From Nothing to $27 Million in Eight Years
by Frank Mangravite, Ph.D.
(reprinted, with permission, from Public Works Financing)
|The water/wastewater privatization market among Connecticut
municipalities has grown from two door-opener projects in 1991 in Ridgefield and North
Haven to 10 contracts worth $22 million a year in 1997. In 1990, there was no municipal
water or wastewater system of significant size operated by a private firm.
OMI and USFOS started two projects in 1991. Three years later PSG started two projects. These four projects appeared to have established the viability of the concept of privatization among elected and appointed officials in the state. This acceptance coupled with the growing national awareness of privatization and the increased flexibility of the new IRS "management rules" transitioned the water and wastewater privatization market from a development stage into a rapid-growth stage.
In 1997, six new projects started. Danbury is expected to start operation by U.S. Filter Operating Services shortly. Most major cities are now considering the concept of privatization although some have chosen not to pursue it. The table above itemizes the Connecticut projects.
The 11 projects in the table represent fourteen treatment plants. All are wastewater plants with the exception of New London's water plant. The terms of the 1997 projects vary from 5 to 20 years with those projects that were initiated in 1995 or the first part of 1996 retaining the five-year term limit needed to avoid changing the tax status of outstanding debt under the old IRS rules.
Figure 6 shows the value of the annualized revenue of the 10 contracts signed in 1991, 1994 and 1997. No new projects occurred in 1992, 1993, 1995 and 1996. The cumulative value of the privatization market as a function of time is given in Figure 7. The total of the annualized value of the 10 projects is estimated at $22 million. The market is distributed among four firms as follows: Professional Services Group-72%, Operations Management International-4%, U.S. Filter Operating Services-19%, and United Water Services-5%.
OMI's 1997 contract with New Haven had not been put into effect as of early April, 1998. Including New Haven increases the 1997 market to $26.8 million and changes the shares to 53% for PSG; 18% for OMI; 15% for USFOS; and 4% for UWS.
In Figure 6, increases in new contract revenue, shown by the vertical bars, closely paralleled the design flow of the facilities whose operation was being contracted, shown as the line curve. This is not unexpected. However, it is also known that the unit cost of operating a treatment plant is also a function of its size. Typically, the unit operating cost-i.e. the annual operating fee per million gallons of flow-is greater for a small plant than for a large one. The annual operating costs of the 11 Connecticut projects listed above were obtained from industry sources and divided by the design flow of the treatment plant(s) to arrive at a unit operating cost for each project. Figure 8 shows the resulting unit operating costs plotted as a function of treatment plant design flow.
Below about 3 to 5 mgd, the unit cost of operation increases dramatically as the design flow decreases. For this set of data, the unit cost tripled as the design flow decreased from about 3 mgd to 0.5 mgd. Above 3 to 5 mgd, the unit cost of treatment remained relatively flat, decreasing from about $200,000 per mgd down to about $175,000 or less at 40 mgd.
The data in Figure 8 represent a variety of conditions. Three of the data points represent the aggregate design flow of two treatment plants. Two of these are data points at 19 mgd and 40 mgd (higher value). One of these is for both a water and wastewater plant. Also, services vary between each project. At least one project includes billing and collection services.
The projects are for the operation of entire treatment systems, not just the plants. The water system includes the operation of two reservoirs and a distribution system. The extent of the collection system varies widely. For example, one of the larger collection systems includes 450 miles of mains, 11 pump stations, 12 siphons, 238 tide gates, and 50,000 catch basins. One project included the payment of a significant up-front concession fee. The cost of debt to finance the concession fee was estimated and subtracted from that project's unit operating cost.
When comparing the unit costs in Figure 8 to the overall operating cost of a municipally operated system, it is important to realize that operating costs retained by the municipality are not included. These may include the costs of debt, capital improvements, maintenance, repair and replacement, billing and collection, administration, legal advice, financial audits and insurance, among others.