The US Army Corps of Engineers expanded the capacity of the Washington Aqueduct after World War I, to increase the supply of water to Washington DC. The Corps started to provide drinking water to Arlington County and Falls Church in the late 1920's, when those communities were urbanizing and the economy of Fairfax County was still based on farming.1
Fairfax County had over 20 fragmented water systems after World War II, rather than the centralized county-run Fairfax Water system of today. One of the separate water systems meeting the needs of Fairfax residents was the municipal utility of the City of Falls Church.
Falls Church became an independent city in 1948. Separating from Fairfax County meant local taxes could be directed to improve the local schools, rather than used to finance new facilities in other areas of Fairfax County far from Falls Church. The independent city attempted to grow beyond its old town boundaries by annexing territory of Fairfax County, expanding the tax base of Falls Church while shrinking the county's revenue as well as the county's land. However, the county resisted changes in the boundaries of Falls Church. Virginia judges ruled in favor of Fairfax County, rejected the city's annexation proposals, and froze the size of Falls Church.2
In 1957, the county supervisors created the Fairfax County Water Authority (now Fairfax Water), to centralize water supply. From the beginning, all members of the water utility's board have been appointed by the elected supervisors of Fairfax County. Operations of the Fairfax Water utility may be technically independent of the operations of Fairfax County government, but the plans/policies of the utility have been closely aligned with the plans/policies of Fairfax County government.
However, in 1957 Fairfax County lacked a reliable water supply and it lacked a system to distribute drinking water throughout the county. Despite the political competition between juridictions, the City of Falls Church agreed to provide drinking water to nearby parcels located in Fairfax County.
In 1959, the new Fairfax County Water Authority and the City of Falls Church signed a 30-year agreement allowing the city to deliver water to customers who were located in the county. Falls Church had plenty of drinking water available in pipes just across the city boundary, thanks to the capacity of the US Army Corps of Engineers to supply the demand.
Under the service agreement between Fairfax and Falls Church, some county residents/businesses near Falls Church were supplied with water that had been diverted from the Potomac River above Great Falls, piped to the Dalecarlia Reservoir on the edge of the District of Columbia, and then shipped back across the Potomac River to Falls Church.
In 1959, exporting water across the city/county boundary was a good arrangement for both jurisdictions. New development on vacant land near Falls Church increased property tax revenues for Fairfax County, while the City of Falls Church got new customers willing to pay a premium price for its water. From an engineering perspective, it was easy for Falls Church to expand its existing distribution system to supply water to the new developments - though the judges responsible for boundary adjustments would not allow the city to annex that land.
For developers in the 1950's and 1960's, the alternative to using the Falls Church utility was to wait until Fairfax County built a new set of pipes to that particular undeveloped section of the county. The county benefitted from expansion of the Falls Church - and Vienna/City of Fairfax - water systems into the county, because developed land generated extra tax revenues.
City residents benefitted from the excess revenues generated by the city's water sales outside the city's boundaries. Monthly water fees paid by Fairfax (and Falls Church) customers created a significant profit, above the costs of purchasing water, maintaining the infrastruction of pipes/pumps/tanks, and billing customers. Since 92% of the city''s customers were located in Fairfax County, the annual profit was generated from customers who could not vote for officials that might change the utility's policies or water rates.
Each year, the city's utility profits were transferred to the city's General Fund, allowing the City Council to set lower tax rates. The subsidy from the city's water utility reduced the property taxes that city residents otherwise would have had to pay, in order to operate the city's school system and provide other services inside Falls Church.
As Fairfax County grew rapidly after 1960, the county utility's infrastructure began to overlap the area being serviced by the Falls Church water utility. The 30-year agreement expired in 1989, without generating any action. Falls Church officials appparently assumed the city would maintain exclusive rights to provide water to developing parcels in its traditional service area within Fairfax County, and no one proposed to define specific boundaries for the city's authorized service area outside the city's boundaries.
Developers did not complain about the city's water charges, even though the Falls Church rates were higher than the rates charged by Fairfax Water. In late 2009, the city charged $3.03/1,000 gallons, while Fairfax Water charged only $1.83/1,000 gallons. Different utilities increased rates at separate times after 2009, but the difference in cost between jurisdictions remained significant.4
Why were developers satisfied with the relatively high cost of water from Falls Church? First, for many years the city system was the only source of supply in that portion of eastern Fairfax County. Developers financing projects on borrowed money could eliminate delay by purchasing water directly from the city. Speculating that the county water system might someday expand to the parcel being developed could involve many years of waiting...
Also, developers recognized that Falls Church charged a low initial cost for hookups to its water system. The low hookup fee reduced the construction costs of new buildings. Developers benefitted from the low up-front costs. The people saddled with the higher monthly fees charged by the city were the renters/buyers of the buildings after construction was completed, and the developers had moved on to new projects.
In 2005, Fairfax County decided to break the pattern. Fairfax Water offered to provide drinking water to developers in Merrifield, and near the Dunn Loring Metro station. That area was in the county, but also in the traditional water service district for Falls Church.
County officials apparently negotiated for proffers for new projects, and tried to commit developers to connect to the Fairfax Water system. In proffer negotiations in advance of a rezoning approval, Fairfax County officials had many opportunities to make concessions on transportation requirements, impact fees for new schools, or other elements that would offset the higher hookup costs to the Fairfax Water system. (Had Fairfax Water been a regional rather than a county-controlled utility, such tradeoffs would have been harder to arrange.)
The city objected to the county's efforts to "steal" potential customers and reduce the future profits of the city's water utility. In February, 2007, Falls Church filed a Federal lawsuit. It claimed that arrangements with the US Army Corps of Engineers to purchase Washington Aqueduct water provided the city with an exclusive right to sell water within a portion of Fairfax County.
In May, 2007, a Federal judge rejected the city's various claims to exclusive utility service rights. In April 2008, an appeals court affirmed that decision. Then the water war escalated.
Falls Church refused to allow the developer of the Halstead Project in Merrifield to move city water lines, in order to connect to Fairfax Water. In response, Fairfax Water sued Falls Church in December 2008, filing in state court. The county accused the city of violating the Virginia Antitrust Act, by blocking legitimate competition between two possible suppliers for water at the Halstead Project. Fairfax Water not only asked for damages totally $21 million, but also asked the state judge to end the transfer of excess funds from the city's water budget to its General Fund.
On January 6, 2010, Fairfax Water won a clear victory. A state judge ruled that Falls Church's transfer of water utility profits to the General Fund was an unconstitutional tax on people who lived outside the boundaries of the city. The decision blocked all future transfers, and called into question the legality of the October 2009 transfer. The city quickly capitulated, agreeing to pay Fairfax Water $750,000 for legal costs in exchange for release of the county's $21 million claim. Both parties agreed to allow competition for customers in Fairfax County; Falls Church would no longer object to its pipes being moved by customers seeking to connect to Fairfax Water.5
Falls Church appealed the ruling that blocked transfer of utility profits to its General Fund - and on September 1, 2010 the Virginia Supreme Court ruled against the city. By choosing to pick a legal fight over who could service customers in Fairfax County, in hopes of increasing future revenues, Falls Church lost its existing ability to impose an extra-territorial tax on Fairfax County customers. The city was blocked from generating excess revenues from 92% of its customers in Fairfax County, in order to keep tax rates low in the City of Falls Church. The state court saw the dispute as Fairfax Water described the situation, in its objections to the city's appeal:6
The answer was provided by the court system: such inflated rates were not legal. Falls Church lost the water war with Fairfax. To comply with the judge's ruling, city residents would have to pay a price: raise local taxes to make up for the lost profits from the water system, or lower services in order to reduce costs of city government.
Falls Church officials resisted making that hard choice - no politician wants to raise taxes or reduce services. After contracting with a water rate consultant, the city claimed it had to establish new reserve funds and expand the water system infrastructure to service new customers at Tysons Corner. The city raised rates 8% for the fiscal year starting October 1, 2011, with plans to increase costs a total of 30% by 2016. Since most of the city's water customers lived in Fairfax Cunty, most of the increased revenues would come from county residents who could not vote in Falls Church elections.
In December, 2011, the Fairfax County Board of Supervisors reacted. Fairfax County decided to set water rates for all county residents, no matter who supplied the water, and to prohibit utilities other than Fairfax Water from servicing new customers in the county. The utility rate control ordinance said:7
Opposition to the county monopoly came from Falls Church, of course. The city feared it would be unable to recover the investment to upgrade water facilities in anticipation of new demand as Tysons Corner redevelops, creating "stranded costs." The town of Vienna and the City of Fairfax also challenged the county's monopoly. In addition, the developer of Tysons 2 Center noted that the existing water pipes for that development had been sized for future connections with Falls Church, and the new policy could require the developer to fund costs for duplicative infrastructure.8
In early 2012, Falls Church decided to escape the legal fight with Fairfax County by auctioning the city's water distribution and sewer system to the highest bidder. The city obtained an appraisal that valued the water distribution system at $40-$53 million, assuming new owners would be able to maintain the income levels based on current water rates, and set a minimum sale price of $44 million.9
Negotiations failed to arrange a direct sale to the Fairfax County Water Authority (Fairfax Water), because the county would not commit to paying anything for the infrastructure. According to Fairfax County, the 92% of utility customers living in the county had already paid 92% of the cost to construct the city's system. The county would assume responsibility for the utility, but would not give Falls Church a $44 million cash payment - or any cash, for that matter.
Just 24 hours before the auction to privatize the utility, after nine potential bidders had responded to the city's Expression of Interest (including Fairfax Water), the Army Corps of Engineers changed the legal interpretation of its contract. The Corps decided that it would be unable to provide water to an investor-owned utility, and could only service a government-owned water distribution system. By June, 2012, Falls Church had spent over $1 million in legal fees on the water war with Fairfax County.10 In July, negotiations for a transfer/merger/sale between Fairfax Water and Falls Church failed to resolve the dispute.11
The water distribution system, and the rate for water sold in the county by utilities other than Fairfax Water, could be resolved only after a court ruled on the county's utility rate control ordinance - or the city/county resolved their differences through mediation. The mediation effort, designed to arrange for Falls Church to sell its water sytem to Fairfax County, was announced on October, 2012.12
Mediation was successful, and an agreement was announced on November 20, 2012 for Fairfax Water to acquire the Falls Church water system assets in January, 2014 (assuming approval of the deal by Falls Church voters in the November, 2013 election). The county water system will pay $40 million for the city water system, but will not assume the city's debt and pension obligations (approximately $30 million). The high city water rates will be lowered to county levels within two years, benefitting the 90% customers of the city water system who live in the county as well as the 10% who are residents of Falls Church.13
As part of the bargain, the City of Falls Church got to annex nearly 40 acres of land near the West Falls Church Metro station currently occupied by city schools. The agreement required that 70% of that annexed land stay dedicated to school uses for the next 50 years, limiting the economic potential - but the city may develop 12 acres immediately. A 12-acre parcel next to the Metro offered Falls Church a great opportunity to increase revenue from the property.14