Sunday, February 15, 2015

DWSD's Costly Overcapacity in Water

We learned this month that the Detroit Water and Sewerage Department (DWSD) is abandoning its suggestion last September that a 4% lid on water and sewer rates was feasible for 10 years.

The Detroit News reported, “Water department officials said a decline in water sales is a major reason behind the increase in flat monthly charges. They estimate the department lost more than $26 million between July and December due to lower water usage and are projecting a $59 million shortfall this fiscal year,”

and (same article),

“In January, water officials said a $12.5 million decline in water sales might push rates higher than a 4 percent cap to be established under the new Great Lakes Water Authority.”

OK, so the numbers are jumping around a little.  What’s $12 or $13 million among friends?

Of course, most of the shortfall was known to DWSD before the Memorandum of Understanding (MOU), formally proposing a regional water authority, was cosigned by City of Detroit negotiators, no doubt with input from DWSD Director Sue McCormick.

In the MOU, it was “assumed” (p.4) that water and sewer rate increases would not need to exceed 4% for years.

It’s abundantly clear, however, that the real problem isn’t declining water usage.

The truth is that DWSD has had too much water production capacity for years.  Ratepayers have been carrying the cost unnecessarily.

The following is quoted from the analysis of Veolia in its Peer Review Report to DWSD in December 2014 (p.14) -- note that the overcapacity issue is anticipated to fall on GLWA:

5. Right-Sizing Capacity

Reduce the long-term expense of operating and maintaining capacity surplus to requirements

GLWA’s significant water production over-capacity should be right-sized in order to reduce both capital investment requirements and operations costs. [Emphasis added.] The necessary analysis could be done to reach a revised capacity decision in the next 12 to 18 months and Veolia recognizes that work is already underway in this regard. It is critical, however, to increase the speed and urgency of executing this particular initiative.

Indeed, existing discussions about closing one water treatment plant have been ongoing for many years. With almost twice the capacity of water treatment required, Veolia considers it both reasonable and responsible to execute this plan unless an alternative method of utilizing the excess capacity is identified. One such option includes selling it to other communities.

It is beyond the scope of this report to calculate the net detailed savings that would result from these approaches; however, the benefits would be significant in terms of both operational and capital savings, freeing up resources for other important initiatives.

Veolia recommends expeditiously determining if there is a reasonable possibility of selling water to other communities, while at the same time evaluating which of the plants to consider shutting down.

Closing at least one of DWSD’s five water plants should be a condition precedent to finalizing a regional water deal.

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