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Suez says borough customer water use was $1.9 million below target

By Dan Miller

danmiller@pressandjournal.com

717-944-4628
Posted 4/25/18

The 11.5 percent surcharge Suez has added to Middletown water and sewer bills is based on Suez claiming it is owed $1.9 million for water sales falling below a target for the three years.

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Suez says borough customer water use was $1.9 million below target

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The 11.5 percent surcharge Suez has added to Middletown water and sewer bills is based on Suez claiming it is owed $1.9 million for water sales falling below a target for the three years.

The borough on April 16 sued Suez and Middletown Water Joint Venture LLC in Dauphin County Court, seeking to block Suez imposing the surcharge.

The borough also seeks changes in the water sales shortfall formula in the contract governing the 50-year lease of the borough’s water and sewer systems to Suez and the joint venture, which went into effect on Jan. 1, 2015.

The three-year period is from Jan. 1, 2015, through Dec. 31, 2017, according to court documents.

The borough lawsuit says the formula as crafted by the joint venture triggered the 11.5 percent surcharge and is unfair to Middletown water and sewer customers, as it creates a financial “windfall” benefitting the joint venture at the expense of borough residents.

In a report included in the borough lawsuit, Suez and the joint venture says that the daily average retail water volume and the municipal bulk sales fell below a 639,340-gallon threshold identified in the lease “for all periods except September and October of 2016, as well as November 2017.”

Otherwise, the daily average retail water volume during the first three years of the lease has been 556,240 gallons per day, and the municipal bulk sales has been 55,088 gallons per day.

The average water sales shortfall during the three years has been 82,520 gallons per day, according to the Suez and joint venture report in the borough lawsuit.

Suez and the joint venture contend this equals an annual revenue loss of $640,918, or $1,922,754 in revenue for the first three years of the lease to be made up by the 11.5 percent surcharge.

The borough takes issue with how the water shortfall is calculated by Suez and the joint venture in the lease. The formula is calculated in such a way that water sales in the borough must increase at least 63,000 gallons per day to avoid a shortfall, the borough says.

“Thus, the provision as finally drafted creates an instant and unavoidable shortfall that would lead unevitably to rate increases on an annual basis beginning in 2018,” according to the borough lawsuit.

Besides contending that the formula is rigged in favor of the joint venture and Suez, the borough lawsuit also questions the accuracy of the figures used by Suez and the joint venture to quantify the shortfall.

For this, the lawsuit relies on a deposition from borough Manager Ken Klinepeter, who while working for Suez in Middletown from September 2015 to May 2016 became aware of problems involving some of the water meters being used by Suez, he stated.

Klinepeter was employed by Middletown borough from October 1979 to August 2014 “in varying capacities from Utility Operations Supervisor in charge of the borough’s water and sewer system to Director of Public Works,” according to the deposition.

Klinepeter in the deposition said he had “general knowledge” of the lease process but “I was not actively involved in the borough’s negotiations with prospective bidders” including Suez.

He retired from the borough in August 2014 to take a job as director of public works for Steelton borough. He held that position until taking the job with Suez in Middletown as operations superintendent, a position where Klinepeter according to the deposition was in charge of training and supervising employees in the daily operations of the Middletown water and wastewater systems.

Klinepeter left Suez in May 2016 as a result of being hired as Middletown borough manager. About a month after starting as borough manager, Klinepeter according to the deposition “brought up with (Suez) the delay in repairing the broken meters and the borough’s concerns about the reliability of the (Suez) records as to water use when several meters were not promptly fixed and other meters may have similar problems.”

“These issues caused me to raise concerns about the accuracy of the (Suez) records as to the volume of water use,” Klinepeter states in the deposition.

Suez and joint venture officials in a March 28 interview told the Press & Journal that responsibility for the water sales shortfall formula rested primarily with the borough.

“We don’t set the consumption numbers,” Suez spokesman Rich 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 … we came in and bid off the information we were getting.”

“When it comes to volumes and growth in a community we don’t control that. Not only do we not control it, we have very little to say about it,” said Dan Sugarman, managing director of Water Capital Partners LLC, a firm affiliated with the private equity investors backing the joint venture.

Elsewhere during the interview, Sugarman told the Press & Journal the joint venture “had nothing to do with” the borough deciding that the threshold for the shortfall be based not on dollar revenue but on volume.

However, lawyers for the borough Dilworth Paxson contend in the suit that Suez and the joint venture sought “last-minute” changes to the formula that went against “the true intent” of the lease, at least as understood by the borough.

“In proposing the two changes to the shortfall recovery provisions on Sept. 3, 2014, (Suez) was either unaware of the economic impact of these changes, notably in giving it a virtually certain windfall, as well as the anomalous consequences of extending the ‘recovery’ to sewer revenues, or it was aware of those consequences and sought to ‘pull a fast one’ on Middletown,” the borough lawyers say in the lawsuit.