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Suez ready to move ahead with water, sewer improvements as borough legal disputes end

By Dan Miller

danmiller@pressandjournal.com

717-944-4628
Posted 8/22/19

Hoping its legal disputes with Middletown are now over, Suez plans to resume making capital improvements to the borough’s water and sewer system that Suez says are supposed to be done in each …

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Suez ready to move ahead with water, sewer improvements as borough legal disputes end

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Hoping its legal disputes with Middletown are now over, Suez plans to resume making capital improvements to the borough’s water and sewer system that Suez says are supposed to be done in each year of the company’s 50-year lease of the system.

Nearly half — 44 percent — of all water lines in the borough are 2 or 4 inches in diameter, officials representing Suez told the Press & Journal during a meeting at the Middletown water and sewer treatment plant Aug. 19.

All these lines should be replaced, as the industry standard to provide adequate water pressure — including pressure for fighting fires — is at least 6 to 8 inches, Don Correll, CEO of Water Capital Partners LLC, said during the meeting.

In many cases the actual amount of water flowing through the 2 and 4-inch lines is much less, due to the build-up of mineral deposits from the water itself over many years — similar to a clogged artery.

For example, Suez showed a picture of a 2-inch pipe replaced in 2015 where the amount of water flowing through the pipe had been reduced to one inch in diameter.

The build-up in these pipes — some of which date back to the late 1800s according to Correll — is not harmful to drink as the material is a build-up over many years of the minerals in the water itself, Suez Middletown Project Manager Jesse Randles said.

Suez replaced about 2,700 linear feet of water lines in the first year of the lease, 2015. But no capital improvements have been done since then, due to a dispute between the borough and Suez over who is responsible for paying for the improvements.

As a result, besides needing to replace water lines Suez has also been unable to address needs of the sewer system, where cracks and leaks of pipe allows stormwater and ground water to get into the underground sewer pipes.

Besides contributing to sewer backups during heavy rains, this leads to higher costs and inefficiency as the waste water treatment plant ends up treating all this excess water, in addition to what normally comes in through the sewer system.

Another part of the Middletown system that Suez says has been neglected during the now nearly four-year impasse without capital improvements has been the three above-ground water storage tanks.

All three were already beyond the point where repainting and re-coating should have been done when Suez took over in 2015, Correll said. Conditions have only worsened since then.

Suez contended the lease allows the company to recoup the cost of capital improvements by imposing a charge on the bills of ratepayers.

The borough’s position was that the lease did not give Suez authority to recoup the cost by imposing a charge.

According to Correll, each year since 2015 Suez has presented a plan to the borough for what capital improvements need to be done.

“They said, It’s all on your dime, go do it,’” Correll said of borough council. “We said, ‘That’s not the way we read the agreement.’”

The dispute now appears settled in Suez’s favor, following a July 10 decision handed down by a binding arbitration panel that Suez is entitled to recoup the cost of major capital improvements by adding a capital cost recovery charge to the bills of Middletown water and sewer ratepayers.

The arbitration decision followed a March decision by a federal judge rejecting a lawsuit the borough had filed seeking to get rid of the 11.5 percent surcharge Suez had added in 2018 to recoup the cost of a water sales shortfall in the first three years of the lease.

The borough is still pursuing one other lawsuit in Dauphin County Court seeking damages against the borough’s former solicitors and financial advisors for what the borough contends is providing bad advice that council and the former authority relied upon in approving the lease in 2014 with Suez, then known as United Water.

However, Suez is not a party to the lawsuit, which is pending.

Water Capital Partners, along with Suez and private equity investors, makes up Middletown Water Joint Venture, the entity with whom council and the former authority approved entering into the 50-year lease of the borough’s water and sewer systems in 2014.

Suez has prepared a five-year plan that recommends capital improvements totalling $15 million from 2019 through 2023, starting with nearly $2.6 million in 2019.

The plan is a draft that Suez is expected to present to borough council at its Sept. 17 session.

Under terms of the binding arbitration decision, Suez will be able to add a charge to the bill for capital improvements done in each preceding year equal to about a 0.5 percent increase for every $1 million worth of capital improvements, Daniel Sugarman, managing director of Water Capital Partners, told the Press & Journal during the Aug. 19 meeting.

That additional charge does not go away, in that it is financed by ratepayers over the 50-year lease, Sugarman said.

As a result, it makes more sense to do as many capital improvements as possible in the first years of the lease, so that the cost of the improvements to ratepayers can be spread out over as many years as possible, he noted.

In addition to the charge added for capital improvements in each preceding year, Suez under terms of the lease can impose a rate increase in each year of the lease, starting with the first one that was put in place in 2019.

From 2019 through 2033, the annual rate increase equals 2.5 percent a year, plus an index change tied to the annual rate of inflation, Sugarman said.

From 2034 through the end of the lease the base increase goes down to 2 percent, plus the annual index for inflation.

Sugarman said even with the need for “doubling up” capital improvements over the next several years — to make up for undertaking no major improvements at all to the system since 2015 — the capital cost recovery charge plus the annual rate hike should total between an increase of 5 to 6 percent on ratepayers each year.

That is within the national average for how much water and sewer rates have been going up annually across the United States in recent years, according to the American Water Works Association, Sugarman said.

Sugarman acknowledged this estimated 5 to 6 percent increase each year does not include the 11.5 percent water sales shortfall that was added in April 2018 and is to remain on the bills of Middletown water and sewer customers until sometime in 2020.

At that point, the lease gives the joint venture authority to replace the 11.5 percent charge with another surcharge — if there is another water sales shortfall in the next three years of the lease, from 2018 through 2020.

Middletown contended in the federal lawsuit that the water sales shortfall language in the lease all but guarantees a perpetual shortfall — amounting in the borough’s view to a financial windfall for the joint venture over the 50-year lease.

The borough tried through the federal lawsuit and the arbitration to change terms in the lease as to what triggers a water sales shortfall, but failed in both attempts.

But as Correll and Sugarman pointed out during the meeting, Middletown got an up-front payment of $43 million from the joint venture upon council and the former authority approving the lease in 2014. The borough used the money to pay off debt, mostly pension related.

The lease also provides for the joint venture to make additional payments to the borough totaling another $45 million over the course of the 50-year lease.

This money does not have to be spent on the water and sewer system; the borough can use it for anything it wants, Sugarman pointed out.

Add to that the joint venture investing more than $80 million in capital improvements to the borough’s water and sewer system, and the lease is a pretty good deal for Middletown, as Sugarman and Correll see it.

But the deal has never been allowed to work the way it is supposed to, due to the disputes between the borough and the joint venture that have been going on since 2016, the two say.

The joint venture wants to do in Middletown what Correll said Suez does elsewhere — bring the water and sewer system up to current standards and rehabilitate it “from what we knew were the problems it had, and frankly from what the borough told us during the due diligence and negotiations” that took place during the lease approval process.

While Correll said it is now clear the joint venture has authority to increase rates to recoup the cost of capital improvements, he anticipates a process of give-and-take with the borough regarding what work is to be done.

“This is a partnership, this is not a conflict. We don’t go in and say. ‘This is what we are doing, you are going to pay the bill.’ We want to work with them,” Correll said of the borough and council. “We expect that we have a dialogue about it, as opposed to ‘we send you something and you send us an email back.’ We want to have a discussion about it. They can come back with questions about it, they can ask us about the timing, the location, but they can’t just do what (they have) in the last three years — send us an email back saying we rejected it, period…they can’t just say we don’t want to do it.”