For the 10th year in a row, the North Texas Municipal Water District has increased water rates to its member cities.

The NTMWD, a nonprofit wholesale water provider, is increasing its rates almost 10.5 percent, or 24 cents per 1,000 gallons. The rate will increase from $2.29 per 1,000 gallons to $2.53 per 1,000 gallons for fiscal year 2016-17.

For the city of McKinney, that equals $26.5 million owed to the NTMWD for the upcoming fiscal year. Because of this increase, the city, for the second year in a row, is passing along the NTMWD increase to its customers.

“The city currently cannot continue to draw down reserves to offset the increases passed on to us by the North Texas Municipal Water District, so ultimately [city water] rates will increase,” McKinney Mayor Brian Loughmiller said. “In the [city’s] most recent presentation pertaining to the rate study, 62 percent of the rate is directly attributable to the rates charged by the water district. Only 18 percent is based on [city] operations.”

Loughmiller said the district’s rate hike will cause 70 percent of the increases to the average McKinney resident’s water bill.

The city of McKinney joins the 12 other water district member cities—which are spread throughout portions of 10 North Texas counties—in finding ways to pay for the increasing cost of water.

According to NTMWD, rates are projected to increase 29 cents per 1,000 gallons in FY 2017-18 and an additional 28 cents in FY 2018-19. Rates are projected to continue to increase until at least FY 2033-34, when the projected water rate is estimated to be $4.26 per 1,000 gallons.

Loughmiller said in addition to the challenge of increasing water costs comes the challenge of the take-or-pay system, which requires a city to pay for the maximum amount of water it has used in a year at any point in its history. The amount of water paid for by the city does not waver.

“We are required to pay for water we don’t use based on our allotment, so it does not incentivize conservation that is ultimately necessary,” he said. “In the meetings I have attended, I have not seen an alternative to take-or-pay that would provide relief to our residents, and in fact potentially could cost us more due to McKinney being a developing city as opposed to other cities in the system that are built out.”

The water district is discussing with its member cities the potential for using a different structure to allocate the regional system costs that would reward conservation, said NTMWD public relations manager Janet Rummel.

Loughmiller said the city has discussed the possibility of creating a stabilization fund in the future that could offset some of the increased costs and will continue these discussions as the city looks for solutions to the rate issues.

District challenges

Rummel said there are three factors driving water rate increases: costs associated with rehabilitation and replacement of aging infrastructure, complying with strict state and federal regulation requirements, and finding additional water supplies to support the district’s rapidly growing service area.

The population in the NTMWD’s service area in 2015 was 1.6 million. By 2040, the district is projecting a population of 2.5 million residents. By 2070,  there could be as many as 3.7 million people.

Since 2006, district officials said NTMWD has spent nearly $1.05 billion in supplementing existing supplies, complying with mandated regulations and working to develop additional water sources. Rummel said these projects are primarily the reason for increases to its wholesale water rate.

“Adequate funding through rates is required to cover increasing fixed costs and repay bonds for capital projects,” Rummel said. “From [fiscal years] 1993 to 2001, NTMWD held water rates flat while the population in our communities grew by more than a quarter-million people. With the continued significant growth projected, NTMWD could no longer wait to invest in new [water] supplies and infrastructure.”

A multiyear drought and regulatory challenges, such as a $125 million ozone-disinfection project at the Wylie water treatment plants, and a $300 million pipeline to circumvent infectious zebra mussels in Lake Texoma, drove rate increases, Rummel said.

In addition, the high population growth projection in the district—particularly in Collin County—requires the water district to work ahead now to supply water for the future, she said.

Rummel said the NTMWD is closely monitoring major developments in its service area, including Legacy West in Plano, the $5 Billion Mile in Frisco, Watters Creek in Allen and CityLine in Richardson. West McKinney, which is largely undeveloped, is also closely watched for its development potential, she said.

Since 2006, the district has been working on land acquisition and permitting for the Lower Bois d’Arc Creek Reservoir in Fannin County. The district has already spent more than $125 million, and the total cost of the project is projected at $1.2 billion. This water source is expected to supply the district’s water needs through 2040.

Construction of the reservoir has been pushed back two years because of a fall 2015 delay in receiving a federal permit. Construction is now expected to start in 2018 with completion projected for 2022.

Covering a service area as large as the one NTMWD is responsible for, combined with the growing Texas population, means a substantial amount of pipe to maintain and additional infrastructure to be installed, said Tommy Holmes, the legislative director for the American Water Works Association. The Colorado-based organization is the largest nonprofit, scientific and educational association dedicated to managing and treating water.

“Building a new reservoir—that’s a big deal. It’s difficult to get one built in the first place because there’s a lot of permitting involved,” Holmes said. “[The NTMWD is] to be saluted for looking forward and trying to anticipate future needs.”

Construction costs on any water project, including the reservoir, trend higher every year, said Cesar Baptista, assistant deputy director of engineering for the NTMWD. He said the ENR Construction Cost Index, which is typically consulted by the construction industry, tend to increase by about 3 percent every year. Baptista said increased construction costs are also caused by the same reason the district needs additional water supply—rapid growth in the North Texas area.