Thursday, January 22, 2015

The Risk in Basing Future Rates on Dubious DWSD Financials

Both Oakland County Executive L. Brooks Patterson and Macomb County Executive Mark Hackel have recently reiterated their concerns about the accuracy of financial figures furnished them by representatives of the City of Detroit during bankruptcy negotiations leading to the creation of the Great Lakes Water Authority (GLWA).  

GLWA was superimposed over the Detroit Water and Sewerage Department (DWSD), which is notorious for its shortcomings in accounting.  GLWA is to lease certain DWSD assets for $50 million per year for 40 years.  The system is supposed to be sustained by water and sewer rate increases not greater than 4% per year over the next 10 years. Whether that goal is feasible depends on the accuracy of DWSD’s financial representations.

Some insight can be garnered from a report published a month ago by Veolia, an international water, waste and energy management and consulting firm.

The following excerpts are from the Executive Summary in the Peer Review Report furnished to DWSD by Veolia last month, intended to show cost saving opportunities through application of best practices in the water services industry.  

It is hoped that these quotes will serve as an introduction to further observations on this blog concerning DWSD, its accounting practices and the financial predicates of GLWA rate setting.

“As part of the bankruptcy process, Veolia responded to a Request for Expressions of Interest on April 7, 2014, to manage, operate and maintain DWSD, which was issued by the Emergency Manager.” (p.ES-2)

“This was followed by a Proposal on May 20, 2014, entitled, “Partnering to Build the New Detroit Water and Sewerage Department”, which was based on different financial information utilized in this analysis. The use of different financial information contributed to significant differences in savings potential, but the objective to enhance performance at reduced cost remained the same. Many ofthe concepts in that proposal are included, enhanced and clarified in this report.” (p.ES-2)

“Veolia’s approach has been to identify potential efficiencies in O&M that reduces costs and contributes to the $50 million Lease charge contemplated in the Memorandum of Understanding (MOU) regarding the GLWA; but only to the extent the GWLA and DWSD performance is maintained or improved to the levels expected of utilities performing these critical services.” (p.ES-3)

“This section reviews the potential for savings that can enhance GLWA’s capacity to pay the proposed Lease charge. For clarity, the term ‘Lease charge,’ as used in the GLWA MOU dated 9/9/2014 refers to the $50 million annual payment to be made by GLWA to the City of Detroit for the lease of the DWSD systems. This payment is also referred to as the ‘Control Premium.’ “ (p.ES-3)

“It is important to note that Veolia has not performed an assessment of current costs, nor verified that the proposed projections fit the 4% revenue increase requirement. These two tasks were considered to be out of the scope of Veolia’s assignment.” (p.ES-3)

“Furthermore, Veolia understands that during the negotiations for the creation of the regional authority, the viability of the Lease charge was based on several sources of funds, including O&M cost savings estimated by DWSD in an amount between $10 million and $20 million annually. The details of these savings estimates were not provided to Veolia and, therefore, were not included in the assessment.” (p.ES-3)

“Veolia did not include potential capital expenditure savings in the Lease charge analysis as such savings would not have a dollar-for-dollar impact on GLWA’s ability to make a lease payment.” (p.ES-4)

“As noted in the Report, there is potential for additional revenue to GLWA from the enhanced calibration and/or replacement of the large wholesale meters. This additional revenue could be as high as $30 million a year (water only – not including wastewater) if the meter inaccuracy is at the high range (about 10%) of estimates, which Veolia has seen in other jurisdictions. This additional revenue could also contribute to GLWA’s ability to pay the Lease charge, and it has not been included in Veolia’s savings analysis.” (p.ES-4)

Stay tuned.

No comments:

Post a Comment