TWW: Hate to say I told you so

Back during the Water Works debate when times were less turbid, I made one central argument for selling the suburban water works. (see Invest the Trenton Water Works proceeds in the future not the past ,   Valuation tips for voters on the Water Works deal  and  Hope for Trenton – Compromise on the Water Works deal)

My thesis was that the suburban pipes were not strategic for the operation of Trenton as a city and that it would, instead, divert management attention from out critical issues.

Sure enough!

I didn’t debate my friends in the “No” camp that the price wasn’t high enough.  I had no idea what the right price should be.  In the end, there was evidence that the $80M price was too low by virtue of the expensive marketing campaign,  American Water waged to win the deal.   I voted “No” but think $100M would have moved me into the ‘Yes” column.

Nor did I debate my “Yes” friends who wanted to patch the 2010 budget with the proceeds.  By the time the vote happened, the Governor had pulled the plug on Trenton’s budget and it should have been clear to everybody that the TWW patch was like putting a finger in the dam of financial destruction.

Both sides were wrong and neither considered the central question:  “Is it strategic for a city to operate water works for its suburban neighbors.” 

I can’t see how it is.

Now with a Mayor beset by personal financial issues, dramatic municipal financial issues, a looming crime wave, low worker morale and an “almost” flood; here he is, having to take flack from the mayor of Hamilton.  That call to Hamilton warning about unsafe water is one more thing on Tony Mack’s “to do” list that he shouldn’t have had to do and certainly didn’t want to do.  It was a distraction and so much so, he did it poorly, causing himself and the city even more embarrassment.

In tough times it’s important to simplify your operation and focus on the core. Trenton needs to shed every single operation that doesn’t directly lead to its own revitalization.  There is no way running pipes in Hamilton will ever revitalize Trenton. 

Even the most ardent “No” supporters will have to agree that there IS a price at which we can profitably sell the water works.   There are professionals in the business of properly valuing assets like TWW’s suburban pipes and we should hire one.  Given risk and the time value of money, there simply has to be a price at which our future revenues are worth the same as a current price.  Perhaps $80M was too low, but there is a price.

The suburban Water Works is only the most glaring example of a non-strategic distraction for our very scarce management resources.  Other operations that should be up for discussion are our Health and Human services department, the libraries and our schools. 

The question is what parts of our city budget give us strategic advantage in attracting new residents with disposable income.  Pipes in Hamilton most certainly do not.

And before people try to correct me by pointing out that we would have still supplied the water to Hamilton this week, I know that.  However it would have been a very different customer dynamic with American Water serving as a buffer between Trenton and its irate neighbors.  Perhaps the water company would have been a bit quicker to turn on the reserve taps.

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2 Responses to “TWW: Hate to say I told you so”

  • And when they broke that 20 year contract for bulk water 3 months in, and Trenton was left holding all of the debt and none of the profits, you would have been happier? The only saving grace we have right now is that we did not sell the utility. Of course Mack appears to be doing everything he can to give it away.

  • William Pyle:

    A higher price would have made the sale more attractive. However, there were contract provisions that would have also had to be changed in order for the deal to be good one for City customers. One of those provisions was the capital improvement surcharge that would have required City customers to pay a disproportionate and, therefore, unfair share of the cost of the capital improvements that would have benefited New Jersey American. One other provision was an insufficient charge for water sold to NJAW. It was shown that those deficiencies would have resulted in City customers having to pay more for their water service.

    Although a higher price would have made the deal more attractive, the price was established after hearings at the NJBPU. Those hearings examined and then established the value of the assets according prescribed regulatory standards. What limited the value of the assets in that context was that many of the assets had zero cost to the City and could not then be included in what is known as the rate base for NJAW. Without being allowed to do that and if NJAW paid more than the $80 million, NJAW would have not have been able to recover those costs in rates. With that prospect, NJAW understandably would not pay anymore. If it did, the funds would have to come from its reserves or stock or bonds. Any of those would decrease shareholder value, which NJAW could not allow.

    Any future attempt to sell any assets in the Townships would face the same constraints with respect to the price that the City could receive. This could only change if the statutes and codes that govern such transactions were changed to allow a higher price.

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