by Peter Decaprio
Chairman of the Cohasset Water Commission
Eighteen months ago, I was appointed to Cohasset’s Water Planning Group to help address a looming budget deficit in the water department. I thought the situation was hopeless.
Knowing nothing about water production, I falsely assumed that economies of scale would work against us, and that being in the water business was too complicated and costly for a small town like ours.
If what was then thought to be an insurmountable $1.0 million budget deficit wasn’t bad enough, I was also told we needed $5.0 million in new capital expenditures to deal with water quality problems that were causing us to fail new federal guidelines. How were we supposed to dig our way out from all that? As most ignorant people do, and I was supremely ignorant back then, I lashed out and looked for scapegoats.
Fortunately my misplaced anger and my sharp, uninformed confrontations with the chairman of the then water commission yielded a surprising result: answers I wasn’t expecting.
A blown thesis is the best, as any scientist will tell you, because it puts one on the path to understanding. Every citizen complaint sent my way for investigation regarding water quality, and there were many, was thoroughly pressed and investigated – and promptly debunked by the facts. Same with my concerns regarding out of control expenditures. After a while, even the most stubborn of us yields to the facts, and sees clearly.
The Water Dept. Never Really Had A Serious Financial Problem
What I learned was this: the water department never really had a serious financial problem. But it did have a contract problem.We generate $4.7 million in revenue annually.
Our debt service totals about $2.8 million and is comfortably covered by revenue. And contrary to my initial fears, running the water department is not costly; non-contract expenses are only $600,000.
Where’s the problem? Fees to American Water totaled $1.2 million this year, leaving us only $100k in excess for contingencies, and you’ve seen this year what some of those contingencies can be. But, we believe total employee cost is only $500,000 (the contract is simply a pass-through). Fortunately for us, that contract ends this year. Our goal is to capture the excess margin now flowing to American Water, and return it to ratepayers.
The question is how best to do that. We can’t sell the water company because the tax consequences are severe and will be until our debt is retired (only twenty years from now).
We can, however, take advantage of a change in market dynamics. In 2007 when we signed the last contract, operators were busy – it was a seller’s market. Today the situation is reversed. Operators have capacity, and to generate suitable returns are making their balance sheets available to those smart enough to take advantage.
Out from underneath the onerous American Water contract, the water company can generate significant free cash flow. We believe we can get an operator to pay us for that. There will be much to negotiate and many issues to overcome, but none are insurmountable. “Other People’s Money” is a tried and true maxim that has been successfully applied in business by many. It can now apply to us.
One of the last recommendations of the Water Planning Group was to return the focus of the water commission to water quality. I agree with that completely. This new contract will give us the best chance to do that, as it will free us from the capital constraints that have plagued us in the recent past while at the same time allowing for meaningful rate reductions. Yes, rate reductions.
Our goal at the commission is to set the water company on a path to complete financial independence.
With a clear capital plan in front of us (and we don’t need $5.0 million to improve water quality by the way), it would be a shame if we were held hostage by budget problems elsewhere, should they ever occur.
All municipalities, Cohasset included, will soon face difficult choices. The solutions will require radically new approaches to all aspects of our municipal corporation because the old ways are no longer viable. That also holds true for the water company.© Copyright 2011 Tanna K, All rights Reserved. Written For: Tinytown Unleashed