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Suez concerned that capital projects aren’t being done; borough disagrees with proposal

Posted 4/10/18

Middletown’s 50-year water and sewer lease with Suez requires the company to undertake about $1 million worth of capital improvements to the water and sewer systems each year, according to …

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Suez concerned that capital projects aren’t being done; borough disagrees with proposal

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Middletown’s 50-year water and sewer lease with Suez requires the company to undertake about $1 million worth of capital improvements to the water and sewer systems each year, according to Suez.

However, no capital improvements have been done in the past two years — 2016 and 2017 — because Suez and council have not been able to agree on a plan regarding what projects are to be done, and at what cost.

Borough council is not living up to its end of the lease bargain, Rich Henning, senior vice president for communications for Suez and a Suez spokesman, told the Press & Journal.

“We’ve got the plans, we’ve got everything we need to start making the system much better, but we need a dancing partner. We don’t have that right now,” Henning said. “They’ve (the borough) taken the $43 million. They’ve used it. They used it on the debt, they’ve used it on the pension. But the system needs to be looked after. There are a lot of needs there, and the investor needs to be looked after. … To be an effective partnership, it takes two to tango.”

Council President Damon Suglia disagrees, telling the Press & Journal that the improvements proposed by Suez are not warranted.

“We don’t feel as if the borough and the residents should be responsible for paying for these capital expenditures,” he said, adding that council rejected the capital improvement plans from Suez because “we don’t agree with what they are proposing.”

“We don’t feel it is the borough’s responsibility to pay for what they are proposing. … Their requests and demands are unreasonable,” Suglia said.

As for Suez, “we feel that approval of the capital plan in any of these years has been unreasonably withheld” by  council, said Dan Sugarman, managing director of Water Capital Partners LLC, a company affiliated with private investors financing the Suez lease of the Middletown water and sewer systems.

Cost estimates in the plan are “very reasonable estimates … based on a lot of engineering experience,” Sugarman added.

Sugarman contended that council in rejecting the plan has not given Suez “a lot of reason” for doing so.

“There isn’t any strong professional engineering type of opinion as to what they disagree with,” he said. “They are really just objecting to the plan on the basis of some notion of affordability, which we are very sensitive to. We don’t want to put rate increases on people for no reason.”

2018 work?

It remains to be seen whether Suez will be doing any capital improvement projects in 2018. Suez earlier this year submitted a plan for projects to be done this year, but council in March rejected the plan as too costly.

Proposed work includes replacing 2,500 feet of water main each year, replacing or rehabilitating 1,100 feet of sewer main each year, addressing infiltration and inflow issues, making upgrades to the wastewater treatment plant, recoating the three above ground water storage tanks, and rehabilitating the borough’s six groundwater wells, according to an analysis of the lease provided by Suez to the Press & Journal.

Suez completed nearly $2.2 million worth of capital improvement projects in 2015, the first year of the lease.

Suez planned to impose a 2.1 percent surcharge beginning in January 2017 to cover the cost of capital improvements Suez had completed in 2015.

That surcharge was never put in place, as council instead negotiated an agreement with Suez whereby the borough used its own funds to pay Suez for the improvements, instead of Middletown residents doing it through higher water and sewer bills.

Suez would also not be able to impose a capital cost recovery charge in 2019 to go along with a proposed rate increase, unless there are projects completed in 2018 for which to recoup money.

According to Suez, council accepting the plan does not guarantee that the projects will be done. Suez still would have to come back to council with firmer cost estimates and engineering plans before each specific project can be undertaken.

Gaps in the pipelines

Suez as part of a two-hour presentation to the Press & Journal on March 28 showed video from an underground television camera depicting cracks in sewer lines in the borough.

The cracks create holes that allow groundwater, stormwater and dirt and other debris from outside to get into the sewer pipes.

This outside water and debris limits the capacity of the pipes to carry sewer to be treated at the wastewater treatment plant. That can impact the borough’s ability to grow economically by adding more customers, Suez officials said.

Water leaking from the cracked pipe to the outside is also bad for the surrounding road surface, in the same way that water leaking from pipes in your house destabilizes floors and ceilings, Henning said.

“Wherever water ends up going, it’s destructive. When you look at this it’s amazing to see the gaps in these pipelines,” he said.

The system has 24.8 miles of sewer main, and Suez is able to televise 15 percent of the sewer lines each year.

In the three years since Suez took over in 2015, Suez has televised 45 percent of sewer lines throughout the Middletown system — and identified about $5 million worth of work to the lines that needs to be done through the capital improvement plan process, said Kevin Chandler, vice president of Suez’s North Division.

“These are ones that are dire, that have to be addressed or they are going to result at some point in time” in “catastrophic failure,” Chandler said. “If you have a collapse you not only lose the pipe but lose the street or worse.”

Chandler said the borough before the lease with Suez was not doing much of this televising of the sewer lines. Suez didn’t know how bad the sewer lines were until it started inspecting them with the cameras after the lease went into effect.

The way the lease is supposed to work — according to Suez — is that Suez is to complete on average about $1 million worth of capital improvements every year.

System customers then pay for those improvements, through an annual capital cost recovery surcharge equal to about 2 percent of a customer’s bill.

Despite now being two years’ behind in capital improvements, that schedule should still hold for the remaining 47 years of the lease, Chandler said.

“Do you have to go back and do three years worth of work? No, likely not. But you are not going to do (just) the one year’s worth either. You’re going to have to start doing some catch up, but it may not be all at once.”

Chandler said he expects the impasse between Suez and council over the capital improvement projects to be “ultimately resolved,” although he doesn’t know when. “We will resume the capital investment and there will be a recovery charge associated with it.”

But what if Suez and council can’t agree on a plan?

The lease spells out formal provisions for resolving disputes between the parties, Suez spokeswoman Ghilianie Soto told the Press & Journal in an email.

These include provisions for outside mediation and binding arbitration. If binding arbitration doesn’t work, a dispute between Suez and the borough can go to court, according to the lease.