an ongoing basis.

The terms of the 1994 agreement included: . that Haldimand pay for the construction of a pipeline and related infrastructure for water transmission from Mount Hope to the Haldimand boundary and ownership of these assets was transferred to Hamilton-Wentworth (now the City of Hamilton) upon completion; . that Hamilton-Wentworth pay the cost of oversizing the water main in order to have capacity to provide water service where desired to identified properties abutting Highway 6 South from White Church Road to the Haldimand boundary;

. that Hamilton-Wentworth undertake capital works upstream of Mount Hope to be debt financed with cost recovery to occur via the rate Haldimand has been required to pay over the twenty (20) year term of the agreement; . that Haldimand agree to pay for all water delivered at one and one-half (1.5) times the rate that Hamilton charges for the supply of water to its consumers.

The 1994 agreement was for a 20 year term expiring on August 11, 2014, and the two parties have had several discussions leading to the proposed new agreement.

Haldimand has undertaken various water servicing related studies driven by the County’s interest in identifying a County-owned water supply to areas currently serviced by Hamilton (Caledonia and Cayuga), and to service any future development in the Lake Erie Industrial Park. To this end, Haldimand Council has approved a capital project to upgrade and provide additional capacity at the Nanticoke Water Treatment Plant (NWTP) that is expected to be complete by mid-2016. The commissioning of the upgraded/expanded NWTP would make the County self-sustainable from a water supply/treatment perspective. However, in order to displace the current requirement of Hamilton supplying potable water to Haldimand, a pipeline extension and other related transmission infrastructure from Hagersville to Caledonia would be required.

In light of Haldimand soon becoming self-sufficient from a water supply/treatment perspective, Hamilton staff entered into discussions seeking to retain Haldimand as one of Hamilton’s largest water customers. The proposed long-term agreement does provide for a mutually acceptable variable water rate that provides Hamilton ratepayers an appropriate rate of return over and beyond Hamilton’s cost to provide the water supply to Haldimand.

It is proposed that the new agreement will contain, at a minimum, the following terms and conditions:

. Haldimand agrees to pay for all water delivered at the rates as set out in recommendation (a) of Report FCS14048, where the total monthly water consumption charge is the sum of usage in all blocks at the rate for each block; 2014 to January 1, 2019 and thereafter 2018 Monthly Water Consumption Rate Rate Block (m3)/metered ($/m3) ($/m3) account Hamilton Water Rate + 10% 1 0 - 62,500 m3 $ 1.94 Operating Surcharge + 15% Return On Investment Hamilton Water Rate + 10% 2 > 62,500 m3 $ 1.46 Operating Surcharge

. minimum annual consumption requirement of 1.2 million m3 to ensure demand remains at least at current consumption levels providing some measure of revenue stability for Hamilton; . Haldimand agrees to pay fixed charges based on the size of the water meter at the rates that from time to time Hamilton charges to its water consumers within the City of Hamilton; . the term of the agreement will be 20 years effective August 1, 2014, with a potential renewal of two additional ten (10) year periods upon the same terms and conditions; . early termination by either party requires no less than ten (10) years notice; . provisions have been included with respect to interruptions of supply and impacts on water pressure; . such other content acceptable to the General Manager of Finance and Corporate Service and General Manager of Public Works.

Provisions of the proposed agreement are intended to achieve and maintain at a minimum, current consumption levels and to provide reasonable incentives to increase consumption. A lower cost per unit provided by the proposed Haldimand declining block pricing structure, provides cost effective water rates for Haldimand new development growth and in turn, the increased consumption levels will enhance revenues for Hamilton. The proposed Haldimand variable water rate structure will reduce revenues from that forecast in the 2014-2023 Rate Supported Strategy as presented to Council in December 2013 (refer to Report FCS13082/PW13085). However, staff have identified a number of rate revenue increases that are expected to more than offset the new Haldimand pricing impact as described in detail in the Analysis and Rationale for Recommendation section of this report.

The proposed agreement ensures Haldimand remains as one of Hamilton’s largest water customers through the provision of a mutually acceptable variable water rate that provides Hamilton ratepayers an appropriate rate of return over and beyond Hamilton’s cost to provide the water supply to Haldimand.

Alternatives for Consideration – Not Applicable.

FINANCIAL – STAFFING – LEGAL IMPLICATIONS (for recommendation(s) only)

Financial: Given Hamilton’s favourable position of water treatment capacity and water supply, the continued supply of water to Haldimand and Halton provides revenue that, in part, offsets rate revenue pressures that have been experienced in recent years from declining consumption across all water consumer sectors. In 2013, the water supplied to Haldimand was approximately 1.2 million m3 equating to approximately $2.1 million in water revenues. Haldimand represents Hamilton’s second largest individual water customer and accounted for approximately 2.7% of the total water revenues earned in 2013.

The proposed Haldimand rate structure will negatively affect the projected related revenues projected in the most recent approved 10 year rate forecast period (2014-2023). Forecast consumption over this period has been set at a constant assumption at just over 1.2 million m3 reflecting 2013 demand and the expectation of no appreciable growth to offset the ongoing conservation of the mostly residential Haldimand customer base.

The proposed pricing structure holds the current variable cost rate constant until 2019 after which the variable rate will increase over time reflecting the variable Hamilton water increases as approved by Hamilton Council. The resulting revenue impact to Hamilton’s 2014-2023 Rate forecast plan is outlined in the following table:

TABLE 1

HALDIMAND RATE STRUCTURE 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Rate Budget Assumptions Forecast Haldimand Consumption (m3) 1,201,180 1,201,180 1,201,180 1,201,180 1,201,180 1,201,180 1,201,180 1,201,180 1,201,180 1,201,180 Forecast Variable Water Rate Increase % 5.25% 2.30% 4.50% 3.60% 4.20% 4.00% 4.50% 4.30% 4.10% 4.00%

Forecast Rates Rate Budget 50% Premium Rate (Note 1) $ 1.94 $ 1.98 $ 2.07 $ 2.15 $ 2.24 $ 2.33 $ 2.43 $ 2.54 $ 2.64 $ 2.75 Proposed Haldimand Rate Structure $ 1.94 $ 1.94 $ 1.94 $ 1.94 $ 1.94 $ 1.94 $ 2.03 $ 2.11 $ 2.20 $ 2.29

Forecast Haldimand Revenues ($000's) Rate Budget 150% Premium Rate $ 2,330 $ 2,378 $ 2,486 $ 2,583 $ 2,691 $ 2,799 $ 2,919 $ 3,051 $ 3,171 $ 3,303 Proposed Haldimand Rate Structure $ 2,330 $ 2,330 $ 2,330 $ 2,330 $ 2,330 $ 2,327 $ 2,432 $ 2,537 $ 2,643 $ 2,748

Revenue Variance ($000's) Rate Budget Impact $ - ($ 48) ($ 156) ($ 252) ($ 360) ($ 471) ($ 486) ($ 514) ($ 529) ($ 556) Note: 1) A premium rate of 50% applied to Hamilton's water variable rates was assumed in the 2014-2023 Rate Budget in the absence of a new negotiated rate structure.

The proposed agreement does secure Haldimand as a major customer for Hamilton over the long-term and continues the annual revenue contribution of over $2.3 million for 2014 and beyond.

As noted previously, it is essential to ensure that Hamilton ratepayers are not adversely affected by external water supply arrangements. As such, staff have identified a number of revenue measures that are expected to mitigate the impacts identified above by the proposed new Haldimand pricing structure:

. Forecast 2014-2023 Haldimand Water Consumption – The ten year forecast was set with a constant annual consumption assumption of approximately 1.2 million m3 largely based on the 2013 experience. Based on discussions with Haldimand staff, it is anticipated that there will be increased water demand related to Caledonia growth and, depending upon the financial aspects of the new agreement, Haldimand may undertake pipeline capital works to extend their pipeline from Hagersville to Caledonia to facilitate Hamilton sourced water supply to Hagersville.

The proposed agreement introduces a declining block structure to act as an incentive for Haldimand to utilize more Hamilton sourced potable water in the future. The new pricing structure provides a lower cost per cubic metre after a set threshold, which, based on recent Haldimand water use, has been surpassed. It is reasonable to expect that Haldimand’s annual water consumption will exceed the ten year budget forecast assumption of 1.2 million m3 per year resulting in revenues that will partially offset the impact as presented in Table 1 to Report FCS14048.

. Newly Adopted Rate Related Fees – 2013 represented the initial full year of two new fees that have been approved by Council. The new fees have been implemented in order to address fairness and equity issues of specific situations as described below:

 Private Fire Line Fees - effective July 1, 2012, related to permanent unmetered services dedicated to the supply of water for private fire protection systems. This item was presented to Council in December 2011 (refer to Report FCS11099/PW11085) and staff estimates of the number of unmetered dedicated water lines servicing private fire protection systems has proven to be much lower than has been identified over the past two years. Consequently, the annual revenues from this new fee were estimated at $420,000. However, the 2014 annual private fire line budget is set at $600,000 and based on recent billings the 2015 budget will be set at $800,000.

 Construction Water Fees - effective January 1, 2013, related to unmetered City provided water used during new construction recognizing that unmetered water is used for construction purposes for some length of time until a water meter is installed and further supported user fee principles. The 2014 budget for construction water fees is set at $150,000 with the related 2015 budget expected

to increase due to forecast construction growth and variable water rate increases to which the construction water fees are linked.

. Water/Wastewater Warranty Protection Plans – Hamilton will generate commission revenues based upon the uptake of the service line warranty offerings in Q3 2014 (for details refer to Report FCS12044(a)). This new rate revenue source has not been incorporated into the Rate supported budget as Council had not approved awarding the related contract until April 2014. The forecast revenues to come from the vendor (Service Line Warranties of Canada) are expected to be in the range of $200,000 to $400,000 per year.

Staffing: No impact.

Legal: By entering into a new water supply agreement with Haldimand, Hamilton will commit to continuing to provide water to Haldimand, subject to the various terms and conditions contained within the new agreement. The fees and charges relating to the supply of water to Haldimand County and The Regional Municipality of Halton have historically been imposed through the City’s Water and Wastewater/Storm Fees and Charges By-law and Waterworks By-law (“By-laws”). With these water rates now being individually negotiated with Haldimand, they can be removed from the By-laws and imposed through a valid agreement entered into with Haldimand County. The fees and charges for the supply of water to The Regional Municipality of Halton have already been negotiated and imposed through an agreement entered into between Hamilton and Halton in 2011 (see Report FCS11035).

HISTORICAL BACKGROUND (Chronology of events)

The Regional Municipality of Hamilton-Wentworth (now the City of Hamilton) and the Regional Municipality of Haldimand-Norfolk (now Haldimand County) entered into an agreement on August 11, 1994 incorporating the following terms and conditions:

. that Haldimand pay for the construction of a pipeline and related infrastructure for water transmission from Mount Hope to the Haldimand boundary (approximately 4kms in length) and ownership of these assets was transferred to Hamilton- Wentworth (now the City of Hamilton) upon completion; . that Hamilton-Wentworth pay the cost of oversizing the water main in order to have capacity to provide water service where desired to identified properties abutting Highway 6 South from White Church Road to the Haldimand boundary; . that Hamilton-Wentworth undertake capital works upstream of Mount Hope to be debt financed with cost recovery to occur via the rate Haldimand has been required to pay over the twenty (20) year term of agreement; . that Haldimand agree to pay for all water delivered at one and one-half (1.5) times the rate that Hamilton-Wentworth/Hamilton charges for the supply of water to its consumers; . 20 year term expiring on August 11, 2014.

Given that Hamilton currently has water treatment capacity beyond its own requirements and with Lake Ontario being its water source, it is in a position to provide Haldimand with a secure supply of clean, safe water without negatively impacting the City’s own water customers. It should be noted that Hamilton also provides water to Halton Region albeit at a much less significant amount than that provided to Haldimand at approximately 10% of Haldimand’s consumption of 1.2 million m3 in 2013. Hamilton’s ability to provide a supply of water to neighbouring communities by utilizing existing infrastructure provides revenues that, in part, offset revenue pressures that have been experienced in recent years from declining consumption across all water consumer sectors.

Hamilton staff have been working closely with Haldimand staff to retain Haldimand as one of the City’s largest water customers via a renewed long-term agreement by developing a mutually acceptable variable water rate that provides Hamilton ratepayers an appropriate rate of return over and beyond the City’s cost to provide the water supply to Haldimand.

POLICY IMPLICATIONS AND LEGISLATED REQUIREMENTS Not Applicable.

RELEVANT CONSULTATION

City Manager’s Office – Legal Services Division has provided advice and guidance in developing the new water supply agreement.

Corporate Services Department – Financial Services, Risk Management Section, has provided input into the development of the new agreement.

Public Works Department – Hamilton Water Division has been consulted and supports the recommendation of entering into a new water supply agreement with Haldimand

Haldimand County – The new water supply agreement has been developed in a collaborative fashion between the two parties.

ANALYSIS AND RATIONALE FOR RECOMMENDATION

In 2013, the water supplied to Haldimand was just shy of 1.2 million m3 equating to approximately $2.1 million in water revenues. Haldimand represents Hamilton’s second largest individual water customer and accounted for approximately 2.7% of the total water revenues earned in 2013. In order to retain Haldimand as one of the City’s largest water customers, staff have actively engaged with Haldimand staff to develop a renewed long- term water supply agreement.

Haldimand Water Servicing Initiatives

Staff were provided details regarding the County’s studies and capital plans related to future Haldimand water servicing initiatives:

Nanticoke Water Treatment Plant Upgrade/Expansion Project

Haldimand Council has approved a capital project to upgrade and provide additional capacity at the Nanticoke Water Treatment Plant (NWTP) that is expected to be complete by mid-2016. This project was driven by the County’s interest in identifying a County- owned water supply to areas currently serviced by Hamilton (Caledonia and Cayuga), and to service any future development in the Lake Erie Industrial Park. The commissioning of the upgraded/expanded NWTP would make Haldimand self-sustainable from a water supply/treatment perspective. However, in order to displace the current requirement of Hamilton supplying potable water to Haldimand, a pipeline extension and other related transmission infrastructure from Hagersville to Caledonia would be required.

Highway 6 Corridor Study

Initiated in 2012 and expected to be complete in 2014, the purpose of the study is to develop a servicing strategy for providing water to urban centres along Highway 6 within Haldimand currently serviced by Hamilton, First Nations in the area and surrounding municipalities including the County of Norfolk, the Region of Waterloo, the City of Guelph and the County of Brant.

The possible water servicing alternatives being considered include:  Expansion of the Nanticoke system that currently terminates at Hagersville extended to Caledonia  Renewing the Hamilton water supply agreement with the possibility of system expansion from Caledonia to include some or all of the Nanticoke system  Groundwater supply options for Caledonia and Cayuga

New Haldimand Rate Structure

Staff have recognized that Hamilton-Wentworth undertook capital works upstream of Mount Hope in order to provide the required water supply to the pipeline extension which Haldimand constructed in the mid 1990’s. The Region debt financed the upstream capital works with the associated cost recovery to occur via the 50% premium rate Haldimand has been required to pay over the 20 year term of the existing 1994 agreement. The Region/City has recouped this cost of capital over the term of the agreement and as such, a mutually acceptable variable water rate needs to be developed for a new agreement.

Hamilton and Haldimand jointly engaged a third party consultant to review other Ontario water supply agreements to guide the development of a variable charge rate for the new agreement and to assess Hamilton’s cost of providing water service to Haldimand. The

sample review of various Ontario municipal water supply agreements reflected that rates reflect full cost recovery considering operating costs, capital investment and life-cycle replacement costs. In some cases, a return on investment and an operating cost surcharge related to the provision of an external water supply were also factored into the development of a variable rate.

Staff from both parties have had several discussions with the objective of developing a mutually beneficial arrangement that maintains Haldimand as a major user of Hamilton potable water over the long term. Provisions of the new proposed agreement are intended to maintain at a minimum, current consumption levels and to provide reasonable incentives to increase consumption. The lower cost per unit of the proposed Haldimand declining block provides cost effective water rates for Haldimand new development growth and in turn, the increased consumption levels will enhance revenues for Hamilton.

It is proposed that the new agreement will contain, at a minimum, the following terms and conditions:

. Haldimand agrees to pay for all water delivered at the rates set out in recommendation (a) of Report FCS14048, where the total monthly water consumption charge is the sum of usage in all blocks at the rate for each block; . minimum annual consumption requirement of 1.2 million m3 to ensure demand remains at least at current consumption levels providing some measure of revenue stability for Hamilton . Haldimand agrees to pay fixed charges based on the size of the water meter at the rates that from time to time Hamilton charges to its water consumers within the City of Hamilton; . the term of the agreement will be 20 years effective August 1, 2014, with a potential renewal of two additional ten (10) year periods on the same terms and conditions unless otherwise agreed to by both parties; . early termination available to either party which requires no less than ten (10) years notice; . provisions have been included with respect to interruptions of supply and impacts on water pressure; . such other content acceptable to the General Manager of Finance and Corporate Service and General Manager of Public Works.

ALTERNATIVES FOR CONSIDERATION

Not applicable.

ALIGNMENT TO THE 2012 – 2015 STRATEGIC PLAN Strategic Priority #2 Valued & Sustainable Services WE deliver high quality services that meet citizen needs and expectations, in a cost effective and responsible manner. Strategic Objective 2.1 Implement processes to improve services, leverage technology and validate cost effectiveness and efficiencies across the Corporation.

APPENDICES AND SCHEDULES ATTACHED Not applicable.