TU Water RFP Expert comments

by the TU Water RFP Expert

(Click here to read the 10-Year Cohasset WaterRFP)

Last night sounded like a clear signal that the water commission is feeling the heat and light of public scrutiny. I wonder, did Aquarion back off – too many bright lights and too much controversy for the  Cohasset deal to be worth their while under the concession RFP? Congratulations are owed to the Fourth Estate if this reading of the water commission’ statements is correct!

Next on the list will be a full going over for the one-year management contract RFP, which will probably reveal itself as a measurably less expensive route for the procurement of water system management services. However, Cohasset water watchdogs will want to be on watch to be sure that the management contract RFP is not written either as an unattractive straw man for the concession RFP or a stalking horse for a ten-year concession that it evolves into at the end of the first year, when the water watchdogs are tired and distracted.

Here are a couple of new questions that come from listening to the proceedings:

1. How does the water commission expect the concessionaire to earn a profit if it does not “mark up” its labor and other costs (something they see as a short-coming for a management contract, like the one the Town currently has)? Certainly the concessionaire will not provide services at cost and leave at that. Is it expected that they will reduce staffing? If so, why can’t American Water or another company  do this within the context of a standard “qualified” management contract?

2. Does We haven’t applied to the state for permission (to sell surplus water into another basin i.e. Hingham) mean we never will? Or does it mean that the water commissioners will never do this until the controversy has died down, people have gone to the beach for the summer and an addendum to the concession contract can be slipped under the radar. (By the way, Scituate, which is in the same basin as Cohasset, meaning that no state permission for an out of town sale is needed, is looking for a new source of water.)

(Publisher’s note: We already have an inter-basin transfer permit
which was required for the current sale of water to Aquarion.)

3. How do costs go down if Cohasset just shifts them to another party? Doesn’t the other party (the concessionaire) need to cover the same costs and then add a margin for a profit, even if the annual fee is “fixed” and the contents of the concessionaire ‘s grab bag are not subject to examination?

4. Cautionary tale: Back in the 1990s and the early years of this century, municipalities entered into opaque interest rate swaps that were meant to stabilize outlays for interest on variable rate bonds. Unfortunately, these agreements were built on faulty assumptions and tilted in favor of the banks. All of this fell apart in 2008 and some major municipal bankruptcies, including the notorious bust-out of Jefferson County, Alabama were the ultimate result. The refrain at last night’s Cohasset Water presentation, a breathless infomercial for utility concessions as the ultimate solution, was “stability” of operating costs. As interest rate  swaps demonstrated, you can’t “stabilize” volatile costs without paying for it. People who take on transferred risk only do so if they are being paid for it.

5.  Another cautionary tale: One of the names that came up tonight was United Water. Selecting that firm to do major work for the Town after the Atlanta fiasco would be like hiring Bechtel to design and manage the construction of a tunnel after the Big Dig.

6.  Since Cohasset has some large new watt customers, whose demand will add to net revenues and the Town is nowhere near to being I excess of permitted (by the Commonwealth) retained earnings, why can’t repair and replacement reserves and a rainy day fund be built up to help smooth out the variability of net revenues that relate to factors such as weather and housing cycles?

7.  Is Cohasset still at a point where the Town can’t execute credible cost accounting and deliver what an auditor needs to give a clean opinion on water? If this is the true rationale for a water concession, then the Town is still in trouble after a concession is granted. Or maybe we pay the concessionaire to do the job within the opaque “prix fixe.”

8.  If Cohasset has to be in a position to track licensing and other compliance matters and report to the Commonwealth as owner of the Town’s water system, how does this tracking and reporting obligation get offloaded to the concessionaire without paying the concessionaire for the services?

9.  Bottom line: Tonight sounded like “New lamps for old.”

© Copyright 2012 Tanna K, All rights Reserved. Written For: Tinytown Unleashed
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  8 comments for “TU Water RFP Expert comments

  1. cmallen71
    April 2, 2012 at 11:48 am

    I have found this blog very informative on town issues and hope it remains a good source for information in the future. But regarding Mr. Coughlin: How can we miss him when he won’t go away?

  2. peter decaprio
    April 2, 2012 at 11:13 am

    Hi Mike. Nice to hear from you.

    Again, for accuracy’s sake, we no longer manage a hedge fund and haven’t since March of last year. Our registered mutual funds do own American Water (thank god), and have for quite some time, which is why I made the relevant disclosure under M.G.L. 268A on December 21, 2010. I made the disclosure when Karen went to the ethics commission to try and throw up roadblocks during Bear Hill. Didn’t work then, as the state was most happy with my response.

    But, I would like to thank you for pointing out the outstanding performance of American Water stock this past year (+30%). I had forgotten. As you know, the utility sector was up almost 19.5% last year, versus 2.11% for the S&P 500. Picking stocks that outperform the index is what we get paid to do, and American Water was a big reason why we outperformed the benchmarks against which we are judged. That’s the good thing about performance benchmarks – you know how well someone is performing. It’s one of the primary differences between the public and private sectors.

    One of the reasons why American Water stock rose as much as it did is that it is a well-managed company that delivers results and is taking advantage of some clear trends world-wide. Among those are that delivering potable water is becoming more complicated everywhere with increased quality standards, and professional operators are benefiting. Did you know that in the past 10 years, the number of people worldwide that receive water from private companies has increased from 50 million to over 200 million?

    You must remember “Brian’s Song,” the movie about Gayle Sayers and Brian Piccolo? You remember the scene when Sayers was receiving the comeback player of the year award on the night he found out Piccolo had cancer? He told the crowd that “I love Brian Piccolo and I want you to love him too.” Well Mike, we love utilities, and we want you to love them too. Did you know that utilities, while considered defensive investments, have actually outperformed the fast-growing NASDAQ index since the NASDAQ was formed in 1972?

    What is more interesting to me is your approach with respect to our RFP process. In your mercifully short time as Town Manager/Chief Procurement Officer/CFO, in emails either to me or members of the BofS, at different times you expressed support for the concession (December 2011), support for an in-house solution and a preference for municipal management (early February 2012), and support for an extension of the American Water contract (mid-February 2012). So which is it?

    How about we do this: since you never attended any of our contract planning meetings or proffered a clear and unambiguous plan, do so now. Let’s hear what your preferred approach is (now). Lay the marker down. We’ll assume your plan will be good for two or three weeks, or until the political winds shift, whichever comes first.

    Concurrent with your public support of three of our four options, you have also publicly expressed concerns over outsourcing to private, “for-profit” enterprises because historically, a few of the 1,600 utility concession contracts that exist in the US have gone awry. You have been clear (I think): privately run bad, publicly run good. Do you know that doctors occasionally are sued for malpractice? Under your logic, we should all become Christian Scientists and take our chances. Additionally, since Cohasset has had a disastrous experience with the class of municipal managers you represent, under your logic, we should turn away from your kind of manager because the historical performance has been so bad. We should, in fact, turn toward the private sector and get someone with real management skills.

    Please do not misstate our stance vis-a-vis joint management of water as you have misinterpreted the town by-law. Chris and I were members of the Water Planning Group that wrote the by-law. Our intention was to actually get you involved in the day-to-day management of the enterprise fund. DeRensis was clear. Here is the language from his memo:

    “As set forth more fully below, the vote amending the Water Enterprise Fund calls for the Town’s Board of Water Commissioners (“Water Commission”) and the Town Manager to collaborate in overseeing the finances of the Water Enterprise Fund, empowering the Town Manager to share with the Water Commission oversight of all expenditures made from the Water Enterprise Fund, but not general management activities of the Water Department.”

    What you also neglect to tell people is what Melanson Heath said about your version of joint-management. I’ll save you the trouble of digging for the language. Here’s the quote: “In my opinion, co-management of Water and Sewer operations by a Town Manager and elected Commissioners is a recipe for disaster. An independently elected board can make life miserable for a Manager who does not agree with their actions. Conversely, a Town Manager can make a board powerless by refusing to approve and authorize their requests and actions.” You made their case perfectly.

    If you wanted to manage the day-to-day ops of the water company, you should have quit as town manager and run for election to the commission. Failing that, you should have instead managed the fund as the law directed.

    I have been public in my support of a combined water/sewer commission. You would be more honest if you also showed townspeople what Melanson Heath said was required before any combination could be considered. To wit: “The problem is that of limited financial resources at a time when rate payers are already overburdened with costs without any major cost reduction opportunities in the near future. The only way to accomplish such a re-structuring is to reexamine the structure of the contract operators and services being performed by outside advisors.”

    Exactly. That’s one of the reasons a concession makes sense – it will make the superintendent’s job easier. If you don’t outsource, your superintendent will get buried with day-to-day in water and will have no time for DPW or sewer, and you’ll need more than one guy. I know staffing budgets have historically been kind of an ethereal concept for you, but the rest of us get that budgets matter and people cost money.

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