02/10/2011

November 30 Minutes

Commonwealth of Massachusetts
Water Infrastructure Finance Commission Meeting
Minutes November 30, 2010

The Commission convened in a meeting duly posted at 10 am in the Senate Reading Room at the State House.

Members Attending:  Senator Eldridge; Representative Dykema, Philip Jasset, Bill Callahan, Tom Walsh, Michael Martin, Becky Smith, Tom Tilas, Dave Hanlon, Ned Bartlett, Robert Zimmerman, Paul Niedzwiecki, for Bruce Tobey, Dave Terry(for DEP), Martin Pillsbury, David Riedell (for the Treasurer), Peter Shelley

Also attending:  Rosalie Starvish, Jessica Strunkin, Jennifer Pederson, Robert Sims, Beth Miller,  Ann Rhinelander, Christopher Woodcock,  Mary Beth Morrison, Howard B. Maki, Linda Maki, Leah Robins, Heather Bell, Sally Schnitzer

Senator Eldridge opened the meeting and welcomed the members and guests.

Minutes

The minutes for the October meeting of the Commission will be approved at the next meeting.

Hearings

Senator Eldridge asked the Commission for thoughts about the statewide hearings held in October  and November.   Mr. Tilas noted that Professor David Cole who was present at the hearing in Barnstable has been in touch with him to pursue further his thoughts on financing wastewater, and has sent a white paper that is very interesting.   This came directly out of the hearing on the Cape.   It was agreed that Ms. Schnitzer will circulate this document to all the members.  Mr. Jasset wondered if there would be notes from the hearings, or were they videotaped?  How can we summarize what we heard? Ms.Schnitzer said that notes from all four hearings will be posted on the website, and that two of the hearings were videotaped.  Mr. Jasset also wondered if we needed to be approaching the Governor regarding the proposed 2011 budget (known as House One) to see if anything can be added to the old rate relief line item and to press for other budget priorities.

Administrative Matters

Martin Pillsbury announced that Working Group Four would NOT meet later in the day, as the invited speaker had to cancel at the last minute.   The meeting will be rescheduled.

Senator Eldridge asked each Working Group chair to lead a brief discussion of the issues being covered in that Group.

Group One.

Rep. Dykema reported that Group One is reworking its outline, and an intern is going through reports and resources to organize information for the report.  This afternoon at 12:30 Working Group One will meet with two speakers who have prepared remarks on the cost of stormwater retrofit and infrastructure.

Group Two

Mr. Walsh reported that Group two has not met since the last meeting, but is meeting next week, on December 8.

Group Three

Ms. Schnitzer reported that Group Three has two meetings scheduled, on December 7 and December 14.

Group Four

Mr. Pillsbury reiterated that today’s meeting of Group Four is cancelled, but the Group had an excellent meeting last month with Robert Cialek, talking about the issues facing Cape Cod.

Rates and Rate Structures

Senator Eldridge introduced the first of two speakers who will share their thoughts on rates and rate structures for water, sewer and storm water infrastructure.

Mary Beth Morris is an engineer with Tighe and Bond, a 200 person engineering firm that is one of the oldest continuing engineering firms in the Commonwealth.  The company does a lot of work with communities on water and sewer infrastructure, and a number of years ago (1997), they began to compile data on rates across the commonwealth.  The structure of their annual rate report mirrors the data collection that had already been started by the MWRA.

Benchmarking can be a powerful tool.  The MWRA data was helpful but did not cover the state.  It is important to understand the internal assumptions and data sources and to understand that there are limits to the data available.  For example, some systems cover energy or administrative costs in their rate structures, while others do not.  Some rates include all operating costs and capital improvement investments, while others do not.  Some systems are financed by the general fund, while others are funded by enterprise funds. There are also some 30-40 systems that are run by private water companies.  So the comparisons are not always “apples to apples”.

These rates comparisons are also based on assumptions about water consumption for a four person household, rather than on actual consumption.  The assumption is annual consumption at 90,000 gallons.  All this data relates to residential rates, only.

Between 1998 and 2010, on average, costs for rate payers have increased by 70% for drinking water.  Sewer costs are also higher, up nearly 70% over ten years.  The average rate payer spends more than $1000 on water and sewer together.  The median is lower.   These numbers have not been adjusted for inflation.

Again, the assumption in these numbers is that a 4 person household consumes 250 gallons per day.  Most households these days report ACTUAL consumption of significantly lower, unless the home does outdoor irrigation.

In general, smaller systems are more costly to the consumer than larger systems, due to various efficiencies.

We generally see three types of rate structures:  62% of suppliers are now using ascending rate structures; 30% use flat rate; and 2% use a flat fee.

Sewer rate structures are different from water rate structures.  Only 38% of those utilities use ascending rate structures.

Ms. Morris noted that towns also vary as to how often they bill customers, with the majority now moving to quarterly billing.

There are various theories as to why we see these trends.  Two of the biggest factors are the conservation message that many towns are working on, and a second is that the SRF requires towns to meet specific application hurdles.

To summarize, some of the major trends observed include:

  • Typical annual costs for water and sewer have risen steadily and now average around $470 for water and $576 for sewer (ANNUAL).
  • There is a wide RANGE in water and sewer rates across the state, from a low of $113 (water) and $193 (sewer) to a high of $1962 (water) and $1455 (sewer).
  • Costs are usually higher in smaller communities
  • The majority of towns (62%)now use ascending rate structures for water rates
  • The majority of towns (58%)now use flat rates for sewer rates
  • The majority of towns bill their customers quarterly for both water and sewer (57% and 55% respectively)
  • Some towns now have differential rates for businesses, the elderly, low income clients, those who pay their bills early, or seasonal users.  The most common differential rate is the business rate, with approximately 20% of the towns having such a rate.
  • We are seeing more and more charges for billing, administrative costs, or metering
  • Some towns have separate rates for irrigation
  • A handful of towns have set up rate structures for storm water utilities.
  • Some towns are setting up rates for multi-unit residential properties
  • Some towns include a capital improvement fee in their rates.

Mr. Martin:  Is there a correlation in these numbers to the presence or absence of metering?   Towns using a flat fee may not have access to metering information.

Mr. Jasset:  What percentage of the population are in regional utilities?  These lack flexibility because their infrastructure is already built, and they have debt service build in.  If this is a large proportion of the population, this is important to know.

Ms. Morris.  The MWRA alone has about one third of the state.   Perhaps the regional utilities serve up to 50%, but I am not sure.

Mr. Walsh:  I am interested in the issue of folks wanting to pay their utility bills so they can claim a deduction on their taxes.  People push back on enterprise funds because of this.   Also, can you talk a little bit about how the storm water utilities bill their rates?  Is it in a separate account, or added to the sewer bill?

Mr. Pillsbury:  I believe that in Reading it is a separate fee, but in Chicopee it is part of the sewer bill.

Mr. Callahan:  The Pennsylvania report recommends that we get people to value the true cost of water.  They propose that people should expect to spend about 1 ½ percent of the median family income on each of their water and sewer bills, or about $1000 per year.   That would be a doubling of the current average you report.   My question is, do you think that would double the revenue stream?  Ms. Morris:  Well, first of all, the estimate on consumption is undoubtedly high because we are using a hypothetical use number.

Mr.  Tilas:  How do we compare to other states? Ms. Morris:  I know the costs are higher than in Connecticut, because we do a survey there.  Not sure about the other states.

Mr. Martin:  You referred to a CIP fee.  What is that?  Ms. Morris:  a fee to cover existing debt payments, generally.

Mr. Hanlon:  A big variable is the assumption of use. Mr. Pillsbury:  The DEP standard for residential use is 65 gallons per day.  Could we use that as a number and change the assumptions?  Mr. Jasset:  The national average is 60 gallons per day, so that is the right ballpark.

A comment was made by a guest that enterprise funds are “raided” for administrative costs or other costs of municipal government.  How does that show up in these rates?  Mr. Hanlon noted that in an enterprise fund, the purpose is to build a surplus to fund the CIP.  It is valid and expected that a certain percentage is appropriate to pay to town hall for admin costs, but these must be kept in line.

Mr.  Eldridge introduced Christopher Woodcock, from Woodcock Associates in Northborough MA.  Mr. Woodcock is an expert in rate setting, and his firm provides water and sewer rate consulting services to governmental and investor owned utilities in North America and overseas.   He has worked with many communities in Massachusetts.

Mr. Woodcock stated that the work of the Commission is very important.  His expertise is in water and sewer rates for the last 35 years, including large entities like New York City and hundreds of smaller communities across the country.

e spoke of an imaginary Boston Globe ad to hire someone to supply clean water 24/7 in good weather and bad, on holidays and without serious service interruptions.  What would you pay for that service?  We actually pay about a dollar a day.  This is in a time when we willingly pay large amounts for internet, cable, or cell phone service –functions that are not essential to life and economic health.

Keep that in mind:  the huge disparity between value and cost.

Mr. Woodcock stated that is a lack of political will at the local level that keeps rates low.  Rate increases to reflect the true cost of water is nearly impossible, unless a REASON or an imperative can be blamed.  For example, we have been able to blame the MWRA for rate increases in their region.  That has actually been helpful in making people pay closer to the true value.

Here are some suggestions:

  • Put strings on any loans or grants.  Few people remember that the 75% federal grants of the 1970’s had important strings attached.  Specifically, I recommend that you require enterprise funds before any grant or loan is given.  And these enterprise funds should be used for the purposes of the utility, only, disallowing any “raiding” by the municipality, especially in rough fiscal times.  The Enterprise fund allows the town to say to its residents:  This is what it costs, here is how we pay for it.  Allow only the specified indirect costs to be assessed by the municipality, and use lots of transparency.
  • Require or incentivize Capital Improvement Fees, although they might be called something else.  This is a mechanism for infrastructure investments to be saved for.
  • The State of Rhode Island has an infrastructure improvement act that requires utilities to update a Capital Improvement Plan every five years, and to plan for a 20 year period.  They are required to set aside a separate, interest bearing account for this purpose.  Using rates, they raise substantial amounts each year that are set aside strictly for capital improvements.
  • Take a look at water conservation and the impact that it is having on revenues.  Water use is going down, and revenues go down, too.  But costs are FIXED and must be paid.  At that point, towns should raise rates, but instead, most are reducing their capital improvement plans.
  • A town should have an asset management/depreciation approach that tells them how much they need to spend each year for the next 50 years to take care of their assets.  When towns under-spend, they just push these investments onto future generations. But the Commission could make this an imperative.
  • Remember, a rate increase is not the same thing as a bill increase.  Bills do not necessarily go up as rates go up, if water is being conserved.
  • I also recommend against grants.  Cities need to have a mindset that they have participated financially.  We also need to let towns know that they ARE expected to step up and get this accomplished, and they should not wait for a bail out. Examples of Boston and Belmont.  There is no question that towns need help.  But low interest loans can do that.
  • Regional districts have done well, and may be more isolated from the political issues.

Mr. Tobey:  I don’t agree with the analysis that Boston and Belmont did good planning and did it on their own.   They got substantial grants.  Many towns have difficult issues and huge new regulatory demands.  I welcome you to come to Gloucester and see how hard it is.

Representative Dykema:  Many towns are reluctant to raise rates, but the rules of the game have also changed.  There are new demands on towns to meet regulations, and some towns are starting new systems.  There is a new paradigm.  I don’t believe that rates can cover all the costs.

Mr. Shelley:  I believe it will be a long time before the federal government is able to step up, so we need to look at the worst case scenario.  Mr. Woodcock, can you address how Prop 2 ½ fits into this picture?

Mr. Woodcock:  Proposition 2 ½ is a limit on local property taxes, but not on rates.  But because of this, we do sometimes see towns pressured to raise rates to cover items that are more legitimately covered by taxes.

Mr. Martin:  I have a question on how towns can accumulate money for capital needs.  Can you transfer money into a utility from the general fund?  Do you collect it pre-construction or post-construction?   Mr. Woodcock:  Yes, and it can be done either way.

Mr. Tobey:  Can you talk about the pros and cons of regionalization?   Mr. Woodcock:  For many towns, regionalization makes sense.  A district can attract employees with broad skills, and can run efficiently.  The drawback is loss of local control.  MWRA is a huge success story, as are the other districts in Massachusetts.  Our rates may be generally higher than elsewhere in the country, but our systems are older, too.

Mr. Tobey:  Is the Rhode Island model an unfunded mandate?  Mr. Woodcock:  The Rhode Island set up is a bit different, with all municipal utilities regulated by DPU.   But yes, the towns are required to do the planning.   Mr. Tobey:  This sounds like mandated asset management.   The state urges us to do the hard work of raising rates without matching with state will.

Mr. Shelley:  What do we know about the fiscally strong towns that have done full cost pricing?

Ms. Strunkin:  The towns have testified at hearings that they would like to invest in asset management, but instead they are forced to deal with new regulatory requirements.

Ms. Pederson:  The MWRA sewer relief fund used to help, but has been zeroed out the last few years.  Mr. Pillsbury:  When it was funded, 251 communities got money from it.

Mr. Zimmerman:  Your comments regarding grants being double-edged swords is important.  If the municipality gets easy money, it is easy to ignore alternatives.  We need to push towns to find money-saving alternatives and other innovations.  Paying for improvements makes towns pay attention.  We need to find a way to use the SRF for innovation, while forgiving the loan if the improvement doesn’t work.  Otherwise, no one will dare to innovate.

There was agreement and disagreement with this statement around the table.

Mr. Jasset:  DEP and EPA have been proactive.  We’ve spent more than most states and have done lots of innovative things.  Yes, you have to fight to get those approvals, but it has worked.  We can’t minimize how much DEP/EPA has accomplished.   We have done billions of dollars of investment and have greatly improved our dirty harbors and rivers.  My son recently caught a 30” bass in Watertown Square.  That is a huge accomplishment for our rivers.  Massachusetts has been a leader, and has some of the best engineering firms in the country working on solutions.

Mr. Tobey;  I would like to bring up a report that should be sent around to everyone.  It is a research study on best practices from a group in Denver.  I will send the link to Ms. Schnitzer.

Mr.  Eldridge:  Thank you for a great meeting.  Meeting adjourned.

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