The following was posted by Greg Forester on the Trenton Speaks Forum.  It is lengthy but worth the time to go through because it addresses several points of the proposed water sale that NJAWC and the City are NOT talking about.

Under the pending contract, NJAWC would buy water from Trenton not for $14 million per year but for $9.6 million a year for the first three years. This is contained in pages 1 and 2 of the Second Amendment to the Water Supply Agreement where it is stipulated that the payment shall be based upon a yearly quantity of 5,110 million gallons at a cost of $1.880 per thousand gallons. For year two and year three, that amount would only be increased by the percentage increase, if any, in the Consumer Price Index for the preceding 12 months of the contract anniversary date.

Right now, the system loses large amounts of water to leaks, theft and poorly metered lines, according to Trenton Water Works' general superintendent Joe McIntyre.

If that were the case, NJAWC would conduct leak surveys to find the leaks. NJAWC could reduce the amount of leakage by half. Doing so would reduce the amount of water passing through the municipal boundary meters by 15 percent. That may reduce the amount of water passing through the meters to less than the estimated amount of metered water used to determine the first three years payments. NJAWC would conduct a theft survey and determine if there was widespread theft. If theft were found, NJAWC would undertake a program to minimize or eliminate theft. Any existing theft found would not increase the revenues to the City. It would only increase revenues to NJAWC. NJAWC would identify the poorly metered lines and make them not poorly metered lines. Doing so would only benefit NJAWC and would not increase the amount of water passing through the boundary meters and would not increase the amount of money the City would receive. It would only increase the revenue to NJAWC. Rather than a windfall for the City it would be a windfall for NJAWC. NJAWC would have three years to remedy the leaks before excessive leakage would be benefit or “windfall” to the City.

All of this raises the question as to why the City and Mr. McIntyre have not and are not addressing these issues to the benefit of all of water users and to the City. The benefits would not just accrue to NJAWC upon the sale of the assets but could and should accrue to the City upon the rejection of the sale of the assets.

There is also an argument over the utility's expenses, which New Jersey American has promised to help cover under the water supply agreement. If expenses get too high, or revenues too low, the utility will not have any surplus at the end of the year. It's that surplus - - currently $3 million a year -- that goes into the city budget, and helps keep taxes from going higher.

There are no provisions in the pending contract that would require NJAWC to pay the City any additional monies should the water utility find itself operating at a deficit. Eliminating the deficit would fall on the shoulders of City water customers. As shown in the City’s FY 2010 budget, the current water utility surplus is not $3 million but is shown to be $8.5 million. This is comprised of the $2.5 million that will be transferred to the City and the $6 million shown in a line item for Capital Improvement fund. This is the first time that water utility surplus monies have been placed in such a fund. In an environment of low interest rates and low interest funding provided by the State and the Federal governments it raises the question as to why this is being done instead of getting almost “free” money. It also raises the same question because only $2 million of the $6 million dollars is being scheduled for spending in the FY 2010 budget. That leaves $4 million dollars that will not be spent and can be considered surplus. Trenton Water Works earns $38 million a year, including $21.5 million from the townships and $16.5 million from Trenton, according to McIntyre.

The City FY 2010 budget shows that the water utility revenue will be $42 million not $38 million. That would raise the township portion at least proportionately, if not more, due to better collections in the Townships.

Water sale opponents say that, with inflation, township customers will pay Trenton $800 million over 20 years, but the city says that estimate is far too high. According to The Times' calculations, total revenues could reach $800 million over 20 years, but only $500 million would come from the Townships. Starting with a revenue figure of $25 million and using a 3% inflation rate, the total amount of revenue to the City from township customers over twenty years would be about $617 million. The Times’ calculation assumes no increase in rates over the twenty-year period.

The revenues could be reduced, however, by some $30 million in maintenance projects in the townships that must be started in the next couple of years, according to McIntyre. What maintenance projects in the townships “must” be started in the next couple of years? The only major projects that the City has spoken about are both located in the City. They are the pumping station project and the reservoir project. Other than resuming a comprehensive piping system improvement program, which would only involve about $2 million a year and which would include the City part of the system, there are no $30 million projects that the City has identified.

City residents will continue to pay $16.5 million a year in water bills, and in the first year of the contract, New Jersey American will pay about $14 million for bulk water. The rate the company pays will automatically increase every year.

The City FY 2010 budget shows that the City residents may pay more than $16.5 million. NJAWC would only pay $9.6 million. NJAWC may also pay additional monies based upon a formula for capital improvements that would benefit the township part of the system. The rate would not necessarily increase every year. It would increase only if the CPI increases in the 12 months prior to the date of rate review.

New Jersey American will also pay 60 percent of the cost of recent and future capital projects, including a filtration plant upgrade, central pumping station improvements, and the covering of the reservoir. The payment would be $2.5 million a year, according to McIntyre.

Exhibit C of the agreement includes the terms for a Capital improvements Surcharge. The section establishes two factors that would be applied to the cost of capital improvements that benefit the townships. The first factor would be based upon an agreed percentage assigned to the City and to the townships. This could be a 40% allocation for the City and a corresponding 60% allocation for the townships (NJAWC). However, it could be less for the City and more for the townships because more growth in the system would occur in the townships than in the City and the improvements would be built and have been built to provide the capacity to meet the demands of that growth. The second factor is based upon the amount of water the City customers use and the amount of water that township customers use. Those percentages could also be 40% for the City and 60% for the townships. To determine the amount that NJAWC would pay the City, the cost of the project, say $70 million dollars (the cost of the Filtration Plant project), would be multiplied by each factor. Applying the first factor of say 60% would give $42 million. Then applying the second factor would give $25.2 million. The $25.2 million would then be divided into annual payments that would also include the interest that the City is paying on the money it borrowed to finance the project. The annual payment would then be converted to a per thousand gallon surcharge to add to the base water rate. The figures would be re-calculated every three years. What this means is that NJAWC would pay $25.2 million for a benefit that is worth at least $42 million dollars. What that also means is that the City, actually its water customers, would have to make up the difference of $16.8 million over the life of the loan. The actual amounts would be more over the life of the loan due to the interest charges. Applying the provisions of Exhibit C of the pending contract reveals that NJAWC will not pay 60% of the cost but only about 36% of the cost or less depending upon the factors. This means that at the start of the contract NJAWC would not pay an annual amount of $2.5 million but would pay an annual amount of about $1.45 million. That uses an interest rate of 1.5%, which is about what the City received from the State and Federal governments for the financing of the Filtration Plant project. The utility would save $4.5 million by not having to do maintenance in the townships, he said. And with the sale of the pipes helping pay off a chunk of debt, debt payments would drop by $4 million, McIntyre said.

The City has yet to distribute a break down of the cost savings. Some of those have already been implemented. Specifically, 20 to 30 positions have already been removed from the utility’s personnel budget. That represents between $1 million and $1.5 million dollars already taken out of the budget. There are some additional savings but it is unlikely that they will be as much as estimated by McIntyre and the City. Historical data shows that 60% of maintenance costs are related to City maintenance and 40% of maintenance costs are related to township maintenance, just the reverse of the percentage of customers in the respective areas. This is due in large part to the newer infrastructure in the townships.

The City has yet to provide a breakdown of the debt savings. What debt will be retired? To save $4 million per year after retiring $36 to $40 million of debt would mean that the City is paying 8% interest on that debt. That is extraordinarily high for municipal debt and is considerably higher than the interest rate that the City received for the financing of the water treatment plant project.

The numbers are rough, but with $32 million in revenues and $29.5 million in expenses, the money left over for the city budget could amount to as much as $2.5 million -- though McIntyre is officially predicting a figure closer to $1 million.

How will the water utility receive $32 million in revenues? That apparently comes from the $16.5 million from City customers and from the $14 million form NJAWC for bulk sale of water and from the $2.5 million from the Capital Improvement surcharge, which may be included twice in the City’s figures. While the $16.5 million from the City is in the ballpark, the other revenues are not. Using the contract formula revenues gives a total of $27.55 million. Using the questionable $32 million expense amount produces deficit of $4.45 million, which will be made up by the City customers and not NJAWC or the township customers.

Looking at the long term, New Jersey American has said its ongoing water purchases from Trenton Water Works will grow to $20 million a year by the end of the contract, and total $320 million over 20 years. But the actual figure could turn out to be higher or lower than that estimate.

What NJAWC and the City are not saying is that the projection may include additional water sales to other NJAWC areas beyond the townships. What they also don’t say is why that additional revenue is not included in their analysis of the expense and revenue for the water utility without the sale. That additional revenue is dependent upon the water utility being able to deliver that additional water. Although the water treatment plant improvement project specifications called for the plant to be able to produce 60 million gallons per day, the plant can only produce 40 million gallons per day. This may shortcoming may affect the amount of money that the City will receive from the Capital improvement surcharge.

The reason for the variance is the leaks. In the fourth year of the contract, New Jersey American will start paying for water based on readings from newly installed meters on the pipes that go into the townships. 

By the fourth year, NJAWC will have reduced the amount of leakage that may exist in the townships. Neither McIntyre nor anyone else in the City knows whether the so called unaccounted for water is equally distributed in the whole system or whether it is greater in the townships or in the City. If the latter, NJAWC would have to do less work and the City would have to do more work to reduce the leakage in the City.

The actual amount of water flowing into the suburbs could be worth more than $14 million, in which case New Jersey American will have to start paying the city more. To receive $14 million for water sold the amount of water sold would have to increase to more than 7,452 million gallons. That would be a 46% increase. It is unlikely that the townships will grow that much. The Capital Improvement Surcharge could increase the water sold revenue to about $11 million ($9.6 million plus $1.45 million). To get to $14 million would require water sold to increase to about 6,503 million gallons. That would be a 27% increase. It is unlikely that the townships will grow even that much.

City officials said the actual cost of the increase to city residents is $2.3 million annually. It is undisputed that the water rates were raised by 40% in 2008. Currently reported City customer revenue is $16.5 million. Applying the 40% increase results in a before rate increase revenue of $11.8 million. The difference of $4.7 million is what the 2008 rate increase cost City customers. The City should explain how it calculated its $2.3 million increase. It should be kept in mind that the City also raised rates in late 2006. On average, City customer saw a 37% increase. What that means is that a City customer that paid his or her bill on time saw a 100% increase in their water bill. In 2006, the City also eliminated the 10% discount that customers received for paying their bills within 30 days of receipt.