PWSA’s 5-Year Plan

Summary: The Pittsburgh Water and Sewer Authority (PWSA) was placed by the state Legislature under the oversight of the state Public Utility Commission (PUC) in 2017.  The PUC was tasked with making sure the PWSA brought its operating procedures up to its guidelines and with forcing the agency to craft a long-term plan to replace/upgrade its aging infrastructure.  The first five-year plan has been released and this Brief looks at some of its details.

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2017 was a momentous year for the PWSA.  After a couple of water system issues spotlighted a frail and aging system that would be very costly to repair, the state Legislature placed the PWSA under the regulatory oversight of the state PUC (see Policy Briefs Vol. 17, Nos. 14, 29 and 49).  Act 65 of 2017 compels the PWSA to do two things: 1) bring its operating system into compliance with the rules and regulations of the PUC, and 2) put together a long-term infrastructure improvement plan for the replacing/upgrading of its systems, both water and sewer conveyance.

PWSA’s plan, covering the first five years, 2018 to 2023, was submitted to the PUC in September 2018 and is now being reviewed by the PUC.  News reports note that after obtaining public input, the PUC has until November 2019 to accept outright, accept pending the PUC’s recommended changes or reject the plan.

The proposed plan spells out the details of the two systems’ infrastructure components.  The water system is very old and much of it is well past its expected life span with an estimated average age of over 80 years.  Forty percent of the system was installed prior to 1920 and 86 percent was built prior to 1970.  It is comprised of over 1,000 miles of water lines of which 964 miles are water mains.

While the entire system has not yet been adequately cataloged and updated, the PWSA says it is using a Geographic Information System that is constantly being updated to get a more accurate picture of the system’s health. However, given the extreme age of much of the system, estimates of needed immediate and near-term replacements are just that. It is almost impossible to know with certainty where potentially calamitous breaks might occur.

The water system contains two treatment plants (one rapid sand and one microfiltration), eight distribution pump stations, four reservoirs (three covered, one not), 10 distribution storage tanks/reservoirs, two finished water pumps, one raw water pump on the Allegheny River, 24,900 valves and 7,450 public fire hydrants.

While the PWSA does not treat sewage—the Allegheny County Sanitary Authority (ALCOSAN) does—it does have a conveyance system to ALCOSAN that needs to be looked at as well. There are 1,213 miles of sanitary, storm and combined sewer lines in the system.  The system also has four wastewater pump stations, 30,000 inlets, 29,000 manhole covers, 185 storm sewer outfalls and 38 combined sewer overflow outfalls.  Approximately 77 percent of the sewer system is combined with storm water, which by federal consent decree, must be separated. There are 24 neighboring municipalities that convey wastewater through PWSA lines for which they do not provide a cost share to PWSA.

Obviously, the system is immense and will take many years and billions of dollars to fix it in its entirety.  The proposed five-year plan covering 2018 through 2023 will be the first of several such plans. Recall that a similar comprehensive plan by an engineering firm from 2012 proposed a 40-year time frame recommending eight five-year plans, for overhauling the entire system.

According to the five-year capital improvement plan submitted to the PUC, the top priorities are “the Aspinwall Water Treatment Plant, replacement or rehabilitation of the two major (treated) or finished water pumping stations, upgrades to storage facilities; replacement of critical transmission lines; continuation of the lead service line replacement program; and acceleration of the small diameter water main replacement program with an overall five-year budget of approximately $775 million.”  Small diameter pipes (8 inches or smaller) are scheduled to be replaced in one percent of the system (720 miles) in the next five years.  The lead service line replacement program has been well underway, replacing more than 2,700 lines from 2016 to 2018 and plans to be finished by 2026. It has been under a Pennsylvania Department of Environmental Protection order to do so since 2016.

As was mentioned in a state Auditor General’s report from 2017, the city had an agreement with PWSA to provide bulk water to city properties (600 million gallons per year) and that many city properties were not metered.  As part of this plan, the PWSA will also be installing meters at approximately 200-400 sites that are currently unmetered along with another 500 properties that pay a flat rate but do not have a meter.  The cost of this part of the program will be billed to these customers and is expected to take five years to complete.  The PWSA does not provide an estimated cost per meter.

This five-year plan also includes wastewater system renewal priorities that have a budget of $155 million over the five years.  The total budget for the three project areas comes to $930 million.

In sum, this plan calls for spending a very large amount of money.  And it represents only the first five years of repairs and replacements.  As was noted in an earlier Policy Brief (Vol.17, No. 14), the PWSA carries a large amount of debt.  In 2015 the amount of net total bonds and loans stood at $763 million before increasing to $866 million at the end of 2017 (2017 audited financial statement).  The net position of the PWSA at the end of 2017 was negative $43.8 million—up from 2015’s negative $35.7 million but better than 2014’s negative $59.1 million net position. And this figure depends on what can only be an estimated value of the system’s infrastructure.

In the plan, the PWSA states that “current planned improvements will be funded through both current rates and rate increases, as well as through revenue bonds, a capital line of credit, pay-as-you-go funding, and PennVest low interest loans.”  It will also explore federal funding through the Water Infrastructure Finance and Innovation Act of 2014, which offers low fixed-interest rates and flexible terms.  It will also look to potential private-public partnerships where possible—and if allowed by the mayor and council who have been unalterably opposed to privatization.

In September 2018 it was reported the PWSA petitioned the PUC to increase rates across its customer base, including 17 percent on residential customers and 10 percent on educational and health care organizations. In 2018 the PWSA’s budget show receipts from water totaled $109.7 million.  With an estimated composite average rate hike of 13.5 percent, those receipts should climb another $14.8 million. If approved the new rates will take effect in April 2019 and remain through 2020.  It will likely be the first of a several rate increases for PWSA customers in the coming years.

And, of course, the plan’s estimates of costs are just the direct monetary cost of the replacement and repair to be borne by the PWSA. There will be other huge costs, some non-monetary, imposed on the citizenry as streets are closed during work on the water lines. Add to that the lost revenue and output of businesses whose patrons and employees cannot get to them.  Nor do the PWSA’s costs include the serious inconvenience of water service being cut off to communities for extended periods.

According to the plan, in 2014 through 2017 annual capital spending was under $40 million per year. Spending increased to $70 million in 2018 and is projected to balloon to $330 million by 2021 before dropping a bit to $265 million in 2023—in all $1.35 billion over five years.

But this is the price that has to be paid because of years of failing to address the problem of antiquated system components. Bear in mind, too, that PWSA funds were misused by past administrations to shore up city budgets rather than investing in needed repairs.

Still this plan, though too long in coming and purposely delayed, is the first step of many to insure a properly functioning reliable water and sewer system for Pittsburgh.

PUC to Begin Exercising its Jurisdiction over the PWSA

Summary: The Pennsylvania Public Utility Commission (PUC) officially begins its oversight of the Pittsburgh Water and Sewer Authority (PWSA) on April 1st. This will be a monumental task. The PUC has moved quickly to get its arms around that task by approving a tentative implementation order specifying how it will carry out its duties and provides deadlines the PWSA must meet to accomplish the mandates specified by the Legislature.

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On Dec. 21, 2017, Governor Wolf signed Act 65 of 2017 into law. The statute amends the Pennsylvania Public Utility Code to give the PUC regulatory jurisdiction over the PWSA with regard to the provision of utility water, wastewater and storm water service. The law also establishes regulatory deadlines for the PWSA. The law went into effect immediately upon the governor signing the legislation. Section 3202 of the amending legislation provides a date certain on which PWSA will become subject to commission jurisdiction: Sunday, April 1, 2018.

A December 2017 Allegheny Institute Policy Brief (Vol. 17, No. 47) summarized the myriad  issues and problems facing the PWSA. An auditor general report concluded that, “the City [Pittsburgh] has over-extended authority regarding the PWSA,” and the PWSA was never intended to be a truly independent organization. Indeed, the city has maintained ownership and leases the infrastructure and equipment to the PWSA. In part, the PWSA was used to help the city with its financial problems.

Then, too, the PWSA has piled up enormous debts that reached $750 million by the end of 2016. The massive debt has crippled the authority’s ability to spend on needed infrastructure replacement. Replacement is now estimated to cost upwards of $5 billion.

It was these and other serious and unaddressed problems that prompted the Legislature to pass with overwhelming majorities the bill giving the PUC a major role in fixing the problems at the PWSA. On January 18th , the PUC approved a Tentative Implementation Order (TIO) in which it lays out how it intends to proceed with its regulation of the PWSA under the requirements spelled out in the law.

Under its regulatory authority regarding rate-setting, the TIO states, “This section provides that PWSA prior tariff rates and terms will have the force and effect of law as of April 1, 2018.  That Prior Tariff will continue in effect until modifications are approved by the Commission.”  Moreover, the TIO says “In practical terms, beginning Monday, April 2, 2018, the Commission will entertain informal and formal complaints from PWSA customers as it would any other regulated utility.  For PWSA, this will mark the end of its current Exoneration Hearing Board as an adjudicative body.”

The PUC expects the PWSA to submit a tariff filing by July 2, 2018.  The PUC also would prefer the PWSA to utilize  a method similar to the Philadelphia Gas Works’ cash flow ratemaking method as it is likely most appropriate for PWSA to gauge compliance with its bond covenants.”  In addition, the PWSA will within 180 days—by Sept. 28, 2018—file a “compliance plan with the commission which shall include provisions to bring an authority’s existing information technology, accounting, billing, collection and other operating systems and procedures into compliance with the requirements applicable to jurisdictional water and wastewater utilities.”

A still larger part of the Legislature’s charge to the PUC, as it assumes regulatory control over the PWSA, is to see to it that the PWSA “develop and file its proposed compliance plan, including a long-term infrastructure improvement plan (LTIIP). This plan will also be submitted by Sept. 28, 2018. According to the TIO, the LTIIP should include any metrics that PWSA uses to track and evaluate the effectiveness of infrastructure improvements, e.g., lost or unaccounted for water, main breaks or non-revenue water.  PWSA should also provide detail on how the programs and property eligible for LTIIP consideration were determined and targeted, e.g., a risk-based approach, age, material type, lost or unaccounted for water, non-revenue water, regulatory directive or audit findings.”

The TIO explains that it will require the PWSA to include a schedule for eligible property repair and replacement by class and category for each year for the duration of the LTIIP. To carry out this effort the PWSA will “project its annual capital expenses including detailed estimates of expenses by category to ensure that the LTIIP is cost effective.”

In more detail the TIO lays out what it expects to see in in the PWSA’s LTIIP in terms of achieving cost effectiveness:

i. the competitive bidding process or other means of choosing contractors;

ii. how contractors are evaluated in terms of work quality, safety and cost effectiveness;

iii. how much LTIIP work will be performed by contractors and/or competitively bid and the process for determining what projects are done by contractors;

iv.how materials are economically procured and vendors are chosen;

v. the salvage and scrapping process/program

The LTIIP will also show how PWSA will accelerate the replacement of aging infrastructure and how repair, improvement or replacement will maintain safe and reliable service.

In addition to the LTIIP, the PUC will request that PWSA provide it with an Annual Asset Optimization Plan (AAOP).  “The AAOP includes associated expenditure information for completed LTIIP work for the reporting year and the projected year.  AAOP data is broken out by individual projects completed in the reporting year.”

Obviously, a major overhaul of the PWSA’s infrastructure will be very expensive and revenues must increase to cover those expenses. The PUC addresses this by allowing the PWSA to “petition the commission for the establishment of a distribution system improvement charge (DSIC).”

The PUC says in the TIO that it understands that PWSA does not currently collect a DSIC surcharge.  If PWSA wishes to reinstate its DSIC after April 1, 2018, the law will require PWSA to petition for approval of a DSIC that is fully compliant with statutory requirements.  In order to recover costs through a DSIC, the PWSA must first submit a LTIIP.

In sum, the PUC, following the requirements set out in the recently amended utilities law, will within the next year or so put the PWSA on a course of better day-to-day management and a long term plan of overhauling its old and rapidly deteriorating distribution systems. Further, it has the authority to grant the PWSA permission to levy a distribution system improvement charge on water and sewer bills to pay for the costly repairs and replacements.

The inability and or the unwillingness of the city to manage its water and sewer system effectively and keep it in good shape have forced the Legislature to take the drastic step of placing a municipal authority under the regulatory control of the PUC and has given the PUC specific mandates as to steps that must be taken to fix the problems at the PWSA.

This process will be painful for customers of the PWSA. But years of neglect and misuse of the PWSA by city officials has made the actions taken by the Legislature necessary.  Now the city’s elected officials can blame the PUC and Harrisburg when the inevitable detours and serious inconveniences due to construction get underway and higher water bills start arriving in mailboxes. Will the electorate and customers accept the blame-shifting?

A New Chapter Begins in the Long Running PWSA Saga

Summary: The year 2017 has not been kind, to say the least, to the Pittsburgh Water and Sewer Authority (PWSA).  As Policy Brief Vol. 17, No. 14, described earlier this year, the PWSA’s very old infrastructure has been continually springing leaks that have cost millions of dollars to repair.  The mayor proposed leasing the beleaguered authority to a private operator.  But given the very high level of debt and the daunting problem of replacing the many miles of water and sewer lines at a cost of several billions of dollars, finding a firm that will enter into a lease agreement on the mayor’s terms is not likely to happen. A state auditor general’s (AG) report claims that half of all the water treated is lost before it reaches customers.

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PWSA’s very serious problems caught the eye of the state Legislature which introduced a bill (HB 1490) back in June to place the authority under regulation by the state Public Utility Commission (PUC). After the House passed the bill and sent it to the Senate, HB 1490 was not acted on again for several months.  It received legislative approval and was signed into law in late November.

The legislation does two essential things:  First, it holds the PWSA accountable for putting together a compliance plan to bring its procedures such as accounting, billing and technology in line with the requirements applicable to other PUC-governed water and wastewater utilities.  The authority needs to improve its asset management capabilities so it will know what assets need repair and be able to prioritize those repairs.

Second, it requires the PWSA to create a long-range plan to improve its infrastructure. This plan must include a general description of items needing repair, where they are located and an initial schedule of the planned repairs or replacements.  The PWSA will also be required to project annual expenditures to implement the plan and will be allowed to raise rates to pay for the repairs/replacements.  The authority will be allowed to update the charge quarterly as appropriate while keeping customers informed about any rate increases.  In addition, the PUC will require the authority to submit an annual plan detailing what has been improved or replaced as well as a description of the work to be done in the coming year.  This requirement is designed to ensure that the PWSA follows through on the urgent need to replace the outdated and fragile infrastructure.

The legislation gives the authority six months (until May 20, 2018) to present its compliance plan.

In addition to legislative action on the PWSA this year, the AG conducted an audit of the authority (the city controller had performed an audit earlier in the year).  The AG audit focused on the leadership of the PWSA and its ties to city government but also provided a useful history of the authority.

A succinct recap of that history follows: The PWSA was established in 1984 under the Municipal Authorities Act of 1945 but was not granted a fully independent status.  Indeed, its primary function was to oversee a $200 million capital improvement program to refurbish the entire system.  The city would bill the PWSA for any back-office services the authority used and employees remained on the city payroll. In 1995, the PWSA and city replaced the 1984 arrangement by entering into a new agreement in which the authority would lease the system from the city for an upfront payment of $101.4 million to cover the 30 year lease. At the end of the lease, the authority could purchase the system for $1.

However, the 1995 agreement also included a 40-year co-op arrangement in which the city would also provide for a fee the same services agreed to in 1984—telephone and data, vehicle fuel and repair, legal aid, computer services, payroll service and administration of benefit programs.  A major change was to move PWSA employees off the city’s payroll.

In addition, the PWSA would provide the city with 600 million gallons of water per year at no charge (estimated to be worth $6 million and $6.84 million at 2016 and 2017 rates, respectively).  The city would also charge the authority for direct and overhead expenses for any services required (estimated to be worth a total of $7.15 million from 2012 to 2016).  Furthermore, the PWSA is required to make equalization payments to city residents not served by the authority and have to get their water from another provider if its water costs more than PWSA water. Over the three years ending in 2016, this requirement cost PWSA an estimated $4.8 million.

Both the 1984 and 1995 agreements placed conditions on the PWSA that doomed it to financial hardship—while providing a bailout for a city that couldn’t put its fiscal house in order. The AG quoted a former mayor who claimed that from 1984 to 1995 the PWSA was used to help balance the city’s budgets. Revenues were diverted to uses not related to the PWSA system limiting the authority’s ability to invest in infrastructure upgrades.

A primary aim of the 1995 agreement was to spin off the PWSA to “focus on rebuilding the system and not use it as a financial tool of the city.”  The AG’s report notes that the city used the $101.4 million payment—which the PWSA had to borrow—to improve its own financial situation. According to the audit, “the City retained ownership of the system, yet pawned the financial and operation responsibilities of the neglected system off on the PWSA.”

The AG believes the “City has over-extended authority regarding the PWSA.”  Based on the original governing documents (1984 and 1995 leases), the city never intended the PWSA to be a truly independent organization.  That starts with the makeup of the board of directors.  One seat belongs to city council, two belong to the city finance director and treasurer and the remaining four are appointed by the mayor.  The board appoints an executive director.  Little wonder the authority agreed to lopsided agreements with the city.

Additionally, to the detriment of the PWSA, the 1995 lease agreement states that the PWSA is to keep the system in “as good condition as it is in on the date hereof, ordinary wear and tear excepted… while also putting all the financial burden on the authority.” The new 1995 agreement stipulates that “the City shall not be liable for any [PWSA] debt payments.”  This holds the PWSA responsible for the system and absolves the city of any responsibility even though it still owns the system’s assets. City ownership of the assets and the co-op agreement have limited the steps PWSA could take to accelerate needed improvements.  This arrangement designed to benefit the city while hamstringing the PWSA is not remotely akin to good governance.

As mentioned above the AG audit reports that the city receives free water worth close to $7 million, the value of the 600 million gallons allowed under the 1995 agreement. What is not known is how much water the city actually uses because the water it uses is not metered. The city does not have a list of all properties that receive free water. However, as the audit explains the known free water users include, “its departments, agencies and instrumentalities (i.e., Pittsburgh Zoo, Phipps Conservatory, National Aviary, and Schenley Golf Course).”  Although in a footnote it is explained that the golf course was metered in 2012 and has been paying bills, but for prior years was not.

The PWSA has severely under-invested in its infrastructure in large part due to the heavy debt load incurred over the past 30 years.  The audit notes the debt levels (debt, bond and loan debt minus swap debt) increased from $300 million in 1995 to $680 million in 2012 to $750 million at the end of 2016.

High debt levels at the PWSA have critically hampered the authority’s ability to make adequate investments in its infrastructure.  For the years 2012-2016, the period of the audit, the PWSA’s average annual capital investment was $31.4 million, ranging from $21.4 million in 2013 to $47.2 million in 2015.  The recommended annual capital investment during this time, as noted by a PWSA official, was $200 million.  Obviously the actual investment fell well short of what was needed.

Misuse of the PWSA as a source of funding for the city resulted in inadequate expenditures on the crumbling infrastructure.  This ill-advised policy has caught up to the authority (and the city) in a big way and it will cost several billions of dollars to fix the problems now staring them in the face.

So where does the PWSA go from here?

Provisions of HB 1490 require the authority to start working on a plan to begin addressing the dreadful condition of its delivery infrastructure. Presumably, the PWSA board is taking the six- month deadline seriously.  Moreover, the board and the city should also take the AG’s audit to heart and begin to develop a more arms-length relationship wherein the PWSA has greater independence and less influence from city government officials.  Perhaps the PUC can help with that effort.  While the authority will remain an autonomous entity, its board will be accountable to the PUC and ultimately the Legislature which will undoubtedly be keeping a close watch.

Of utmost importance is to keep the PWSA’s critical problem of repairing and/or replacing its very old equipment at the forefront of management thinking. And that project will be very costly—recent estimates place the cost at $5 billion. Unfortunately, with its current debt and revenue levels, the authority will find it difficult to borrow the enormous amount of funding necessary to carry out a long term repair and replace program.  Thus, as our earlier Policy Briefs pointed out, customers will be forced to bear the cost of borrowing the funds for the project in the form of substantially higher rates. Note that rate hikes must be approved by the PUC and those increases must conform to the long-term plan.

And what can the city do to help fix the mess it has allowed to develop? While the co-op agreement frees the city from any PWSA debt responsibility, nonetheless the city should take steps to help.  First of all it needs to meter all city properties and begin paying for water like any other user.  Secondly, city officials should pledge to support the PWSA as it develops a long-term plan as required by law and avoid carping when rate hikes become necessary. Indeed, city officials should help prepare residents and businesses for the likelihood of substantially higher water and sewer bills to come over the next several years.  Dealing with this critical problem cannot be avoided any longer.  In short, the city must accept the urgent need for a wholesale system upgrade and fully and willingly cooperate and assist in the process.

State Legislature Weighs in on Pittsburgh Water and Sewer Authority

Summary: The plight of the Pittsburgh Water and Sewer Authority has caught the attention of the Pennsylvania Legislature.  The State House has unanimously passed a bill which would place the PWSA under the oversight of the state Public Utility Commission.  The bill would require the PWSA to bring their operating system under PUC compliance and put together a long-term plan to address long-standing infrastructure issues.

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A Policy Brief (Volume 17, Number 14) from April outlined the troubles of the Pittsburgh Water and Sewer Authority (PWSA), specifically its aging infrastructure and the trouble they have with high debt levels which may preclude them from seeking help from a private operator as proposed by the Mayor.  That Brief also noted an engineering report from 2012, commissioned by the PWSA, which had inventoried the entire system and gave recommendations on how to begin to a replacement program at a cost of $2.51 billion (in 2011 dollars).  Other recent estimates put the replacement at four to five billion dollars. The Brief noted that the engineering report recommendations have largely been ignored by the PWSA at its own peril.

It turns out that the State House has also paid attention to the issues of the PWSA and has unanimously passed HB 1490 that has now been sent to the Senate. This bill places the PWSA under the oversight of the Pennsylvania Public Utility Commission (PUC).  HB 1490 adds a new chapter (Chapter 32) to Title 66 of the Pennsylvania Consolidated Statutes (Public Utilities) giving the PUC some limited power over the PWSA.

Chapter 32 will compel the PWSA to do two things:  1) bring their operating system into compliance with the rules and regulations of the PUC, and 2) put together a long-term infrastructure improvement plan for the replacing/upgrading of their distribution system.

The first point is fairly self-explanatory.  The bill states that the PWSA would have 180 days from the effective date of passage to file a compliance plan which would “…bring an authority’s existing information technology, accounting, billing, collection and other operating systems and procedures into compliance with the requirements applicable to jurisdictional water and wastewater utilities…”  This is a great first step as the City Controller recommended in an audit from earlier this year that the PWSA needs to improve their asset management capabilities so they will know what assets need repair and to prioritize them.

The second point is perhaps the most important—putting together a long-term plan to fix the aging system.

In the same section that orders the PWSA to put together a compliance plan for their management system (3204b), comes another directive to “…include a long-term improvement plan in accordance with subchapter B of Chapter 13….”  Title 66, Chapter 13, subchapter B (§ 1352a) outlines what the long-term improvement plan needs to include:  a general description of what needs to be repaired, where it is located, and an initial schedule of the planned repairs or replacements.  Furthermore the subsection requires projected annual expenditures to implement the plan and how the repair/replacement will ensure and maintain safe, reliable, and reasonable service.  If the PUC deems the plan to be insufficient, it can order a new or revised plan.

Section 1353 would allow the PWSA to implement a service charge to pay for the repairs/replacements.  “…[A] utility may petition the commission, or the commission, after notice and hearing, may approve the establishment of a distribution system improvement charge to provide for the timely recovery of the reasonable and prudent costs incurred to repair, improve or replace eligible property….”

To do so, the PWSA would have to submit information about the base rate charged to customers called the “initial tariff” which the PUC will consider when setting/allowing the distribution system improvement charge.  The PWSA would then have to justify the improvement charge by demonstrating that it is in the public interest and will help finance the long-term plan.  The PWSA would be allowed to update the charge quarterly as appropriate.  It would also have to let customers know the about the charge and if adjustments have been made through their bills.

If the PWSA is granted a distribution system charge to pass along to customers, it will have to file an annual asset optimization plan (§1356).  This will require the PWSA to file an annual plan that must include a description of all eligible property that had been improved or replaced within the previous year as well as a description of work to be done over the next year.  This requirement should hold the PWSA’s feet to the fire and compel them to get the necessary repairs/upgrades done.

Of course a distribution system charge will not sit well with PWSA customers, or even the City’s elected officials.  Past administrations and councils have been reluctant to raise water rates on city customers, a major reason the water department was spun off to its own authority. Thus, placing the PWSA under PUC oversight and direction should go a long way to push the authority to do what everyone knows must be done but that heretofore has been the proverbial can being kicked down the road.  With HB 1490 requirements, local politicians can blame Harrisburg for higher rates.

PUC oversight will come with a price.  HB 1490 subsection 3207b allows the PUC to “…impose an assessment on an authority based on the authority’s proportional share of the commission’s expenses relating to the commission’s utility group…on an annual basis….”  Considering that the PWSA currently operates with thin margins and may not be able to absorb this cost internally, this may be another addition to customers’ bills.

However, the PWSA will retain most of its autonomy and nothing in the proposed bill will prevent an audit by the City Controller.

The problem with aging infrastructure has been known for quite some time but the urgency to take the necessary steps is just now getting the attention it deserves. At a cost of over $2.5 billion (or more) upgrading the PWSA’s water and sewage conveyance systems is going to be very difficult to accomplish. Decades of neglect are finally being addressed seriously by the Legislature.  It is unfortunate that local political games playing have forced the State Legislature to take action to prevent major water and sewer system disasters.

PWSA Infrastructure Problems are Getting Worse

Summary: The Pittsburgh Water and Sewer Authority (PWSA) has a host of problems that will require large amounts of capital—both monetary and political—to solve.  The century old system is in dire need of replacement but the PWSA is deeply in debt and will have great difficulty raising the revenue and capital necessary to complete such a large project.

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The PWSA has been beset by problems this year continuing a trend dating back several years. This year alone the PWSA issued a boil water advisory, had a problem at a pumping station, and then a break in a water main that leaked 10,000 gallons a minute before it was diagnosed and stopped.  Repairing the break will cost an estimated $1.7 million.  This break is very worrisome as it may just be the beginning for a water system with pipes dating to the early twentieth century.

Pittsburgh’s Mayor has suggested looking to outside sources for help and has convened a panel to look into the issue.  The plan would be for the City to retain ownership of the system and have an outside firm come in that would not only manage the system, but foot the bill for replacing it.  In return this firm would be allowed to keep any revenues.  However, there are four major obstacles to this plan being successful. First, the cost of replacing the entire system (water and sewers) has been estimated to be above $2.5 billion.  Second, the system is very old—well past its design life—and as such is subject to an unknowable failure rate (and unpredictable future year capital and repair costs). Third, the PWSA has a very heavy debt load—$763 million according to their 2015 audited financial statements.  Fourth, the PWSA has had negative net income with operating costs and debt service payments exceeding revenue in both 2015 and 2016. Not exactly a resume that will have suitors beating down the door.  Who would contemplate pouring billions into an economic entity that is losing money and whose maintenance and repair costs could swell losses for years to come and long before the infrastructure replacement can be completed?

Bear in mind that the system’s oldest reservoir, Highland Park #1, was constructed in 1879 and that the system’s oldest pipes and valves date back to 1887.  It has been estimated, by an engineering firm who completed a study of the system that most of the cast iron pipes are over 70 years old—about the life expectancy of such pipes.  The water system’s inventory includes four in-ground reservoirs, twelve above ground storage tanks, the Aspinwall filtration plant, a membrane filtration plant (Highland Park # 1) and 1,012 miles of water lines ranging from one to 120 inches in diameter.  There are also 25,330 valves and 7,558 hydrants.  This inventory was compiled as part of the engineering firm report’s 40-year plan released by the PWSA in 2012.  The estimated cost to replace the entire water system (at 2011 prices) was $1.25 billion.

The engineering firm recommended a timeline at which the work would be accomplished in eight, five year periods.  Their report also recommended the PWSA embark on a program to spend $14.8 million per year to rehabilitate and replace medium to high risk mains over the next 40 years. PWSA plans $60 million in capital spending for 2017. To date however, the 40 year plan has not been implemented, with PWSA staff telling the City Controller that the 40 year plan was just a “wish list” and was not adopted as an actual plan.

While the PWSA does not process sewage, it does have conveyance lines to the ALCOSAN system.  The sewage system comprises 1,211 miles of sewer lines, 29,084 manhole covers, 24,143 catch basins, 99 diversion structures, and four sewage pump stations.  The cost of replacement for this system is another $1.26 billion.  The total bill for replacing the entire water and sewer system, as estimated in the 40-year plan, was pegged at about $2.51 billion—again at 2011 prices.

The average age of the pipes and the recent pattern of large and expensive breaks cast doubt on the 2015 audit’s $583 million estimate of the value of PWSA’s depreciated capital assets.  To be blunt, with the rapidly deteriorating, very old pipe system, it is hard to believe that the PWSA’s capital assets are worth $583 million dollars and that the net negative balance sheet position is only $36 million. The repair and replacement costs are likely to soar in the coming years making the system worth only what net income would justify and net income will likely be negative for a long time as spending rises sharply

Here is the key question: Would a water company (or any other firm) be interested in entering into an agreement to lease the PWSA with the requirement to replace the very old infrastructure in return for the right to operating revenues?

A prospective bidder would look at recent performance data as well as long term financial information. To wit, data from the PWSA’s 2017 budget shows 2015 actual operating expense ($122 million) and receipts ($172 million) for net operating income of $49.8 million. However, when debt service of $52.6 million is included (principal and interest payments) it brings total expenses to $174.8 million.  Thus the net income for 2015 was a loss of $2.8 million.  The revised 2016 budget called for a decrease in operating costs ($182.4 million, down from $185.7 million) combined with a small revenue increase ($184 million, up from $180.8 million) that would reverse the loss and produce net income of $1.65 million.

Even though small changes to costs and receipts made 2016 look better than 2015, the amount of debt service remains very high at $53.7 million.  The audited financial statements for 2015 show the PWSA with total debt (bonds and loans) of $763.3 million.

The 2017 budget is even more optimistic about revenue thanks to an approved rate increase of 30 percent for water used and sewage conveyance. The flat rate charge for the first 1,000 gallons was raised only 15 percent to $18.42 and the sewer flat rate was raised 34 percent to $6.09. Significant further increases in both water and sewage conveyance rates are slated for 2018. Meanwhile, ALCOSAN has boosted its charge for sewage treatment by 11 percent in 2017, the fourth consecutive hike that has boosted the rate to $6.90 per 1000 gallons of usage. A total monthly bill from PWSA for a residential customer using 3,000 gals of water per month and including Alcosan charges will exceed $70, up about $11 from 2016.

Total receipts are expected to increase to $218.8 million in 2017 while expenses are scheduled to increase to $151.4 million.  Thus net operating income is forecast to be $67.4 million.  With debt service budgeted at $53 million, net income will be about $14.4 million. The PWSA plans to borrow $60 million to spend on capital projects.

Projected net income at this level might be enough to entice bids to take over the PWSA, assuming the numbers come in close to budget projections and can be sustained in the face of greater expenditures in the future.  Bear in mind however, that the company would pay taxes on any profits—the authority does not have to pay income taxes. And depending on the terms of the lease, the company might have to pay property taxes as well. Then too the new operator would have to pour in huge amounts of capital to rebuild the system and having already taken responsibility for nearly $800 million in authority debt, might find borrowing more money difficult or expensive unless it has deep pockets and considerable income from other holdings.

Unless a firm is given the authority to enhance future revenue numbers substantially as needed and has the power to cut operating expenses through personnel and other changes, it is unlikely there will be serious bidders.  Even a modest 20 year plan for completion will require outlays of  $125 million per year (not including inflation and/or major cost overruns) and no significant rise in other operating costs. If borrowed in tranches and paid for over 40 years, the full $125 million per year would not have to be generated immediately but rates would have to rise sharply for several years to make the program viable wherein borrowing could occur and residential bills could double with comparable increases in commercial and industrial users’ bills. And that is before the firm makes any profit.

The City Controller in his recent performance audit echoed the engineering firm’s findings that the fix will be very costly and take many years.  He also recommended the PWSA “establish a realistic and comprehensive line replacement plan of action for both the water and sewer lines.”

In light of the severe problems and the probability of significant failures increasing with every passing year, dramatic actions are needed to keep Pittsburgh’s crucial water and sewer systems capable of supplying the City’s requirements.

One, the PWSA needs to complete interior inspection of all large pipes and then catalog the most likely to fail pipes and valves for immediate attention. They then need to create and implement a plan for replacement or upgrade for all system infrastructure and equipment older than 70 years (the average life span of cast iron pipes) or with a high probability of failure in the next 15 years.

Two, to fund these capital projects, the PWSA should put in place scheduled water and sewer rate increases to build sufficient capital reserves to complete the necessary upgrades.  Once those rate hikes has been authorized, they should look for large water and sewer firm (or other suitable management firm) to take over the PWSA.

By way of comparison, for a residential customer the Pittsburgh monthly charge for water and sewer for 4,000 gallons per month will be $90. In Philadelphia that volume will cost just over $59—with an add-on $14 storm water fee.  Seattle, DC, San Francisco are $100 per month or higher, while Cincinnati, Cleveland, Charlotte and many other cities are at $70 or lower.  In sum, PWSA is not the highest cost among the bigger cities but is moving closer to that group. And that means the needed push to raise prices and revenues will be exceedingly difficult politically.

Given the current multitude of problems at the PWSA, it is unlikely a buyer or potential partner can be found who would be willing to absorb the risks posed by the aging system and the high water and sewer charges already in place. A new management firm, without the authority to make substantial personnel and operational changes and with no ability to increase revenues significantly through rate hikes will be unable to correct the major infrastructure problems at the PWSA.

In the worst case scenario wherein a firm to take over cannot be found, the City might have to take back ownership of the water and sewer system and find new sources of revenue or divert existing city funds to supplement usage charge revenue in order to have the funds necessary to begin the badly needed replacement.

Water, Water Everywhere but No Accountability

A 2009 performance review of the Pittsburgh Water and Sewer Authority (PWSA) does not paint a pretty picture. The recent tragic events of August 19th and complaints of recurring flooding in the East End of the City have focused a brighter light on the Authority, so a printed report looked at that review. It should be noted that a subsequent audit on the contracting practices of the PWSA was released by the City Controller’s office in August of 2010.

The 2009 review found "excess turnover among top managers and over-reliance on outside contractors at much greater cost, to inadequate attention to cleaning and maintaining the system and a lack of accountability at all levels." This is important in light of the relationship to the City, the makeup of its board, and the near term future of the Authority.

According to the City’s annual financial report, on paper the PWSA is legally separate from the City but one member of City Council and four mayoral appointees serve on the seven member board (the City Treasurer and the City Finance Director are the other two members). The water system used to be run by the City Water Department and Public Works, but in 1995 the system was transferred to the PWSA under a long-term cooperation agreement and lease agreement. Water employees became PWSA employees, and the PWSA has paid the agreed upon lease price of $101 million to the City. In 2025, the PWSA can purchase the system for $1. The PWSA provides the City with 600 million gallons of water annually free of charge.

The initial 2004 Act 47 plan characterized the lease of the water system between the City and the PWSA as "one time revenue" pointing out that other rating agencies looked at such an arrangement as "only serv[ing] to delay the inevitable action on the budget including expenditure reduction or revenue increases". Did the City leaders at the time really think out how the PWSA would operate, or were they just interested in the money? Surely they must have felt there would be more professionalism and expertise in running the water asset, but has that continued?

Recall the objections to the proposed long-term lease over the parking system to a private operator last year, some fifteen years after the water system lease: people were worried about rates, service, and parting with a lease for a one time payment. Now there seem to be other significant concerns about another City asset, but one that is in the hands of a quasi-government agency.