Another rate hike won’t solve WSSC’s structural problems
Bethesda Beat’s Oct. 16 article on the WSSC’s outrageous 9% rate hike proposal made it clear that our politicians believe the WSSC is in trouble.
A Bethesda Beat follow-up story on October 21 noted a recommendation from the Montgomery County Council committee to conditionally approve a 6% increase.
The central question for policymakers remains: is this a short-term cash flow problem that can be addressed through rate adjustments, or is there something structurally wrong with the WSSC?
The WSSC departed from the state-imposed cost reduction regime following state intervention in 1998 which was supposed to bring costs and tariffs under control. Rates have increased continuously since 2005 after a six-year hiatus and a one-third reduction in staff (from page 3 of a board memo).
At the October 21 committee meeting, President Tom Hucker cited a presentation of a September 30 state benchmarking survey by the Department of Legislative Services when it asked the number of employees, salary increases for management and bad debts.
This presentation provides data in the exhibits cited below comparing the expenditure, capacity and liquidity of the WSSC to neighboring water and sewer services. The cost and capacity problems seem to me to be structural, and the liquidity problem is a symptom of this.
WSSC wastes a lot of money compared to its big box counterparts with its large number of employees and costs of labor and IT. The new state survey sheds light on this productivity problem.
The number of employees (Exhibit 1 of the State Benchmarking Survey presentation on page 5) shows that the WSSC has 50% more employees than the DC Water and Sewer Authority – 1,695 vs. 1,109 – reflecting economies of scale for DC’s Blue Plains wastewater treatment operation, and more than double what Fairfax County has (763).
Differences in IT spending (Exhibit 3 on p. 7) are irrelevant for WSSC: a whopping $ 236 million versus $ 85 million for DC and $ 13 million for Fairfax.
The five-year contract labor costs (Exhibit 6 on page 10) for WSSC were an embarrassing $ 313 million compared to $ 3.5 million for Fairfax. There was no five-year total for DC, but he had paid $ 1 million for one year.
Equally astounding were the differences in head office square footage (Exhibit 11, p. 15), showing WSSC at 326,000 square feet versus 150,000 square feet for DC. Fairfax Sewer Headquarters space is only 21,000 square feet. The space separated from the Fairfax water service has not been reported.
WSSC has huge capacity that doesn’t generate revenue, increase costs. In the jargon of economists, this is proof of diseconomies of scale. The wasted capacity seems less than with direct current, but direct current faces much older pipes. Fairfax is much more efficient.
Exhibit 4 at p. 8 shows that WSSC lost water due to pipe leaks and 20% underbilling compared to 28% for DC and 8% for Fairfax.
Even more astonishing is the wasted sewer capacity (Figure 5 on p. 9) for sewer infiltration / inflow (groundwater that enters sewer lines and must be treated without generating income). For WSSC, it’s 89 million gallons per day (MGD) compared to DC’s 123 MGD and a much lower 44 MGD for Fairfax. But, WSSC doesn’t even mention underbilling, leaks, or groundwater treatment issues in its capital budget.
WSSC’s liquidity is a growing problem, much worse than its peers, and could cause service disruptions if there is an interest rate hike or an economic slowdown next year that causes it to run out of liquidity.
WSSC has the highest percentage of delinquent clients (19%) according to Table 9 on p. 13, compared to 11% DC and 3% Fairfax.
Cash reserves presented in table 12 on p. 16 are also extremely low – only 113 days for WSSC compared to 337 days for DC and 152 days for Fairfax sewers. Water reserves weren’t provided, but previous budget presentations showed this at around a year, similar to what DC has.
Major restructuring is needed to reduce costs, better manage assets and stabilize liquidity. The WSSC must stop living off a price increase after a price increase.
Dividing the organization into two, by county, can be done by dividing the assets, which are divided tightly by county, which makes this possible.
Transferring WSSC from the state to two separate county utilities would improve accountability and pay dividends to our residents in the form of sustained service, lower costs, and lower rate increases.
Gordie Brenne of Silver Spring is the Treasurer of the Montgomery County Taxpayers League.
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