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Middletown may go to court over Suez water and sewer bills, pays law firm $400 an hour for advice

Posted 4/5/18

Middletown Borough Council might go to court to try and stop the 11.5 percent surcharge recently added to water and sewer bills by Suez, and it is paying a Philadelphia-based law firm $400 an hour as …

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Middletown may go to court over Suez water and sewer bills, pays law firm $400 an hour for advice

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Middletown Borough Council might go to court to try and stop the 11.5 percent surcharge recently added to water and sewer bills by Suez, and it is paying a law firm $400 an hour as a “special counsel” to advise solely on the lease situation.

“It’s going to go before a judge sometime probably in the very near future so that is all we can say at this point. We will report back to you after our lawyers have a chance to file their briefs and have a discussion with us,” borough Manager Ken Klinepeter said. His comments came after the surcharge issue was raised by a resident during the public comment portion of the April 3 council meeting.

It is not clear how much work Philadelphia-based Dilworth Paxson LLP has done for the borough. Klinepeter said the first bill would be paid after council approves the first invoice of the firm. Dilworth Paxson has an office in Harrisburg.

Council approved hiring Dilworth Paxson on March 6, when it unanimously concurred on the decision in executive session, Klinepeter said. No public vote was taken. Council President Damon Suglia on March 8 signed an engagement letter to formally hire the firm, Klinepeter said.

Suglia told the Press & Journal on April 4 that no lawsuit has been filed yet and there is no guarantee that one will be. Suglia and Klinepeter, however, repeatedly used the word “litigation” during the April 3 council meeting when the Suez surcharge issue was raised by a borough resident.

Suglia told the Press & Journal on Wednesday that his use of the word “litigation” includes continuing efforts short of going to court.

Suez added the surcharge on bills for the March cycle going out to residents in the first week of April to make up for lost revenue from water usage, as is spelled out in the lease according to Suez. Less water was used than what was anticipated in the first three years of the lease, from January 2015 to January 2018.

The surcharge is costing Middletown customers on average 20 cents a day, or roughly $72 a year, according to Suez, the private company that operates the borough’s water and sewer systems under a 50-year lease approved by council and the former water authority in 2014. The lease went into effect on Jan. 1, 2015.

The 11.5 percent surcharge is to stay on residents’ bills for three years.

One resident speaks

The surcharge has generated much discussion on social media, but only one resident addressed council about the surcharge during the public comment period of the April 3 meeting.

“The residents of this town need an explanation of how this happened. How did we get to this position?” asked Patricia Volpe of Linden Street, after which Klinepeter referred to the agreement that was approved in 2014.

“You are telling me how we got to an agreement. How did we get to the disagreement?” Volpe responded.

In a prepared statement that he read during the meeting, Suglia said that council has been “attempting to negotiate a resolution of these disputes over the past year or more” and the goal is to “protect our customers and our residents.”

The goal of Suez and its partners, he said, is to increase their own bottom line revenue by increasing the rates, and they are doing so at a “rate and pace that is simply unsustainable and just not reasonable.”

“Since our efforts to resolve the dispute reasonably and amicably have failed, the only avenue we have left is to proceed with litigation,” he said.

Suglia in his statement said council would do its best to have the rate increases reversed and the amounts paid refunded.

Adding his own off-the-cuff statement, Suglia said, “These people that you see sitting here have been working their butts off trying to fight this.”

Mayor James H. Curry III, who is an attorney, urged Volpe and other borough residents “to trust and believe that the people you elected and put into these seats are doing the right thing and are fighting for you, but unfortunately with a dispute of this caliber it is not — would not be correct for us to make statements when we are entering litigation. …We have to watch what we say. I am asking the residents in general to understand this is not just a body that is sitting back and doing nothing, I promise you.”

Resolving disputes

Council does not agree with how Suez and its joint venture investor partners are interpreting the lease regarding the water revenue shortfall and the surcharge, Suglia said.

The lease agreement, which is a contract between the borough and the joint venture consisting of Suez and its private equity partners, includes provisions for resolving disputes between the parties such as mediation and binding arbitration.

If disputes can’t be resolved through mediation and binding arbitration, the parties can go to court, according to the lease.

Asked whether council and the joint venture have already exhausted the mediation and binding arbitration provisions identified in the lease, Suglia responded, “They said we didn’t try in good faith, that was their opinion.”

Suglia said council was never given a “drop-dead date” for when Suez would have to put the surcharge on residents’ bills. However, Dan Sugarman of Water Capital Partners told the Press & Journal on March 28 that Suez had given council “a time limit” for when the surcharge would have to be imposed. New Jersey-based Water Capital Partners LLC is affiliated with the private equity investors providing the financial backing for the lease.

Rodney Horton, a former borough council president, has advocated the borough file a complaint with the state Attorney General’s office over the lease.

“I don’t know if we have pursued that,” Suglia told the Press & Journal.

Other parts of the lease

In return for council and the former borough authority approving the lease in 2014, Suez and the private investors gave the borough an upfront payment of $43 million that the borough used to pay off debt.

The lease also requires Suez and the private investors make additional payments to the borough that will exceed $45 million over the 50-year lease.

Suez says the lease allows for annual rate hikes starting in January 2019 equal to the rate of inflation. Given current inflation projections the first such increase in January 2019 is expected to be about 4 percent, Suez officials told the Press & Journal on March 28.

The lease also gives Suez authority to impose another surcharge — a capital cost recovery surcharge — to recoup from customers the amount of money Suez says it has spent on capital improvements to the water and sewer system over the previous year.

No capital cost recovery charge has been put on residents’ bills yet, but Suez officials have said it would be in the neighborhood of another 2 percent a year.