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.
Falls Church became an independent city in 1948, so local taxes could be directed to improve the local schools. The city agreed to provide drinking water to nearby parcels located in Fairfax County. (The city attempted to annex territory of Fairfax County, expanding Falls Church and shrinking the county, but Virginia judges ruled in favor of Fairfax County. The judges rejected the city's annexation proposals and, in effect, froze the size of Falls Church.)
Fairfax County had over 20 fragmented water systems after World War II. 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.
In 1959, the new Fairfax County Water Authority and Falls Church signed a 30-year agreement allowing the city to purchase drinking water from the county and to deliver that water to customers who were located in the county. In 1959, that was a good arrangement for both jurisdictions. New development near Falls Church increased tax revenues for Fairfax County, and it was easier for Falls Church to expand its existing distribution system to supply water to the new development.
The Town of Vienna established a similar pattern, servicing customers who were located in the county but near the edge of the town. The alternative was for developers to wait until Fairfax County built a new set of pipes to that section of the county, and for the county to go without the extra tax revenues during the delay.
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 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 Fairfax City 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.
Why were developers satisfied? In addition to the desire to speed approval of projects being financed on borrowed money, 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 those 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.
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 may no longer generate excess revenues from 92% of its customers in Fairfax County, in order to keep tax rates low in the City of Falls Church.
In the end, Virginia judges saw the dispute as Fairfax Water described the situation, in its objections to the city's appeal: "This is a dispute about whether a city-run water system can inflate its water rates in order to divert surplus revenues to the general fund so as to reduce local property taxes." 1 The answer is that such inflated rates were not legal. Falls Church lost the water war with Fairfax, and it appeared that city residents will have to pay the price by raising taxes/lowering services in order to make up for the lost revenues.
However, 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. In December, 2011, the Fairfax County Board of Supervisors reacted in order to reduce the cost of water to county residents. 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:2
Opposition to the county monopoly came from Falls Church, of course. The city fears it will be unable to recover the investment to upgrade water facilities in anticipation of new demand as Tysons Corner redevelops, creating "stranded costs." 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.3