Lexington has negotiated a new five-year franchise agreement with Kentucky American Water. It will replace a 20-year agreement that expired in April.
In addition to a shorter franchise term, the new agreement increases penalties for noncompliance of the terms. It keeps the franchise fee — the amount Kentucky American Water pays the city — at the same rate: 3 percent of the company's gross revenue.
Mason Miller, a lawyer who negotiated the franchise agreement for the city, told the Urban County Council during a special meeting Thursday that the city has the option to increase the franchise fee to 5 percent over the next five years. However, the water company is allowed under state Public Service Commission rules to charge its customers for the fee.
The relationship between the city and the water company has been tense and rancorous at times. Frustrations over water rate increases and other problems nearly a decade ago led to a failed attempt by the city to take over the water company.
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Miller told the council during Thursday's meeting that the franchise agreement mirrored those the city has with Kentucky Utilities, Columbia Gas and Time Warner Cable. The agreement has options for two five-year extensions, Miller said.
Kentucky American wanted a much longer franchise agreement, which is one of the reasons negotiations dragged on long past April, Miller said.
The city is working on an ancillary agreement with Kentucky American Water to address other issues between the company and the city, including how much the utility will pay the city if a water main breaks, damaging streets and other city infrastructure.
"We have resolved most of those issues and are in the process of signing an ancillary agreement," Miller said.
Councilwoman Jennifer Mossotti questioned whether the city had considered another effort to buy the water company.
Miller said the city decided that would be too costly.
Miller said the previous franchise agreement did have some penalties for non-compliance. Under the new agreement, those fines will increase from $100 a day to $500 a day.
Councilman Jake Gibbs asked whether it was possible to charge Kentucky American Water more, considering it is a for-profit company.
David Barberie, a city attorney, reminded Gibbs that if the city increases the franchise fee, the Public Service Commission allows Kentucky American Water to pass along that increase to its customers.
The Public Service Commission regulates utility companies and determines how much a utility may charge customers.
Barberie also told the council that under state statute, the current franchisee has the right to negotiate a new franchise agreement even if the franchise agreement is bid.
The council is expected to vote to advertise the bid for the city's water franchise in coming weeks. Kentucky American Water — or any other potential bidder — must respond to the bid. Then the council must approve the franchise agreement.
Miller said the city and Kentucky American Water were operating now under the prior franchise agreement.