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11.5 percent surcharge now going on water and sewer bills in Middletown, Suez says

By Dan Miller

danmiller@pressandjournal.com

717-944-4628
Posted 3/30/18

An 11.5 percent increase in water and sewer bills for Middletown customers has been put in place, effective with bills residents and businesses are to receive in the first week of April.Suez, the …

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11.5 percent surcharge now going on water and sewer bills in Middletown, Suez says

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An 11.5 percent increase in water and sewer bills for Middletown customers is now in place, effective with bills residents and businesses received this week.

Suez, the private company that operates the borough’s water and sewer systems under a lease approved in 2014, sent out a letter dated March 28 telling customers of the increase.

The change is not a rate hike. It is a surcharge to make up for water usage in the last three years that fell below a target in the 50-year lease with Suez.

Borough council and the former water authority approved entering into the lease in September 2014, and the lease went into effect on Jan. 1 2015.

The surcharge will cost Middletown customers on average an additional 20 cents a day, Suez has said — roughly $6 a month, or about $72 a year.

But a rate increase is also on the way.

Suez cannot raise water and sewer rates before January 2019. However, in that month, residents and businesses will see an annual rate hike equal to the rate of inflation starting in 2019 and continuing for each of the remaining 46 years of the lease, Suez has said.

The first such rate increase in January 2019 will be about 4 percent, based on the expected rate of inflation, Dan Sugarman, managing director of Water Capital Partners LLC told the Press & Journal.

New Jersey-based Water Capital Partners LLC is affiliated with the private equity investors providing the financial backing for the lease. The entity created by the lease is known as the Middletown Water Joint Venture LLC, consisting of Suez as the private company operating the Middletown water and sewer systems under the 50-year lease, and the private equity investors.

‘A long-term bind’

Council President Damon Suglia said the council in 2014 “really put this town in a long-term bind” with the lease.

Suglia was elected to council in November 2015 and became president in April 2017, when he replaced Ben Kapenstein after Kapenstein resigned as council president. Kapenstein is the only member who remains from the council that approved the lease. He advocated for it at the time.

Suglia said the borough and current council is now stuck with a lease deal that he and the other officials now in charge had no role in crafting.

“Suez knew those numbers (regarding water usage) were not realistic for us to reach in a town of our size,” Suglia said. “The borough is landlocked” and cannot grow beyond its current borders.

“If we keep raising rates then people will leave and there will be less water use,” Suglia said. “They (Suez) are biting off their hand to spite their face. They are going to be chasing people out of the borough.”

“To them (Suez) it’s about the almighty dollar. To us it’s about keeping our town prosperous and affordable to live in and attracting those looking to move here or move a business here.”

Suez in a press release said water and sewer rates in Middletown have not gone up since Suez and the borough entered into the lease contract in 2014.

“Water and sewer rates have been rising by an average of 5 and 6 percent each year in most major U.S. cities for the last 15 years,” Suez said in the release. “Despite the surcharge, Middletown water and sewer fees remain reasonable in aggregate and this partnership provides great value to local customers with the cost per gallon for safe drinking water delivered to customer taps still less than a penny.”

Suez says the 11.5 percent surcharge will stay on customers’ bills for three years, to make up for water consumption falling below the target for the three-year period from the start of the lease in January 2015 through January 2018.

The next surcharge — if one is necessary — would go into effect in early 2022 and replace the current 11.5 percent surcharge that would be taken off residents’ bills in 2021. This same process continues after every three-year period, until the lease expires in 2065, according to Suez.

However, Suglia told the Press & Journal that council still hopes to be able to reduce the surcharge or remove it from bills entirely.

Council through an outside law firm the borough has hired had been holding closed-door discussions with Suez toward avoiding the surcharge being imposed on residents, but those talks fell through, Suglia said.

“We tried to negotiate with them to not have this happen, but they (Suez) refused to accept any offers or any type of settlement,” Suglia said. “We tried to negotiate with them. We feel this is not fair to our residents.”

Council also does not agree with Suez’ interpretation of the provisions in the lease having to do with the water usage shortfall and the surcharge.

“We are not reading the (lease) contract the same way as they are,” Suglia said. “We tried responding, we tried working with them and they refused any sort of counter proposal. All they did was say no.”

The “definitions” section of the lease referring to “water sales shortfall” indicates that the minimum volume threshold for daily water consumption in the system is 639,340 gallons per day.

After council and the authority approved the lease in 2014, private equity investors backing the lease in return made an upfront payment of $43 million to the borough that the borough used to pay off pension debt and debt tied to the borough building a new wastewater treatment plant.

The lease also provides for Suez and its private equity partners to make annual payments to the borough over the 50 years of the lease that will exceed another $45 million, according to Suez.

“Because we made an upfront payment and our investors invested in that upfront payment, there has to be a level of confidence that there is going to be adequate revenues to support the debt service and the recovery of that investment,” said Kevin Chandler, vice president of Suez’s North Division.

The lease mandates Suez impose the surcharge to make up for water usage being less than the amount specified in the lease contract between the borough and Suez, Suez officials told the Press & Journal.

“From our perspective it’s rather clear cut in the contract. It (the surcharge) doesn’t require any kind of approval from the borough,” Sugarman said.

Unless council can find a way to remove it, the 11.5 percent surcharge would stay on residents’ bills until it goes off in 2021.

But a new surcharge could be put on residents’ bills in 2022, if water consumption is again less than the identified target during the next three-year period from January 2018 through January 2021, according to Suez.

If water usage meets or exceeds the target over the next three years, no new surcharge would be imposed in 2022.

However, if water usage exceeds the target, the lease as written includes no provision for reducing the water bill, Suez officials told the Press & Journal during a meeting on March 28.

Council first alerted residents to the 11.5 percent surcharge with a message posted on the borough’s Facebook page on March 8.

Suez at that time told the Press & Journal that the impact of the 11.5 percent surcharge on bills could be mitigated or eliminated altogether, if a “negotiated settlement” was reached between Suez and council whereby the borough would absorb the cost of some or all of the surcharge, instead of it being imposed on residents.

But the time allotted for council and Suez to reach such an agreement ran out, Suez officials told the Press & Journal.

“We indicated openness to doing something” with council to minimize the impact of the surcharge on residents, Sugarman said. “They (council) had a time limit to decide.”

Discussions to avert the impact of the surcharge were ongoing between the borough and Suez, but the time came when Suez had to impose the surcharge because of bills having to go out, according to Chandler.

“We did basically set a deadline,” Sugarman said. “They (council) had to come back to us with an acceptable and concrete offer, because billing happens on a timetable.”

Water usage being less than that specified in the lease means revenue to Suez and the investors being less than that anticipated when the lease was negotiated and approved, according to Suez.

“We know if water usage is where they say it is, that’s the revenue we can expect. Now we are seeing obviously that that’s not the case,” said Rich Henning, senior vice president for communications for Suez and a Suez spokesman. “We built an operations system and a capital expenditure system based on what they presented to us, and that’s not happening. What’s happening is that the water usage is far less than what they originally told us over this three-year period.”

The Suez officials did not say how far below water usage fell during the first three years compared to the amount specified in the lease.

However, they said that the shortfall here is consistent with nationwide trends regarding people using less water.

“What we are seeing across the industry is in the range of a 3 percent (reduction),” Chandler said.

Henning cited water conservation acts Congress has passed mandating household appliances use less water.

On average, new appliances such as washing machines, dishwashers and toilets use a third— and sometimes more — less water than they used to, he said. “Anytime you put something like that in your home you are dropping the usage.”

Henning also referred to American families getting smaller over the past few decades, which is also a factor in using less water.

The water usage target in the lease is already set for the entire 50 years, Suez said. According to Suez, the lease has no provision for changing the target number, despite changing conditions in the borough over the 50 years of the lease such as population growing, or decreasing, or businesses and industries moving in — or out.

This is how the borough wanted the lease written back in 2014, the Suez officials said. The borough determined the water usage target, not Suez, the water company officials told the Press & Journal.

“We don’t set the consumption numbers,” Henning said. “We’re coming into a community that we do not really know. That’s why the borough sets those numbers. They may have been projecting growth, we don’t know that. That’s a question you have to ask the borough as to what the impetus was.”

Otherwise, borough management in place back then has also all departed and been replaced with new staff. Council retains the same solicitor, McNees Wallace & Nurick.

Council and the borough, along with the special lawyer hired regarding the lease, are trying to “revisit” the water usage figure now in the lease to come up with a new number that better reflects actual conditions, Suglia said.

Otherwise, he sees the water usage as set in the lease, and the resulting surcharge when consumption falls below that level, triggering a vicious cycle that makes an already bad deal for residents even worse.

Delinquent accounts and water shut-offs have been “fairly consistent” since Suez took over in 2015, Suez spokeswoman Ghilianie Soto told the Press & Journal in an email on Monday.

The system averages about 10 water shut-offs per month as a result of delinquent accounts, Soto said. “We have not seen any sudden spikes.”