Town Government &
Committees: Water Company Acquisition Study Committee
Article 19 : Water Company Acquisition Feasibility Study
Will the Town raise and appropriate, borrow, or transfer from available funds, a sum of money to be used by the Board of Selectmen for professional fees and costs, including, but not limited to, engineering services, financial services, valuation services and legal services, to investigate the feasibility of the acquisition of the corporate property, and all rights and privileges, including the assets of the Town's water company, now known as Aquarion Water Company of Massachusetts and/or affiliated and related companies, pursuant to St. 1879, c. 139, or through any other method of acquisition, including any negotiation or litigation the Board of Selectmen may determine to be necessary, in order to determine whether the acquisition is feasible and advisable for further Town Meeting consideration, or act on anything relating thereto?
(Inserted by the Board of Selectmen)
COMMENT: This article seeks funding to determine whether the Town should recommend acquisition of its water company. The article also authorizes the Board of Selectmen to enter into negotiations or, if needed, litigate with the current owner to determine a potential purchase price. Future Town Meeting authorization would be required to appropriate funds to make a purchase.
The Hingham Water Company was incorporated in 1879 by the General Court of Massachusetts through Chapter 139 "for the purpose of furnishing the inhabitants of Hingham with pure water for the extinguishment of fires, generation of steam, domestic, and other purposes…" Since its incorporation, the water company has been privately owned.
Section 11 of Chapter 139 allows the Town to purchase the property and rights of the water company "at any time" if approved by a 2/3 affirmative vote at Town Meeting. The statute further defines the cost to be "the actual cost of the same, together with interest thereon at a rate not exceeding ten percent per annum, said cost to include all actual loss or damage paid or suffered by said company…deducting from said cost any and all dividends which may have been paid…or at such a price as may be mutually agreed upon…".
In 1881, the General Court authorized the Hingham Water Company to extend its water pipes through Hull and Cohasset. In 1924, the Hingham Water Company was authorized to extend its water pipes into the Town of Norwell.
According to Town records, the Town previously considered purchasing the water company at least twice. In 1958, a motion to investigate purchasing the water company was considered and voted down by Town Meeting. The 1984 Annual Town Meeting authorized funds to study the Town's water service, assess its ability to meet future demand, estimate the cost to acquire the company, and project operating costs assuming Town ownership. The study was completed in 1985. The Water Supply Committee reviewed the study and concluded it was not in the Town's best interests to purchase the water company at that time.
In recent years, the water company was owned by American Water Works, whose holdings included water companies in Connecticut, New Hampshire, Oxford MA, and Millbury MA. In 2002, American Water Works sold all of its New England subsidiaries to the United Kingdom-based Kelda Group. In 2006, Kelda sold its entire Aquarion subsidiary, including the companies purchased in 2002, to Australia's Macquarie Bank
Today, the Aquarion Water Company ("Aquarion") supplies water to 42 cities and towns throughout Connecticut, New Hampshire, and Massachusetts. The part of the company that services Hingham is referred to as "Service Area A" and includes Hingham, Hull, 309 homes in North Cohasset, and 4 homes in Norwell. Hingham is one of few communities in the Commonwealth with a privately-owned water company.
The Town is currently considering purchasing the water company for four main reasons.
Town ownership gives the Town greater control over water rates. Hingham water rates are the 5th highest in the state. Despite a nearly 21% rate increase in 2009, Aquarion initially petitioned the Department of Public Utilities ("DPU") for an 18.7% increase to take effect in 2012 (this case is still under consideration by the DPU). Moreover, the 2012 DPU rate filing indicated Aquarion's ongoing intent to request rate increases every three years to a level where they have the potential to double approximately every ten years.
Town ownership may result in lower operating costs and fewer or lower rate increases. In its public filing for the latest rate increase petition, Aquarion cited the need to recover diminished investment returns, legal fees associated with litigation outside Hingham, and pension fund losses as some of the rationale for its requested rate increase. Town ownership should effectively eliminate each of these items from operating expenses, making additional operating revenue available for reinvestment in infrastructure or for reduction in the amount and/or frequency of future rate increases. The Town believes the potential for fewer or lower rate increases would likely offset any incremental debt service payments.
Town ownership gives the Town greater control over the water system infrastructure. During recent discussions related to a recurring and persistent service disruption, Aquarion has indicated it cannot make all necessary improvements because of limited capital resources. In a December 2011 meeting with the Board of Selectmen to discuss a water pipe that had broken six times during the year, an Aquarion company Vice President is quoted as saying, "The capital budget is determined by a formula related to investment return, depreciation, and 'appetite for rate increases in service areas'." (Source: Boston.com December 18, 2011). The Town believes Aquarion's "break-and-fix" capital strategy is neither cost effective nor a good long-term strategy for such an important resource.
Town ownership gives the Town greater control over its water supply. Since the water company has distribution rights within its service area, it makes all water supply decisions. The Town would like to have a more substantial role in policies and oversight related to the supply of such a critical resource.
Development of the South Hingham Industrial Park Area is a Town priority because it is low-impact growth that has the potential to yield significant, long-term commercial tax revenue for the Town. In Fiscal Year 2011, the Town collected $4.3 million in commercial property taxes. While there is high potential for existing business expansion and new development in the Industrial Park Area, having adequate water and sewer infrastructure is a necessary prerequisite for any further economic development. It may also be necessary to ensure that existing businesses wishing to expand are not forced to relocate.
Additionally, there are currently 323 private wells for drinking water registered in Hingham, which represents approximately 4% of total households. Some of these residences have wells because the costs associated with connecting them to water system (currently the responsibility of the resident) are prohibitive.
Other potential benefits of Town ownership include cost reductions from resource-sharing and/or consolidations with other Town departments, a greater ability to coordinate road construction and underground utility work, avoidance of legal fees associated with rate request appeals and DPU hearings (approximately $75,000 per rate request), and the ability to finance this acquisition at a time of historically low interest rates.
However, it is equally important to consider the potential issues associated with this undertaking. Aquarion may not be receptive to an acquisition, which could result in litigation. Hingham would want to work with other affected towns as to a governance and operating model. While the Town has both experience and success regionalizing its Dispatch Services, Veterans' Services, Animal Control, and School Foodservice, it recognizes that regionalization of a regulated utility will most likely be more complicated. Lastly, from a financial perspective, the acquisition and transaction costs could make this project cost-prohibitive.
This article seeks funding to allow the Town to determine the viability of acquiring the water company. Given the complexities associated with this potential transaction, this analysis will require the Town to engage the services of engineering, financial, and legal experts. These experts will analyze documents, records, and studies prepared by the Town and the water company. They will provide perspective and make recommendations in three areas: Operations, Finance, and Management.
• The condition of the system
• The capacity of the current water distribution system to meet current and future demands
• Future capital requirements
• Opportunities and savings associated with streamlining operations
• Addressing property owners who currently do not have access to the water company
• The potential cost of the system
• Future cash flows
• Potential future rate increases
• Financing options
• Financial impact to customers and the Town
• Organization/governance, particularly as it relates to communities currently serviced by the water company
• How the Town should manage and operate the company
To ensure this analysis is comprehensive, efficient, and cost-effective, the Town intends to apply a phased-review approach, with each phase having clearly-defined objectives and outcomes. Upon completion of each phase, the Town will evaluate its output, then consider whether or not to proceed.
The total cost of performing this work is estimated to be as much as $500,000, the amount of this appropriation request. While not obligated to spend up to this limit, the Town believes it is advantageous to have adequate resources available. The Board of Selectmen will take every measure to spend appropriated funds in a judicious manner.
Source of Funds
If approved, funds will be sourced from the Town's Fund Balance. Should a future Town Meeting authorize purchase of the water company, expended funds would be included in a debt issuance, effectively allowing the Town to replenish Fund Balance. However, if the Town, or Town Meeting, decides not to proceed with purchasing the water company, expended funds would not be restored.
The Town Financial Policy calls for maintaining Fund Balance at 14-18% of Total Annual Expenditures ("TAE"). Since 2009, the unreserved Fund Balance as a percent of TAE has increased from 9% to approximately 16.7% as of June 30, 2011. The increase is due to one-time savings, reduced debt service through bond re-financing, greater budget discipline, and by implementing a policy of not using Fund Balance for capital expenditures.
While the Town Financial Policy does not preclude using Fund Balance for this purpose, the Advisory Committee acknowledges the importance of Fund Balance to the Town's financial stability and Aaa bond rating and the difficult decisions that have been made to improve it. The Advisory Committee therefore carefully considers any appropriation request that reduces Fund Balance and the potential precedent that might be set.
If all requested funds are expended, the impact of the feasibility study is a 0.6% reduction in Fund Balance as a % of TAE (from 16.7% to 16.1%).
Proponents of this article cite the desirability of the Town controlling a critical and valuable resource, Aquarion's plan for future rate increases, and infrastructure concerns as compelling reasons to evaluate this acquisition. They suggest the Town may be able operate the company in a more cost-effective manner that mitigates future rate increases. Lastly, proponents argue that Town ownership allows the Town to more directly manage its water supply.
Opponents of this article question the ability to thoroughly assess the infrastructure and value the company given that most of it is located underground, placing the Town at risk for overpaying for the company. They also raise concerns about the possibility of the Town engaging in a long, expensive, and unsuccessful effort that diverts time and resources away from other Town priorities. Opponents also question whether Hingham should own and operate a water company.
RECOMMENDED (as amended 23 Apr 2012): That the Town appropriate $320,000 from available funds to be used by the Board of Selectmen for professional fees and costs, including, but not limited to, engineering services, financial services, valuation services and legal services, to investigate the feasibility of the acquisition of the corporate property, and all rights and privileges, including the assets of the Town's water company, now known as Aquarion Water Company of Massachusetts and/or affiliated and related companies, pursuant to St. 1879, c. 139, or through any other method of acquisition, including any negotiation or litigation the Board of Selectmen may determine to be necessary, in order to determine whether the acquisition is feasible and advisable for further Town Meeting consideration.
|Committee Members |
|Jonathan R. Asher, Chair|
|Joshua C. Krumholz, Secretary|
|Samuel S. Mullin|
| Michael A. Salerno|
|Edward R. Siegfried|
|L. Bruce Rabuffo, Selectmen Liaison|