Can QT Balance Its General Fund On The Richland 900?

February 13, 2012

We all drink pretty much the same tap water. So why does it cost more next door, or down the street? Or does it really?

That issue has been gurgling up recently for the 900+ families living in Richland, but served by the Quakertown Borough water system. QT just announced a plan to double the rates for those folks, bringing them more into line with what borough residents pay. These out-of-towners had not seen a rate increase since 2004, while the 6000 locals were hit twice, including 18 percent this year (about $8 a month), plus a monthly debt service fee, which was instituted in 2010.

Borough Manager Scott McElree explained "During the budget session, Borough Council decided to increase the out-of-town rates due to the increased cost of the salaries and benefits for the water department employees, and the need to continue maintaining the aging infrastructure. It was felt that the increased expenses should not be solely impacted on the residents of Quakertown, and should be disbursed to all those who benefit from Quakertown water. Council increased the rates for in-town customers by 18 percent in 2012 from $11.28 to $13.31. The out-of-town rates would be slightly higher than those in-town, but the in-town pay a monthly service fee of $16, therefore the in-town rates are 46 percent higher than the out-of-town."

The hard numbers sound logical. But while Qtown has the authority to unilaterally determine the charges to its own residents, any increase to outsiders must be approved by the PA Public Utility Commission. That is usually a rubber-stamp process, but because some Richland families complained, the PUC will hold a formal investigation, which could take up to seven months. The dates and locations of public hearings will be announced.

McElree explained "Our goal is to see how we can receive the proper revenues to support the service that we provide. The PUC has a process that we know has to be followed; we're doing that, and we're prepared to present all the proper data."

A PUC administrative law judge will either approve the borough's request, or set a lower rate hike. According to the commission's website, the investigative process will determine "the lowest reasonable rate for consumers while maintaining the financial stability of utilities." And that phrase, maintaining the financial stability of utilities, might be the key here.

Quakertown Borough owns all of its own utility systems - water, sewer, and electric. Rather than profits going to outside companies like PP&L, they are transferred to the town's general fund to help keep property tax rates low. That is particularly important during the current economic problems, when revenue sources, including earned income tax, remain sluggish.

According to McElree, in 2011 Qtown transferred $185,000 from water and sewer to the general fund, and will move $250,000 this year. This covers expenses like salaries and administration, and current infrastructure repairs, such as specific water line replacements. But the town does not set aside money for future capital projects. When they identify a need, they simply raise rates instead of raising taxes.

And that would seem to be a problem under the PUC general guideline. Quakertown's water department isn't just "maintaining the financial stability of utilities". It is helping to reduce the borough's property taxes. In essence, The Richland 900 are indirectly paying a piece of everyone's real estate taxes in Quakertown.

And there is another, even bigger, reason why in-towners have been paying more. In 2004-06, the borough borrowed about $10 million to slip-line, and replace, miles of its leaking 100-year old water and sewer systems. And now residents are paying off the loan (that monthly debt service fee, which ranges from $192 to $2400 per year , more than their actual current water bill!). According to McElree, it will last until 2023.

So when Quakertown wants to bring The Richland 900 up to parity, that new number is basically covering work done 6-8 years ago, and nowhere near the RT homes.

The question for the PUC judge will be: can the borough more than double the water rates on Richland customers to help prevent a property tax increase for Qtown residents?

Quakertown will undoubtedly stress that the new rates only level the playing field, bringing out-of-towners to the same dollar amount as in-towners.

RT's would argue that by raising water rates rather than property taxes, Qtown is simply shifting the tax burden out of town, without providing any additional services, or covering new expenses. On the other hand, those homeowners knew they were on someone else's system when they bought in that part of town.

It is only logical that when the commission investigates, a key factor will be what other local water companies are charging for similar service. And contrary to what you might think, that is not a simple comparison.

Consider the elementary example of buying a bottle of water. That same 16 oz bottle can cost, perhaps, 79 cents at Wawa, or $1.59 on the Atlantic City boardwalk, or $2 at a Phillies game. And the prices vary even more if you want Poland Spring, or Evian.

Each producer, each bottler, each distributor, and each retailer has its own costs to cover. It's the same for municipal water systems. The H20 may be (mostly) the same, but the costs of getting it to you safely and reliably - now and in the future - vary widely. And the method of collecting those costs varies too. Quakertown and Richland are two perfect examples.

The "average" Quakertown resident, using 3000 gallons of water a month, pays $13.31 per month, plus an Operations Fee of $12.50 per quarter, or about $160 per year. In addition, all customers pay that debt service fee, depending on how many gallons of water they consume. "Average" users would have a total bill of $352.

The average Richland 900 customer who uses 3000 gallons a month is currently paying 13.50 per month, or $162 a year, but does not have to pay the debt service fee. Quakertown's proposed rate hike would increase the average monthly cost to $28.98, or about $348 a year, almost exactly what local Qtowners are paying.

But what if The Richland 900 were connected to the Richland Township Water Authority, which serves the other 90 percent of the township? It shares aquifers with Quakertown, but has a separate board and executive director who make the decisions. And the income stays in the authority to maintain and upgrade the facilities.

Unlike Qtown, RTWA maintains a reserve fund to help pay for future equipment and line repairs, and replacements, that will someday be needed. Over the last several years, the authority has spent more than $2 million dollars on iron, manganese, and arsenic remediation, and still has a well station presently off line until the filtration system is installed there. They are budgeting an additional $50,000 a year to replace the media in the filtration systems by 2015.

The largest looming expense is a line extension from the upper end of the township to the lower end, providing better fire protection and overall system flow. This project is expected to cost between $1.5 - $2 million, and will take about six months to complete. Yet Tim Arnold, the Executive Director of RTWA, said that fees won't have to be raised for another 3-5 years, if then, because RTWA planned ahead, and budgeted for the projects. Of course, Richland's system is much newer than QT's, so it hasn't yet needed a major overhaul.

If the "average" customer of RTWA used 3000 gallons a month, just like Qtown, he/she would pay $3 per thousand, or $108, plus $12.50 per quarter Operations Fee, total $160 per year. Just like Qtown, without the debt service fee. And just like The Richland 900 were paying.

Bottom line - the only difference between the three rates is the debt service fee. The underlying water rates are the same. No wonder the Richland 900 are upset.

As angry Springfield residents have learned, PUC rulings tends to lean toward utilities. The judge will tell us if Qtown is indeed justified.