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HomeMy WebLinkAbout1991 11 11 - Responses to John V. Little's Analysis11/20/51 10:30 $407 839 3790 HARTMAN & ASSOC. Ilh003 RESPONSES 7'0 MR. JOHN V. LITTLE'S ANALYSIS OF THE BRIEFING DOCUMENT FOR THE INVESTIGATION OF EXISTING UTILITY FRANCHISE OF PROVIDING WATER AND WASTEWATER SERVICES FOR THE CITY OF SEBASTIAN, FLORIDA PREPARED BY: HARTMAN & ASSOCIATES, INC. HAI 1191-1.74.00 November 11., 1991 A., INTRODUCTION On Tuesday, October 29, 1991, Mr. Gerald C. Hartman, P.E. of Hartman & Associates, Inc. (HAI) met with Mr. Robb McClary, City Manager and Mr. John V. Little. Mr. Little is a private consultant who has reviewed the Briefing Document prepared for and subsequently accepted by the City entitled "Investigation of Existing Utility Franchise and the Advantages and Disadvantages of Providing Water and Wastewater Services for the City of Sebastian-" To facilitate review, we have provided each of Mr. Little's comments with our responses directly below. Cons ent No 1: A statement is made that the concentrations of lrihalomethanes are "notalarming", since GDU does not practice THM control. 1 my opinion, such THM levels should be a concern as they are considered to be carcinogenic and should be controlled. This can he- accomplished by using a disinfection process other than simple chlorination. $ems: The levels are not alarming due to the fact that they were expected, similar to Palm Say, and the same corrective improvement is expected with a combined chlorine residual. The cost for these improvements are included in the report. True, total trihalotnethanes (TTHMs) should be controlled. One method of controlling TTHMs is using an alternative disinfection process, such as chlorine dioxide, ozonation and/or ultra -violet radiation, etc. However, these disinfection processes are more costly to implement and operate. Therefore, process modifications to the water treatment process are generally implemented. One such process modification is ammoniation. This process is extremely effective, very simple to implement, and is cost-effective. It would be safe to say that over 90 percent of the water treatment plants (WTPs) in the state of flprida utilize ammoniation for TTHM control, rather than instituting a new disinfection process. it would be recommended for this facility that an ammoniation system be instituted rather than a new disinfection process. Comment No. 2; The bacteria concentrations inside and outside the control residence are most likely a result of faulty sampling technique rather than system problems. Resan_r)Se: Although faulty sampling techniques could be one reason for violating the bacteria standards within a residence and not outside, it would be inappropriate for us to say that the Indian River County Dcpariment of Health and Resource Services' sampling procedure is faulty. Moreover, it is very possible that bacteria problems could actually occur within a residence and not be detected at a point outside (i.e., faucet) of the same residence. HES/ch R5/Sebast. Rsp 1 ` 11/20/91 10:31 '2407 339 3790 Comment N 3 HARTMAN & ASSOC. n The copper levels should be dealt with, but cannot be resolved by simply modifying the operation of the plant. Re .sponse: True, the copper problems should be dealt with and they will. As a result of the Amendments to the Safe Drinking Water Act (SDWA), the maximum contaminant level (MCL) for copper, monitoring, treatment requirements, etc., have been revised_ The new MCL for copper is 1.3 mg/k. To comply with the Amendments to the SDWA, the utility must begin monitoring by July, 1992 and recommend treatment actions by January, 1993. in accordance with the Amendments to the SDWA, a treatment system must be on-line by July, 1996, assuming the water system exceeds the copper MCL. The source of copper in drinking water is generally due to the corrosion of interior household and building piping. In summary, the finished water is unstable and is basically an aggressive water which induces corrosion in the system. The most cost-effective method of corrosion control techniques is pli adjustment and alkalinity adjustment. Other methods of corrosion control include calcium adjustment and/or the addition of phosphate- or silica -based corrosion inhibitors into the system. it was recommended, based on our review of the monthly operating reports for the WTP, that a pH adjustment/alkalinity control system be installed at the WTP. This system would consist of a chemical storage tank, metering pumps, pH recording device and miscellaneous controls. This system would consist of a chemical storage tank, metering pumps, pH recording device and miscellaneous controls. This system will continuously monitor the drinking water and adjust the pH of the drinking water to maintain a stable water. The costs for these improvements are included in the report. Comment No. 4: 'Che statement. that the County impact fees are higher than most others in the region is misleading and is presented as a negative when such is not the case. Impact fee levels may vary greatly from system to system due to a number of factors, such as' a) The immediate need for new plant as opposed to costing existing plant. b) Ratemaking philosophyfpolitics. impact fees may f1wily reflect plant costs or may be only partially costed to avoid high fees. The difference is then made up in monthly rales/conunodily charges. Since there is no "free lunch", impact fee costing is analogous to the Fram commercial, i.e., "You pay now or you pay later." To avoid growth costs being a burden on existing customers, impact fees should be fully costed. The result is often HES/ch R$/Sebast.Rsp 2 C UVb 11i'LOi91 10:31 $'90'1 339 3790 HARTMAN & ASSOC. 41 Vbb what appeal's to be high charges. Such a problem should be handled by time payments (teem -financing), not by artificially lower impact charges. c) Lnpact fee levels are greatly affected by what costs are included, i.e., treatment plant, transmission, distribution, service and metering. Again, all appropriate costs should be included, as stated above. R- op nse: The statement that the County's impact fees are higher than most others in the region is a LrUe— statement. As Mr. Little indicated, impact fees vary greatly from system to system and are based on the need for new facilities versus upgrade and the ratemaking philosophy/politics. However, all appropriate costs should be included in the impact fees, which include treatment plant needs and collection, transmission and distribution system needs - Comment No. 5 With regard to comparing County impact fees with GDU, in addition to previous relevant continents, one would expect GDU to be lower due to the methods developers almost always use to recover up front capital costs related to utilities and site development. Such capital costs are recovered in the sales price of lots and/or houses. Often, if rate regulation is not sophisticated, such costs are recovered twice, once through lot/house sales and again through impact fees and/or monthly rates. This statement is untrue, though may have occurred in other investor-owned systems in other locations. Our firm is very experienced in the financing policies of GDU, as well as numerous other private utilities. In fact, members of our firm have testified before the Florida Public Services Commission (FPSC) on impact fee and rate making issues. Based on our knowledge of GDU's financing policies, as well as discussions with the ex-GDU president, the customer was charged separately for the connection fee and not recovered twice as implied by Mr. Little. Furthermore, the FPSC as a policy allows a utility to collect up to 75 percent of the facility in service as a maximum and the utility then must carry the remaining 25 percent on their books as an investment. Comment N4:. 6' When a government agency acquires a privately -owned utility system, particularly if condemnation is necessary, such costs are often recovered again. Condemnation law is very much biased in favor of the system owner. HES/ch R5/Sebast. Rsp -3' 11/20/91 10.32 '12407 839 3790 HARTMAN & ASSOC. 0007 Response! This is true; however, we proposed to invoke our franchise rights and pursue the GDU facilities through an acquisition process. We have not and do not expect that condemnation via a "quick -take" will be pursued by the City. We have recommended against condemnation proceedings in this endeavor. Comment No, I The statement that County rates are significantly higher than others in the region is also misleading and seems to imply that rates under City operation would be much lower. Such Ls simply not the case. Rates/monthly cormnodity charges will vary greatly between systems due to a number of factors. a) Ratemaking philosophy/politics. Rates should be fully costed. Some cities subsidize water and sewer operations from the General Fund rather than levy proper charges. b) Contribution to/frorn the General Fund may vary greatly. c) The monthly bill may vary greatly, depending on the level of utility tax levied. Such taxes are not reflective of utility costs, but of local politics and fiscal policy. d) System age, imbedded debt costs, level of service, quality of service, etc. Rgswnse; The statement that /the County's rates are significantly higher than others in the region is an accurate and true statement. The report never implies that under the City's operation, the rates would be much lower. The remaining statements of Mr, Little's, identified as a) through d) are accurate. Comment Nm 8., A proper comparison would compare County rates with pro forma rates under City operation. It is mgst unlikely that City rales could be lower than County gates. Most certainly, CDU rates would not be applicable under City operation, even in the short tenn. Response: A comparison of the County's rates with pro forma rates under the City's operation could not be done at this time, based on the data we had and were provided by the County. HES/ch R5/Sebast. Rsp -4- 11/20/91 10:33 '5907 835 3790 HARTMAN & ASSOC. X1008 Furthermore, the statement that GDU rates would not be applicable under City operation, even in the short-term, is conjecture on Mr. Little's pari. As previously stated, the rate making policies are dependent on a number of factors. Until the GDU system is acquired, any statement regarding rates is conjecture. Comment No. 2 The comparison between the County and GDU is not relevant and is misleading. Assuming that GDU is not the entity to provide citywide utility service, and I believe this a valid assumption considering the present status and integrity of GDU, then the comparison should have been between the City and County as previously stated. es ns It is not proper for us to respond to the status and integrity of GDU. The status of GDU is unchanged, with the exception of various municipalities and counties exercising their franchise rights or condemning the utilities, both of which result in possible sales of their utility. Furthermore, GDU is a subsidiary of General Development Corporation (GDC) and is not under the bankruptcy proceedings that GDC is at this time. Moreover, in our opinion, GDU has in the past been a fine utility that provided good service to their customers. GDU versus the County is the only actual comparison available at this time. Comment o. 10: The City would appear to have some advantage over the County in GDU system acquisition due to existing franchise provisions. I can safely state that the acquisition will ultimately be decided in court, notwithstanding franchise language. The City and County working together should be able to acquire the system in such a ntntuter as to not negatively impact County operation. Response: We agree with Mr. Little that the City has a clear advantage over the County in acquiring the GDU system_ Whether or not the acquisition ends up in court is yet to be determined. However, the City, by exercising their franchise rights, could conceivably offer GDU a value for their utility systems which the bankruptcy hearing officer may accept, or GDU may accept, both of which deletes tite courts. Nonetheless, a court case may be required. Comment No. 11: T'he statements on pages ES -7 and S regarding City ownership and operation are naive at best and appear to be comparing City versus continued GDU ownership. 71-iere b lit IS question all factors considered that City operation would be preferal Ie to GDU. The HES/ch R5/Sebast_Rsp -5- 11/zV/U1 10:33 0407 835 3750 AIMN HARI'MAN G ASSUC. question before us, however, is City versus County ownership, not City versus GDU. In my considered, expert opinion, County operation is the proper option if: a) Acquisition costs can be favorably dealt with; b) Appropriate franchise language, terms, conditions, and payments can be favorably negotiated. Inquiring seems to indicate that such obstacles can be overcome. My conclusion is based in part. on the following: a) In-place County business experience, plant and staff. b) County staff stability and political stability. C) Ability of County to do/pay what it takes to acquire and keep competent staff. Response: The first question is City versus GDU ownership, which we concur with Mr. Little that public ownership is preferred in this case over investor (GDU) ownership. The second real question is City versus County ownership. Mr. Little's conclusions are correct; however, this does not mean that the City can attain the same, For example, Mr. Robb McClary, City Manager, has over 15 years of utility experience and Mr. Dan Ecids, P.E. is a registered engineer in the State of Florida, who can handle the management of the utility system. Both individuals are very competent individuals and can handle die tasks associated with managing a utility of this size. As to paying and doing what it takes to acquire and keep competent staff, we cannot address Sebastian's'past; however, it appears that they are moving in the right direction with the staff they hired in the last three (3) years. As to the political stability and practices of the City Council, it appears that the Council is well versed in utility matters and truly concerned as to rights of the residents of Sebastian. Comment Ho. 12: past history in Sebastian generally and the airport, police and golf course specifically do not give comfort in the operation of a utility system, which is inherently so necessary to the public health and welfare. As only one example, it would be necessary to pay a competent utility director more than is currently paid the city inanager. Response.; There are many competent utility directors that are paid less than the city manager. We concur that reasonable salaries are necessary. The issue of earnings is not the deciding factor. HES/ch RS/Sebast.Rsp -6' C. Uod 11/G0/yl 10:34 V407 83U 3 N HAKIt1AN & A.,SUI:. LgjViu Again, the past history of the City of Sebastian does not mean that the City is not capable of properly running a water and sewer utility. Comment No. 13: The reasons given for City ownership are as follows: a) Control of erowth develop ent. ftc. In my opinion, legally and philosophically, utility service should not be used as a means to control growth. Zoning regulations are the proper vehicle for such control. In a few cases, where cities have used the withholding of utility service as a means to control or eliminate development, antitrust suits have been brought, resulting in the City being the loser. b) Control of operations, rates, etc. Such control is desirable, but it boils down to a "what price glory" situation. In my opinion, rates under City ownership cannot compete favorably with County rates, particularly in the long term. Economics of scale is only one of many reasons. Many admittedly desirable controls can be achieved through an appropriately -drafted franchise agreement. The statements regarding the impact of all ownership change on existing GDU customers are essentially true, when comparing continuing GDU ownership with City ownership. However, the same observations hold true under County ownership. Again, there is not question that City ownership is better than GDU ownership. Iiowever, I was under the impression that bridge had been crossed and that we are now comparing City versus County ownership. Response: The above statements arc opinions of Mr. Little's. For example, rates under City ownership cannot compete favorably with County rates, particularly in the long term. This statement may or may not be true,, since many factors fall into play (i.e., effective operations, future regulations, etc.). At this time, it is very difficult to compare the City ownership versus the County, since until the City has arbitrated the price of the utility, or conducted the necessary 180.301, F.S. investigations, such comparisons are not well documented. Comment No. 14: The statements in Section 5, pages G and 7 are, in large measure, opinion not based on factual evidence. In my opinion, they appear to be telling the clientwhat the consultant HES/ch R5/Sebast.Rsp 7 11/20/91 10:34 '$407 839 3'790 HARTMAN & ASSOC. wivi1 /WN perceived the client wanted to hear. In my opinion, most of the advantages of City ownership listed in Section 5, page 8 are incorrect and/or highly speculative, especially the first eight listed. Res pana Based on our review of the legal documents and other documents provided from tate County, regulatory agencies and other sources, our professional opinion regarding the City versus County ownership was developed. For example, the County did inform us that if the County took over the GDU wastewater treatment plank, it would be abandoned. The same holds true for the GDU water treatment plant. It is true that the County cannot purchase GDU under the same terms and conditions as the City. It would seem logical that the rates and capital charges would increase if the County did somehow purchase the GDU system, since they have in the past (i.e., park Place). Furthermore, we believe that the advantages listed in Table 5-2 are an appropriate representation at this time. SUMMARY Our meeting of October 29, 1991, was very productive. We believe the key issue initially is what entity, City or County, is the best to acquire GDU in Sebastian. We believe Ute City is the best entity due to the ability to acquire using its franchise rights granted to it by GDU. We expect a settlement negotiation, mediation negotiation or formal arbitration to determine the price, terms and conditions. Once the above and the 180.301 F.S. investigations are complete, then any future consideration/negotiation with the County as needed at the time would be appropriate. The second and smaller, yet important, issue is how the existing 95 ERU's as manifested by a handful of wastewater connections are served. We requested the County to continue service; they do not wish to if the City of Sebastian gains the rights to purchase GDU. 'Therefore, a reasonable transition of the very few existing customers is necessary. The third issue is capacity availability in the County plant for the assessment program the County initiated. The collection system assessment areas were not provided treatment and disposal capacity for 100% of the affected properties. In fact, only those property owners who purchased capacity from the County up -front were assured capacity. In addition, much of the treatment and disposal capacity was sold by the County to City property owners who were not within a collection system assessment area, and these owners have been told they must build their own pump station and force main, or similar facilities, to connect to the County transmission facilities. The County sold transmission, treatment and disposal capacity amounting to 2,000 ERC's in the County system. Then they built the transmission system, plant and disposal system_ They sold well over 5,000 ERC's upfront at 250 gpd per ERC in a 1,000,000 gpd plant. The County only conducted a very preliminary engineering study for the collection of sewage in Sebastian and never took the project any further. There are no detailed surveys, plans, specifications, cost estimates or assessment values established for the 2,000 ERC's sold and who had to pay what for connection. We do know that the collection systems will cost HES/ch R51Sebast.Rsp 8_ 11i2Ui91 10:35 $907 839 3790 HARTMAN & ASSUG wrvi4 probably more than three (3) times the County impact fee, if such costs are applied to only a few properties in the County's assessment area due to the lack of available capacity, such capital costs would be unreasonably great. In order to be able to assess all of the properties in the County assessment area, the County must unconditionally commit that capacity will be available when requested by the property owners. Tile County has not been willing to make such an unconditional commitment at this time for its own planned assessment area. The County states that new capacity will be available only when the next increment of the plant (the next 1.0 MGD) is sold and only at the time of the capacity sale, because the County will only build enough capacity for those who buy it up -front. After this sale, then one must wait until the next We (Le., next 1.0 MGD expansion). Tile fourth issue is the situation which the original Sebastian customer 2,000 ERC's have been in and their actions. Over 800 of the original 2,000 ERC's have been turned back into the County and the County has resold them elsewhere in the service area. Approximately 700 of the remaining 1,200 ERC's have refused to pay their impact fee assessments to the County and may be considered by the County in default. Nearly 400 ERC's of the some 500 ERC's are continuing to pay their impact fee assessments or have prepaid the entire impact fee and have not or cannot connect to the County system and are paying a reserve capacity fee to the County because they are not connected. Ninety-five (95) ERC's are connected to the County system and are paying all customer charges. In summary, the connected wastewater flow from Sebastian is about 19,000 gpd. The documented inhibited demand of potential paying wastewater customers is 80,000 gpd. There are no County water facilities and no County water customers (other than the maintained Park Place system) in Sebastian. HES/ch R5/Sebast.Rsp -9-