|In 2018, Microsoft acquired approximately 279 acres, generally located between the north side of Broadway Road and the south side of MC-85 and extending from east of Bullard Avenue to west of Litchfield Road (the “PHX 10-11 Site”). Since this acquisition, Council has considered numerous requests related to Microsoft’s plans to develop the PHX 10-11 Site for use as data centers. These requests include: (i) the adoption of Ordinance 2018-1418 by Council on December 17, 2018 rezoning the PHX 10-11 Site; (ii) the adoption of Ordinance 2019-1420 by Council on January 14, 2018 annexing a section of Broadway Road adjacent the PHX 10-11 Site to facilitate the construction of Broadway Road improvements when the PHX 10-11 Site develops; (iii) the adoption of Resolution 2019-1931 on January 14, 2019 and of Resolution 2019-1939 on February 25, 2019 that will allow for the consolidation of the PHX 10-11 Site into lots consistent with Microsoft’s development plans; (iv) the adoption of Resolution 2019-1937 by Council on February 11, 2019 authorizing the issuance of an at-risk grading permit; (v) the adoption of Resolution 2019-1942 by Council on February 25, 2019 and Resolution 2019-1957 being presented to Council as a separate item on February 22, 2019, which establish a self-certification process for use by Microsoft in the development of the PHX 10-11 Site; (vi) the adoption of Resolution 2019-1959 approving the Infrastructure Development Agreement for Project 10-11; (vii) the adoption of Resolution 2020-2077 approving the First Amendment to the Infrastructure Agreement for Project 10-11; (viii) and the adoption of 2021-2152, approving the Second Amendment to the Infrastructure Agreement for Project 10-11. Although this item has not been previously presented to the Council, this amendment is consistent with many of these earlier actions that identified Microsoft’s general obligation to construct on-site and off-site infrastructure needed to serve Microsoft’s property and to acquire and convey to the City all land necessary for such infrastructure.
|Under the terms of the Infrastructure Development Agreement for Project 10-11 (the “PHX 10-11 IDA”), Microsoft is responsible for the design and construction of all infrastructure, within the boundaries of the PHX 10-11 Site and outside the boundaries of the PHX 10-11 Site as reasonably determined by the City to be both in accordance with the duly-adopted Development Regulations and needed to support the development of the PHX 10-11 Site and to allow the City to provide City services to the PHX 10-11 Site. The identification of the public infrastructure needed was to be guided by engineering studies paid for by Microsoft.
When Microsoft acquired the PHX 10-11 Site, its original intent was to develop five (5) data centers in phases. Each of the five (5) data centers would use direct evaporative cooling (water-cooled, each of which would require no more than, 1 MGD (million gallons per day) of water with a maximum amount of 5 MGD of water to be delivered to serve the PHX 10-11 Site. The cooling water or industrial discharge was to be treated to a level that it could be used as a raw water source and delivered through a dedicated raw water line to the City’s surface water treatment plant to be used as a source for potable water. Domestic sewage was to be delivered to the wastewater treatment plant to the city’s wastewater treatment plant through an existing sewer transmission line located within Broadway Road. The existing sewer transmission line was developed and sized to serve adjacent properties as they developed.
Phase One Development (PHX 10)
Until the raw water line was constructed, Owner was allowed to temporarily discharge the industrial discharge water from the Phase One Development (“PHX 10”) through an existing transmission line to the City’s wastewater treatment plant. The industrial discharge that was to be delivered to the City’s wastewater treatment plant had to comply with applicable regulatory standards and the maximum level of total dissolved solids (“TDS”) in the industrial discharge delivered to the wastewater treatment plant was 1400 mg/L. Microsoft subsequently abandoned plans to deliver treated industrial discharge to the City’s surface water treatment plant to be used as a source for potable water. Microsoft’s current plans call for the industrial discharges to be delivered to the 157th Avenue Wastewater Treatment Plant.
Phase Two Development (PHX 11)
When Microsoft sought a building permit for a second data center (the Phase Two Development or PHX 11), it sought permission to temporarily deliver industrial discharge from PHX 11 to the city’s wastewater treatment plant through the existing transmission line. Because there was existing capacity in the line, the PHX 10-11 IDA was amended to allow Microsoft to temporarily discharge no more than 500,000 gallons per day (GPD) of industrial discharge and domestic sewage generated by PHX 10 and PHX 11 into the existing transmission line to be delivered to the city’s wastewater treatment plant. The maximum amount of TDS allowed was 1400 mg/L, and Microsoft was to construct Storage Improvements and a Discharge Control System to ensure that no more than 500,000 GPD was discharged into the existing transmission line. The treatment facilities required to treat the industrial discharge, so it did not exceed the maximum level of TDS allowed, the Storage Improvements and the Discharge Control System were to be completed prior to the issuance of a Temporary Certificate of Occupancy or Permanent Certificate of Occupancy for PHX 11.
The construction of PHX 11 is almost complete, and Microsoft is seeking a permanent certificate of occupancy. However, Microsoft has not completed the construction of the improvements that would limit the level of TDS in the discharges from the Phase Two Development that would be discharged into the existing transmission line to the city’s wastewater treatment plant to 1400 mg/L nor did they construct the Discharge Control System or Storage Improvements, all of which are conditions of temporary certificates of occupancy and permanent certificates of occupancy being issued for PHX 11. In addition, Microsoft is seeking a building permit for the Phase Three Development (PHX 12). City staff and Microsoft’s representatives have been working on a solution that would allow Microsoft to obtain a certificate of occupancy for PHX 12 and to continue developing the PHX 10-11 Site.
Phase Three Development (PHX 12)
The continued development of the PHX 10-11 Site presents certain challenges that have resulted in changes in its plans for the development of the PHX 10-11 Site and the infrastructure needed to support the future development. The first challenge is the lack of treatment capacity at the city’s 157th Avenue Wastewater Treatment Plant. Microsoft has effectively abandoned its original plan to return treated industrial discharges from its operations to be used as a raw water source. Industrial discharges will be delivered to the wastewater treatment plant. At this point, there is no additional capacity available to at the city’s wastewater treatment plant to accept industrial discharges from Microsoft’s operations in excess of the 500,000 GPD currently allowed.
The second challenge concerns the delivery of the industrial discharges to the city’s wastewater treatment plant. Currently, industrial discharges are being delivered to the city’s wastewater treatment plant through the existing transmission line in Broadway Road. This transmission line was designed and sized to support development adjacent to the line and was never intended to take industrial discharges from Microsoft’s operations. Instead, Microsoft was to treat industrial discharges and deliver the treated discharges for use as a raw water source for potable water through a dedicated raw water line. Because of development that is occurring within properties adjacent to the existing transmission line, the capacity of that line has to be freed up to support this new development as it comes online.
The third challenge concerns Microsoft’s operational needs. For operational efficiencies, Microsoft has to recirculate water used for cooling at least two times. Roughly, two circulations will double the level of TDS in the industrial discharge. Thus, if the level of TDS in the water delivered to the PHX 10-11 site has 700 mg/L of TDS, two circulations will result in an industrial discharge of 1400 mg/L of TDS. The problem occurs when the level of TDS in the incoming water exceeds 700 mg/L of TDS.
In considering the city’s interests and Microsoft’s interests, the parties reached an agreement on terms for the third amendment to the PHX 10-11 IDA. The third amendment includes the following terms:
1. All data centers developed on the PHX 10-11 Site after PHX 12 will be air cooled
2. Microsoft will provide an updated engineering study to determine the annual water demand for the PHX 10-11 Site at full build-out, all water and wastewater infrastructure needed to support the city’s delivery of water and wastewater services to the PHX 10-11 Site and full build-out and during the interim solution based on the assumption that only PHX 10, PHX 11 and PHX 12 will be water cooled and that the operations of those data centers will be limited to two (2) cycles of recirculation.
3. By August 31, 2024, Microsoft will have completed the construction of a dedicated discharge line to deliver industrial discharges generated from all data centers constructed on the PHX 10-11 Site at full-buildout to the wastewater treatment plant.
4. Once the dedicated discharge line is completed all industrial discharges from the operations on the PHX 10-11 Site being delivered to the wastewater treatment plant, including those discharges that are being delivered on a temporary basis through the existing transmission line in Broadway Road, will be delivered through the dedicated discharge line.
5. Microsoft will make a $36 million in-lieu payment towards the cost of an expansion of the wastewater treatment plant for the treatment capacity that will be needed to treat all discharges (industrial discharges and domestic sewage) generated by the operations on the PHX 10-11 Site at full build-out. This payment assumes the cost of an expansion that will result in an additional 3 MGD of treatment capacity will cost $90 million and Microsoft will require 1.2 MGD of treatment capacity at full build-out. This amount will be adjusted if the assumptions change.
6. The $36 million in-lieu payment is in-lieu of wastewater impact fees, which currently do not contemplate the capacity required by Microsoft’s operations. Accordingly, the city will not be charging wastewater development impact fees for development within the PHX 10-11 Site and will be returning those that were previously collected.
7. The city will be responsible for expanding the wastewater treatment plant and providing treatment capacity for which Microsoft has made an in-lieu payment.
8. Once the wastewater treatment plant is expanded, Microsoft, all industrial discharges from the operations on the PHX 10-11 Site delivered to the city’s wastewater treatment plant will have a maximum level of TDS of 1400 mg/L or double the TDS level of the incoming water from the city.
9. Microsoft will have to construct any additional water lines that are identified in the updated engineering study as being needed for the delivery of water supplies to the PHX 10-11 Site at full buildout.
10. Microsoft will be responsible for any water supplies required to serve the water supply in excess of the Type 1 Grandfathered Non-Irrigation water right owned by Microsoft and which is currently being used to serve PHX 10, but which appears to be sufficient to serve PHX 10, PHX 11 and PHX 12.
11. Microsoft will deposit $5 milliion with the city as financial assurance toward the cost of the dedicated discharge line and any additional water lines Microsoft has to construct. Once the infrastructure has been designed and an engineer’s estimate of the cost of the infrastructure has been provided, an escrow in the amount of the estimated cost of the infrastructure will be established, with Microsoft funding any shortfall, which can be used to pay for the infrastructure as the infrastructure is completed.
12. Microsoft will deposit $800,000 with the city, which the city will use to pay for the services of a person the city will retain to serve as the city’s designated representative to coordinate and facilitate the development of the PHX 10-11 Site and the PHX 70 Site.
13. The Third Amendment provides for a temporary solution that will allow a permanent certificate of occupancy to be issued for PHX 11 that includes the following:
a. Until the earlier of August 31, 2024 or the date the dedicated discharge line is completed, Microsoft will be allowed to discharge industrial discharges through the existing transmission line. If the dedicated discharge line is not constructed by August 31, 2024, Microsoft will be required to store all industrial discharges on-site.
b. Until the city’s 157th Avenue Wastewater Treatment Plant has been expanded, Microsoft shall be allowed to deliver to the wastewater treatment plant up to 500,000 GPD of discharges (industrial discharges and domestic sewage) with a maximum level of TDS of 2853 mg/L.
c. Until the city’s 157th Avenue Wastewater Treatment Plant has been expanded, Microsoft will have to construct improvements required to store all discharges in excess of 500,000 GPD on-site and will have to store discharges in excess of 500,000 GPD within such improvements.
The terms of the proposed amendment are consistent with the general intent of the infrastructure development for Project 10-11 which requires Microsoft to construct infrastructure improvements needed for the city to provide utility services to the property. Accordingly, staff supports its adoption.
Higher levels of TDS create problems for the operations of the wastewater treatment plant. Because of this, City staff is working on its own “brine solution” to address TDS levels in the city’s discharges to the wastewater treatment plant that result from the development of potable water.
These improvements were not completed because there were discussions about Microsoft participating in the brine solution that the city was working on, but these discussions never materialized into an agreement because the city has not finalized a brine solution.