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The Big Water Acquisition Playbook

 

When elected municipal officials strike a tentative deal to sell a water or sewer system, expect them to put on a full court press to convince their constituents it is a good deal.  It is also very likely that their actions will follow a common pattern.  The items that follow outline what you should expect. 

The Big Picture

Let's start with a quick five chart summary of what is going on with water and sewer privatization.  Click here (LINK)

Suitcase of Free Money
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The municipality is going to get a huge amount of money – “free” money.  No tax increase needed.  They will make it appear as one “sweet” offer.  From the perspective of the local official this can be an amazing opportunity.  The amount of money being offered is usually a “once in a lifetime” event.  It is somewhat like winning the lottery. 

Big Water’s promise of “free” money without a tax increase is highly seductive.  Municipalities are hounded to fund all kinds of causes.  They generally produce a shopping list of all the wonderful things it will enable.  Some elected politicians are likely to see it as being in their best interest for career advancement.  Often they are quick to grab the money.

The sad irony is that selling a water or sewer system is actually the most expensive way to raise that “free” money.  What local officials do not understand or choose to ignore is that there are cheaper ways to fund those public good projects.  They are not serving the best interests of their constituents who are left to pay the bill.  Selling is actually a negative to the public good. 

That "Suitcase of Money" is a major driver to get the sale done.  Here is a more in-depth view of the “Suitcase".

The Municipality Should Not Be In The Water/Sewer Business

 

A standard story line is that water/sewer utilities should be left to the Big Water “pros”.  This is usually a blanket assertion with nothing to back it up.  This is a very self serving position when a municipality wants to sell a system. 

 

Local government exists to serve the needs of its citizens:  roads, schools, police and fire protection, storm water management, parks, libraries, zoning, and many other similar things.  Water and sewer service is a common need of everyone and fits very well into the type of services provided by local government.

 

Public systems far out number private for profit systems – both in number of systems and number of customers.  This did not evolve because of random chance.  It evolved because municipal systems provide quality service in the most cost effective way.  Here is more detail on this issue (LINK)

Major Expensive Repairs Are Needed 

 This is a frequent justification for a sale.  There are claims about the large investments needed to bring the system up to “standard”.  The story line is to let the Big Water company “pros” manage the improvements.  They claim that Big Water can invest cheaper.  There may be an element of truth to that on the investment side, but Big Water resulting rate increases will cost the ratepayer significantly more. 

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It is easy for local officials to come up with a long list of "improvements" and repairs to spend money on.  That list can easily total to a large number.  Healthy skepticism is in order here.  Especially when the list is filled with items that should be routine maintenance.  Our experience is that  often little of that money actually gets spent – with or without an acquisition.  

This is an area where a go slow approach is needed.  The municipality should clearly spell out what is needed and why.  Do not accept that at face value.  This is an area where needs can be easily distorted. 

Somewhere in the community of ratepayers there will be people qualified to assess the needs.  Seek them out and get them involved – to the point of facility tours and inspections.  The ideal outcome is where the officials promoting the sale and skeptics can agree on future investment needs. 

Much more detail on this issue here: (LINK)

Big Rate Increases Are Needed Without A Sale

Rate increases are always part of the sale pitch.  However, this is an area where needs can be easily distorted.  For New Garden Township the forecast increases were ~80% and a major justification for selling.  After the fact investigation of this claim showed it was wildly exaggerated.  That analysis is detailed here: (LINK). 

This is another area where a go slow approach is needed so there can be adequate community involvement.  Each municipality will have its own rate forecast.  The municipality should clearly spell out the detailed basis for the rate increase.  Do not accept that at face value.  Like the repair issue noted above, find qualified individuals in the ratepayer community to make an independent assessment of what is needed.  If the proposed deal really is in the best interest of the ratepayer, taking time to validate the rate forecast would be time well spent. 

Big Water’s Costs Are Cheaper

 This is a frequent claim actually based on a grain of truth.  And, it applies to both operating costs and capital investment costs.  There could be a grain of truth that Big Water operating costs could be lower due to economy of scale.  But, what is not told is that operating costs are a pretty small part of the customer’s bill.  However, Big Water's other costs are usually higher, a lot higher, and totally overwhelm any operating savings. 

 

Big Water also generally claims its investment costs are 25% - 35% lower than a municipal system.  Again, there could be some truth to this due to labor rates.  Construction work by a government entity must pay "prevailing wages rates".  Typically labor can be a significant part of construction costs.  So, Big Water may be able to realize some saving because of that.  What is not mentioned is the impact on the ratepayer.  Big Water's cost structure is largely based on investment.  The net result is that the ratepayer winds up paying more, often a lot more.

Click here for more detail: (LINK

There May Be A Rate Cap For Some Period Of Time
But, Beware of ...
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The sale of New Garden Township's sewer system was the first one under Act 12 (LINK).  It had a very favorable ten year rate freeze/rate cap - guaranteed in the sales contract.  But it was a promise broken before the sale was complete.  That story is told here: (LINK)

It is not likely that there will be another ten year deal like New Garden.  However, deals have frequently contained promises that the buyer would limit future rate increases for some period of time.  A common “promise” is a rate freeze for a year or two.  Generally, this is NOT a special benefit extended to the ratepayers of the acquired system.  And, a key thing the sales pitch glosses over is what happens to rates once the “freeze” expires.  For more detail follow this (LINK)

The Seller Will Set Up A Rate Mitigation Fund
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Some deals claim that the seller will use part of the sales proceeds to set up a fund to compensate ratepayers if promised rates are exceeded.  To our knowledge, none of these have actually been established. 

 

New Garden Township made this promise multiple times in writing.  Those promises were never fulfilled.  The township has now declined to pursue this further (see Chester County Press article on New Garden: 12/21/2022) The full story is told here (LINK)

DELCORA has taken this concept further than most.  They propose an independent fiduciary controlling the mitigation funds, not a political unit.  Presumablely, some share of the sale proceeds would flow directly to the fiduciary.  But, the DELCORA deal has yet to close. 

 

Our estimates indicate that these proposals generally understate the funds needed for the mitigation fund.  The ideal mechanism would be for the full sale price to be controlled by the fiduciary.  Earned interest could be released to the municipality.  When the rate cap period is over, any remaining funds would be released to the municipality.  This is not going to be a popular proposal.  Based on our estimates some of the deals could deplete the entire sales price.  

If this type of rate “protection” is being touted for your system, we recommend a qualified person to analyze in detail the structure of the deal and get the details and promises in writing.  For the cases we have seen, precious little detail is provided.

A Sale Road Map

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The items listed above focus on the "WHAT" - the things the buyer and seller will present to make it look like a good deal.  They make it about the money, the sad state of the system, the rate increases needed, etc.

This section is about "HOW" it is done.  It is keeping the sale very low profile until the proposed deal is struck.  Then there is a frantic rush to announce the deal, "educate" the public on how great it is and finally sign the sales contract.  During this frantic rush, various techniques are used to suppress any opposition that may materialize.  

For an in-depth look at the "HOW", click here (LINK).

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