Bulova Proposes Merger of Water Systems

By FALLS CHURCH TIMES STAFF

May 22, 2012

Sharon Bulova, chairman of the Fairfax County Board of Supervisors, has proposed that the City of Falls Church merge its water system with the County’s. 

Writing in response to recent comments by Vice Mayor Dave Snyder, Ms. Bulova states she believes such a merger would lower rates for residents of both jurisdictions.  However, she adds that if the City were to sell to its system to the “highest bidder,” rates for all its customers very well may increase substantially, as an investor-owned utility would have to charge higher rates to recover not only its purchase cost, but also the profit margin and tax obligattions that governmental utilities do not have.

Ms. Bulova also calls attention to a recent opinion by the Chief Counsel for the Army Corp of Engineers that the Washington Aqueduct, the provider of Falls Church’s water, is not permitted to sell water to a non-governmental entity.  The chairman adds that Virginia law does not permit the State Corporation Commission to authorize the operation of an investor-owned utility in the County without the approval of the Board of Supervisors.

The full text of the chairman’s letter is available here.

Vice Mayor’s Statement Regarding Water System Sale

Via CITY OFFICE OF COMMUNICATIONS

May 14, 2012

During this evening’s Council meeting Falls Church Vice Mayor Dave Snyder commented on the proposed sale of the City’s water system.

“The City is taking the necessary steps to sell its public water distribution system after a long and concerted effort by Fairfax County to drive the City out of providing water service in the County.  The sale is not driven by financial stress in the City.  The City of Falls Church is financially sound, maintaining high bond ratings and high quality public services.”

“The City is taking responsible steps to divest its water utility assets with appropriate protections for our customers and utility employees embedded in the Agreement for Sale. The proceeds from the sale will be deployed to meet other core public needs.  Those who are concerned about private ownership of water utility systems should encourage Fairfax Water to participate in the bidding process.”

Concerning water quality:  “The City water system is a distribution system only.  Whichever entity purchases and operates the City water system in the future will continue to receive treated drinking water from the Washington Aqueduct, operated by the United States Army Corps of Engineers.  The Army Corps has a long track record of meeting or exceeding regulatory requirements for the water that we deliver to our customers.”

Rate structure:  “Rates will be frozen for one year after the sale.  If a private entity were to purchase and operate the water system, rates in the future would be regulated by the State Corporation Commission.”

Service level:  “Water service is one of the most highly regulated industries in the United States.  The State Corporation Commission regulates the level of service for private water providers in Virginia.”

Following the statement the Council voted, 5-0, to give preliminary approval for the sale, with Mayor Baroukh and Ms. Gardner absent.  A second reading and vote is scheduled for next month.  Final approval of the sale would be via a referendum.

City Receives Nine Expressions of Interest in Water System

By CITY OFFICE OF COMMUNICATIONS

March 7, 2012

The City of Falls Church received nine responses from water industry leaders to the Request for Expressions of Interest (REI).  The substance of the responses will remain confidential as Council reviews and evaluates all options for the future status of the water and sewer systems, including maintaining the status quo.  The nine respondents include American States Utility Services, Aqua Virginia, Corix Infrastructure, Fairfax Water, Government Services Group, United Water, and Virginia American Water.

The Falls Church City Council is undertaking a comprehensive evaluation of options for the future of City water and sewer systems, with the goal of providing the best possible stewardship of the City’s utility assets on behalf of its taxpayers and customers.  The City issued the REI on February 13 to seek input from qualified utility entities that may have an interest in entering into an agreement for the purchase of the City’s utility assets.  The options under consideration include sale to a public or privately owned utility operator, creation of a new water authority, and maintaining the current ownership structure.

“I am pleased by the strong expressions of interest from national and regional leaders in the water and wastewater field.  The Council will use this valuable input to evaluation options going forward,” said Mayor Nader Baroukh.

The City has operated a successful public water supply system since the 1930s, growing significantly beyond the City’s borders.  The City’s total service area is approximately 33 square miles, with 34,500 accounts and annual revenues of approximately $20 million.  The City is a wholesale customer of the Washington Aqueduct, which provides drinking water for the City of Falls Church , Arlington County , and District of Columbia. The City water system delivers an average of 17 million gallons of water to its customers each day, with a maximum capacity of approximately 38 million gallons per day. More information about the City Water and Sewer Systems is available via the City’s website, www.fallschurchva.gov/WaterFuture.

Over the coming months, the Council will engage in a deliberative process with key stakeholders and industry leaders to chart out the future of its water and sewer systems.  A sale of the water system would require approval by City voters by referendum.  Should that be the preferred option, it is possible that a referendum for sale of the system could be before the voters at the Nov. 6, 2012 General Election.

Fairfax Water Proposes Merger With Falls Church

By GEORGE BROMLEY
Falls Church Times Staff

February 29, 2012

Fairfax Water has proposed that the City of Falls Church agree to merge its water system with Fairfax County’s.  Submitted in response to the City’s recent request for expressions of interest (REI) in its water and sewer systems, the proposal suggests that a merger would result in significantly lower water costs, provide robust system backup, and offer tens of millions of dollars in savings for Falls Church’s capital improvements program.  The City also would have a seat on Fairfax Water’s ten member Board.

Fairfax Water also lists three reasons why it would be inadvisable for the City to attempt to sell the system to the highest private bidder.  Falls Church would forego the additional reliability gained through joining Fairfax and its customers would pay considerably more for water.  The City also would likely face major regulatory hurdles, including approval of the sale by the Fairfax County Board of Supervisors.

Falls Church officials had little immediate reaction to the proposal.  “We look forward to reviewing it along with the other responses that we receive, as the City Council evaluates preferred options for the future of the City’s water and sanitary sewer systems,” said city manager Wyatt Shields.

In the proposal’s text, Fairfax Water’s general manager Charles Murray states “In short, the benefits of merging our two systems would be extraordinary.  Not only would your existing customers pay significantly less for their water but our joint water system - with two independent water treatment plants in Virginia and one in the District of Columbia - would be the most robust and reliable in the world.”

Falls Church issued the REI on February 14.  Responses are due by Friday, March 2.  Sale of the water system to a public or private utility would require citizen approval via referendum.  However, a merger with Fairfax Water might only require a majority vote by the City Council.

Falls Church’s system services around 34,000 accounts and 140,000 customers.  Most of its customers reside in Fairfax County.  Fairfax Water services 234,000 accounts and 835,000 customers.  It currently has six wholesale customers.  The City has one.

The full text of Fairfax Water’s response to the REI is available here.

INTERVIEW: City Manager Discusses Water System Sale

By GEORGE BROMLEY & STEPHEN SIEGEL
February 20, 2012

Five days after the Falls Church City Council unanimously approved the release of a request for expressions of interest (REI) in the City’s water and sewer systems, City Manager Wyatt Shields sat down with the Falls Church Times on Friday to discuss the complex and weighty subject.

The Feb. 13 vote (with Robin Gardner absent) may rank as the most significant since the City’s founding in 1948. The water system is older than the City, dating to the 1930s.  It serves over 120,000 customers, primarily in Fairfax County.  For many years, it provided Falls Church with a significant return on investment, but a 2010 Fairfax Circuit Court decision prohibited the City from transferring the system’s profits to its general fund, effectively making it a non-performing asset.

During the interview, Mr. Shields said he was “cautiously optimistic” that the water and sewer systems will be sold for a good price, but he reminded reporters, residents, and interested parties that the City won’t automatically sell the system if the offers received are inadequate. Read more

COMMUNITY COMMENT: Why We Should Sell the Water System

By IRA KAYLIN
February 20, 2012

This week the City of Falls Church announced that Requests for Expression of Interest for possible purchase of the Falls Church Water System had been broadly circulated to potential buyers.  I believe this is a great opportunity to convert a problem into a benefit.

At the same time it was mentioned that the process of a possible sale would be deliberative with all options being considered and citizen input sought.  Clearly, any process that involves the possible sale of the City’s largest single asset should be a careful, thoughtful process. There can be no argument with such an approach.

However, there are really only two available options: sell the system or don’t sell the system. There is no range of options. It makes little sense to continue to operate a water system under the legal challenges that have been imposed upon us by the Judge Ney decision and, more recently, by the adoption of an ordinance by the Fairfax County Board of Supervisors that purports to establish an exclusive service area in Fairfax County for the Fairfax County Water Authority and to improperly and unfairly regulate the City’s water rates even though the City is in full compliance with Judge Ney’s rulings.

It is important to emphasize that we are in no way operating in a stress situation.  There will be no fire sale, subsidized sales, or giveaways to anyone.  The court’s decision is counter intuitive in the extreme as it states, in effect, that the owner of an asset is not entitled to a return on equity. Nevertheless, it is what it is.

The decision converted a water system that was generating over $2 million per year for the City’s General Fund into a system that generates zero income to the City. On top of that Fairfax County is attempting to add another blow in the form of the new ordinance, the result of which would be the City’s water system generating negative income from service in Fairfax County, a loss that would have to be funded by the citizens of Falls Church. At the same time, the City was and is providing clean and affordable water to over 100,000 County residents and businesses. Unfortunately, the water system has become an engine of litigation and associated costs.  Falls   Church citizens are being treated like a Pinata whose hidden treat just happens to be our water system.

I believe the best approach is the same as the one any business would employ. Sell the non performing asset and invest the proceeds of the sale into another asset—one which does make money on a periodic and long term basis.

Ultimately, there will be four issues involved in the sale of the system: 1) to whom might we sell it; 2) the terms and conditions of a possible sale including the determination of best price, 3) impact on water rates and, 4) possible uses of future proceeds.  While it is premature to discuss the first two issues, it is appropriate to discuss the latter two.  First,  will water rates increase?  And second, what is the best use of the water sale proceeds?

Rate Impact

The rate impact of the sale of the water supply system is not possible to predict.  It could go up or it could decrease depending on a wide variety of variables including the long term business strategy of the purchasing firm or authority.

It is useful to note that water rates, subject to Council approval, are already scheduled to increase by 8% for the years 2012 and 2013, 3% for 2014 and 2015.  These increases are based on an outside consultant analysis of the financial status of the system which requires significant infrastructure maintenance and upgrades if reliable and safe water is to be provided to all customers.  No matter what path we pursue, we can expect continued  interference from Fairfax County making it increasingly difficult for Falls Church to be able to continue to provide water service to its valued customers in Fairfax County.  Fairfax County officials may believe it is their destiny to wrest the water system from Falls Church for free, and to monopolize water service in Fairfax County through its own water authority. That is why it is prudent now for Falls Church to explore its options in the open marketplace, free from duress, for the sale of its water system, so that it can obtain the best price for the water system. Fairfax County and its water authority have been invited to participate in that fair and open process.

Use of Proceeds

The question is, how can the citizens be assured that the funds will not be poorly spent? I believe that is a totally justified concern.  Even though I am an elected official, it is recognized that, over time, there is the magnetic attraction of elected officials to spend money until it is no longer available.

A basic consideration when selling an equity asset is retention of the long term income generating capacity of the new equity asset.  Use of the proceeds of an equity sale for capital and/or operating cost coverage is a reduction in the value of an equity asset. Such transformation is frequently by used firms that are on the brink of failure.

Virginia statutes prohibit Cities from investing General Fund resources in long term assets.  Rightly so. Some long term assets are not easily converted to cash without paying a penalty. Also, well-intentioned, but not well-informed officials may be tempted to engage in market speculation with taxpayer money.  Only the largest cities would have “in house” capability to understand and monitor large scale, long term asset management.

Because of the above constraints, under current market conditions cities receive virtually no return on assets sitting in bank accounts eligible for General Fund uses.

One Approach to be Considered

I believe we should consider investing the proceeds in a yet-to-be-created Falls Church City Teacher Pension Plan whose returns would be used to help pay for the City’s Virginia Retirement System obligations and add to the City’s existing pension plan.

Pension plans are expected to invest primarily in long term assets that earn much higher return than short term assets. These funds are never mixed together with General Fund resources.  Pension plan returns fluctuate with market movements but can be expected, over the long term, to generate annual returns of 6% to 8%. To put it in another way, for every $10 million of sale proceeds we can be expected to earn $600 to $800 thousand per year.

The business climate is unusually good for a utility sale.  Cash rich companies can not place these funds in easily accessible, low risk securities that generate a decent rate of return.  If funds are to be borrowed, long term bond rates are now at historic lows.  In the current market environment, Falls Church becomes even more interesting as an investment opportunity.

Importantly resources used to fund pensions can not be directly accessed by a City Government for current expenses.  They are effectively “lock boxed”.

Impact on Tax Rate

The pension-generated income would lessen transfers from the City’s General Fund to cover pension expenses by an equivalent amount.  These returns could amount to two to three cents on the tax rate for every $10 million in proceeds.

It is possible that the City’s employment attractiveness would be enhanced since our pension plans would be well funded and more robust than other municipalities.

We should recognize the caveat, however, that returns generated by the pension plans would effectively represent a new revenue stream that will greatly help in the short and medium term, but is in no manner sufficient to cover Falls Church’s long term needs.  Economic development must proceed at the fastest prudent way possible.

A Start to the Discussion

There may be other viable approaches which could be presented during the deliberative process. The information and opinion presented above is provided to help start the community discussion.

Ira Kaylin is a member of the Falls Church City Council.

City Seeks to Sell Water, Sewer Systems

By CITY OFFICE OF COMMUNICATIONS
February 13, 2012

The City of Falls Church has issued a Request for Expressions of Interest (REI), seeking input from qualified utility entities that may have an interest in entering into an agreement for the purchase of the City’s utility assets.  The City Council is undertaking a comprehensive evaluation of options for the future of City water and sewer systems, with the goal of providing the best possible stewardship of the City’s utility assets on behalf of its taxpayers and customers.

The City expects a wide variety of responses from industry and public water authorities. Council will review responses as it evaluates options for the future status of the water and sewer systems, including maintaining the status quo.

“Council has been considering the future of the water and sewer utilities for quite some time,” said Mayor Nader Baroukh.  “Seeking industry input is the next step in the orderly, transparent, and comprehensive process where Council will consider all options.”

The City has operated a successful public water supply system since the 1930s, growing significantly beyond the City’s borders.  The City’s total service area is approximately 33 square miles, with 34,500 accounts and annual revenues of approximately $20 million.  The City is a wholesale customer of the Washington Aqueduct, which provides drinking water for the City of Falls Church, Arlington County, and District of Columbia.  The City water system delivers an average of 17 million gallons of water to its customers each day, with a maximum capacity of approximately 38 million gallons per day.  Interested organizations and the public can find information about the City Water and Sewer Systems via the City’s website.

Over the coming months, the Council will engage in deliberative process with key stakeholders and industry leaders to chart out the future of its water and sewer systems. A sale of the water system would require approval by City voters by referendum. Should that be the preferred option, it is possible that a referendum for sale of the system could be before the voters by the Nov. 6, 2012 General Election.

“By issuing this REI, we are inviting industry and public water authorities to provide us with information that will help the City evaluate the best options for the future of this critical utility service. We want to make sure that no stone is left unturned.” said Councilman Lawrence Webb, member of the Council’s Public Utilities Commission.

The full REI will be available tomorrow on the City’s website.  Responses and questions are welcomed through 2 p.m. EST, Friday, March 2, 2012.

WATER WAR: Fairfax Board Approves Exclusive Service Area, Maximum Allowable Rates, Fees, & Charges

By GEORGE BROMLEY
Falls Church Times Staff

December 6, 2011

Late this afternoon the Fairfax County Board of Supervisors unanimously approved an ordinance which amends the County Code to require that developers hook up with Fairfax Water’s system, even in cases where new lines must be built to reach sites having access to existing Falls Church City, Vienna Town, or Fairfax City lines.  This exclusive service area would apply to both new development and redevelopment.

The measure also allows the Board to fix rates and charges for water service provided to customers located in Fairfax County so that no County customer of the City of Falls Church water system will be charged rates and charges that exceed those of Fairfax Water, unless the City can demonstrate the need for higher rates and charges to the County’s satisfaction.

Falls Church repeatedly asked Fairfax County to defer a vote on the ordinance, most recently via a December 1 letter from City Manager Wyatt Shields to County Executive Anthony Griffin.  Local leaders were quick to criticize the Board’s action.

Mayor Nader Baroukh said the City had sought a deferral to allow time to respond to its serious concerns and create a mutually beneficial outcome that ensures the safety and reliability of the City water system and reflects the value of that system.  ”Instead, the Board chose to rush to enact an ordinance that is anti-competitive and not in the best interests of our County water customers” said the mayor.

Vice Mayor Dave Snyder also voiced dismay. “Over the years, the City has taken on significant risk so that Seven Corners, McLean, Merrifield, and Tysons Corner—the economic engine of the County—could develop. Today’s action by the Fairfax County Board of Supervisors is a blow for regional cooperation” Snyder said.

Councilman Lawrence Webb, a member of the City’s Public Utilities Commission also was critical.  “It is unfortunate that the County Board rushed to enact this ordinance.  The effect of the new regulations will be to increase water costs for County residents, create an expensive new County bureaucracy,  [and] invite litigation” he said.  ”[The action] will force County developers to construct new water mains that overlap the existing system in order to hook-up to Fairfax Water, an enormous unnecessary cost that could stop Tysons and Merrifield redevelopment effort in its tracks.”

Although the vote was unanimous, Supervisors Pat Herrity (Springfield) and John Cook (Braddock) expressed some reservations.  Herrity observed that he didn’t see how dual infrastructure would save anyone any money and said he didn’t think this was how the County should be doing business with its partners.  Cook warned of possible unintended consequences and referenced Senator Petersen’s recent suggestion that he would introduce legislation in the General Assembly to override the Board’s vote.

Representatives of several Fairfax neighborhood associations, who spoke against the City’s rate increase at Council sessions last summer, spoke today in favor of the ordinance.  All reiterated their view that County residents serviced by the City’s water system are subjected to an unconstitutional tax due to their having no means of voting in Falls Church elections.

About 92% of the Falls Church’s customers reside in the County.  However, the City does not impose a rate differential between its City and County customers.  Its water rates are lower than average for water utilities in the region, and in the lowest quartile statewide.

Over the past five years the City invested $20 million in upgrades in the Tysons, Merrifield, and Dunn Loring areas, keeping water rates flat until an 8% increase in 2011.  Fairfax Water has increased water rates by 33% since 2005.  The County has raised sewer rates 80% since then.

Background on the Board’s actioin is available here at Page 611.

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