Says higher water rates cheaper than cost of long-term borrowing
By Adam Hocking
MARSHFIELD — Representatives of Marshfield Utilities are advocating an increase in water rates, which they say will save residents money over the long term.
Marshfield Utilities seeks to increase its rate of return — the money it can collect from residents based on the water service-related assets it has, for example a water tower or water treatment plant — from 5.25 percent to an estimated 7.5 percent. This rate of return increase would be financed by raising customers’ water rates by an estimated 10.6 percent. A memo from Marshfield Utilities said that the average customer’s monthly bill would go up less than $3 as a result of the proposed rate of return increase.
“The (state’s public service) commission approves the rate of return that we’re allowed, and then based on that, they calculate what rates we have to generate to (create) that rate of return,” said Marshfield Utilities General Manager Bob Trussoni.
The rate of return increase would be aimed at generating an extra $500,000 per year to help pay for extensive water main replacements and repairs. Marshfield Utilities estimates that the project, in total, will cost about $1,000,000 per year over roughly 75 years.
The Public Service Commission of Wisconsin (PSCW) would have to approve a rate of return increase, though Trussoni said the commission is “open to the idea.” The PSCW wanted to see support from the local utility commission and Marshfield Common Council before considering approval of a rate of return increase. Both local bodies have endorsed the increase.
Trussoni, speaking before the common council on June 28, noted that the city currently has water mains composed of three different materials, some installed at the “turn of the last century,” others between 1945-1969, and some after 1969. The mains installed between 1945 and 1969 are composed of a spun-cast material and present the biggest issues.
“Those mains are a thinner material, and they’re more brittle, and those are the ones that we have most of the failures with,” Trussoni said.
The cost to continually borrow money to upgrade water mains, according to Marshfield Utilities, would, over time, cost more to residents than a rate increase because of what would have to be paid in interest and bond-issuance costs on that borrowing.
“As an example, if $1,000,000 of 20-year bonds are issued every other year for 20 years, the principal and interest paid during this 20 years is $8,498,702 with $6,953,478 of additional principal and interest to be paid in future years. The total principal and interest for the life of these bonds is $15,452,180. If these projects would have been financed with cash, the total cost would have been $10,000,000 or a savings of $5,452,180,” said a memo from Marshfield Utilities.
“If $1 million of 20-year bonds are issued every other year for 75 years at four percent interest, the principal and interest paid during this 95 years is almost $62 million. If these projects would have been financed with cash, the savings would be almost $22 million,” said Marshfield Utilities Financial Manager Kent Mueller.
If a rate of return increase is not initially approved, Trussoni said the PSCW “would likely need to approve a higher rate of return in the future for Marshfield Utilities because of the large amount of debt that would accumulate if forced to borrow for water main upgrades.”
Marshfield Utilities believes it is being proactive by pursuing a rate of return increase now rather than later, seeking to avoid debt piling up and then raising rates to pay off the debt.
“Our water customers pay for all the costs in the water utility, including bond principal and interest payments. Interest payments do nothing to improve the water utility, and they don’t benefit anyone other than the bond holders,” Mueller said. He later added, “Our customers will save significant money by not having to pay for issuance costs and interest expense on bonds.”
The downside to using increased rates, according to Marshfield Utilities, is that ratepayers would be on the hook immediately for $500,000 a year, whereas with borrowing, initial debt-service payments would be lower than that $500,000. Short-term residents who plan to leave Marshfield would pay increased water rates without realizing the majority of the benefits of new water mains being put in place because it is such a long-term project.
President of the Marshfield Utilities Commission Mike Eberl said, “It makes incredible sense to incur a little bit (of) extra cost today to save a lot of money over the long term.”
Common council member Pete Hendler called the proposal a “unique opportunity.”
“I think it’s marvelous,” Hendler said. “I think it’s a great idea for the city to look ahead instead of behind. Too many times, I think, government has a tendency to react instead of being proactive.”
No council member spoke in opposition to the plan, and support for taking a proposed rate increase to the PSCW was unanimously approved. However, the final authority to increase the rate of return rests with the PSCW. Trussoni said a formal request to the PSCW to raise Marshfield’s rate of return would be submitted by the end of July, and new rates could be in place in early 2017.
Trussoni thought it was about a 50-50 proposition that the PSCW would approve the rate of return increase.