The following message is from Town Manager John Hozey, as he clarifies the Town’s position on the possibility of selling off its water and wastewater utilities:
On January 13 the Town Council decided to continue evaluating a potential utility sale by advancing Virginia American Water (VAW) to the public review phase. This selection does not commit the Town to anything but does begin a public dialog about what all this might mean. We know there are lots of questions floating around about this already. But let’s start with the main question, “Why would we want to consider this, and what benefit could it be to the town?” To tackle that question, we need to begin with an understanding of the “utility universe”. Utilities are different than other public services like police or public works. Utilities must follow special rules.
For example, our utilities (water and sewer) exist within an enterprise fund, meaning all revenues and expenditures for those functions are segregated and must balance. In other words, it needs to pay for itself. All costs: employee salaries, capital investments, or other routine operations, are directly charged back to the utility customers in the form of monthly rates. It is not acceptable to take general tax revenue and apply it here. So, if something breaks or needs to be upgraded, rates must increase to cover those costs. We have a wonderful operations crew running our utilities and always have. But the Town does not have, nor have we ever had, true engineering experts on staff who understand all the ins and outs of the complex regulatory requirement for our systems. As a result, we have received many warnings and violations over the years.
Therefore, if we decide to keep these systems, we will need to solicit contract management to ensure proper future operations. The cost of that contract would then have to go back into the rates, driving them up. We also have aging systems that need more and more maintenance every year, again putting upward pressure on rates. So herein lies the problem. Town (with the help of our consultant) has done an analysis of our future utility requirements, and this projection shows that the status quo operation of our systems is going to require substantial rate increases over the next five to ten years. At issue is our rate base (the number of ratepayers) is relatively small, and this base will have a very hard time covering future expected costs (even after considering the future growth in Bay Creek).
A private utility company, on the other hand, has the ability to spread some of these costs over a much larger base, reducing impacts locally. These companies also have access to economies of scale when purchasing supplies and equipment, they have ready access to capital when needed, and they have experts already on staff who know how to properly maintain these systems and remain compliant with DEQ permit obligations. Sure, they are also allowed to make a profit, but that profit is tightly controlled. Private utility companies must still answer to a public body, the State Corporation Commission (SCC).
The SCC provides regulatory oversight and is there to protect the public. Private companies cannot raise rates at will. They must first go before the SCC and explain why the rate increase is necessary. The SCC will make sure that rate increases are legitimate, and the minimum needed to support the system.
These companies are allowed to figure in a set return, but no more than what’s authorized. Let me be clear, nobody is attempting to paint a strictly ideal picture of the privatization of our utilities. Like all things, there are definitely pros and cons to all options.
But in answer to the main question, why would we consider this; it’s because it appears that even with an authorized rate of return to the company, VAW seems capable of providing better service, improving our water quality, ensuring better oversight, and wiping out the town’s debt; all while keeping rates lower than the Town could if we kept the systems.
Again, the above discussion is not meant to be a justification for selling our utilities, only the reason for why we are “considering” this action. All pros and cons must be weighed, more details need to be offered, and more questions must be answered before we could all get comfortable moving forward. So please keep an eye out for this additional information coming soon (this is all too complex to cover in one message).
For now, we just ask that everyone try to keep an open mind and make an effort to learn more about what this could really mean for the community.
Town Hall meetings are being scheduled for February 16 and 19, and we look forward to your participation.
Also, feel free to send me your questions at any time, and I’ll try to work that information into the upcoming detail we hope to get out over the next few weeks.
This is a very important discussion, and we appreciate your ongoing interest.