COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING COMMITTEE ON TRANSPORTATION AND PUBLIC UTILITIES - - - - Room 400, City Hall Philadelphia, Pennsylvania Thursday, May 20, 2004 2:10 p.m. - - - - RESOLUTION 040298 - a resolution authorizing City Council's Committee on Transportation and Public Utilities to hold public hearings to investigate the proposed nearly 43 percent water and sewer cost rate increase to be effective July 1, 2004... PRESENT: COUNCILMAN MICHAEL A. NUTTER, Chair COUNCILMAN DARRELL L. CLARKE COUNCILMAN DAVID COHEN COUNCILMAN RICHARD T. MARIANO COUNCILMAN JACK KELLY COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO COUNCILWOMAN DONNA REED MILLER COUNCILMAN BRIAN O'NEILL COUNCIL PRESIDENT ANNA C. VERNA - - - - V A R A L L O Incorporated Litigation Support Services Eleven Penn Center 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 19103 215.561.2220 215.567.2670 I N D E X RESOLUTION 040298 BERNARD BRUNWASSER, Acting Water Commissioner................... MR. MCKINLEY....................... 20 JAMES PALLADINO, Water Dept........ 99 NANCY KAMMERDEINER, Revenue Commissioner. ................ 105 NAOMI ZASLOW, Homeowners Association of Philadelphia................ 138 HARRY ZASLOW, Homeowners Association of Philadelphia................ 144 3 05/20/04 - TRANSPORTATION - RES. 040298
Good afternoon. This is a public hearing of the Committee on Transportation and Public Utilities pursuant to Resolution No. 040298. The members of the Committee who are here are myself, Councilman Nutter as Chair, Councilman Clarke, Councilwoman Tasco, Councilman Mariano and Councilman Rizzo has been appointed to the membership of the Committee by Council President Verna for today. Resolution 040298 is a resolution 13 authorizing City Council's Committee on Transportation and Public Utilities to hold public hearings to investigate the proposed nearly 43 percent water and sewer cost rate increase to be effective July 1, 2004, requested by the Philadelphia Water Department and in furtherance of such investigation authorizing the issuance of subpoenas to compel the attendance of witnesses and the production of documents to the full extent authorized under Section 2-401 of the Home Rule Charter. We have a list of witnesses. This 4 05/20/04 - TRANSPORTATION - RES. 040298 resolution was sponsored by Councilman Rizzo, and his office has been kind enough to put together a witness list. And the first person to be testify Mr. Bernard Brunwasser. Would you please come to the witness table? Please identify yourselves for the record and proceed. COMMISSIONER BRUNWASSER: Good afternoon, Chairman Nutter and Members of the Transportation and Public Utilities Committee. I am Bernard Brunwasser, acting Water Commissioner, appearing before you today to testify on behalf of the Philadelphia Water Department. On my right is Mr. Jay row McKinley from the firm of Black & Veatch. Black & Veatch, that firm, is the Department's rate consultants. My appearance is at your request to response to various questions arising from the Department's application for increased rates filed earlier this year. As you know, technical hearings concerning the rate increase will take place following the 5 05/20/04 - TRANSPORTATION - RES. 040298 appointment of a hearing examiner and public advocate who will be jointly chosen by the Mayor, the president of City Council and the City Controller. As I said in my budget testimony of April 28th, the Philadelphia Water Department provides high-quality drinking water to all of its customers. Its extraordinarily safe. We provide award-winning wastewater treatment and environmental stewardship to Philadelphia and southeastern Pennsylvania. Within the water industry we are recognized as one of the finest water and wastewater utilities, public or private, in the world. Finally, we do all of this at the lowest cost in the region. Water rates are let's than half in Philadelphia are less than half what most suburban customers pay in this region. Also, around the country, rates have been shooting up as water and sewer utilities have been forced to deal infrastructure problems and many cities are facing higher rate increases than we are, double digits; in some cases, a tripling of rates within five 6 05/20/04 - TRANSPORTATION - RES. 040298 years. Before answering your questions I would like to offer a brief overview of the reason for Department's application for rate relief. 9 million. And there's a table attached to this testimony which highlights those. By way background, the City Council should be aware that the Department last requested a change in rates back in 2001. We got a three-part rate increase. 8 7 05/20/04 - TRANSPORTATION - RES. 040298 percent per year and that was after six years of no increases. million in the current year, FY 2004. percent. The cost driving the budget include those for personal services, debt service, inner fund payments, security materials, supplies, and equipment and inflation. 1 percent, arising from the last labor agreements with our union workforce. 9 million since FY 2001. In addition, increased costs associated with security, additional treatment for water and wastewater at Department 8 05/20/04 - TRANSPORTATION - RES. 7 percent more today in FY 2004 than it did in FY 2001.
This budgetary growth also occurred during a period when Philadelphia continued to lose a portion of its population and businesses. And we've loss approximately 1500 customers each of the last three years on average. Needless to say, this continuing trend has the effect of substantially eroding the Department's customer base. This demographic reality has caused the Department's high fixed cost, and that's cost to maintain water mains, sewer mains, pumping stations, treatment plants, inlets. And it's caused that to be spread over fewer and fewer customers. These budgetary and demographic factors in combination with the loss of state subsidy for wastewater operations and also future costs for the Department's proposed implementation of the lateral service program, the need to meet rate convenance for 9 05/20/04 - TRANSPORTATION - RES. 040298 investors, additional regulatory costs associated with environmental requirements, this is all combined to force us to seek higher rates. As shown in the table that's attached to this testimony, the lateral service program is proposed to be funded by the rate increase. That means out of operating funds. Program costs are calculated to be $70 million over the rate period 2005 to 2008. This represents about percent of the 13 incremental revenues tat we've shown as being 14 required. Projected expenditures in 15 connection with this program during the rate 16 period are $10 million annually in the startup 17 period of '05, and then that's repeated in '06 18 with an additional $10 million coming in and 19 then $20 million annually thereafter. 5 percent in Fiscal Year '07, and 10 05/20/04 - TRANSPORTATION - RES. 4 percent in Fiscal Year '08. 8 percent in Fiscal Year 2008. And this is very preliminary. And I'd like you -- for more detail on the funding options for the lateral program, I would refer to an attachment which is a letter to City Council President addressing, Councilman, your question to me back on April 28th. We took a look at it and we do believe that the Department's view is that it's cheaper in the long wrong and therefore cost beneficial to our customers to treat these costs as operating expenditures. In any event, I hope I've made it plain that there are significant substantive reasons justifying the proposed rate increase so the Department can better serve its customers. The Department remains open City 11 05/20/04 - TRANSPORTATION - RES. 040298 Council's suggestions as to the appropriate cost of recovery mechanism for the service lateral recovery program as well as recommendations in all areas to improve service to our customers. I am prepared to answer any of your questions.
Commissioner, I just have a couple questions. Let me first get on the record that we have been joined by Council President Verna, Councilman Cohen and Councilwoman Donna Reed Miller. I guess a couple things. First, I did receive your response to the question as it was addressed to Council President Verna. I think I received it yesterday, and I did try to read through it. While you may be relatively new in your current position, I know that you are a long-term public employee and you have clearly mastered the art of responding to a question in great detail, but in a way that is almost impossible to glean a clear answer. So I might have to stumble back 12 05/20/04 - TRANSPORTATION - RES. 040298 through some of the responses. I thought my question at the time on that issue was, how would we differently use the $125 million that's proposed from the water reserve funds for a different use as to benefit all of the ratepayers. I did not think that I limited the question just to the lateral program or even a four-year period of time. And we can go back through all of that, but let me get to a couple of these questions. First, in your first paragraph you talk about -- and I know that there's an extensive process here -- that two individuals have to be appointed; one, a hearing examiner, and one a public advocate. And you note that candidates for such positions are under consideration by the Administration, City Council, and the City Controller. Now, what is the process? Those three appointing authorities, the Mayor, Council President, and the Controller have to agree on a hearing examiner and a different person as a public advocate? COMMISSIONER BRUNWASSER: CORRECT. 13 05/20/04 - TRANSPORTATION - RES. 040298 There is a table that I passed on April 28th and I passed out again today.
When does that process take place or by what time must it conclude? COMMISSIONER BRUNWASSER: Well, at this point in time, I'm not certain that Council President Verna has yet been contacted or the City Controller, but I believe that's eminent. After that particular process, there are a number of things that will help. Once the hearing officer is chosen and the public advocate, the hearing officer will call all the parties that have registered with the Department of Records after we've filed there, all interested parties will get together and they will set up a hearing schedule, both a formal hearing schedule where witnesses cross-examined and there's a record taken --
Maybe this is what I'm not understanding. Is it my understanding that the anticipated rate increase is to start July 1, 2004 for FY '05? COMMISSIONER BRUNWASSER: That was 14 05/20/04 - TRANSPORTATION - RES. 040298 what we had hoped for, yes.
Well, today is May 20th. We don't have an advocate or a hearing examiner appointed yet. How would you get all of this work done in any kind of legitimate process in the next 40 days? COMMISSIONER BRUNWASSER: Well, I believe it will have to be -- the effective date will have to slip perhaps as much as 60 days.
Well, can you impose a rate increase in the middle of a fiscal year or once a fiscal year has started? COMMISSIONER BRUNWASSER: Yes. There is no prohibition.
Let's talk about your second paragraph. I'm sure this will attract a fair amount of attention. First, letter A, you have basically $90 million in increased debt service. Have you done a number of borrowings in recent times? COMMISSIONER BRUNWASSER: Yes, we have. 15 05/20/04 - TRANSPORTATION - RES. 040298
Were they unanticipated? COMMISSIONER BRUNWASSER: No. 5
How many have you done? COMMISSIONER BRUNWASSER: Personally, probably on -- as far as new money, we probably go out every two and a half to three years on average.
When was the last one that you did? I mean, what's causing the -- your statement is, "increased debt service, $89.4 million." Which bond offerings caused you to have $89 million in increased debt service? COMMISSIONER BRUNWASSER: We are anticipating going to the bond market this summer. And for $250 million which City Council has already approved, and that results in an estimated annual debt service of $17.2 million each year.
It's a 30-year offering? COMMISSIONER BRUNWASSER: 16 05/20/04 - TRANSPORTATION - RES. 040298 Approximately. It depends on when you get to the market how it's structured, but some of the debt actually gets defeased earlier than that but will likely run as long as 30 years, yes.
Where does the $89.4 million come into place? You have a $17 million annual debt service on the 250. COMMISSIONER BRUNWASSER: Right.
Are you somehow put this in the four-year box? COMMISSIONER BRUNWASSER: Right. 17.2 each of the four years for the $250 million.
That's 68. COMMISSIONER BRUNWASSER: And by the last year of the four-year period we're out again for new money resulting in additional debt service which gets you to 89.
I know that Councilman O'Neill will have even more questions than I, but the discussion around a lateral service program, I thought there had been a fair amount of discussion back and 17 05/20/04 - TRANSPORTATION - RES. 040298 forth about whether this should be in Operating or Capital. I'm not going to step on that area, but it does jump out at me. The $34 million in increased personnel costs, is this for additional staff or is it solely related to raises and fringe benefits? COMMISSIONER BRUNWASSER: That will be primarily raises and fringe benefits and perhaps a small increase in staff.
So you're increasing your staff? COMMISSIONER BRUNWASSER: We hope to fill some of our positions, yes. We're not asking -- we don't foresee many more authorized bodies, authorized positions, we foresee filling a little higher level than we have today.
Can you provide us with a list of the water rates for the four immediate counties around Philadelphia? I know some of them may not operate their own water departments as we do, but if there is an authority or a private company 18 05/20/04 - TRANSPORTATION - RES. 040298 that provides service to any of the cities and towns and municipalities around us. I'd like to see a rate chart. COMMISSIONER BRUNWASSER: The major ones are right in this booklet.
Was that a part of what you handed out? COMMISSIONER BRUNWASSER: Yes. Again, that was handed out in a spiral bound fashion on April 28th. I think I brought 12 copies. 13
Commissioner, 16 could you also provide us, if you haven't 17 already, with the wholesale price of water? 18 I know we've talked about this in 19 the past, and I understand that there are 20 municipalities, other water companies that buy 21 our water at a very, very reduced rate. So 22 I'd like to know what we plan to do in 23 adjusting that rate also. 24 COMMISSIONER BRUNWASSER: Their 25 rates are going up July 1st. They don't go 19 05/20/04 - TRANSPORTATION - RES. 040298 through a hearing process per say, but when Black and Veatch revises the rates, all we have to do is give them 90 days notice of revision of rates. And they are going up and they're seeing some significant percentage increases.
And there's no 9 approval process that you have to go through to raise those rates or decrease those rates? You don't bring that to Council? COMMISSIONER BRUNWASSER: No, no. 13 Our relationships with the townships are governed by ordinances of City Council. The last one was in 1987, and it told us that we have to charge at least the cost of service, full cost of service rates, plus at least a 10 percent management fee on top of that. And that's what we're getting today.
That sounds to me like a very good deal. So you can charge basically whatever you want and they can say yes or no?
Excuse me. Point of order. 20 05/20/04 - TRANSPORTATION - RES. 040298
Are you referring to water and waste, or just water? I want to make that we're not talking about one and not the other if they're different.
That's a good point, Councilman. Thank you. Does that apply to wastewater also? COMMISSIONER BRUNWASSER: That's correct. It's full cost of service plus 10 percent management fee.
That's obviously a very different number than a business customer in Philadelphia would pay -- I guess what I'm trying to learn is how that compares with a major corporation that would buy water and sewage charges versus what we would charge a municipality. Could you describe -- are they in balance, is it a significant break for those municipalities or is this an industrial customer? 21 05/20/04 - TRANSPORTATION - RES. 040298 COMMISSIONER BRUNWASSER: I think I know the answer, I think I will defer to Mr. McKinley who is really a recognized expert in United States.
Let me describe a little bit about how the wholesale customers, both the water side and wast water, are charged within the City of Philadelphia. Obviously, there are contracts with each of these customers. We'll start with the water side first. We have Bucks County and sewer on the water side and Philadelphia Suburban Company Water as a second wholesale water customer. And we basically allocate costs to these customers in proportion to their contract capacity or contract demand. Their contract with the City of Philadelphia actually have a maximum date capacity which you effectively reserve in your water system to provide them. They pay the capital costs on their contract capacity even though they may not be utilizing their full contract capacity amount. And for Philadelphia Suburban Water 22 05/20/04 - TRANSPORTATION - RES. 040298 Company, there's 10 percent management fee as Bernie has described. We pay full cost of service. They don't utilize necessarily the same total facilities of a water system, for example, as an industrial customer. They use only the large mains, the transmission mains, to get the water from the treatment plants to the outlying areas where they take the water. They don't utilize the small distribution mains within the City system, so appropriately they're excluded from paying for the small mains cost. However, they do pay their full cost of the capital cost for the treatment plants, the source of supply facilities, the pumping facilities of the large mains. And basically they're paying in cost for service, it's what it cost of the City of Philadelphia Water Department to provide service to these customers. And that's basically what's embodied in the contracts with the customers that they should pay cost. And there are certain methodologies outlined in those contracts that we follow in our allocation and rate design process. 23 05/20/04 - TRANSPORTATION - RES. 040298
What effect does this arrangement we have on our rates? Is this good? Is this a business deal for us? In other words, if we stop doing this, would this bring the potential rate increase down or is this good for Philadelphia to do this type of an arrangement?
I'll answer that from, I guess a technical perspective, then Bernie can answer from maybe a more political perspective.
I'm talking about what the market will bear type of situation.
I've been in the rate business for somewhat 30 or 40 years now, and we try to establish cost of service and rate design, whether it's wholesale or retail customer rates that will stand the test of courts. We don't like to have arbitrary capricious rates because you get into trouble when you vary from what the true cost of 24 05/20/04 - TRANSPORTATION - RES. 040298 serving on. So that's kind of our position as we educate and we recommend to the Water Department what it costs to actually serve these various customers, whether they be wholesale, which are governed by contracts, or retail customers. So I think from the perspective that I'm coming from, paying full cost of service plus a percent adder for a 10 management fee is certainly fair to the City in providing that service. They're recovering their cost. In the case Philadelphia Suburban and in Bucks County, we are at a rate of return on the investment provided to those customers based on their contract capacity, and neither one of those customers on the water side are actually utilizing currently their full contract capacity. So they're paying for reserve capacity at a 7 percent rate of return as well as depreciation on the facilities they're using as well as the actual operating cost based on how they use the system each year.
I'll let our 25 05/20/04 - TRANSPORTATION - RES. 040298 Chairman continue. I just didn't want that to get by us. I guess to finish up, Commissioner, you have a political side of that question to answer versus -- and again, lastly, when we're in a water crunch here, if we weren't exporting this water when we tell people we can't wash our cars and we can't do all these things, if we weren't exporting this water, could we do all the things we want to do? COMMISSIONER BRUNWASSER: Well, just to get back one moment to what Ro just said, it's good for us to be able to spread the fixed cost of our facilities across the widest, largest customer base we can. The three water treatment plants were actually designed in the 1950s and I guess constructed probably in the early '60s, and they were designed and built to handle maybe two and a half million people inside Philadelphia with industry. So we have very large reserve capacity at those plants. It's best for us to market as much of this capacity to the suburbanites as we can. 05/20/04 - TRANSPORTATION - RES. 040298
I'm finished. I'm going to turn it back to Councilman O'Neill.
It's excess capacity so if we're not selling it to suburbs, we're just paying for it among ourselves so even if we have to sell it for less, it's still better than nothing. That's kind of the argument I've always heard from the Water Department on the excess capacity argument and why suburbanites pay less than Philadelphians for the same service. COMMISSIONER BRUNWASSER: They pay differently, they pay on a different basis. For instance, Bucks County, that's a pipe through Northeast Philadelphia. That's one pipe. They pay for that pipe, for that conveyance pipe, and they take the water at the City boundary. Then they have to go and distribute that water -- we have 3300 miles of water main inside the City. They have their own water main system in Bucks County, and they have to go and meter and bill those customers. So that's why it's wholesale. 27 05/20/04 - TRANSPORTATION - RES. 040298 They have one pipe. We give them all the water they required under the contract. And that portion of the plant that's attributable to them, they share in that cost. So it helps to spread our fixed cost of that plant, but we charge them everything that it costs us plus, as Ro just said, return on capital and 9 percent management fee. 10
Okay. I'm going to ask you just as an example. To carry that thought along, and I think I understand it. I never agreed with it, but I understand it. I'm a developer. I find a tract of land, maybe it's the Byberry site, something big. I want to put a thousand residences in there, residential properties. Why can't I sit down with you and say, "I want to pay cost plus 10 percent. This is excess capacity. If I don't build this, you're not going to use that water, you're not going to use that wastewater capacity." To me, it is no different. You're recognizing a border as important, and it's offensive to people that live in the City the 28 05/20/04 - TRANSPORTATION - RES. 040298 same recognition that a border makes the difference, because you would never allow a developer -- maybe you would. Maybe I should let you answer the question. Would you allow a developer to negotiate that with you? Because I have a few that are interested in it, I can tell you that. COMMISSIONER BRUNWASSER: We already have the lowest water rates in the region. If people made the judgment -- if people in the Delaware Valley made the judgment whether to move in or move out of an area based on water rates alone, we would have 4 or 5 million people here and the suburbs would be emptying out if that's the basis. So I don't believe --
Just answer the question. You would not do that with a developer what you're doing with suburban townships and other political entities. COMMISSIONER BRUNWASSER: It's a different story --
You consider it a different story. I understand that. I 29 05/20/04 - TRANSPORTATION - RES. 040298 think it's clear you wouldn't. COMMISSIONER BRUNWASSER: Yes, right
I always like an absurd example to bring out what I think is the real meat of the matter here, because I've talked to enough people in the counties surrounding Philadelphia who love us treating their sewage because of the political problems. And you raised that there's a political side to this. What we're refusing to go recognize, and have been for years, is how we're helping their political problem because their residents don't want the wastewater treatment there. Instead of charging them extra to take them off the hook, we charge them less. That is wrong. It's wrong for our citizens, and it's too easy for them. They shouldn't be treated any different than a developer who has a massive development they want to build and one of the negotiations with the City is, "I'll build this. Let me use your excess capacity. Give me one pipe, I'll figure out the rest while the homeowners association or whatever the mechanism is --" 30 05/20/04 - TRANSPORTATION - RES. 040298 but cost plus percent is fine if it's that way for everybody. The politics of wastewater treatment is just mind boggling in the suburbs, what people will take "not in my backyard thing" and we're letting them off the hook and having our people subsidize it, because that's the end of it. You get full rate from them, you don't get a subsidy up there. What we pay, they pay. As soon as you start with a different rate, we're subsidizing. So I don't know we can continue to make this excess capacity argument. COMMISSIONER BRUNWASSER: Councilman, I disagree with you because we charge wholesale rates at the border. They then have to go back and do what they do to either send us wastewater through a bunch of sewer pipes that they have had to build and they have to go and bill their customers. Now, the bottom line is the suburbanites in these regions that are our customers, our wholesale customers, are paying more than we do, than our inside city customers, so the 31 05/20/04 - TRANSPORTATION - RES. 040298 argument doesn't really work out that way. What we've discussing is retail and wholesale. And I think I'll ask Mr. McKinley to kind of explain because Mr. McKinley has a nationwide view of how this is handled. He happens to be chairman of the American Waterworks Associations's Rates Charges Committee. So there's probably no one in the country who understands this any better than Mr. McKinley.
And we're a member of that association and all the township water departments and water companies are a member of the association. I don't see an objective position here. I see an expert. He's got all the credentials, but is he going to say anything that might offend someone in a suburban jurisdiction that's a member of the association? I don't think so and I wouldn't expect it. This is partly political. And you can't not recognize it. These people in Bensalem or other townships, they don't care if they have sewer -- they want sewer pipes in their street. What they don't want is a wastewater treatment 32 05/20/04 - TRANSPORTATION - RES. 040298 plant down the street from their house. If we don't have it, somebody's going to have it down the street from their house. And it its politically difficult to build those in the suburbs. And I think they'd be willing to pay more if they had to than to pay less. COMMISSIONER BRUNWASSER: One point before I turn the mike over to Ro. Those three wastewater treatment plants that we have -- by the way, it was the biggest investment; up until the building of the stadiums, that was the biggest investment we have ever made as a City. Those three wastewater treatment plants were also designed to treat the wastewater from those suburban customers. And the federal government gave us grants in order to build those plants at those sizes for those customers.
There's two issues with the plants. One is when we built them, the other is when they forced us to up grade them and over purify and overdo it for 33 05/20/04 - TRANSPORTATION - RES. 040298 political reasons. It was going on between the Administration here back in the late '70s and people in Washington who didn't like who somebody running, you know, the was Mayor supporting, and we paid dearly. We first started having the true increases that have gotten our water bills to monthly instead of quarterly because of the requirements that were being placed on us here and not necessarily nationwide in the same way. That is what changed the whole water structure in Commissioner Marazzo's administration, because of the mandates from the federal government on our treatment plants. I understand that. That's when it really got expensive and that's when we started off-loading a lot of this excess capacity. But it doesn't make it right. It may explain what happened, but -- I put two bills in today ave. One is just Gas Works add another line telling people how they're paying for people who aren't paying that can afford to. The Water Department put in another line -- your collections are better, but not 100 percent 34 05/20/04 - TRANSPORTATION - RES. 040298 and they should be closer to 100 percent, considering you can only live a day in the house without water. Why don't we just put in here how much your subsidizing the suburbs, this is how much the differential is. I mean, this is -- we're not going to solve it today, but the 1997 ordinance has to be revisited.
Thank you, Councilman O'Neill. Before you shift over here, I have developers like Councilman O'Neill just said that there are so many buildable, fine construction opportunities in various sections of our City that has no sewerage, that has no 16 water, and I don't know what the relationship is with the Water Department and some of the these developers, but they give up, they walk away because of the cost associated with the infrastructure to provide water, specifically I assume more so the sewage side. Why are we letting all of these developers walk away that want to build 20 houses, nice singles here, 15 over here because they, for lack of a better word, 35 05/20/04 - TRANSPORTATION - RES. 040298 they're not getting cooperation from the Water Department or any assistance in looking down the road what this construction could mean in revenue? Commissioner? COMMISSIONER BRUNWASSER: Well, I've been Commissioner for four weeks. This is an area that I want to explore. I believe that policy where we have the developer build the development to our standards, the water and sewer infrastructure to our standards and then deed it over to the Water Department where we take over maintenance from then on, I think that's served us well so far. But I'm willing to listen and learn a little bit more about this topic.
Because I know three developers that have walked after spending a lot of money for engineering and survey, et cetera. But they claim that they just can't work with the Water Department because of the cost associated with what you just described, the construction of the system and turning it over to you for maintenance. Thank you. Excuse me for 36 05/20/04 - TRANSPORTATION - RES. 040298 interrupting.
That's no problem. As Bernie said, I am the Chairman of the American Waterworks Rates Committee. I also have just completed a rewrite of the wastewater rate manual for the WEF, Water Environmental Federation, which basically is a manual of practice in rate-setting, so I've seen a lot of experience, a lot of jurisdictions around the country through my own experience and through the experience of the people on my committee. And ratemaking 101 is kind of hard to explain in a nutshell, but let me just do it this way. Basically, when you establish rates that are fair, equitable, will hopefully stand the test of the courts, you start with three processes, and we're talking really about the first one here, and that's the revenue requirement projections, what requirements do you have of your rate revenue; you have O and M expense, capital costs, et cetera. Once you've done the projection of the revenue requirements and indicated the need for rate 37 05/20/04 - TRANSPORTATION - RES. 040298 adjustments or revenue adjustments -- which is what we're facing here, we're looking at a four-year proposed revenue increase in each of four different years -- the next step is to take your cost, your revenue requirements and distribute those equitably amongst the classes of customers you serve. In the broadest scheme, you could say we have two classes of customers Philadelphia and many other jurisdictions; wholesale customers and retail customers. You have to do the allocation of your revenue requirements, your O and M expenses, your costs, your annual capital costs to these two groups of customers in an equitable fashion. Once you've allocated the cost, the next step is to design rates when applied to the usage, consumption and the strength parameters and the wastewater, extract that allocated cost from each of these customer classes. So when you're looking at wholesale versus retail, and this is not an uncommon situation, in most cases you'll find you have contractual obligations with your wholesale 38 05/20/04 - TRANSPORTATION - RES. 040298 customers. It's kind of a two-way street; they want to have service provided by the providing entity, such as the City of Philadelphia Water Department, and the City of Philadelphia Water Department wants protection that these wholesale customers won't walk away and leave you with stranded capacity that you've built for them. So when you're allocating costs between the wholesale and retail group, you're bound by contractual commitments in allocating the cost of service to the wholesale customers most generally and certainly in the case Philadelphia, which, as I say, a typical case around the country. On the wastewater side, the largest of your wholesale customers, whether it's Bucks County or Bensalem or Lower Southampton or Upper Darby, they have all made capital contributions, upfront capital payments to the Water Department based upon your investment in the system to provide service to them and their contract capacity. They actually made an upfront capital payment which basically 39 05/20/04 - TRANSPORTATION - RES. 040298 makes their service risk-free from a capital standpoint to the City of Philadelphia. In other words, Del Couras uses 50 million gallons a day; that's their contract capacity. And the capacity of the Southwest Treatment Plant where their water goes directly to, wastewater goes directly to, they paid 50 divided by 210 or about percent of the 10 City's share of capital cost of that Southwest 11 Treatment Plant. All of the other large 12 wastewater customers have done the same thing. 13 That was not only on the original 14 contribution, but as you replace and upgrade 15 and because of new regulations and the system 16 wearing out, they also make a capital 17 contribution for their share of the capital 18 investment in the replacements of the 19 Southwest Plant or Southeast Plant or the 20 Northeast Plant. This is on the wastewater 21 side.
22 So the contracts really govern what 23 you charge your wholesale customers. And 24 that's what I was saying earlier, we allocate 25 them what it costs to serve them. And in most 40 05/20/04 - TRANSPORTATION - RES. 040298 cases -- I think maybe one exception, Bucks County Water, I don't think that has a 4 percent management fee. I think all the other 5 wholesale water and wastewater customers have 6 a 10 percent surcharge on top of the cost to 7 provide service to them. There's no 8 justification for that. That's just a cost of 9 doing business. So to say that they're being 10 subsidized I think is, in my opinion anyway, a misstatement, the wholesale customers. They're paying their cost plus 10 percent. 5 billion or whatever the number is of revenue bonds are outstanding that says you'll recover revenues -- Remember, this is not a taxing authority. This the Water Department has to 41 05/20/04 - TRANSPORTATION - RES. 040298 recover revenues from their rates they charge to their customers is their only source of revenue basically except for interest income. And they have to pledge to the bondholders that they will get enough revenue not only to meet their cost, their O and M expense, to pay that debt service, but there's a coverage covenant, debt service coverage. They have to recover revenue, the Water Department, that's percent over and above their annual debt 12 service payment. And it's a cushion to 13 bondholders that the money will be in the bank 14 to pay the principal and interest on bonds. 15 Now, there's a use of that 20 16 percent. The Water Department also has to 17 make a capital contribution as part of its 18 bond covenant called the annual capital 19 deposit which is about 16 to $18 million 20 capital contribution to the construction fund for cash financing a portion of their capital improvements. So basically, we allocate the cost of service to the wholesale customers plus 10 percent. The balance of those costs have to 42 05/20/04 - TRANSPORTATION - RES. 040298 distributed amongst the retail customers, residential, commercial, industrial. And we have rates designed that basically follow the manuals of practice in terms of the rate structure themselves that recover the cost equitably from the retail customers. Now, you talk about industrial development or you have people walking away. There are such things in the industry called industrial development rates, and those maybe below cost rates to attract industry; a thousand jobs, 2000 jobs. When you do that, you have to very careful, though, because if you're trying to an attract some sort of an industry, a brewery or whatever you already have breweries in the City of Philadelphia and you're giving this customers a break in their water rates, the existing customers may feel like they've been disadvantaged. It's kind of a double edged sword when you talk about industrial development type of rates, subsidized rates. Because, like I say, you have a revenue requirement to recover, you have bond covenants to comply with. And 43 05/20/04 - TRANSPORTATION - RES. 040298 anytime you subsidize a rate to any group of customers, small group or large group, somebody else has to make up the difference because you have a certain total amount of revenue that has to be generated from your rates. So that's my quick and dirty story from, I guess, a rate expert and a revenue requirement responsibility.
Am I hearing you say that someplace in the United States if a developer installs the infrastructure that there could be a reduced rate for the water? But I didn't hear you say that maybe until they recovered their investment. Is there a time associate with that reduced water so it balances investment installation of the facilities?
I would suspect so. An example, we do work with the City of San Antonio water system. They just attracted a large Toyota automobile manufacturing plant. And a part of the package was reduced water rates, water wastewater rates. I don't know 44 05/20/04 - TRANSPORTATION - RES. 040298 what percent of the package it was. I suspect it was not a significant part. There are also tax breaks for a certain amount of time. So when you try to attract industry, water is typically a very small piece of pie. It's the taxes, it's the other infrastructure costs. The Philadelphia Water Department does not have a system development charge for new customers, which many, many utilities do, particularly those that are growing system development charge. It's a new customer contribution, a front-end contribution that residences have to make, businesses in cities where they have such charges. And like I say, most of these cities are fast-growing cities, so rather than make the existing customers pay for the cost of holding extra capacity or reserve capacity, they make the new customers pay a front-end capital contribution towards that capacity. It helps keep the rates lower in a long run. But, see, the City of Philadelphia does not have such a system development charge, so that's not a reason why some water or customer wouldn't locate here 45 05/20/04 - TRANSPORTATION - RES. 040298 because high system development charge. Those charges can be to $10,000 depending on the 4 infrastructure of the City, and you don't have 5 those.
Just on the same subject. THE cost plus 10. You mentioned that the '87 ordinance is cost plus minimum. 10 COMMISSIONER BRUNWASSER: Yes.
Has the City Water Department ever gotten more than 10? COMMISSIONER BRUNWASSER: No. 14
You have close to years of experience where we've treated 19 the floor also as the ceiling. 20 COMMISSIONER BRUNWASSER: Correct.
Okay. And can you explain the Bucks County water not paying the 10? COMMISSIONER BRUNWASSER: Well, yes. Bucks County Water's contract with 46 05/20/04 - TRANSPORTATION - RES. 040298 Philadelphia precedes the ordinance. They signed a 45-year contract back, I believe, in 1966. I may be off by a year or two. 1966 is correct, yes.
Now that they're getting near the END, are they planning to open their own treatment plant so that when the contract is over they won't have to continue this wonderful arrangement? COMMISSIONER BRUNWASSER: We don't know what their plans are, but I would suspect no. 14
You have to have some sense, I mean, you're all in the same business, you're not competitors. What would be your instinct on that? COMMISSIONER BRUNWASSER: No. 19
What do we pay -- what's involved in the cost of the service charge that Philadelphians pay. We pay a 47 05/20/04 - TRANSPORTATION - RES. 040298 water cost and then we pay a service charge. COMMISSIONER BRUNWASSER: That's right. The service charge portion of the bill 5 which is -- I used to know the number, but it's probably along the number of $17 or so. It's a little less than what it used to be when we re-allocated storm water over the past three years. We lowered the service charge cost to the residential customer. And the large meter customer has gotten some significant increases because we've discovered that they occupy more property of the City than we thought initially. And we use meter size as a surrogate. So every five-eighth inch meter customer, their service charge is approximately $17. I know some of the fellows behind me know exactly what it is. But most of that charge is related to storm water treatment, and disposal; collection, treatment, and disposal. Many of the sewers in the street, some of them in the older sections carry both storm batter and sanitary wastewater. In the newer parts of the City, we separate system, separate storm water and 48 05/20/04 - TRANSPORTATION - RES. 040298 separate sanitary lines. The storm water sewers have to be much larger, and there's a large capital cost component to those sewers. Also, we maintain the sewers through our sewer maintenance unit. We maintain the inlets that are associated with storm water runoff through our inlet cleaning unit. And we also have the capital cost of treating the storm water that gets to our wastewater treatment plants, and that adds up to a rather high burden of about, I don't know, 85 to $90 million probably annually; 85 to $90 million of our annual budget is devoted to storm water related items. And storm water, the reason it's in your service charge, it has no relation to the amount of water that you use, it's there to take rain water off of your property and off all the City streets so we're able to navigate during rainy whether.
Do we provide any of that service to areas we sell water to? COMMISSIONER BRUNWASSER: We don't directly, but what we have during rain events 49 05/20/04 - TRANSPORTATION - RES. 040298 is a lot of infiltration of storm water at our connection points to the City, and that comes in and goes to our wastewater treatment plants and we charge them for that. We actually treat their storm water, the storm water that gets into their sewer system, and we charge them on volume as well as strength.
So you charge the county? COMMISSIONER BRUNWASSER: Yes. We charge -- well we have actually now nine entities on the wastewater side that we charge for wastewater. And in this particular instance, wastewater includes storm water.
Is that charged to the county and not to individual? COMMISSIONER BRUNWASSER: Right. It's wholesale. In other words --
That cost is calculated in the cost you charge the municipality. COMMISSIONER BRUNWASSER: Right. The municipality, the township or the authority. Yes, we have about 55 communities 50 05/20/04 - TRANSPORTATION - RES. 040298 surrounding Philadelphia in Pennsylvania send their wastewater to us. They do this through what's been 10. Now two of them have merged, so nine wholesale wastewater contracts, and that's the entity we deal with on a wholesale basis. We say, "Here's what you sent us last month. This is the volume of sewage and this is the strength of that sewage and here is the calculation. Here is the peak you had, et cetera. Here is the calculation for your sewage bill for the month of April." They then turn around and use that to calculate their retail bills back to their customers.
Are they charged the same rate that we pay? COMMISSIONER BRUNWASSER: Their rates are higher than ours. They pay us and then they have to cover the cost of collecting their wastewater through their own pipes to get it to us and they have metering and billing charges and maintenance charges within their area. So all of that has to be added on top of wholesale bill that they paid us. So 51 05/20/04 - TRANSPORTATION - RES. 040298 what we've discovered is that wastewater rates in the suburban areas are more expensive than ours and water rates are more expensive than ours. The other thing I should tell you is in many areas outside of Philadelphia, they honestly don't know much they pay for wastewater because it's part of their tax bill. Sometimes wastewater is separate, sanitary wastewater, but storm water costs is part of their tax bill so they don't really know. They really don't know any all the components of their cost. Some of it is buried in their taxes.
The Chair notes that Councilman Kelly has joined us. Commissioner, I wanted to just ask a couple questions in the same area. I'm now looking at the document that you gave out to us either a couple weeks ago or today. I'm looking at the 2003 regional residential water and sewer charges. Now, let me just make sure I'm understanding this. When you say 52 05/20/04 - TRANSPORTATION - RES. 040298 Philadelphia Water Department, $17.27, is that -- what does that exactly mean? How much water is that? COMMISSIONER BRUNWASSER: That's 800 cubic feet of water a month. That is what we call typical residential customer. I sometimes hit that exact number 8,000 cubic and --
800 or 8,000? COMMISSIONER BRUNWASSER: Excuse me. 800 cubic feet, and that means for me a bill 13 of about 41.76. Only $17.27 of that bill is associated with water. If it was purely a water bill, it would be $17.27. The 17.50 you see for the monthly sewer bill is sanitary sewer charge. Then in the service charge, the service charge which you don't see here, you have storm water taken out and charged as part of your service charge. What this chart depicts here is monthly water bill and a monthly sanitary sewer bill. These are all apples to apples type relationships. In other words, most of these suburban customers have no idea what their storm water charge really 53 05/20/04 - TRANSPORTATION - RES. 040298 is because they don't get a separate storm water charge, it's part of their tax bill, I should say their real estate tax bill.
Why can't we just call it gallons? Why do we have to do cubic feet? Why can't we just do just what people can understand? I don't know many cubic feet of water I use to take a shower.
It's about 50/50 in the U.S. 100 cubic feet versus a thousand gallons. 800 cubic feet per month turns out to be about 72,000 gallons per year or about 6,000 gallons per month. That's a typical residential user 6,000 gallons a month, COMMISSIONER BRUNWASSER: Quite a bit cheaper than bottled water.
So let me try to understand this. Let's go back to part of Councilman O'Neill's original question. What is the actual dollar amount that we charge, suburban companies, I guess, for water versus what we charge a Philadelphia resident for water? COMMISSIONER BRUNWASSER: That's a 54 05/20/04 - TRANSPORTATION - RES. 040298 bad comparison because of the volume. In Philadelphia, we have declining block rates --
Commissioner, I know you've been in the Department a long time and you probably haven't spent much time at the witness table. Let me give you at least one bit of advice. When a Councilmember asks you a question, you cannot like the question, you can think it's a stupid question, you can think it's an inappropriate question. My strong advice to you is just try to answer the question without an editorial comment on whether it's the right question or the wrong question. I can assure you that most members, whether it's the first time they asked the question or the tenth time they asked the question, they'll get to the question that they want to get to. So I'm going to ask you about the residential customer in Philadelphia and the suburban customer or company or whoever we sell the water to, what are the rates in the City, outside the City. COMMISSIONER BRUNWASSER: Thank you 55 05/20/04 - TRANSPORTATION - RES. 040298 for setting me straight.
It's all right. COMMISSIONER BRUNWASSER: The rates do vary depending on the customer.
What does that mean? COMMISSIONER BRUNWASSER: Well, we charge on a number of bases.
Number of bases? Criteria? COMMISSIONER BRUNWASSER: Criteria. And we charge on capacity and the bases of usage. We do have declining block rate in Philadelphia.
I'm sorry, declining -- COMMISSIONER BRUNWASSER: Declining block rates in Philadelphia.
What is that? COMMISSIONER BRUNWASSER: It's part of cost of service rates. And I think it's best for me to pass off to Mr. McKinley because he has the better technical expertise.
Talk about water 56 05/20/04 - TRANSPORTATION - RES. 040298 first of all.
And you heard what I explained to the Commissioner, right?
Declining block rates, what that means is in the general terms, the more water you use, the lower the per unit cost is. Now, it sound like it's not a very conservation oriented rate. It sounds like it's a quantity discount like if you're a big customer you get a break. And just a little bit of background on that from a retail customer perspective. Residential customers by and large -- it's a long answer, but I'll get to your answer. You asked what a declining ing block rate is, and I'm trying to explain it.
No, actually, I wasn't that excited about declining block rate. I'm sure there's more for me to learn about it.
The first block rate 57 05/20/04 - TRANSPORTATION - RES. 040298 which is what the residential customers tend to use is the highest per unit cost because of inefficiencies in their water usage habits.
It's basically $2.50 per hundred cubic feet, $25 per thousand cubic feet. It's he about $1.88 per thousand gallons if you convert it to numbers we understand, the per gallon thousand number.
No, I want to tell you what Philadelphia Suburban's rate is, for example, which is what you asked, and I know that one right off the top of my head because we just negotiated that with them three or four years ago. It's about $1.10 per thousand gallons. So it's lower than the residential rate. That's the answer.
Slow down. The Philadelphia resident, the rate is what?
About $1.88 per thousand gallons. 58 05/20/04 - TRANSPORTATION - RES. 040298
And does this go back to Councilman O'Neill's point with regard to -- is this excess capacity issue where we're just trying to sell whatever we have at whatever rate we can get, I mean, is it the goal here?
The 1.10 is a rate based on the capacity that they have contracted for with the Water Department, they're paying for their full cost of that contract capacity. It's 11 million gallons per day is what they contracted for. And so they're paying for that cost plus the 10 59 05/20/04 - TRANSPORTATION - RES. 040298 percent markup. That's what Philadelphia Suburban rates are paying.
They have a considerable different peak to average demand factor that's embodied into their rates, that's embodied into their contract capacities. The Philadelphia Water Department, the service area and the retail system has a much different usage characteristics. And that's why I was starting to talk about -- 60 05/20/04 - TRANSPORTATION - RES. 040298
Both rates, the retail rate that I talked about for residential and the Philadelphia Suburban rate reflect the cost of providing service to each of these two distinct customer groups. It's cost based.
I hear what you're saying. I'll assume that you really know your business, but for the average person trying to under tan this and you're just a regular Philadelphia ratepayer -- I mean, the Philadelphia residents paying whatever the rates are, they're paying rates, they're paying for bond offerings. The Commissioner talked about an upcoming $250 million deal, $17 million in debt service going back into why our rates are going up. I mean, we're the entity with the product. Now we may not have necessarily 61 05/20/04 - TRANSPORTATION - RES. 040298 created it, but from above we have the product here. We have a system that's been paid for by many Philadelphians over decades. We have a certain number of people, I might even agree I don't know that folks have fled to suburbs because they can get keeper water. We have more than enough incentives built into many systems here in the City that this just kind of be a little bonus that you might not even know about until you get out there. But Philadelphians pay to make this system what it is. How do you justify to a Philadelphia ratepayer that the pipes under the ground, especially if you're in like an outlying area near a county -- Councilman O'Neill is very close to Bucks County. I have Montgomery County literally a block and a half from my house. Some pipe in my neighborhood, some pipe in his neighborhood, some pipe in somebody else's neighborhood is running wit the same infrastructure, connecting a pipe possibly in the middle of City Avenue or Street Road or County Line Road, and when it crosses that line, that political imaginary 62 05/20/04 - TRANSPORTATION - RES. 040298 boundary, people getting that water -- I mean, what is that, 40 percent, a 40 percent difference?
If I can explain a little bit of that, some of the rationale for these differences. When that water crosses the city line at $1.10 a thousand gallons, whoever the purveyor is, Philadelphia Suburban in this case, they have to add to that cost the cost of their local distribution system, their pumping stations, their reservoirs to get that water.
See, those costs are not included in the $1.10 because Philadelphia doesn't provide that service to them.
That's why the rates aren't comparable because $1.88 has all those local distribution mains, the additional pumping, the local cost as well as the reserve capacity within the City of Philadelphia 63 05/20/04 - TRANSPORTATION - RES. 040298 retail system. All of those costs are in the $1.88.
Why wouldn't we have just one rate for water? It's all produced here in the City. Why wouldn't there be one rate in Philly, out of Philly? We produced it with Philadelphians' money. Why wouldn't there just be one rate?
Because just like on the wastewater side, when the water goes out or the wastewater comes in, there's a litany of infrastructure within each of those wholesale customers' boundaries that are costs that they have to incur to distribute the water to their customers or to collect the wastewater and give it to the City of Philadelphia. They don't have the same level of service that you provide to them as you provide to your own retail customers because you have not only the collector sewers, the treatment plant --
I understand 64 05/20/04 - TRANSPORTATION - RES. 040298 everything you're saying. The thing you didn't mention in this equation that I think we're all begging to hear some information about either at this hearing or a future one, and that is the fact that there's a value, not just political, but a real dollar value to them not having to build treatment plant in today's dollars. I haven't heard yet where that cost savings to them is recognized at all and what they're paying us who built ours in the '50s and have paid repeatedly to upgrade it. And I just want to mention one thing. It was a statement by Commissioner that we built this for the suburbs. I had always been told as you started to say at the beginning of your testimony that we built it for a much larger city than we have and it is wise for us to sell. When we had two and a half million people that we were building for, we also were building for the suburbs? You said two different things, and if we can just get that clarified. I think it's an inconsistency, anyway. 65 05/20/04 - TRANSPORTATION - RES. 040298 COMMISSIONER BRUNWASSER: What I said was these plants were designed for a lot more customers and --
Right, but you initially said for Philadelphians that never materialized. Then you said they were built also for the suburbs. COMMISSIONER BRUNWASSER: I was referring basically to the wastewater side. The wastewater treatment plants were -- we didn't get federal money for the water plants, but in order to build the wastewater treatment plants and to build them size appropriately, they were built with two-thirds federal money based on our serving the 10 wholesale wastewater customers that we had at the time. And we still have the same customers. So we got federal dollars in recognition of building adequate capacity so that wastewater treatment plants wouldn't be placed in many different places and they would lose the economy of scale. The federal government would have had to pay a lot more money if they had to build 15 wastewater 66 05/20/04 - TRANSPORTATION - RES. 040298 treatment plants, small ones, rather than three large ones.
Commissioner, while you're on that grant thing, and it was a grant that was given long ago. Does the federal government still give grants for wastewater treatment plants? COMMISSIONER BRUNWASSER: Not directly. What they do is they do have an infrastructure bill that they do give money to some of the state revolving loan funds.
Right, but they don't do what they did in the '50s and '60s anymore. COMMISSIONER BRUNWASSER: No, not at all.
So if I'm Bucks County, I'm not getting two-thirds of anything no matter what I tell them. I've got to pay for it. COMMISSIONER BRUNWASSER: Uh-huh.
Can I ask a question? 67 05/20/04 - TRANSPORTATION - RES. 040298
If we didn't have the deals with the suburbs, both water, could we adjust the facilities? You say we have three. I believe the biggest one was built in the '70s. Would we be able to close one or reduce or change the way it is configured to accommodate just the wastewater from Philadelphia? COMMISSIONER BRUNWASSER: My suspicion is it would save us little bit of money, but the flow -- it would be -- I think we'd have to keep all three wastewater plants open. We've looked at possibly mothballing one of our three water treatment plants, but I think the last study that we looked at made that insufficient.
And because of the contract, we have a staffing level to support the contractual needs, the needs of the City. But you're telling me that if we wanted to, we could reconfigure the way the plants are set up even if they were petitioned 68 05/20/04 - TRANSPORTATION - RES. 040298 off somehow, they could actually run like an electric generating facility that's always running at full capacity? Could it be backed off to just accommodate the needs of Philadelphia? COMMISSIONER BRUNWASSER: Well, that's a goo question. I don't have a simple answer for that because there are other demands on wastewater coming down the road from the federal government, from the EPA and eventually through the Pennsylvania Department of Environmental Protection. And one of the major items that we have on our radar screen is combined sewer overflows. We have, I would say, two-thirds of our city have combined sewers and during storm events, they are allowed to overflow into creeks and rivers. That was the scientific design at that time. They said this is diluted sewage that's going out there and the rivers have the capacity. Well, the federal government is basically telling us now -- telling many cities around the country what they're doing, their problems with combined sewers overflows have to be 69 05/20/04 - TRANSPORTATION - RES. 040298 addressed and we may need some of that capacity anyway just in order to send more storm water directly to our plants for treatment as opposed to releasing storm water directly to the rivers.
I understand one of the biggest costs associated with moving water from Point A to Point B is electricity, the pump cost. Have we calculated all of our costs associated with those wholesale contracts? Have we included the electric bills that we have to spend the money to move the water? COMMISSIONER BRUNWASSER: Yes, we have.
Everything's in there. COMMISSIONER BRUNWASSER: Yes, we have. And in past years we've had occasional disputes with wastewater, especially the wastewater treatment customers because, the wholesale customers, because they were getting large rate increases also. As we were getting large increases here, they were somewhat 70 05/20/04 - TRANSPORTATION - RES. 040298 mitigated by the water side of our bill. They were getting pure wastewater increased charges and if they flowed into Southwest Plant and Southwest was under major reconstruction, they were seeing some eye-popping increases. And so they disputed them and then Mr. McKinley came in and explained to them and, you know, they had some places -- they went over this with a fine tooth comb with their consultants. So we're pretty confident we've got all the costs in there.
Thank you, Mr. Chairman. Commissioner, I just want to get something clear in my head, that for Philadelphians, they're paying $1.88 per 1,000 gallons, according to your testimony. The suburbs, we, of course, are charging them $1.10 per thousand, as far as I gather from your testimony. Is this treated water? Is this all treated water when you sell it to the suburbs? 71 05/20/04 - TRANSPORTATION - RES. 040298 COMMISSIONER BRUNWASSER: Yes, this is drinking water.
I just can't get it out of my mind that we seem to be subsidizing the suburbs for treated water -- COMMISSIONER BRUNWASSER: We're not. We're not, Councilman. You know we've tried to explain. The 1.10 --
What would happen if we charged $1.50 or $1.35 or $1.40? Would they pay or would they say, "No way"? COMMISSIONER BRUNWASSER: Philadelphia Suburban has other sources of water as well.
In other words, it's very competitive -- COMMISSIONER BRUNWASSER: There are places within their system that they could probably produce water a little cheaper than that but what we're doing is helping them in a district of their service area where they don't have as much water. But the $1.10 -- 72 05/20/04 - TRANSPORTATION - RES. 040298 you have to remember that they've hooked up to our system down near the airport. They built miles of pipe, big transmission main from that point and then they have to distribute it.
Do they maintain it also? COMMISSIONER BRUNWASSER: Yes. They have to distribute it. It's a much different -- wholesale and retail is much, much different. Believe me, we are recovering all of our costs and 10 percent. That's how we're doing it at present. Whether 10 percent is negotiable later on, that's something for us to explore.
In other words we're making 10 percent over and above the cost that -- COMMISSIONER BRUNWASSER: The full cost of service, yes, that we incur.
Do you have any intentions of going after either the Suburban people to see if they can help us out by -- COMMISSIONER BRUNWASSER: You mean by selling more water to them? 73 05/20/04 - TRANSPORTATION - RES. 040298
By selling water a little -- COMMISSIONER BRUNWASSER: We have, we have. And we have to -- we don't have the franchise outside of the borders of Philadelphia. We have to act through let's say the Bucks County Water and Sewer Authority or Aqua Pennsylvania or any other company that actually has the franchise to deliver water in those areas. So we can't retail outside of our borders. If we were to retail outside of our borders, their costs would be higher than inside City customer because we have would also have the responsibility for the water mains in the suburbs and to bill and collect from those customers on individual basis. That's what's missing here.
Well, they could still use that infrastructure that you're speaking about, about pipelines and whatnot if, for instance, they did not deal with Philadelphia, they could use that same infrastructure to deal with another water company? 74 05/20/04 - TRANSPORTATION - RES. 040298 COMMISSIONER BRUNWASSER: Presumably, within the suburbs, yes. But there are certain facts --
And it wouldn't cost them an additional sum of money to do that? COMMISSIONER BRUNWASSER: They wouldn't be buying it from us if they could get it cheaper in that particular location. Now, we've reached out to the State of Delaware, believe it or not, as far away as Delaware when there was a drought a couple years back. Delaware, I think, was in a very bad way. I think they were pretty much rescued by the rain. They should be looking at ways to assure themselves of additional water. That state is growing rapidly, and their water sources will be pretty much tapped out the next time there's a drought. So this is the time for them to look for new sources, and we are reasonably priced even though we're 14 miles away.
Well, Commissioner, with all due respect, I think 75 05/20/04 - TRANSPORTATION - RES. 040298 the price differential is quite alarming, to say the least. That's all I have, Mr. Chairman. Thank you.
Commissioner, I think I know the answer to my question about the reason hasn't been deregulated is because of the cost of distribution. It's not like electricity where you can pull a switch and fill a grid with it and it's transmitted through the power lines. Is there any movement in the United States to deregulate water and be able to put our water into the existing infrastructure the same way they do with electricity? PECO Energy still has the wires on the street and the service to the house, but you could be buying your electricity from a company in California. Where are we with that? COMMISSIONER BRUNWASSER: Councilman, I think if we deregulate it, because of our economies of scale and our 76 05/20/04 - TRANSPORTATION - RES. 040298 efficiencies, we would be in good shape. We would be more competitive than our surrounding areas.
We talked about politics. What is the politics to water deregulation? Where does it stand? Is there any movement at all or is it a political issue? COMMISSIONER BRUNWASSER: Perhaps Mr. McKinley, since he has a more nationwide view can answer that better than I.
It's a kind of difficult question to answer because really water, per se, isn't regulated. Most of the energy companies, the electric companies are regulated by public service commissions because they're in the business to make a profit. There has to be some watchdog. The PUCs the PSCs of the world to look the after energy rates. So virtue of the profit making characteristic of the energy business, it's regulated from a ratemaking standpoint and when you talk about wielding energy, basically electrons are electrons. There's no 77 05/20/04 - TRANSPORTATION - RES. 040298 difference in California's electrons and New York City's, whether it's generated from coal fired, gas fired or hydropower fired facilities. Water, however, doesn't work that way. Water systems are built -- the City of Philadelphia Water Department has a grid system that's built and sized to serve its own needs. Philadelphia Suburban or Aqua Pennsylvania has its own system sized to meet its needs. The water system in Del Cora, Delaware County, the systems are sized so that they aren't basically configured to wield water from one entity to the other entity. Because the smaller mains tend to be on the outside of the system and the larger mains as you come into the system. There's another thing with water compatibility. Different sources of water have different chemical characteristics. And when you pump water from one system to the other system, most often there's some sort of a reaction. It can corrode the pipes. So water is not like electricity because it's not a fungible commodity, it doesn't matter whose 78 05/20/04 - TRANSPORTATION - RES. 040298 water it is and where it goes. The systems aren't really built to wield water back and forth to different entities, and the characteristics of the chemical constituency of water isn't built to do that. However, out in California with Southern California Water District, it is a big district and they do have a lot of water pipelines that transmit water up and down the California system. And if there's really no 12 water from Los Angeles to San Diego, that's kind of where it might happened. It's configured to do that type -- the system is configured to accommodate that.
But to hear what the Commissioner just said, we could go beyond the county line that we would be in a good position? COMMISSIONER BRUNWASSER: I mean, we don't have the franchise. It if it was opened up and somebody wanted to buy -- somebody in the Lower Bucks County -- well, no, they already get our water, but if they got it directly from us or, you know, without the 79 05/20/04 - TRANSPORTATION - RES. 040298 intervention, if Bucks would have to allow us to pump the water through their pipes, et cetera, and we got the benefit of that somehow, yeah, that would be to our benefit, but...
Let's talk about -- the 1.88 per thousand gallons to the Philadelphia customer, what's included in that price? COMMISSIONER BRUNWASSER: $1.88 for the water, that would be -- included would be the maintenance of 3,300 miles of water main, the cost that the wastewater treatment plant pumping the electricity in the pumping -- basically work on gravity, but there are about 16 or 17 water side pump pumping stations and about an equivalent number on the wastewater side, a lot of electricity chemicals, et cetera, metering and billing.
Is there any cost associated with uncollected billings in the $1.88? 80 05/20/04 - TRANSPORTATION - RES. 040298 COMMISSIONER BRUNWASSER: Well, we set rates in a similar fashion to almost every other business. When we set rates, we determine what the revenue requirement is and we do take a look at collection factors and payment patterns and we set rates realistically on past history.
So let me ask again. Is a portion of the $1.88 to cover non-paying customers? COMMISSIONER BRUNWASSER: A small portion.
How much? COMMISSIONER BRUNWASSER: Perhaps 3 percent, to percent.
Now, in the $1.10 for the suburban customer, is three an uncollectible factor or percentage in the $1.10? COMMISSIONER BRUNWASSER: I don't believe so. We get paid every month by these customers.
Well, I understand that. But again, the overall 81 05/20/04 - TRANSPORTATION - RES. 040298 system is being paid for by Philadelphians in order for this water to be made available. It gets shipped through the City in the various pipes, it goes where it goes. You already have the 41 percent differential that's been laid out, and then the Philly customer also is covering other cost factors in the system. But we're selling water to other people and they're not helping to contribute to that?
We establish the rates and charges to the suburban customers based on the cost it takes the City to provide service to them. They pay their bills on time. They aren't contributing to any delinquencies or unpaid accounts. So they shouldn't be sharing any costs because they pay their cost of service basically in a timely, so far as I know. I don't think anybody's really in arrears. I get a monthly report.
I understand that, but again, it's our system. How did you decide on the $1.88? How did you decide on the $1.10? Where did 82 05/20/04 - TRANSPORTATION - RES. 040298 that come from?
There's a lot of information here and I try to synthesize it to you and tell you basically what goes into those numbers. And I will tell you a couple things that, again, the $1.10 versus the $1.88 --
What do we know about the charges -- you mentioned in response to Councilman Kelly that if you we went to $1.50 or $1.35 whatever some other number might be that the companies would start looking to other providers. What are some of the rates that they pay to other service providers?
I'm not familiar with other service providers Bucks Count has or Philadelphia Suburban. I can't answer that question. I'm on the not aware of who sources of supply --
None of that information goes into a determination of -- I mean, in business, notwithstanding whatever your production costs are, it seems to me that 83 05/20/04 - TRANSPORTATION - RES. 040298 you want to price your product so that it is competitive in the marketplace. I mean, IBM must know what Xerox is selling a comparable sized copier for, right?
Why don't we know what our wholesale competitors are selling the product for?
I guess my response to that -- and Commissioner Brunwasser can disagree or correct me, but the City enters into arms length contracts with these wholesale suburban customers. Nobody's holding a gun to either parties head to sign these contracts. The contracts call for providing service at cost, recognizing such factors as the contract capacity that is being provided to these customers.
I understand that. This is more in the realm of either good business sense or inquiring minds want to know. Why wouldn't you want to know what our other wholesale competitors are selling to the same customer for as we try to price our 84 05/20/04 - TRANSPORTATION - RES. 040298 product? Notwithstanding how many miles we have, what it costs, wastewater, treatment plants, all kinds of other factors. I mean, is it possible that some other company is selling to -- and I don't want to use any system's name, but is selling to an entity that we're selling water to, is it possible that they could be selling their water to them for $1.15 per thousand gallons? COMMISSIONER BRUNWASSER: It's quite possible and probably that it would be higher than our cost. As an example, about years ago, 15 the State of New Jersey was looking for water for South Jersey. Their aquifers were getting salt water intrusion, things of that nature. And they came to Philadelphia, and we made a sales pitch to them with very low rates, again, cost of service rates. And they decided to build their own water treatment plant, which is far more expensive on a wholesale basis than Philadelphia. And they kind of built a plant across the river from our Baxter Plant up in Northeast Philadelphia. 85 05/20/04 - TRANSPORTATION - RES. 040298 The reasoning behind it was not a financial one, but a psychological, political reason.
Let me ask one last question. Attached to your testimony, you've got a chart of major costs. You have decrease in interest income. What is that caused from? COMMISSIONER BRUNWASSER: We have several funds set up by our general ordinance. We have our revenue account, a revenue fund. We have a self-generated capital account. We have a bond proceeds account which is both -- the capital account and the bond proceeds account reside under the construction fund. We also have a residual account, and we have a rate stabilization account. And all of these accounts are professionally managed, professionally managed to maximize the amount of interest they earn.
Professionally managed by whom? COMMISSIONER BRUNWASSER: Some of the accounts are -- also the sinking fund reserve account, that's professionally managed 86 05/20/04 - TRANSPORTATION - RES. 040298 by Public Financial Management. And I think the other accounts are managed by -- well, it may still be called Solomon, Smith, Barney, for that portion of their business.
How many different accounts do you have? COMMISSIONER BRUNWASSER: A revenue account, a capital or construction fund account, a rate stabilization fund, and a residual fund.
So five? COMMISSIONER BRUNWASSER: And the sinking fund makes five, I guess.
That makes six. Revenue, construction, rate stabilization, residual, and sinking; five. COMMISSIONER BRUNWASSER: Yes.
And who are they? COMMISSIONER BRUNWASSER: Singing fund reserve is Public Financial Management. 87 05/20/04 - TRANSPORTATION - RES. 040298 And the other accounts, I believe, are Solomon Smith Barney. They may now be called CitiGroup.
They have the other four? COMMISSIONER BRUNWASSER: Yes, I believe so.
And how do they get paid? COMMISSIONER BRUNWASSER: There's a fee structure that they have set up with the City Treasurer's Office.
Well, they get paid by the City Treasurer; do they get paid based on a percentage of funds under management, do they get paid on performance? COMMISSIONER BRUNWASSER: It's a percentage of the earnings.
It's a percentage of the earnings. What's the percent and what was the amount paid last year? COMMISSIONER BRUNWASSER: I would have to consult with the Treasurer's Office. 88 05/20/04 - TRANSPORTATION - RES. 040298 We don't directly manager those accounts.
You can get us information on the five accounts, the two managers, and what their fee structures are and what they were paid for the last three years, the amount of money in each account over the last three years? COMMISSIONER BRUNWASSER: Okay.
This cost plus 10 you made reference to it being a 1987 ordinance. Would someone on the team happen to know the Bill number? COMMISSIONER BRUNWASSER: We can provide that.
Okay, that would be helpful. I didn't actually get an answer. What's the cause of the decreased in your interest income? COMMISSIONER BRUNWASSER: Just lower interest rates in the market generally. In other words, the types of instruments that the fund managers invest in -- and it's a very conservative investment policy. It's 89 05/20/04 - TRANSPORTATION - RES. 040298 difficult to find investments that are high interest if you're limited to double A or triple A treasuries or municipals.
Well, I understand that. But I'm under the impression based on this chart that you have lost interest income. COMMISSIONER BRUNWASSER: We've experienced lower interest income than in the past. That's basically what we're saying.
Let me go back, and then I'm sure my colleagues have some questions. Your May 14th letter to Council President Verna, maybe I wasn't clear in my request. What I was asking you for was if the $125 million from the Water Reserve Fund which is proposed to be used for economic development purposes were not used for that purpose but rather used for the normal purposes, for instance, that you would use the $250 million that you plan to go to the market for next year, what would you use the $250 million for? 90 05/20/04 - TRANSPORTATION - RES. 040298 COMMISSIONER BRUNWASSER: The 125 you mean?
No. You plan to go to the bond market sometime in the next fiscal year, and you're saying that we approved an ordinance for that. Do you recall when? COMMISSIONER BRUNWASSER: November 2002, I believe.
Is that a separate bill by itself? COMMISSIONER BRUNWASSER: Yes.
For the purpose of authorizing a borrowing of $250 million? COMMISSIONER BRUNWASSER: Yes.
And you're just going to the market this summer. COMMISSIONER BRUNWASSER: Yes.
Any particular reason? COMMISSIONER BRUNWASSER: I think we had to ask for a little bit earlier because of the way the City's accounting system works, it's budget accounting system. We need 91 05/20/04 - TRANSPORTATION - RES. 040298 authorization through an ordinance of City Council as opposed to a general obligation bond which requires the authorization of the voters. And we'd run out of authorization long before we run out of cash.
Give me that Bill number on that one too, please. So what do you plan to use the 250 for? COMMISSIONER BRUNWASSER: Approximately million of it will go for 13 water main replacement, another 25 million or 14 so will go for sewer main replacement, another 15 42 or $44 million or so will go for plant 16 improvement or replacement of facilities, 17 water treatment plants, waste water plants, 18 pumping stations, and the like. We also pay 19 some of our staff, they're paid on the capital 20 budget. They work exclusively for capital. 21
So it's all 22 things that are related to the current system 23 and how it functions and operates? 24 COMMISSIONER BRUNWASSER: Yes. 25
For items that 92 05/20/04 - TRANSPORTATION - RES. 040298 are currently within the system to make sure that it functions and operates? COMMISSIONER BRUNWASSER: Primarily, yes.
So my question back at the time was, what would happen if you use that $125 million for the things that you would normally use the proceeds from this now proposed $250 million bond offering that you plan to float this summer; and what effect would using $125 million for things you would normally use for the 250, the first of which is you wouldn't have to borrow 250, you'd only have to borrow 125? So play that out and then tell me how using the 125 in a different fashion on behalf of current customers, the current system, normal operations that you would go to the market for, how would that impact the proposed 43 percent increase in the rates over the next few years? COMMISSIONER BRUNWASSER: Okay. I've attached two tables, as you know. But let me try to walk through it.
Two tables to 93 05/20/04 - TRANSPORTATION - RES. 040298 where? COMMISSIONER BRUNWASSER: To the response, the May 14th response.
Why don't we do this. I don't want to go back through all that. I want to make sure you have the right question because you responded to a question that I didn't really ask and took the 125 and used it for the sewer lateral program. I wasn't asking about that. COMMISSIONER BRUNWASSER: Not quite, but hat I believe you asked, and this is what I provided in that table. I'll hit the highlights of the table. You said, I believe, that assume the capitalization of the lateral program --
That was a different question. COMMISSIONER BRUNWASSER: I watched the tape. I think it was in combination. But.
That was hundreds of questions ago. You could very well be right. 94 05/20/04 - TRANSPORTATION - RES. 040298 COMMISSIONER BRUNWASSER: In other words, what we did was, I went back and we said, let's assume the capitalization of the lateral program --
I understand. COMMISSIONER BRUNWASSER: Now, $125 million in capital that we would use ourselves for our normal program would delay the next bond issue by a year.
I understand. COMMISSIONER BRUNWASSER: What does that do to rates for the typical customer? Well, these two tables indicate that under the rates as filed earlier this year, the Water Department overall needs an increase in revenue of 7.4 percent each of the four years. I'll explain why that varies a little with the other numbers you've seen. If you capitalize the laterals and you push off the next bond sale by one year, you will have 5 percent annual increases over the four-year period instead of 7.4 percent increases. So you're basically cut one-third off the overall revenue requirement each year. That's the 95 05/20/04 - TRANSPORTATION - RES. 040298 effect.