B-162141, OCT. 18, 1967

B-162141, OCT. 18, 1967

LEASES - MODIFICATION - RETROACTIVE DECISION TO SECY. OF THE ARMY CONCERNING WHETHER MODIFICATION TO REDUCE RENTAL PAYMENTS TO GOVT. BY BELL COUNTY WATER CONTROL AND IMPROVEMENT DISTRICT IN TEXAS INCIDENT TO IMPROVEMENTS MADE BY LESSEE MAY BE MADE RETROACTIVE. EFFECTIVE DATE FOR RENTAL REDUCTION INCIDENT TO ADDITIONS AND IMPROVEMENTS MADE BY LESSEE TO WATER TREATMENT PLANT AND TRANSMISSION FACILITIES MUST BE FROM DATE OF LEASE MODIFICATION RATHER THAN FROM AN EARLIER DATE WHEN ADDITIONS AND IMPROVEMENTS WERE MADE SINCE THERE WAS NO CONSIDERATION MOVING TO THE GOVT. EXCEPT THE REMOVAL OF THE EXISTING LIMITATION ON THE WATER SUPPLY AND RIGHT TO ADDITIONAL CAPACITY WHICH BENEFITS ARE PROSPECTIVE.

TO MR. SECRETARY:

REFERENCE IS MADE TO LETTER DATED JULY 24, 1967, FROM THE DEPUTY ASSISTANT SECRETARY (INSTALLATIONS AND LOGISTICS), REQUESTING OUR DECISION AS TO WHETHER A PROPOSED REDUCTION IN RENTAL PAYABLE TO THE GOVERNMENT BY THE BELL COUNTY WATER CONTROL AND IMPROVEMENT DISTRICT NO. 1, TEXAS (THE LESSEE) UNDER LEASE NO. DA-41-443-ENG-4801, INCIDENT TO CERTAIN ADDITIONS AND IMPROVEMENTS WHICH THE LESSEE HAS MADE TO THE LEASED PROPERTY, MAY BE MADE RETROACTIVE TO MAY 1, 1966.

THE LEASE, WHICH WAS EXECUTED IN 1956 PURSUANT TO THE AUTHORITY IN THE ACT OF AUGUST 5, 1947, 61 STAT. 774, 10 U.S.C. 1270 (NOW CODIFIED AT 10 U.S.C. 2667), FOR THE LEASE BY THE MILITARY DEPARTMENTS, IN THE PUBLIC INTEREST, OF NON-EXCESS GOVERNMENT PROPERTY, PROVIDES FOR THE MAINTENANCE AND OPERATION BY THE LESSEE OVER A PERIOD OF 50 YEARS OF A WATER TREATMENT PLANT AND TRANSMISSION FACILITIES AT FORT HOOD MILITARY RESERVATION, TEXAS. UNDER THE TERMS OF THE LEASE, THE LESSEE WAS TO SUPPLY TO THE RESERVATION UP TO 80 PERCENT OF THE CAPACITY OF THE LEASED PROPERTY AS IT EXISTED ON THE COMMENCEMENT DATE OF THE LEASE, WHICH CAPACITY WAS STATED TO BE 7.5 MILLION GALLONS PER DAY (MGD), AND THE REMAINING CAPACITY WAS TO BE AVAILABLE FOR SALE BY THE LESSEE TO THE CITY OF KILLEEN (TEXAS) AND TO OTHER CIVILIAN CUSTOMERS OF THE LESSEE IN THE VICINITY OF THE RESERVATION. THE LESSEE WAS REQUIRED TO PAY TO THE GOVERNMENT A RENTAL OF 5.5 CENTS PER THOUSAND GALLONS OF WATER TREATED AT THE LEASED PROPERTY AND USED BY THE LESSEE FOR THE SUPPLY OF WATER TO ITS CIVILIAN CUSTOMERS, AND THE GOVERNMENT, IN TURN, WAS REQUIRED TO PAY TO THE LESSEE THE REASONABLE COST OF OPERATION AND MAINTENANCE OF THAT PORTION OF THE LEASED PROPERTY PROPERLY ALLOCATED TO THE FURNISHING OF WATER SERVICE TO THE RESERVATION AND REASONABLE ALLOWANCES FOR THE PROVIDING OF A MAINTENANCE, OPERATION AND REPLACEMENT RESERVE FUND, OVERHEAD COSTS AND LOSSES IN TRANSMISSION, ALSO APPLICABLE ONLY TO THE WATER SERVICE SUPPLIED TO THE RESERVATION. THE AMOUNT OF SUCH PAYMENTS WAS FIXED BY SEPARATE AGREEMENT AND WAS SUBJECT TO REDETERMINATION AND ADJUSTMENT AS REQUIRED AT PERIODIC INTERVALS NOT IN EXCESS OF ONE YEAR. IN ADDITION, THE LESSEE OBLIGATED ITSELF TO PROCEED WITH DILIGENCE TO ACQUIRE THE RIGHT TO APPROPRIATE NOT LESS THAN 2500 ACRE FEET OF WATER PER ANNUM FROM BELT ON RESERVOIR FOR DELIVERY TO ITS OTHER (I.E., NONMILITARY) CUSTOMERS.

CONDITION 3 OF THE LEASE CALLED FOR A SURVEY AND INVENTORY OF THE LEASED PROPERTY AT THE COMMENCEMENT OF THE LEASE AND FOR ADDITION TO THE INVENTORY OF SUCH ADDITIONAL PROPERTY, FIXTURES AND INSTALLATIONS AS WERE SUBSEQUENTLY FURNISHED BY OR AT THE EXPENSE OF THE GOVERNMENT OR OF THE LESSEE, EXCEPT SUCH PROPERTY AS REMAINED THE PROPERTY OF THE LESSEE BY AGREEMENT WITH THE DISTRICT ENGINEER UNDER CONDITION 13 OF THE LEASE OR BY SUPPLEMENTAL AGREEMENT TO THE LEASE. CONDITION 13 PROVIDED THAT NO STRUCTURES, ADDITIONS OR BETTERMENTS SHOULD BE PLACED UPON THE LEASED PROPERTY WITHOUT THE PRIOR WRITTEN APPROVAL OF THE DISTRICT ENGINEER AND THAT ALL SUCH STRUCTURES, ADDITIONS AND BETTERMENTS SHOULD BECOME THE PROPERTY OF THE GOVERNMENT WHEN ANNEXED UNLESS OTHERWISE PROVIDED BY SEPARATE AGREEMENT BETWEEN THE DISTRICT ENGINEER AND THE LESSEE. FURTHER, CONDITION 21 PROVIDED, IN PERTINENT PART, THAT NOTWITHSTANDING THE PROVISIONS OF CONDITION 13, THE LESSEE SHOULD HAVE THE RIGHT, SUBJECT TO THE SUPERVISION AND APPROVAL OF THE DISTRICT ENGINEER, TO CONSTRUCT FACILITIES AT THE LEASED PROPERTY FOR THE PURPOSE OF INCREASING THE CAPACITY OF THE WATER TREATMENT PLANT AND/OR TRANSMISSION FACILITIES TO A LIMIT SPECIFIED BY THE DISTRICT ENGINEER; HOWEVER, UNLESS OTHERWISE PROVIDED BY SUPPLEMENTAL AGREEMENT TO THE LEASE, ALL STRUCTURES, BUILDINGS, ALTERATIONS, MACHINERY OR OTHER IMPROVEMENTS MADE TO OR AT THE LEASED PROPERTY INCIDENT TO SUCH CONSTRUCTION WERE TO BECOME THE PROPERTY OF THE GOVERNMENT WHEN MADE.

UNDER CONTRACT NO. DA-41-093-AIV-1146, DATED SEPTEMBER 26, 1955, WHICH THE CONTRACTING OFFICER AT FORT HOOD ENTERED INTO WITH THE LESSEE FOR THE FURNISHING OF WATER SERVICE TO THE RESERVATION, THE ESTIMATED SERVICE REQUIREMENT FOR THE RESERVATION WAS STATED TO BE 6.0 MGD (I.E., 80 PERCENT OF THE 7.5 MGD CAPACITY STATED IN THE LEASE), AND THE GOVERNMENT AGREED TO PAY FOR SUCH WATER SERVICE A RATE OF 10 CENTS PER THOUSAND GALLONS, WHICH RATE INCLUDED 0.27 CENTS PER THOUSAND GALLONS FOR THE MAINTENANCE, OPERATION AND REPLACEMENT RESERVE FUND, SUBJECT TO ADJUSTMENT 30 DAYS AFTER COMMENCEMENT OF SERVICE AND PERIODICALLY THEREAFTER. AS WITH THE LEASE, THE CONTRACT INCLUDED A PROVISION OBLIGATING THE LESSEE TO OBTAIN WITH DUE DILIGENCE THE RIGHT TO APPROPRIATE WATER FROM THE BELT ON RESERVOIR FOR DELIVERY TO ITS OTHER CUSTOMERS; HOWEVER, PENDING ACQUISITION BY THE LESSEE OF ITS OWN SOURCE OF SUPPLY, THE GOVERNMENT AGREED TO SELL SURPLUS WATER TO THE LESSEE. A FURTHER PROVISION PERMITTED EITHER PARTY TO BUY SURPLUS WATER AT THE RATE OF 3-1/3 MILLS PER 1,000 GALLONS, SUCH PRICE ALSO BEING SUBJECT TO REVIEW AND REVISION.

BASED ON THE 7.5 MGD CAPACITY REFLECTED IN THE LEASE FOR THE WATER SYSTEM AS IT EXISTED IN 1956, THE 80-PERCENT SHARE ALLOTTED TO THE GOVERNMENT WOULD BE 6.0 MGD, AS ESTIMATED IN THE CONTRACT, AND THE 20 PERCENT SHARE ALLOTTED TO THE LESSEE WOULD BE 1.5 MGD. HOWEVER, BOTH PARTIES HAVE INDICATED THAT THEY HAVE REGARDED THE CAPACITY OF THE ORIGINAL SYSTEM AS 9.6 MGD, WHICH WOULD MAKE THE ALLOTTED SHARES 7.68 MGD FOR THE GOVERNMENT AND 1.92 MGD FOR THE LESSEE. WE DO NOT HAVE RECORDS OF DAILY CONSUMPTION, BUT THE MONTHLY RECORDS SHOW THAT ON THE BASIS OF A THIRTY DAY MONTH THE GOVERNMENT'S USE OF WATER EXCEEDED 230 MILLION GALLONS (30 TIMES 7.68) IN ONLY ONE MONTH (JULY 1966) UP TO JUNE 1967. THE RECORDS FURTHER SHOW THAT ON THE BASIS OF THE TOTAL VOLUME OF WATER PASSED THROUGH THE PLANT EACH MONTH THE GOVERNMENT HAS NEVER RECEIVED MORE THAN 70 PERCENT AND THE DISTRICT HAS NEVER HAD LESS THAN 30 PERCENT FOR ITS OTHER CUSTOMERS.

IT IS REPORTED THAT IN SEPTEMBER 1960 THE LESSEE DISTRICT REQUESTED AND WAS GRANTED AUTHORITY TO INCREASE THE FILTER RATE IN THE WATER TREATMENT PROCESS FROM 2 TO 3 GALLONS PER MINUTE PER SQUARE FOOT OF FILTER AREA, WHICH INCREASED THE CAPACITY OF THE PLANT TO 12 MGD, PRIOR TO ANY PLANT IMPROVEMENTS OR ADDITIONS. THIS IS BORNE OUT BY THE RECORDS, WHICH SHOW TOTAL MONTHLY WATER OUTPUTS IN EXCESS OF 394 MILLION GALLONS IN JULY 1964 AND 398 MILLION IN JULY 1965. IN A LETTER DATED APRIL 20, 1966, TO THE DISTRICT ENGINEER THE PRESIDENT OF THE DISTRICT STATED THAT "THE ORIGINAL GOVERNMENT PLANT HAS A RATED MAXIMUM CAPACITY OF 11.25 MILLION GALLONS DAILY.'

BY LETTER OF NOVEMBER 15, 1965, THE DISTRICT, REFERRING TO PREVIOUS DISCUSSIONS, ADVISED THE COMMANDING GENERAL, FORT HOOD, OF ITS POSITION THAT THE LEASE SHOULD BE REVISED BECAUSE OF CHANGES OF CONDITIONS WHICH HAD OCCURRED SINCE THE EXECUTION OF THE LEASE, INCLUDING THE CONSTRUCTION BY THE DISTRICT OF CERTAIN ADDITIONAL FACILITIES AND THE GOVERNMENT'S DESIRE TO INCREASE THE FORT HOOD WATER SUPPLY. THE LETTER CONTAINED THE DISTRICT'S SUGGESTIONS AS TO THE TERMS OF ADJUSTMENT, WHICH INCLUDED A PROVISION THAT THE RENTAL PROVIDED IN THE EXISTING LEASE BE ELIMINATED, AND THAT THE GOVERNMENT SHOULD HAVE EXCLUSIVE RIGHT TO UTILIZE 10 MILLION GALLONS PER DAY OF THE TOTAL CAPACITY OF THE COMBINED FACILITIES. SIMILAR TERMS WERE OUTLINED IN A LETTER OF DECEMBER 7, 1965, FROM THE DISTRICT TO THE DISTRICT ENGINEER, FORT WORTH.

ALTHOUGH IT IS INDICATED THAT NEGOTIATIONS CONTINUED BETWEEN THE PARTIES, WE HAVE NO DETAILED INFORMATION CONCERNING THEM, EXCEPT THAT NEITHER PARTY WAS WILLING TO ACCEPT THE TERMS PROPOSED BY THE OTHER. BY LETTER DATED DECEMBER 27, 1966, THE FORT WORTH DISTRICT ENGINEER ADVISED THE LESSEE OF THE REVISED TERMS WHICH WOULD BE ACCEPTABLE TO THE GOVERNMENT. IT IS REPORTED THAT THESE TERMS HAD BEEN PROPOSED ORALLY BY THE GOVERNMENT IN AUGUST 1966 AND REJECTED. THE LETTER PROPOSED THAT THE RENTAL PAYABLE BY THE LESSEE BE REDUCED TO A PER ANNUM CHARGE OF $20,455.05 FOR THE USE OF CERTAIN GOVERNMENT PROPERTY ESSENTIAL TO THE OPERATION OF THE FACILITIES FINANCED BY BOTH PARTIES,AND INCLUDED THE FOLLOWING PERTINENT LANGUAGE:

"IN RETURN FOR THIS RENTAL ADJUSTMENT, THE LEASE WOULD BE FURTHER MODIFIED TO ASSURE AN ADEQUATE SUPPLY OF WATER TO THE DEPARTMENT OF THE ARMY BASED ON THE FOLLOWING FACTORS.

"EVALUATION OF PERTINENT FACTORS INDICATES THAT THE PRESENT FACILITIES AFFORD SUFFICIENT PRODUCTION AND DISTRIBUTION CAPABILITY TO MEET PRESENT AND FORESEEABLE WATER REQUIREMENTS OF BOTH THE GOVERNMENT AND THE COMMUNITIES BEING SERVICED THEREBY FOR THE LIFE OF THE CONTRACT. UNDER THESE CIRCUMSTANCES, IT IS CONSIDERED THAT NO PRECISE LIMITATION IN TERMS OF A SPECIFIC NUMBER OF GALLONS OF WATER A DAY SHOULD BE PLACED ON EITHER PARTY, BUT THAT THE LEASE SHOULD BE AMENDED TO PROVIDE THE FOLLOWING:

"A. THE LESSEE WILL CONTINUE TO OPERATE AND MAINTAIN THE ENTIRE SYSTEM UNDER THE LEASE.

"B. THE GOVERNMENT WILL CONTINUE TO REIMBURSE THE LESSEE FOR WATER SERVICE FURNISHED FORT HOOD IN ACCORDANCE WITH THE PROVISIONS OF THE LEASE.

"C. ALTHOUGH THE LESSEE WILL OPERATE THE ENTIRE FACILITIES COVERED BY THE LEASE AS AN INTEGRATED SYSTEM, THE RESPECTIVE RIGHTS OF THE PARTIES TO USE THE CAPACITY OF THE SYSTEM WILL BE LIMITED ONLY AS FOLLOWS:

"1. EACH PARTY SHALL BE ENTITLED TO THE FULL ACTUAL CAPACITY OF THE PORTIONS OF THE WATER TREATMENT PLANT FINANCED BY IT.

"2. EACH PARTY SHALL BE ENTITLED TO THE FULL ACTUAL DELIVERY CAPACITY OF THE PORTIONS OF THE PIPELINES FINANCED BY IT, AND BOTH PARTIES SHALL CO- USE THE ACTUAL CAPACITY OF THE EXISTING 24 INCH PIPELINE BETWEEN THE CITY OF KILLEEN AND FORT HOOD.

"3. IN ADDITION TO THE ENTITLEMENTS FOR EACH PARTY, EXTRA AVAILABLE CAPACITY IN THE ENTITLEMENTS OF EITHER PARTY WILL BE MADE AVAILABLE TO THE OTHER TO MEET EMERGENCY REQUIREMENTS OCCASIONED BY BREAKDOWNS, TEMPORARY PEAK DEMANDS, ETC.

"THE RENTAL ADJUSTMENT OUTLINED ABOVE IS CONSIDERED TO BE THE ABSOLUTE MINIMUM ACCEPTABLE RENTAL THAT CAN BE JUSTIFIED IN THE PUBLIC INTEREST.

"AS YOU HAVE BEEN INFORMED PREVIOUSLY, THE RENTAL UNDER THE EXISTING LEASE MUST, OF COURSE, CONTINUE TO BE PAID UNTIL THE TERMS OF A LEGAL AMENDMENT THEREOF HAVE BEEN AGREED UPON.'

FINALLY, BY LETTER DATED MAY 25, 1967, THE DISTRICT ADVISED THE DISTRICT ENGINEER OF ITS CONTENTION THAT THE GOVERNMENT HAD NOT SINCE MAY 1, 1966, FULFILLED ITS OBLIGATION TO MAKE AVAILABLE TO THE DISTRICT 20 PERCENT OF THE CAPACITY OF THE GOVERNMENT CONSTRUCTED FACILITIES, AND THAT THE DISTRICT SHOULD THEREFORE NOT BE REQUIRED TO PAY RENTAL FOR USE OF SUCH FACILITIES. THAT LETTER CONCLUDED AS FOLLOWS:

"HOWEVER, IN ORDER TO PROCEED WITH ORDERLY FUNCTIONS OF THE DISTRICT, THE DISTRICT RELUCTANTLY WILL ACCEPT THE ADJUSTMENT AS OUTLINED IN YOUR LETTER OF DECEMBER 27, 1966, WITH THE AMENDMENT FOR SUCH RENTAL TO BE AS OF MAY 1, 1966.'

THE QUESTION PRESENTED INVOLVES THE PROPER EFFECTIVE DATE OF THE RENTAL REDUCTION, THE LESSEE CONTENDING THAT THE ADJUSTMENT SHOULD BE EFFECTIVE FROM MAY 1, 1966, SINCE THE ADDITIONS AND IMPROVEMENTS WERE COMPLETED BY THE LESSEE IN APRIL 1966, AND YOUR DEPARTMENT TAKING THE POSITION THAT THE ADJUSTMENT SHOULD BE EFFECTIVE ONLY FROM THE DATE OF THE REVISION OF THE LEASE. IN THE MEANTIME THE REVISION OF THE LEASE HAS NOT BEEN EXECUTED, BY REASON OF THE CESSATION OF RENTAL PAYMENTS BY THE LESSEE AS OF MAY 1, 1966, AND ITS STEADFAST REFUSAL TO PAY RENTAL FOR ANY TIME AFTER THAT DATE EXCEPT AT THE RATES AGREED UPON FOR THE REVISION.

IN THE BRIEF SUBMITTED BY COUNSEL FOR THE DISTRICT THE GROUNDS OF ITS REFUSAL OF THE GOVERNMENT'S DEMAND FOR RENTAL PAYMENTS AT THE ORIGINAL CONTRACT RATE FROM MAY 1, 1966, UNTIL EXECUTION OF A MODIFICATION ARE STATED AS FOLLOWS:

"1. THE GOVERNMENT HAS FAILED SINCE MAY 1, 1966, TO PERFORM ITS OBLIGATION TO MAKE 20 PERCENT OF THE CAPACITY OF THE GOVERNMENT FACILITIES AVAILABLE TO THE DISTRICT FOR USE IN DELIVERING WATER TO NON-MILITARY CUSTOMERS.

"2. WATER DELIVERED TO NON-MILITARY CUSTOMERS SINCE COMPLETION OF THE DISTRICT'S ENLARGEMENT PROGRAM IS NOT -WATER TREATED AT THE LEASED PROPERTY AND USED BY THE LESSEE FOR SUPPLY TO THE CITY OF KILLEEN AND/OR OTHER CUSTOMERS OF THE LESSEE IN THE VICINITY OF FT. HOOD MILITARY RESERVATION- AS SPECIFIED IN PARAGRAPH 1 OF THE LEASE AGREEMENT.'

ON THE RECORD SUBMITTED WE ARE UNABLE TO AGREE WITH EITHER OF THESE CONTENTIONS.

AS TO THE FIRST, IT APPEARS TO BE BASED UPON THE THEORY THAT THE GOVERNMENT'S ENTITLEMENT TO WATER TREATED AT THE LEASED PLANT IS LIMITED TO 80 PERCENT OF THE ORIGINALLY DETERMINED CAPACITY OF THE PLANT. THIS IGNORES THE FACT THAT THE STATED CAPACITY WAS BASED UPON A FILTRATION RATE OF TWO GALLONS OF WATER PER MINUTE PER SQUARE FOOT OF FILTER AREA, AND THAT BY MUTUAL AGREEMENT THIS RATE WAS INCREASED TO THREE GALLONS WITH THE RESULT THAT THE ACTUAL CAPACITY OF THE SAME FACILITIES, BEFORE ANY ADDITIONS BY THE LESSEE, WAS INCREASED TO A VOLUME IN EXCESS OF 12 MGD, INDICATED BY THE RECORD OF MONTHLY OUTPUT IN 1964 AND 1965, OR AT LEAST 11.25 MGD AS STATED IN THE DISTRICT'S LETTER OF APRIL 20, 1966, REFERRED TO ABOVE. IN THE ABSENCE OF ANY STIPULATION TO THE CONTRARY, WE DO NOT BELIEVE IT CAN REASONABLY BE ASSUMED THAT THE ENTIRE INCREASE SO ACCOMPLISHED SHOULD BE FOR THE SOLE BENEFIT OF THE LESSEE. REGARDLESS OF THAT, HOWEVER, IT APPEARS TO BE CONCEDED THAT THE ACTUAL CAPACITY AT THE TIME THE LEASE WAS ENTERED INTO WAS 9.6 MGD, WHICH WOULD PERMIT THE GOVERNMENT TO USE UP TO 7.68 MGD OR 230 MILLION GALLONS PER MONTH. HERETOFORE STATED, THE RECORDS SHOW THAT IN ONLY ONE MONTH UP TO JULY 1967 HAS THE GOVERNMENT EVER RECEIVED THAT QUANTITY. IN THAT MONTH--- JULY 1966--- THE WATER CONSUMPTION BY THE GOVERNMENT WAS 262,951,000 GALLONS, OR A DAILY AVERAGE OF APPROXIMATELY 8.5 MGD, WHICH IS SUBSTANTIALLY LESS THAN 80 PERCENT OF THE 11.25 MGD CAPACITY OF THE ORIGINAL GOVERNMENT FACILITIES ADMITTED IN THE DISTRICT'S LETTER OF APRIL 20, 1966.

WITH RESPECT TO THE SECOND CONTENTION OF THE DISTRICT'S COUNSEL, YOUR DEPARTMENT STATES THAT THE DISTRICT CANNOT SUPPLY ITS CIVILIAN CUSTOMERS ENTIRELY FROM ITS OWN FACILITIES SINCE THE ORIGINAL PLANT AND ALL ADDITIONS ARE AN INTEGRAL PART OF ONE SYSTEM AND SOME OF THE FACILITIES CONSTRUCTED BY THE GOVERNMENT MUST BE USED IN TREATING ALL WATER FURNISHED THE CIVILIAN POPULATION. INASMUCH AS THE TERMS AGREED UPON FOR THE PROPOSED REVISION INCLUDE THE LESSEE'S AGREEMENT TO PAY AN ANNUAL RENTAL BASED UPON A REASONABLE RETURN TO THE GOVERNMENT ON FIFTY PERCENT USAGE OF THE "FACILITIES FINANCED BY THE GOVERNMENT AND ESSENTIAL TO THE OPERATIONS OF BOTH PARTIES," WE CANNOT ACCEPT THE DISTRICT'S CONTENTION.

ON BEHALF OF THE DISTRICT IT IS URGED THAT ADEQUATE CONSIDERATION FOR RETROACTIVE MODIFICATION OF THE LEASE AGREEMENT IS FOUND IN THE RETURN TO THE GOVERNMENT OF THE USE OF THE 20-PERCENT CAPACITY OF THE ORIGINAL SYSTEM RESERVED TO THE LESSEE, THE RIGHT ACCORDED TO THE GOVERNMENT TO USE THE SURPLUS CAPACITY OF THE LESSEE-FINANCED FACILITIES FOR EMERGENCY PURPOSES, AND THE RELEASE BY THE LESSEE OF ANY CLAIM FOR DAMAGES FOR BREACH OF THE LEASE AGREEMENT BY THE GOVERNMENT. AS LEGAL AUTHORITY FOR THE MODIFICATION OF THE LEASE TO RETROACTIVELY EXCUSE THE PAYMENT OF THE ORIGINALLY SPECIFIED RENTAL BY THE LESSEE, THE ATTORNEYS CITE THE PRINCIPLE SET FORTH IN 91 C.J.S. 220, UNITED STATES, SECTION 99, THAT THE GOVERNMENT IS LIABLE AS OTHER PERSONS FOR BREACH OF CONTRACT; THE PRINCIPLE RECOGNIZED IN LANDLORD AND TENANT CASES THAT A LESSEE'S OBLIGATION TO PAY RENT IS EXCUSED BY ACTS OF THE LESSOR WHICH DEPRIVE THE LESSEE OF POSSESSION, USE AND BENEFIT OF LEASED PROPERTY; THE PROHIBITION IN THE CONSTITUTION OF THE STATE OF TEXAS AGAINST THE PAYMENT BY THE LESSEE, AS A POLITICAL SUBDIVISION OF THE STATE, OF PUBLIC FUNDS WITHOUT A COMPENSATING BENEFIT; AND OUR DECISION AT 41 COMP. GEN. 169, IN WHICH WE HELD THAT THE PERIOD OF PAYMENT FOR A DAM CONVEYED BY THE GOVERNMENT TO A CITY COULD BE EXTENDED WITHOUT PENALTY AGAINST THE CITY IN VIEW OF THE CONSIDERABLE EXPENSE TO THE CITY FOR REPAIRS RESULTING FROM CONSTRUCTION DEFECTS AND DOUBT AS TO WHETHER FAILURE OF CONSIDERATION MIGHT BE SUCCESSFULLY PLEADED IN A COURT ACTION BY THE CITY FOR DAMAGES AGAINST THE GOVERNMENT, THE CONSIDERATION TO THE GOVERNMENT BEING WAIVER BY THE CITY OF ANY CLAIM AGAINST THE GOVERNMENT BASED ON THE CONSTRUCTION DEFECTS.

SINCE WE CANNOT, FOR THE REASONS INDICATED ABOVE, FIND ANY BREACH BY THE GOVERNMENT OF THE TERMS OF THE LEASE, WE SEE NO CONSIDERATION MOVING TO THE GOVERNMENT FOR THE PROPOSED MODIFICATION EXCEPT THE REMOVAL OF THE EXISTING LIMITATION ON THE WATER SUPPLY TO FORT HOOD AND THE RIGHTS GIVEN TO SHARE IN THE ADDITIONAL CAPACITY IN THE FUTURE. SINCE THIS WILL ACTUALLY BE EFFECTIVE ONLY PROSPECTIVELY AND THE LIMITATION OF THE ORIGINAL LEASE IS LEGALLY STILL EFFECTIVE UNTIL EXECUTION OF A SUPERSEDING AGREEMENT, WE ARE UNABLE TO RECOGNIZE IT AS CONSIDERATION FOR RELEASE OF THE LESSEE'S OBLIGATION TO PAY RENTAL AT THE LEASE RATE UNTIL A MODIFICATION HAS BECOME EFFECTIVE. IF IT COULD BE SAID THAT THE GOVERNMENT HAD IN FACT ALREADY RECEIVED ANY BENEFIT FROM THE ADDITIONAL FACILITIES PROVIDED BY THE LESSEE, OR THAT THE PROVISION OF THE FACILITIES GAVE RISE TO ANY RIGHT IN THE LESSEE TO A MODIFICATION OF THE RENTAL, THE CASE MIGHT BE OTHERWISE, BUT WE DO NOT FIND EITHER OF THESE SITUATIONS.

AS TO THE EFFECT OF THE ADDITIONAL FACILITIES UNDER THE TERMS OF THE LEASE, THE FACT THAT THE LEASE AGREEMENT CONTAINED DETAILED PROVISIONS WITH RESPECT TO THE PROVISION OF ADDITIONAL FACILITIES OR PROPERTY BY THE LESSEE, BUT WITHOUT A WORD SUGGESTING THAT THE RENTAL REQUIRED TO BE PAID BY THE LESSEE WOULD BE IN ANY WAY AFFECTED THEREBY, ARGUES STRONGLY THAT NO CHANGE WAS INTENDED--- PARTICULARLY IN VIEW OF THE SPECIFIC PROVISIONS FOR ADJUSTMENTS TO BE MADE IN THE EVENT OF INCREASED TAX BURDENS, AND FOR ANNUAL ADJUSTMENT OF THE CHARGES TO THE GOVERNMENT FOR WATER SUPPLIED TO FORT HOOD. IN ADDITION, SINCE THE FACILITIES HAVE BECOME THE PROPERTY OF THE GOVERNMENT, UNDER THE TERMS OF THE LEASE, IT MAY READILY BE ARGUED THAT THEY ARE NOW IN FACT A PART OF THE "LEASED PROPERTY" FOR USE OF WHICH THE RENTAL IS CHARGED. IN THIS CONNECTION IT IS NOTED THAT IN THE LEASE PROVISION LIMITING THE QUANTITY OF WATER FOR FORT HOOD REFERENCE WAS SPECIFICALLY MADE TO THE "CAPACITY OF THE LEASED PROPERTY AS IT EXISTED AT THE COMMENCEMENT DATE OF THE LEASE," WHEREAS THE RENTAL CLAUSE CONTAINS NO SUCH QUALIFICATION BUT CALLS FOR RENTAL FOR ALL WATER "TREATED AT THE LEASED PROPERTY AND USED BY THE LESSEE FOR THE SUPPLY OF WATER" TO ITS NON -GOVERNMENT CUSTOMERS. FOR ALL THESE REASONS WE CONCLUDE THAT THE LEASE DID NOT REQUIRE ANY ADJUSTMENT OF RENTAL MERELY BECAUSE OF THE LESSEE'S PROVISION OF ADDITIONAL FACILITIES.

AS TO WHETHER THE GOVERNMENT RECEIVED ANY BENEFIT FROM SUCH FACILITIES WE BELIEVE THE FIGURES SHOW THAT THERE WAS NO SUBSTANTIAL BENEFIT, AT LEAST THROUGH THE MONTH OF MAY 1967, WHEN THE PARTIES REACHED AGREEMENT UPON ALL TERMS OF THE MODIFICATION EXCEPT ITS EFFECTIVE DATE. THE MONTHLY RECORDS FROM MAY 1966 THROUGH MAY 1967 ARE SHOWN BELOW, WITH THE "TOTAL TREATED WATER" FIGURES FOR THE MONTH OF JULY OF EACH OF THE FOUR PRECEDING YEARS:

TOTAL TREATED GALLONS USED PERCENTAGE GALLONS USED PERCENTAGE

WATER BY FT HOOD USED BY FT BY BELL USED BY

HOOD COUNTY WATER BELL

IMPV COUNTY

WATER IMPV

----------- ----------- --------- --------- ------- 1966 ---- MAY 253,280,700 156,197,000 61.67 97,083,700 38.33 JUNE 358,842,200 209,842,000 58.48 149,000,200 41.52 JULY 442,550,300 262,951,000 59.42 179,599,300 40.58 AUG 352,479,000 214,361,000 60.82 138,118,000 39.18 SEP 247,858,100 150,125,000 60.57 97,733,100 39.43 OCT 250,682,900 153,005,000 61.04 97,677,900 38.96 NOV 231,239,200 141,950,000 61.39 89,289,200 38.61 DEC 218,973,500 126,365,000 57.71 92,608,500 42.29 1967 --- JAN 236,634,700 140,032,000 59.18 96,602,700 40.82 FEB 208,772,900 117,938,000 56.49 90,834,900 43.51 MAR 339,134,500 206,567,000 60.91 132,567,500 39.09 APR 348,752,900 206,821,000 59.30 141,931,900 40.70 MAY340,464,500 224,413,000 65.91 116,051,500 34.09 1962 337,122,000 1963 365,365,500 1964 394,322,100 1965

398,859,600

FROM THESE FIGURES IT SEEMS CLEAR THAT, EXCEPT IN JULY 1966, THE TOTAL VOLUME OF WATER TREATED WAS NO MORE IN ANY MONTH THAN COULD HAVE BEEN TREATED BY THE GOVERNMENT FACILITIES ALONE PRIOR TO THE ADDITIONS; AND AS POINTED OUT ABOVE THE FORT HOOD CONSUMPTION IN THAT MONTH WAS NOT IN EXCESS OF 80 PERCENT OF THE ADMITTED 11.25 MGD CAPACITY OF THE PREVIOUSLY EXISTING GOVERNMENT PLANT. SINCE THE GOVERNMENT RECEIVED NO BENEFITS FROM THE ADDITIONS THERE IS NO BASIS FOR CONSIDERING THE GOVERNMENT TO BE CHARGEABLE THEREFOR.

FOR ALL THE REASONS STATED WE CONCLUDE THAT THERE IS NO ACCEPTABLE BASIS FOR WAIVER OR RELEASE BY THE GOVERNMENT OF ANY PART OF THE RENTAL DUE BY THE LESSEE UNDER THE TERMS OF THE EXISTING LEASE FOR THE MONTHS IN QUESTION. IT FOLLOWS THAT THE PROPOSED MODIFICATION MAY NOT PROPERLY BE MADE RETROACTIVE TO MAY 1, 1966, AS REQUESTED BY THE LESSEE. HOWEVER, SINCE THE TERMS OF THE MODIFICATION, EXCEPT THE EFFECTIVE DATE THEREOF, WERE ACTUALLY AGREED TO BY BOTH PARTIES IN MAY 1967, THE MODIFICATION MAY PROPERLY BE MADE EFFECTIVE AS OF JUNE 1, 1967, WITH THE UNDERSTANDING THAT EXECUTION OF THE MODIFICATION SHALL NOT BE CONSTRUED AS A WAIVER BY THE GOVERNMENT OF ITS RIGHT TO ALL RENTAL ACCRUED TO THAT DATE UNDER THE TERMS OF THE ORIGINAL LEASE.