Unaffordable at any price (March 26, 2017)

Thanks to the Daily Press for providing a link to the actual report to which you refer in your recent article about the financial implications of cities seizing private water systems (Report takes issue with municipal takeovers of investor-owned water utilities, Daily Press, March 13, 2017).

After reading this report, The Economic Consequences of Contested Government Takeovers of Investor-Owned Water Utilities, by Dr. David Sosa, I contacted the author’s company to ask about an aspect I thought needed more elucidation:

Although Dr. Sosa refers many times to the final cost of purchase, this seems not to include interest rates on bonds.

This seems important because in a privately-held water company, interest (AKA ‘profits’) seem often to be at least partially reinvested into the water system, while bond interest payments are simply gone for good. Of course, it may be difficult to quantify this aspect.

I was wondering if Dr. Sosa might be able to shed some light on this matter for me, in case I’m missing something.

His response was:

Thanks for your question. You are correct that are study did not look at the cost of financing an acquisition, which can be substantial over the life of a 30-year bond. You are also correct that what takeover advocates call ‘profit’ is in fact the utility’s cost of borrowing from capital markets to invest in infrastructure.

Substantial may in this case be an understatement. Although initially the Town assured us that fair market value for the water system was around $45 million, with bond interest rates as low as 2 percent, when it came time to put a measure on the ballot for the voters (a requirement forced upon the Town Council by the passage of Measure V), magically the total amount of the bond had exploded to $150 million at a maximum interest rate of 12 percent!

While the difference in purchase price is only 300 percent of what we were initiall told, the difference in monthly payments between these two scenarios is $168,324 and $1,542,918. The difference in the total cost of the loan jumps from $60,596,894 to $555,450,802 (that is, greater than half a billion dollars) — a 916 percent increase! That means up to $880 per year just in debt service — on top of water costs, maintenance costs, expansion costs, pensions, etc. — for every single water connection. That would be $146 per water bill in addition to all those other costs. And of course, a court might decide that the water system was worth more than $150 million.

Looking at worst-case scenarios, right now it looks to be the case that it would be better for residents if the Town wasted only $10 or $15 million on a failed takeover, as our survival as a community is simply not possible should the Town be successful in its eminent domain efforts.

Greg Raven is Co-Chair of Apple Valley Citizens for Government Accountability, and is concerned about quality of life issues.