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Monday, August 25, 2008

Water deal remains a foul one

A deal pending with regulatory officials calls for $100 million to go to Trenton, in return for miles of pipelines and infrastructure and a majority of the Trenton water utility's captive consumers, all to be handed over to a for-profit company.

Trenton Councilman Jim Coston compared selling infrastructure in Ewing, Hamilton, Hopewell, and Lawrence while continuing to sell water to customers there – as per the deal - as a relationship akin to selling an old, maintenance-costly truck used for delivering widgets, while continuing to hold a contract for widget production with the outlying customers.

If one listened to what has been said about the deal in Trenton, perhaps this is the impression that develops. But in reality this plan promises to damage both Trenton's future revenue-generating capability and its relationship with neighboring municipalities.

The infrastructure currently for sale is anything but old. In Hopewell, most infrastructure was constructed after 1987, according to public advocate witness John M. Mastracchio, whose testimony is available on the Hopewell website. Nearly 90 percent of it was constructed by developers and handed over to Trenton, he said, like some sort of birthday present.

The real aging infrastructure is that of Trenton. The townships, having developed later, have newer infrastructure that is less costly to maintain, according to utility employees.

"What we're selling isn't aging," said a ranking utility employee during some fact checking performed on Sunday. "I have only done 10 repairs in Hopewell in 10 years."

Estimates considered by the Board of Public Utilities say that with all developer-supplied infrastructure, Trenton-bought and constructed infrastructure amounts to less than half the value of the deal - somewhere below $50 million. Testimony given to the BPU from Mr. Mastracchio, reveals that developer-built pipes should belong to the ratepayers and not to Trenton.

At the core of the issue is the arrangement that calls for Trenton to continue to sell water to New Jersey American’s new township customers for 20 years, with a charge of $11.8 million a year among other perks going to Trenton. But when one considers that most of the utility's ratepayers live outside of Trenton, it becomes clear that the $11.8 million is a downgrade, as far as the water utility remaining a significant revenue-generating asset is concerned.

The utility has been making somewhere around $30 million per annum of late, and most - upwards of $16 to $18 million - is coming from the rates paid by township customers making up more than 60 percent of the utility's customers. So the deal means excess cash for the short term, but in the long term there will be less revenue coming into the utility’s coffers.

With the sale, the utility will be left with Trenton's ratepayers. The numbers of ratepayers versus size of infrastructure seems favorable – over 20,000 paying accounts in a very small area - but this is misleading. The ranks of Trenton’s ratepayers are filled with delinquent or non-existent accounts in a municipality experiencing shrinking population. That base was augmented with the 45,000 or so township ratepayers, yet that would end with the deal.

Utility employees say it’s undetermined if Trenton will see more dollars coming from New Jersey American Water once the 20-year deal is completed. The company has outside connections with the township infrastructure that would allow it to pump water in from non-Trenton sources.

The official city line fails to note that private developments perform many repairs to water piping. The city only repairs piping between the main line and the curb and large areas of infrastructure in built-out areas of the townships cost the city little to maintain.

Controlling infrastructure means the city receives revenue that will disappear with the deal. The city charges the townships for the construction and maintenance of hydrants, and receives money from so-called ready-to-serve charges for new customers.

Both the hydrant and ready-to-serve dollars will go with a sale, and future development in the townships will go to New Jersey American Water. What's also bogus is the 40 percent rate hike threatened by administration officials, should the deal fail.

That position comes despite testimony from water expert Howard Woods. He said a hike of the magnitude set to be handed to Trenton and township ratepayers in September is based on fantasy. It is caused by a doubling of budget transfers from the utility to the city's general fund, which Mr. Woods questioned as unlawful. State law says that at most an amount equal to 5 percent of a utility's annual revenue may be transferred into a general fund if the utility provides water to customers outside the host city.

Trenton appears to have transferred $9.2 million over the course of two years, as reported in the Times. The administration hides behind the defense that it happened after a rate equalization that supposedly freed Trenton from Board of Public Utilities oversight. But what has not been discussed is that it appears part of the transfer came out of the 2006 water budget, prior to equalization.

This deal threatens to damage Trenton's finances and destroy relationships with bordering towns, for quick money that could disappear in a year or two. Hopefully the BPU or someone else puts a stop to it, for the sake of Trenton residents and our neighbors in Mercer County.

6 comments:

G Spot said...

Somehow I think we are going to end up with Santiago still in Trenton and our water company owned by someone outside of Trenton.

Such is the Double Dutch Bus
I have come to know as Trenton.

Double Dutch
Function:
noun
Date:
1876
Meanings:
1 : unintelligible language
2 : the jumping of two jump ropes rotating in opposite directions simultaneously

G SPOT Out!

Dan Dodson said...

Greg,

Do you a financial analysis of the water deal and a due diligence report?

I wonder what it would take to clear up this issue. For me, I'm not happy unless I see a respectable analysis by an investment banker.

You're thinking about the deal the right way (what's the differential in quality of the pipes), but you haven't done the valuations. Also, I'd like to hear from someone with experience valuing public utility monopolies.

To Jim Coston, you can't really say this is a good deal until you've see the above. Have you?

If it came from the BA you certainly haven't.

Greg Forester said...

I did not see a financial analysis itself, but I saw the testimony of those men, who reported on three separate financial analyses on the value of the pipes and deal itself.

Anonymous said...

The current Water Utility revenue from the Township customers is about $18 million. The revenue from City customers is about $12 million. The sale goes through and there is zero revenue from Township customers. But there is about $12 million form New Jersey American Water. The total revenue goes from $30 million to $24 million. The City would have to reduce Water Utility expenses by $6 million. The City can't reduce workforce size to reduce expenses because it has already done so to a point where the level of service has fallen below industry standards. It can't reduce treatment plant personnel because that operation will not experience any less of a need for personnel regardless of how much potable water is produced. However the City Administration apparently thinks otherwise. This is evident from the current staffing level at the treatment plant. Water Utility personnel report that the plant is seriously understaffed with higher level staff filling in for absent and non-existent plant operators. For some time now the City Administration has been trying to hire outsiders under a contract with a private company. Guess who that company is. If you said anything other than New Jersey American Water you would be wrong.Other operating expenses could be reduced somewhat but two of the biggest will remain the same or actually increase as a result of the ongoing treatment plant construction project. They are power costs and chemical costs. In the end $6 million dollars or at least most of it will have to come from somewhere. It is unlikely that it will come from the monies from the asset sale. $20 million of that has already been committed to the City's 2009 budget. That leaves City customers with the responsibility to come up with the money. That would mean that City customers would be assessed a 50% rate increase for the City to realized $6 million of more revenue from the current $12 million now coming from City customers. Not a good deal for City customers.

Greg Forester said...

Email me at Greg.forester@gmail.com

Anonymous said...

If the 40 percent rate hike threatened by administration officials comes about, that would mean that City customers would see a 110 percent increase in their water rates and bills since the last rate increase. A City customer previously receiving a water charge of $100 had to pay $90 dollars if the bill was paid within 30 days. The City Administration quietly did away with this incentive. In effect it raised rates for so called "good customers" by 11%. On top of that was the 34% rate increase. So the $100 charge now became $134, which is about a 49% rate increase. Now the City Administration is threatening and apparently City Council has passed an Ordinance that would raise rates another 40%. That would bring the example water charge to $188 or a 109% rate increase in a two year period. Not a good deal for City customers.