There’s an old truism in the theatre: in a play, if someone produces a gun and puts it on a table in Act 1, you know sure as hell it will be used in Act 2, and someone’s going to lie dead on the stage. Happens every time.
Allow me to introduce you all to the “Capital Improvement Surcharge,” a mechanism included in the City of Trenton’s contract with New Jersey American Water to calculate which party pays how much when it comes to major capital spending for the Trenton Water Works over the life of the contract, if the sale is approved next week.
Here, pick up the gun! See how shiny it is?
You can read all about the surcharge on pages 34-41 of Exhibit C to the Sale contract (printed numbers on the pages, not PDF numbers).
Or, let me summarize it. It’s been widely publicized that NJAW will pay a 60% share of the costs of any major project. That is true only if what’s called the Applicability Share Factor (ASF) is 100%. That’s a calculation of how much the project benefits not only Trenton, but NJ American Water as well.
There is another item called the Demand Share Factor (DSF), which is a calculation of what percentage of the total volume of water produced by TWW is actually used by NJAW. It’s estimated that the DSF in the first couple of years of the contract will be around 60%.
The actual percentage of capital expenses that NJAW will pay under this agreement for each capital project is calculated by multiplying the ASF by the DSF.
These are the bullets. They go in like this. Watch!
If the ASF is 100%, and the DSF is 60%, then NJAW will pay 60% of the capital costs of a project. But, if one of the numbers is lower, then the percentage NJAW pays is lower. I don’t have to give you an example of that; there’s one in the contract.
On Page 37 of the Agreement (Exhibit C, Section 3, Paragraph (B) (v) for those scoring at home) there is an example where the ASF is only 60%, and the DSF is 50%. In this example, the calculated share of costs that NJAW would pay is 50% of 60%. In other words, only 30% of the total, leaving Trenton rate payers to pick up the remaining 70%. And that’s the example in the bloody contract itself!
Now, NJAW and the City of Trenton are telling people not to worry about the Capital Improvement Surcharge. NJAW will pay 60% of capital costs, Trenton only 40%. Don’t worry! Trust us! So what if it’s in the contract? Who are you going to trust: us, or your own lying eyes??
Oh, I’m so sorry about that. I didn’t know it was loaded. Here, let me get you a couple of towels!
You got it right. Unfortunately, McIntyre wasn’t asked about this last night. In the days when the utility was regulated by the BPU, the split or allocation (ASF in the CIS) of the facilities and the expenses related to them was about 40% City and 60% Townships. It could be argued that the split is less for the City and more for the Townships. Nevertheless, the demand share factor has been about 44% City and 56% Townships. Applying those actual factors gives NJAW a CIS percentage of 33.6%. NJAW would get the benefit of $60 million of the $100 million of projects already built and soon to be built for only $33.6 million. You are correct in that the City residents will pay not only their share but also the $26.4 million NJAW discount.
More Benefits for NJAW and less for the City
The BPU order authorizing the sale of the assets allows NJAW to bring the rates used in the Townships up to the rates that exist in the NJAW service area that includes Lawrence Township, Princeton Township and Princeton Borough. NJAW will be allowed to do this over the next three rate increase requests that if files. It could certainly do this withing the next five years since it begins preparing its next rate case as soon as the present one is finalized. Keep in mind that the rates that will exist in five years will be greater than the rates that exist today. Applying the rates that exist in Lawrence Township reveals that NJAW will receive about $28 million from Township customers. This includes revenue from water sales of about 4 billion gallons ($18.5 million), fixed service charges ($5.4 million), private fire protection charges ($1 million), public fire protection charges ($2 million), miscellaneous revenue ($.5 million). Remembering that NJAW will only pay the City $9.6 million plus $2.2 million or $11.8 million, that will leave NJAW $16.2 million to maintain the pipes and other facilities. The City says that it costs $4 million to do that. NJAW could do it for that and probably less. That only leaves about $12.2 million for NJAW to pay debt, pay dividends to stockholders, pay taxes and do whatever it does with what is left over. If half of the $80 million is financed with debt, the annual payment would be about $3.4 million (6% for twenty years). Stockholder dividends at today’s rate would be about $1.68 million (4.22%). Combined that is about $5 million. That leaves about $7.2 million. Not a bad return on an $80 million dollar investment that costs you only $5 million a year (debt and dividends).
William – Thanks for your comments. You write as one with a great deal of knowledge on the matter. Is that knowledge from experience, if you don’t mind me asking?
Kevin – A while ago I worked for a municipally owned water utilty and I continue to maintain contact with some experienced water professionals. We have been concerned about the efforts to mislead the voters by the unsupported statements regarding the anticipated revenue and expenses and the condition of the expenses to maintain the assets that would be sold. We understand that this is more of a political campaign rather than an economic or engineering study that will lead the voters to the correct decision. However, we hope that having accurate information, in at least some places, will help the voters make the right choice.
that should be …the condition of and the alleged expenses to maintain…