Montgomery County Taxpayers League

The Voice of Taxpayers of Montgomery County, Maryland

Issue: WSSC Needs Cost Controls Before Rate Increases

Issue:  Washington Suburban Sanitary Commission (WSSC) – Why We Need Cost Controls Before Rate Increases — Gordie Brenne, Vice President, Montgomery County Taxpayers League (November 16, 2014)

Water rates have gone up every year for the last eight years by an average of 7.5%.  WSSC management says the problem is unstable revenues related to less water usage by consumers.  The Taxpayers League believes the real problem is weak cost controls.  Water rates in Montgomery County are double those of the nearby counties of Fairfax and Howard.

The bi-county funded WSSC is a behemoth with 1,700 employees, an annual budget of $1.3 billion, and a new lavish headquarters building off I-95 in Laurel, MD.

So why are costs are out of control?  Could it be that WSSC is too big, with a governance structure that spans both Prince George’s and Montgomery counties and with accountability spread lightly across both counties driven somewhat by political considerations?

Was it ineffective management that led to a consent decree with the EPA to fix leaky sewer pipes at a cost that will eventually exceed over $1 billion?  We note that WSSC is building a $150 million Bi-County Tunnel (originally projected to cost $68 million) to provide more water to Prince George’s County where demand is shrinking.  Why?

County Executive Ike Leggett said in late October that the proposed new fee structure which “disproportionately hits a variety of people”(Gazette, 10/29/2014) should be delayed. He went on to say he supports a 5% rate increase for the next fiscal year instead of a 10.2% increase.

Below are the facts and some questions that need to be answered before rate increases are thrust upon Montgomery County consumers:

1.  Independent Cost Review – Last done in 1999 by Malcolm Pirnie & Co. and resulted in cost reductions of 33% that lasted until 2005 when rates began going up and hiring was resumed.  WSSC needs to stabilize control costs before fees are established and revenues stabilized.

2.  New Revenue Fee Proposal – The latest report recommended a new fee structure (MFSG).  This report included Working Group findings from representatives of both counties that looked at funding, not costs. The rationale for fixed reconstruction (infrastructure) fee versus a volumetric rate is purely subjective and only supported (pg. 22) by opinions of a focus group of 10 or so Working Group participants. Same for the Account Maintenance fee. Neither Municipal Financial Services Group (MFSG) nor the Working Group studied underlying costs or best practices for cost management.

a.  Fee Model Experiment – What percentage of comparable water authorities have adopted the proposed hybrid rate and fee model?  It needs to be determined if (a) the those water authorities that have chosen not to do so (such as Fairfax County, VA) have more stable cost structures,  (b) justification in the MFSG report is valid (pg.22), or (c) the case can be made for higher volumetric rates.

b.  Reconstruction Fee – It needs to be determined if projected fees (MFSG study) would be lower if Montgomery County capital costs were separated from capital costs for Prince George’s County.  Also if study projections which include Percontee Life Sciences Center demand are comparable to that of NIH? (631 million gallons per year, number 1 WSSC customer, pg 13). If demand is underestimated, fees are too high. Displayed pricing impacts do not show large volume (8”-12” meter size) customers like NIH- pg. 35. Need to determine if fixed fee helps or hurts larger customers more than volumetric rates and thus impacts our economic development objectives.

c.  Account Maintenance Fee – Need to review proposed account maintenance fee ($35M a year) and determine if outsourcing these activities would reduce costs (not in scope of recent MFSG report-1/14).

d.  Cost Projections – What are the risks to adopting this model if capital costs soar beyond current projections?

e.  Unbilled Water – How should this $200 million problem be best resolved? Will fees help? How much of this problem is due to old meters at NIH which is currently billed for 630M gallons a year? The current 16% rate is well above 10% goal set in 2000, and no goals or related performance measures are included in the WSSC budget.

f.  Budget Scrutiny – Will establishing the proposed fees interfere with annual budget review where costs and revenues are reconciled and tradeoffs made, or will there be fewer cost tradeoffs?

3.  Capital Costs – are the largest part of the budget and result in debt service charges of $254 million per year.

a . Scale – Need to consider if economies and diseconomies of scale in partnership with PG county could be enhanced/reduced if operations, assets and liabilities were split?

b. Subsidy – Need to determine if Montgomery County rate payers are subsidizing Prince George’s rate payers for a fair share of debt service, including equitable share of Bi-CountyTunnel and EPA settlement costs?

c.  Economic Development- Need to determine if water charges would be best aligned with Montgomery County development plans if the Prince George’s partnership were replaced with separate operations and capital structures?  Also need to determine if pricing criteria that rank economic development last are valid for Montgomery County (MFSG report, pg.18)?

d.  Blue Plains – Need to determine if outsourcing sewage treatment to Blue Plains is a model for outsourcing water treatment?

e.  Supply Chain Management – Need to review new system and determine the impact of potential reductions on future capital cost estimates and Reconstruction Fee estimates?

f.  Regulation – Could WSSC be better regulated by the Public Service Commission rather than the two counties or would this reduce local control and accountability for capital costs?

1.  Operating and Overhead Costs – have been growing since Competitive Action Program Plus (CAP Plus) program ended in 2005.

a.  CAP Plus – Last study (Malcolm Pirnie Co. 1999) led to new efficiency plans. Can new plans be developed without going through another privatization study?

b.  Benchmarks – How do WSSC costs for key operations and overhead compare to similar water authorities? For example, does lower overhead explain why Howard County charges less for water it buys from us?

c.  Best Practices – Are there best practices WSSC should implement to improve productivity?

d.  Labor- Over 200 employees have been added to WSSC since 2007 and the end of the CAP Plus program. Are labor costs comparable to neighboring water authorities? Are labor costs balanced with CIP priorities to improve productivity (e.g. valve replacements)?

e.  Outsourcing – Could outsourcing further improve productivity (e.g. water filtration, fleet maintenance)?

Comments (2)

  1. C D Raab

    Thank you for this thoughtful and thorough article on WSSC and how its prices and services could be improved. You are doing the county and WSSC by outlining the issues and suggesting approaches.

  2. Susan LaCourse

    I recently looked through the Oct. 16th, 2014 Bi-County Infrastructure Funding Work Group report on WSSC FY2016 Spending Control Limits (FY 2016 begins July 1, 2015). If I’m reading it correctly, WSSC plans on accumulating over $400 million in NEW debt during each of the next 3 years ($1.3 billion total). I think this is how they fund Capital Improvements (pipe replacement etc.). The total debt that WSSC is currently carrying must be close to 10 BILLION dollars. The counties limit WSSC’s debt service charges – I think it’s a max of 35% of the operating budget. Unfortunately, instead of limiting debt it’s actually driving up the total operating budget. WSSC doesn’t limit its debt load but increases its budget so the debt is a smaller percentage. The projected operating budget increases from the current $678 million to over $900 million in FY 2021 in order to allow for future debt. That’s a 33% increase over the next 6 years, with a continued 6-9% rate increase each year. I think the core issue is new debt. We need to take a good hard look at WSSC’s Capital Improvement Plan (public hearings are every Sept.) and make them eliminate unnecessary projects, asking questions like, “Just how old are the pipes that are failing/ being replaced? Are they failing prematurely, and if so, why? What other projects are being planned that may not be necessary?” For example, WSSC has spent a lot of money – and acquired a lot of debt – increasing capacity at its Laurel treatment facility, yet usage has remained flat. Was that really necessary? It was certainly expensive. And is the planned major upgrade to T. Howard Duckett Dam necessary, or is it overkill (perhaps WSSC officials have been watching too many disaster movies)?

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