For years, San Antonio Water System had been trying to end a water contract with the agency that oversees Medina Lake costing San Antonio ratepayers $3 million every year for water the utility doesn’t use.

But a few lines in a revenue bond application from the Bexar-Medina-Atascosa Counties Water Control and Improvement District No. 1 led SAWS officials to wonder whether the small water district had been negotiating in good faith. Now the contract is the subject of a lawsuit, and the two parties are in mediation pending a trial.

The water contract, which SAWS inherited in 2012 when it absorbed the Bexar Metropolitan Water District, is with the Bexar-Medina-Atascosa Counties Water Control and Improvement District No. 1, or BMA.

SAWS’ $3 million annual payment makes up roughly three-quarters of the water district’s annual income and entitles SAWS to take up to 19,974 acre-feet of water per year from Medina Lake. An acre-foot is equal to 325,851 gallons.

Once it inherited the contract, SAWS attempted to use the water.

The utility quickly found, however, that the water was unusable — too low-quality to drink, and very expensive to make potable. Since then, SAWS has been trying to negotiate an end to the contract with the small water district, which is led by seven elected board members from the surrounding rural communities.

But when BMA went to the Texas Commission on Environmental Quality in 2022 seeking approval to issue $12 million in bonds, SAWS learned that BMA was guaranteeing the new debt by relying on income from the SAWS contract over the next 20 years. To SAWS officials, it was a signal BMA had no intention of letting go of the contract. The San Antonio Report obtained the bond application through an open records request to the TCEQ.

“That was the tipping point — where we knew we had to do something,” said SAWS President and CEO Robert Puente.

Awaiting a decision

SAWS filed a lawsuit in June against BMA seeking an end to the contract. SAWS is seeking a declaratory judgment from a judge, asking him or her to look at the contract, declare it is against public policy and mediate an end to the agreement.

The two entities are in mediation while they await further action, but no resolution has been reached, said Gavino Ramos, SAWS vice president of communications and external affairs. The deadline for BMA to respond to the lawsuit is Oct. 9. Once that happens, SAWS likely will receive dates for initial hearings and scheduling orders, he said.

To date, SAWS has paid BMA more than $28 million under the contract. If the utility is forced to stay in the agreement through its expiration date in 2049, San Antonio ratepayers will fork over an additional $78 million or more.

Gabriel Eckstein, the director of Texas A&M University’s Energy, Environmental and Natural Resources Systems Law Program, said he’s not sure if SAWS will be able to get out of the contract.

“I’m a little skeptical,” Eckstein said. “Based on what I’m seeing, … SAWS is now the responsible party. … I don’t know how you get out of this, other than to negotiate it away.”

SAWS customers aren’t the only ones who would benefit from the contract ending. A group of Medina Lake residents say the lawsuit could force the BMA to operate in a more transparent manner and lead to more effective management of the lake’s water.

The San Antonio Report made numerous attempts to seek comment on the lawsuit from the BMA and its board members. Office manager Bonnie Sallee declined a reporter’s calls, did not respond to emails and rejected an in-person request for comment.

Desperate for water

As growth on the city’s North Side exploded in the early 2000s, the BexarMet water district increasingly came under pressure to secure new sources of water. Established by the Texas Legislature in 1945, the water district served sections of Bexar County mostly on the county’s outer edges.

Approximately 60% of BexarMet customers resided within San Antonio city limits, although the district also served customers in Somerset, Castle Hills, Hill Country Village, Hollywood Park, Bulverde and portions of Converse.

In the late 2000s, BexarMet began running into water supply issues, having trouble meeting the demand of its growing number of ratepayers. It even resorted to trucking water into some areas at times.

Desperate for alternative water sources, BexarMet entered what’s known as a take-or-pay contract with BMA. It stipulated that BexarMet was allowed to take up to 19,974 acre-feet of water per year from Medina Lake, but even if it didn’t do so, or even if the lake was empty, it still had to pay BMA each month. This type of contract is not uncommon in Texas, Eckstein said.

The rate has increased from $69 per acre-foot of water in 2007 to $157 per acre-foot in 2022, according to financial documents.

Attempts to negotiate

At first, SAWS tried to make the contract work, said Donovan Burton, SAWS vice president of water resources and governmental relations.

“We explored a number of different options,” he said.

Those options included building a water plant near the lake to try to clean the water up, using the water as SAWS would use recycled water, taking the lake’s water and storing it in an aquifer storage reservoir, offering BMA Edwards Aquifer recharge credits, even offering funds to support BMA employees as the water district transitioned to other sources of revenue, Burton said.

While SAWS utilized and treated water from Medina Lake for about a year under the contract, by April 2013 the lake water’s quality became too poor due to drought to be treated at SAWS’ ultrafiltration plant. SAWS chose to stop taking water for the time being.

In October 2015, SAWS began taking the lake water again — but because the quality was still too poor, SAWS stopped just a month later. Getting the ultrafiltration plant up and running full-time would have cost SAWS $30 million to $50 million, Burton estimated.

That’s when SAWS knew it was time to really push to end the contract, Burton said, at which time SAWS staff and BMA staff began meeting to discuss options.

Each option hit roadblocks due to cost or time restraints, he said. BMA didn’t want to end the contract, Burton said.

“They … liked the contract,” he said. “They don’t have to do anything for it and they get money for it, so they like the contract as it is.”

Banking on SAWS revenue

The point at which SAWS realized things were not going to resolve easily was when they became aware of BMA’s $12 million bond request through public channels last year, SAWS Chief Financial Officer Doug Evanson said.

In its bond issuance application to the TCEQ, which has jurisdiction over Texas water districts but limited powers over BMA, the BMA explained the $12 million in bond revenue would be used to rehabilitate Chacon Dam and spillway, which suffered severe damage during a storm event in 2007. The application was submitted to TCEQ in late 2022 and approved by the state agency in April.

“We do monitor activity that goes on in the municipal bond market, particularly for those people that we have contractual relationships with,” Evanson said. “Given the magnitude of our revenue stream in their total funding, it would have appreciated if they had brought it to our attention before they got so far along. They did not do that. So that was disappointing.”

The application packet includes BMA’s 2021 financial report, which breaks down the water district’s annual income into three sections: municipal water sales, irrigation water sales and fixed water assessments. The entirety of BMA’s municipal water sales — all $3 million — come from its contract with SAWS. The packet showed BMA would have been paying off the new debt with SAWS-backed revenue through at least 2042, with the existing contract set to run through 2049.

SAWS trustees gave to OK to file the lawsuit shortly thereafter.

In their suit, the utility claims the agreement violates the Texas Water Code because the terms of the contract are not “’just and reasonable and without discrimination’ as required by the statute,” and that the terms of the agreement are “in violation of public policy.”

Eckstein said he’s not so sure SAWS will be able to prove its claims, however.

“If [SAWS] truly inherited [the contract], I’m not sure they can do anything about it,” he said. “A contract’s a contract — you can contract for almost anything in this world, so long as it’s not illegal. And even if it looks one-sided, as long as it’s not illegal, it’s allowed.”