By Matt Wittlief
This past Monday, the City-County Council voted to approve the transfer of water and wastewater utilities to Citizen’s Energy Group. The deal is very complex and convoluted – perhaps by design, perhaps by necessity. My opinions on the deal have varied, but in the end, I support the transfer, but not the entire deal.
While this process did begin a long time ago, public awareness of the deal has been essentially limited to the last few months after the Mayor’s Office released the Memorandum of Understanding which was signed on March 9. The deal transfers two utilities, the water and wastewater systems, along with a significant amount of debt to Citizens in exchange for a cash payment. The key reason for the transfer, as marketed to the public, was to allow Citizens to leverage synergies in managing utilities to help curb ratepayer costs. There has also been much publicity regarding the issuance of bonds in conjunction with the sale to fund infrastructure improvements for roads, bridges, sidewalks, and parks.
It is important to understand that these are two distinct issues which had two distinct proposals and two distinct votes before the City Council.
The first proposal, which authorized the issuance of bonds to pay for infrastructure improvements, was approved by a vote of 17-12 on May 17. I was against this proposal. The debt service on this 30-year bond will be paid by so-called PILOT. The PILOT (payment in lieu of taxes) is a mechanism for local governments to still receive revenues when property taxes are not collected. The PILOT in this case is paid by the utility provider who receives an exemption on property taxes. Of course, the utility provider gets its money from ratepayers, so it is essentially a hidden tax in the utility bill. This PILOT existed prior to the Citizens deal and is set to increase in the future due to a higher assessment on the future value of the utility systems’ infrastructure. This is a result of mandatory infrastructure improvements that must be made to the systems due to EPA regulations. This increased PILOT, and its future revenue stream, is what is the “collateral” for the bonds.
As I stated earlier, I was opposed to this proposal, and I am pleased that Libertarian Councilor Ed Coleman voted against this proposal.
That leaves us with the second proposal which authorizes the transfer of the utilities from the City to Citizens Energy Group. This proposal is the one which came before the Council this past Monday. This authorizes the transfer of operations of the utilities to Citizens along with associated assets, debts, and obligations. Citizens will pay for the infrastructure improvements noted above, assume over $1B of debt from the City, and receive assets such as the property owned by the utilities. In return, the City will receive over $250M.
I do believe that Citizens will be able to operate the utilities more efficiently than the City. There are economies of scale that they can leverage in providing the service in conjunction with other utilities, and they are not subject to the same political and bureaucratic pressures that make the City less efficient. Further, Citizens is a charitable public trust – ultimately owned by and accountable to the public. This is far more desirable than transferring operations to a well-connected, for-profit company who could run the utility as a monopoly.
Citizens has estimated that it can save about $40M in operational costs per year. Regrettably, some of these savings will go to cover the increase in the PILOT. I find it regrettable as well that some of these savings are essentially lost to ratepayers due to the price of the transfer. That said, if you do the math, ratepayers should still save due to the transfer in the long run. It should also be noted that the propaganda surrounding the deal has suggested that water rates would increase 100% and wastewater rates would increase 400% if we did nothing. That is over the course of fifteen years and translates to annual growth of 4.7% and 11.3% respectively. The water rate increase hardly sounds as bad when you put it that way, and once you recognize that the wastewater systems require nearly $3.5B (yes, billion) of improvements…. well, it’s just a sad state of affairs.
We should not be fooled to think that the Citizens transfer is going to save ratepayers from increases. The increased rates are going to happen due to both inflation, neglected infrastructure which must be improved, and federal mandates for improvements. But, I do believe that the result will be better with Citizens than under City management. And I support the transfer despite the backroom dealing, massive legal fees, payments to Citigroup and other consultants, the expenses of Mayor Ballard’s son’s marketing firm to push the deal, and the convenience of the Mayor’s Office sitting on millions of dollars to invest in basic infrastructure in advance of the 2011 elections.
There is plenty to be upset about when you look at the process. There is reason to oppose the issuance of a 30-year bond supported by hidden taxes in order to pay for infrastructure improvements that have a shelf life of five to ten years. There is also plenty of good reasons to support the transfer of the utilities to Citizens. It’s a step towards smaller government. It’s a step towards lower rates. It was a good vote by Libertarian Councilor Ed Coleman to support the deal.