Monday, July 10, 2006

Aqua Ohio Water Agreement Unfair & Detrimental to the Future of North Canton

Prepared Comments Made to
July 10, 2006

A few weeks ago, I spoke to this body about how difficult it is to sit in the audience and observe city leaders conduct the public’s business with little or no regard for the taxpayers of this community or for the future welfare of North Canton.

On June 12, 2006, I spoke of the CEDA that this council passed in 2003, without my vote, which provided something for Plain Township and something for the developer of the Sanctuary but nothing for North Canton. That CEDA agreement put North Canton on the path it is on today regarding the loss of the water distribution rights for the Sanctuary, now part of North Canton.

On February 28, 2005, city council rushed through, on an emergency, an agreement with a water competitor that is extremely burdensome and unfair to this city. The agreement allows profits to be generated by that company squarely on the backs of the taxpayers of North Canton.

This agreement places the City of North Canton on a path that jeopardizes North Canton’s future.

That water agreement was made with Aqua Ohio, Inc., and received unanimous approval by council as Ordinance No. 49-05. Several current members of this council were on council then and voted their approval. They include council members Snyder, Foltz and Lane.

Did anyone bother to read this agreement?

I am told by the administration that Michael Miller, the former City Administrator who negotiated this unfair agreement, did not consult the city’s water superintendent for his input. The finance director has also told me that she was not asked for her thoughts on the agreement.

North Canton now has a water agreement that lacked needed input from key city officials in North Canton City government. This is an agreement that was rushed through city council with unanimous affirmation that desperately needs to be voided.

I strongly believe that if a judge saw the terms of this agreement that he or she would void this agreement in a New York minute.

Before I get into the shortcomings of the agreement, I want to tell you a little about Aqua Ohio, Inc.

Aqua Ohio, Inc. is Ohio’s largest investor owned water utility. It provides drinking water and wastewater services to nearly 84,000 customers (nearly 250,000 people) in five counties from surface and groundwater supplies.

Aqua Ohio was most recently known as Consumers Ohio Water Company until it merged with Philadelphia Suburban Corporation (PSC) in 1999. PSC was renamed Aqua America, Inc., in 2004, and Consumers Ohio Water Company became Aqua Ohio.

Aqua America, Inc. is the nation’s largest U.S. based publicly-traded water company. Aqua America is a holding company for regulated utilities providing water or wastewater services in thirteen states.

Do you think Aqua America, Inc. would like to acquire the North Canton Water Treatment Plant?

Consider the following statements gleaned from the latest annual report (Form 10K) of Aqua America, Inc.:

“…Part of our strategy to meet the industry challenges is to actively explore opportunities to expand our utility operations through acquisitions of water and wastewater utilities either in areas adjacent to our existing service areas or in new service areas…”

“…. Because of the fragmented nature of the water and wastewater utility industries, we believe that there are many potential water and wastewater system acquisition candidates throughout the United States…”

“… We are actively exploring other opportunities to expand our water and wastewater utility operations through acquisitions or otherwise. We intend to continue to pursue acquisitions of municipally-owned and investor-owned water and wastewater systems of all sizes that provide services in areas adjacent to our existing service territories or in new service areas….”

Aqua America believes that one of the reasons driving the consolidation of these systems is the need for capital investment and that is where I believe this entanglement with Aqua Ohio is taking the City of North Canton.

The rush to sell the increased water processing capacity of the North Canton Water Treatment Plant (WTP) is going to require further expansion of the WTP long before North Canton has paid down the $12 million owed for the recent expansion.

The water agreement with Aqua Ohio requires that North Canton make available 2 million of the total three million gallon increased water processing capacity that has just been completed. And very soon, North Canton will find itself exhausting it’s newly acquired water processing capacity and will not have sufficient borrowing capacity to expand its facilities for a second time.

The Aqua Ohio water agreement, to put it mildly, is grossly unfair to the City of North Canton and I cite the following.

The agreement states water prices to Aqua Ohio “…may be adjusted by the City by a percentage equal to the percentage by which rates for residential customers within the City are adjusted, not to exceed a five (5) percent annual increase for the first twenty-four months of this Agreement.”

Does anybody realize that planned water rate increases passed in Ordinance No. 156-04 that set water rates for the City of North Canton mandate water rate increases for residential customers as high as 7.1 percent?

The ordinance (Ordinance No. 49-05) approving the Aqua Ohio water agreement conflicts with Ordinance No. 156-04 which set annual increases in North Canton water rates through the year 2009.

Do you think you can increase residential customer’s water rates at a higher annual percentage than what you increase Aqua Ohio’s water rates?

Is this fair? Is this legal?

Conversely, the City of North Canton is required to approve water rates set by Aqua Ohio without question.

In regards to billing and payment, the agreement states “Aqua agrees to pay monthly within thirty (30) days after receipt of the bill; all bills not paid by the thirtieth (30th) day after receipt will be subject to a late penalty of one percent (1%) per month.”

The City of North Canton’s policy regarding payment of water bills is that payment is due by the 15th of the month after receipt of the water bill which arrives on the first of the month. North Canton charges interest of 5 percent for late payments. Here again is a conflict between how Aqua is being treated and how all other water customers are being treated.

The agreement states that “If during the agreement, additional facilities are necessary for sale of water hereunder, such facilities will be constructed by the City.” What does this entail for North Canton? I would say that this is quite open-ended and obviously require additional expenditures by the City of North Canton.

The agreement states that Aqua Ohio will make available to North Canton an emergency supply of water subject to Aqua’s availability of supply and availability of engineering and equipment with prior notice and the availability shall be subject to Aqua’s prior consent.

Conversely, under the section titled Continuity of Service, the agreement reads that “In the event of disruptions or interruptions of service, the City shall not give preference or priority to customers other than Aqua…”

It sounds to me that North Canton water customers, other than Aqua, must go to the back of the line if there are water shortages or interruptions of service.

Under this agreement, it appears that North Canton must provide emergency water to Aqua but Aqua is not required to provide the same level of emergency water to North Canton.

The Aqua Ohio water agreement severely compromises any chances of North Canton’s expanding water service to areas not presently served by the City of North Canton. The agreement also requires the city to purchase the water distribution rights to the Sanctuary if the city wants to service that development.

The agreement sets the term of the agreement for 20 years with automatic renewal for up to four, 5-year terms and requires a 12-month notice to terminate the agreement. Trumbull County is presently in litigation with Aqua Ohio in an attempt to force automatic renewal of its water contract with Trumbull County.

It appears to me that once Aqua Ohio gets a foothold anywhere, it does not want to let go.

This appears to be the case upon any termination of the agreement. The agreement states that “Upon any termination, Aqua shall retain the right to purchase water from the City’s water system for ten (10) years…”

The Aqua Ohio water agreement is so patently unfair as to be nearly criminal!

The agreement states that “Aqua is hereby permitted to extend Aqua-constructed and owned water distribution facilities from points of connection with the City’s distribution system designated by Aqua in order for Aqua to serve customers outside of the City’s service…”

Allowing Aqua to tap North Canton water lines and extend water lines to service areas outside the city severely diminishes North Canton's chances to expand its water service area in the future. Clearly, this does not bode well for North Canton.

Aqua can tap North Canton water lines and extend water lines to service areas outside the city. What do you think that does for future growth of the North Canton water system?

There are other shortcomings to the water agreement with Aqua Ohio but I will not belabor them at this time.

But, I would like to add that I believe that the agreement is not valid for the following reasons:

First, the agreement states, “This Agreement is attached to and incorporated with the City’s Ordinance No 49-05 and the City represents that all actions of the City, including the actions of city council and administrative officers concerning and relating to the passage of said ordinance were adopted in open meetings of council in compliance with Ohio Revised Code §121.22, and that such legislation was not passed as an emergency measure [emphasis added], but was subject to a thirty (30) day period before taking effect….”

This legislation was passed on an emergency and it will have serious consequences for the City of North Canton.

Clearly, it appears that no council member ever seriously read this agreement. If they had, first of all, it would not have been passed on an emergency. Secondly, hopefully some city leader who cares about this city and its future would have stood up and said NO to this agreement.

Second, this legislation is in conflict with legislation passed in 2004 (Ordinance No. 156-04) which set water rates for the City of North Canton through 2009.

Third, this legislation violates fairness in the setting of water rates. How can you set one water rate structure for one water customer and then set a different water rate structure for other water customers.

I have shown this disparity in water rates in Chart One. The Aqua Ohio water agreement has opened a can of worms for anyone wanting to challenge the disparity in water rates for North Canton water customers.

Fourth, the Aqua Ohio water agreement appears to totally ignore the City of North Canton’s production costs and how they are allocated. The water production costs data for the City of North Canton were created for a reason and they continue to be utilized to structure the city’s water rates.

In each of the price points for water consumption for water customers billed under the city’s water rates, charges for water more than cover North Canton’s water production costs. This can be seen in Chart Three.

Why would this cost structure be totally ignored in the setting of water rates for Aqua Ohio?

The purchase of 60 million gallons of water a month by Aqua Ohio from the City of North Canton results in an average cost of $1.28 per 1,000 gallons for Aqua.

This is 35% below the city’s water treatment costs which are the city’s barebones cost of water production.

The same quantity of water (60 million gallons) purchased by outside business water customers results in an average cost of $5.25 per 1,000 gallons under North Canton’s present water rate structure. This is more than 400% higher than the rate being charged to Aqua Ohio. This is shown in Chart Two.

In Chart Four, one can see the shortfall in revenue from water sold to Aqua Ohio compared to North Canton’s water production costs.

The purchase of 2 million gallons in one day, which is what North Canton is required to provide to Aqua per the agreement, results in revenue shortfall of $7,254.57 a day. This shortfall would be slightly higher considering that Aqua Ohio’s effective average cost per 1,000 gallons drops from $1.39 per 1,000 gallons for the purchase of 2 million gallons to $1.28 per 1,000 gallons with the purchase of 60 million gallons over the course of 30 days.

Why would city leaders vote to approve such an agreement that is unfair to the city and taxpayers?

Why would city leaders vote to approve such an agreement without expert advice and study?

Why do city leaders not provide a system of checks & balances amongst themselves that is built into our form of government?

There are seven council members on city council for a reason.

Are city council members working for the electorate, feathering their own futures or are they just grossly inept?

I have seen many unanimous votes on this council which are clearly votes of lemmings.

This city council, Mayor David Held, City Administrator Earl Wise, and Finance Director Julie Herr must work aggressively and vigorously with Law Director Randy McFarren to void this agreement.

If you do not, North Canton residents will be consuming water purchased from Aqua Ohio at water rates far above the water rates you are charging Aqua Ohio and far above the water rates everyone in this room is paying today.

And North Canton will have more to lament than just the loss of the Hoover Company.

Thank you
Chuck Osborne
City of North Canton