Taxpayers League Critical of WSSC’s Financial Evaluation of Capital Projects

WSSC CIP Plan Testimony, Sept. 4, 2019, Gordie Brenne, MC Taxpayers League

Tonight I’d like to make some points about the poor capital investment decisions WSSC makes, and how they relate to future solvency and a taxpayer bailout.   The Commission approved new standards for capital controls on July 17 that reduce the risk of WSSC insolvency. The new standards affirm 40% as a hard target for debt service as a percentage of total expenditures, set standards for cash on hand, and fund balances at 10%.  These are points we have made in previous testimony with you and in meetings with Joe Beach.  Thank you.

But, your job in creating new policies to manage costs is far from done.  The risk of insolvency remains because of growing capital demands to replace aging infrastructure, deferred work on environmental consent decrees, high operating costs, and recession risks.  Most projects approved by WSSC have a rate of return that’s either negative or below WSSCs cost of capital.  One example that we oppose is the smart meter project which has a negative rate of return, and illustrates what happens when cheaper alternatives like AMR technology are ignored by rent seeking vendors.  This drives rates higher, and spending more than you get back is a prescription for bankruptcy in any business.  (Either project costs must be reduced or project revenues increased to achieve an acceptable return on investment.  For example, the Piscataway upgrade has a return on investment of just 3%, well below the cost of capital.  And that’s only if construction costs and energy savings come in as estimated.  How do you control variances from those estimates? Why wasn’t a shift to Blue Plains included in the business case?)

(On the revenue side, WSSC can be best characterized as a mature business, one that must make some tough CIP decisions to remain a going concern.  For example, annual rate increases are projected to be above market 6% for FY21-25 in the long-range financial plan (FY 20 budget request, 3/19) to match costs, but that’s not politically sustainable.  Per capita consumption will continue to stagnate because rates higher than the cost of service contribute to a decline in business investments. Lower consumption, combined with inadequate cost controls drives higher rates.)  Three other ways the CIP plan can be reprioritized to better control costs include:

  1. Reduce increased costs due to lost water and leakage into the sewer system. The latest lost water audit report was presented to you in May showing an increase of 16 to 18% from FY17 to FY 18.  The Cost of Service study (May 2017) showed sewage treatment had to handle inflows and infiltration of 43%.  The CIP plan does not organize projects to show how you can prioritize projects to reduce this waste and improve return on investment.
  2. Shift more sewage treatment to Blue Plains where the return on investment is higher. Sewage treatment is the most capital intensive and expensive operation WSSC has.  Currently, only 65% of total sewage is treated by Blue Plains, with 85% of Montgomery County sewage treated by Blue Plains vs. 60% for Prince Georges county.  WSSC continues to demonstrate it doesn’t know how to handle sewage.  The Piscataway treatment plant and it’s pumping stations are responsible for chronic spills: 1 in 2017, 2 last year, and two others this summer.  The latest on 8/9/19 spilled 5.22 Million gallons into the Potomac water shed over-night, undoing years of storm water abatement that have cost the county’s taxpayers 100s of millions.
  3. Fix project classifications and end unfair cross-subsidies from Montgomery to Prince Georges customers. Based on rough estimates of sewage operating and debt service costs, Montgomery County residents pay the same rate for sewage, but their share of the costs is only 36%.  Part of the problem is the CIP plan attempts to organize projects by county, and the largest category is bi-county, which inexplicably includes the Piscataway upgrade project that serves just Prince Georges county.  Efforts to balance projects between the county’s have been unsuccessful, resulting in more money being spent on sewage projects in Prince Georges County.  We urge the Commission to ask the Inspector General to investigate these cross-subsidies.

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