DWSD Denies FOIA Request, Elusive O&M Savings, Gag Order

Prior to the Detroit bankruptcy settlement, it was represented that the proposed $50 million annual lease payment for water-related facilities, payable by the new Great Lakes Water Authority (GLWA) to the City of Detroit, would be offset partially by cost savings initiated by the Detroit Water and Sewerage Department (DWSD).

Veolia, the international water management and consulting firm, in a report to DWSD this past December, stated, "...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)

Because parties to the ongoing negotiations concerning the transition from DWSD to GLWA are prohibited by a renewed federal gag order from discussing the details surrounding the lease payment, I submitted a FOIA request to DWSD for copies of exclusively internal records of O&M cost savings in the $10-20 million range, independent of the negotiations.

Last Friday, DWSD denied my request for the reasons that (a) no such record exists,and (b) even if it did exist, its release would be prohibited by the gag order.

It looks to me like DWSD's dissembling continues unabated.  Ironically, media outlets later this month will be celebrating Sunshine Week, extolling the virtues of open government.

I can make a pro forma appeal of the denial to Director McCormick, but we all know how much good that will do.  Sooner or later, somebody in a position of public responsibility will have to challenge in court the gag order and DWSD secrecy and obfuscation.

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Forecasting Water & Sewer Rates: Con Game or Reckless Use of the Crystal Ball?

“Each system [water and sewer] as a whole, is assumed to experience revenue requirement increases of not more than 4% for each of the first ten years under [Great Lakes Water] Authority management.” -- Memorandum of Understanding (MOU) p.4, September 9, 2014.

“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.”  Veolia Peer Review Report to the Detroit Water & Sewerage Department, p.ES-3, December 19, 2014.

“The GLWA board will cap annual increases in water and sewer billings at four percent a year for 10 years.”  Great Lakes Water Authority Frequently Asked Questions.

“The Detroit Water and Sewerage Department is warning customers that rates could rise an average of either 9.2 or 14.1 percent…” Detroit News, January 27, 2015.

“...[O]ne selling point [of Detroit’s bankruptcy settlement] was the assurance that annual rate hikes would be capped at 4 percent.” Id.

“Promising a 4 percent cap on rate hikes wasn't [the right thing to do]. It was reckless and misleading, and likely was never a real possibility.” Id.

“The cost of water in Flint would likely rise 30 percent or more if the city returned to buying it from the city of Detroit, emergency manager Jerry Ambrose is warning.” -- Ron Fonger, MLive, March 6, 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.”

Charles E. Ramirez, The Detroit News, February 12, 2015

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.

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)

http://www.dwsd.org/downloads_n/about_dwsd/TransitionPlan/PEER_REVIEW_REPORT_Veolia_DWSD_12-19-2014.pdf

Stay tuned.