a Maturing $45-Million Market in '97
by Frank Mangravite. Ph. D. Public Works Management Inc.
(reprinted, with permission, from Public Works Financing)
|Since its start in 1982, the New Jersey water/wastewater
privatization market has grown to $45 million a year in 1997. Figure 1 shows the net
growth of the market on a yearly basis along with the number of new projects starting each
year. The aggregate market value for the 16-year period is $244 million.
The annual values of the contracts were obtained from a variety of sources. Some values were estimated. Private developers' utilities are included if they serve the general public. Revenues are measured based on the annual value of the contract. Groundwater remediation projects and industrial projects are not included.
Actual revenues will lag the reported annual values by about eight months, reflecting the fact that the projects, which may start at anytime during the year, are credited here for a full-year's revenue. A second cause is the delay between the commencement of work and the receipt of payment for that work.
New Jersey has a population of 8 million which is served by 431 wastewater treatment plants and 613 water systems. The majority of water systems rely on wells, of which there are over 2,000. At least one third of the population, 2.7 million persons, receive their drinking water from investor-owned utilities, which are not included in this survey of municipal operating contracts.
|Figure 2 gives the cumulative con-ops revenues in New Jersey
during the past 16 years. Growth during the market development phase, from 1982 through
1993, occurred in four spurts:
The first project of significant size occurred in 1982 when the New Jersey Highway Authority hired a private firm to operate the wastewater plants and water wells at the rest stops along the Garden State Parkway.
A second spurt occurred in 1985 when North Brunswick Township's water treatment plant, serving a population of 30,000, and the New Jersey Turnpike Authority contracted with CFM Environmental Services, now known as U.S. Water LLC, to operate several water systems.
A third cluster of contracts went forward between 1988 and 1990. M&E Services, now part of Professional Services Group Inc., signed up the initial project, the operation of both a municipal water and wastewater system for the Township of Maple Shade, population 20,000, in 1988. Next, WW Operational Services (now part of Earth Tech) began operating the Township of Berkeley Heights' wastewater system, serving a population of 12,000. CH2M Hill Inc.'s Operations Management International (OMI) took over the operation of the troubled 20.2-mgd Hoboken City wastewater treatment plant for the TriCities Sewerage Authority. Finally, CFM Environmental Services began operation of the Pequest Water and Sewer Companies' facilities, now owned by the Township of Allumuchy, as well as the Howell Township Municipal Utility Authority's flotation water treatment plant.
The fourth, and final, development-phase spurt occurred in 1992. Pennsville Township, population 12,000, in conjunction with the Pennsville Sewerage Authority, hired U.S. Water to run their water and wastewater systems. Also that year, Killam Management & Operational Services (KMOS) was hired to operate the 5-mgd West Caldwell wastewater plant.
The rapid-growth phase that began in 1994 continues today. Since 1994, new short-term (five years or less) contract operations projects have included Manchester Township, Phillipsburg Town, Princeton Meadows, Warren Township Sewerage Authority, Fort Dix's new Bardenpho wastewater plant, the City of West New York, and Picatinny Arsenal (1,000 buildings over 8,000 acres).
The major contributors to market growth, however, have been the advent of longer-term contracts involving private capital and the offering of more comprehensive services such as the management of billing and collection or capital improvements. Municipalities, eager for new revenue sources to avoid tax increases, have sought up-front payments as a means of capturing a portion of the future savings from private operations. Contracts' annual values have ballooned due to the amortization of the debt or equity needed to finance the fees or improvements.
Figures 1 and 2 show a slow down in the growth rate in 1997. This is not the start of a trend because there are a large number of projects of significant size in various stages of procurement. The 1997 new IRS "management rules" have significantly increased the flexibility for undertaking long-term contracts. In addition to the IRS rule changes, three state laws passed in 1994 and 1995 plus an amendment of the Local Public Contracts Law have opened the possibility of longer-term contracts in New Jersey.
The maturing of New Jersey's privatization market has brought into play a variety of market forces that are both positive and negative. The negative forces were particularly evident in 1997. The estimated 1997 net revenue growth from new contracts of about $2.8 million is considerably less than the total value of the year's new contracts, $4.3 million. Following are some of the market forces that decrease the market.
Reversion to Municipal Operation-The $45-million market is 3.5% less than it would have been if none of the privately operated facilities reverted to municipal operation through the end of 1997. The largest examples is the Pennsville project. After a 1992 election in Pennsville, the private operator, U.S. Water, was informed its one-year contract would be allowed to expire.
In March, 1998, Newark assumed operation of the Pequannock Water Filtration Plant from Professional Services Group after using the Newark Watershed Conservation and Development Corporation to assume a greater leadership role in a program of utility improvement. As part of that program, HDR Engineers was hired to provide a comprehensive audit of the system. HDR satisfied the city's requirement of having no direct or indirect involvement with providing contract operation services. The reversion of the 80-mgd Newark project represents an additional 3.4% contraction of the 1997 market.
Purchase by an Investor-Owned Utility-- The $45 million market is 3.2% less
than it would have been because municipal or privately owned systems serving the public
that had been contract operated were purchased by investor- owned utilities. New Jersey
has one of the country's highest concentrations of investor-owned utilities, the two
largest of which aggressively seek to purchase new systems. New Jersey American, the
largest in the state, purchased the water systems of Howell Township (formerly an MUA) and
Lower Alloways Creek Township. United Water Resources, the second largest investor-owned
water utility in the state, purchased Princeton Meadows' 1.5-mgd wastewater treatment
system. U.S. Water had operated all three.
Decreases in Existing Contracts-- Competitive pressures, exerted through renegotiating existing contracts or procurements-whether the procurement resulted in a change in the private operator or not-trimmed 3.6% from the market size, as measured in 1997 revenue. This does not seem like a large number. However, the six projects included in this study averaged a 30% reduction in annual fee. Changes in the scope of services can also decrease contract fees. This is believed to have occurred in one of the six projects referred to above. Tracking increases and decreases to existing projects is difficult. Therefore, there are probably numerous decreases and increases that are not included in this study. Other causes of contract decreases are automation, capital improvements, mothballing of small or old facilities, and contractual reductions due to lower flows and loading.
Projects Lost to a Competitor-- About $3.1 million of annual contract value was identified as having changed firms during the 16 years of this study. That is 6.7% of the current market value. Projects which changed operators, usually as the result of competitive procurements, were Fort Dix, Manchester Township, A.C. Wagner Correctional Facility, Roosevelt Borough, Lower Alloways Creek, Jefferson Township, Borough of Chester, and the Environmental Disposal Corp.
|Chester and Roosevelt Boroughs, although relatively small
projects, are the only projects known to have changed firms more than once. Roosevelt
Borough went from Applied Wastewater Group (AWG), now owned by Elizabethtown Water Co., to
U.S. Water and back to AWG. Chester went from U.S. Water to municipal operation to AWT to
a long-term contract with Earth Tech.
Of the 10 project operating firm changes, the firms losing business were U.S. Water (six), AWG (two), and one each for Professional Services Group (PSG) and Killam Management & Operating Services (KMOS). The firms gaining business were AWG (four), U.S. Water (two), and one each for New Jersey American, Spectraserv, and U.S. Filter Operating Services (USFOS).
Interlocal Services-- New Jersey's Interlocal Services Act is the legal basis for one municipality providing services such as water and/or wastewater utility operations to another on a negotiated basis. The law is highly permissive. For example, it says the duration of the contract "shall be for seven years, unless otherwise agreed to by the parties."
The East Orange Water Commission has signed five such agreements for 20 to 50 years, with Bayonne City (pop. 61,000), South Orange City (pop. 25,000), Orange City (pop. 30,000), Kearny Town (pop. 35,000), and Harrison Town (pop. 14,000). In each case the actual operating services are subcontracted to Utility Management and Engineering Inc., a private firm owned by Anthony Scillia, East Orange's water engineer until 1996 (PWF 2/98 p. 1).
Separately, the Passaic Valley Water Commission signed a 30-year lease with Lodi Borough (pop. 22,000) in March 1997. Concession fees paid to Lodi during the first three years total $6.45 million.
The East Orange service agreements involved concession fees or other early project payments to the five municipalities of about $59 million in addition to annual payments of about $5.2 million. Assuming total annual revenues of about $17 million, these projects annual fees would appear to be proportioned as follows: debt-29%, annual payments-31%, and operating costs-40%.
In actuality each project's structure varies widely and the Bayonne project's up-front payment of $27.3 million may be changed-probably increased-as a result of a new procurement underway now. The advantages of tax-exempt financing, no taxes, no equity, and continued public pension participation are significant reasons why the growth of the interlocal services, or public- public partnerships, can be expected to reduce the growth of the private contracting market in New Jersey.
Most of the interlocal public-public projects started in 1997, which helps explain the slower growth shown in Figures 4 & 5. Had the $6.8 million in operating contract costs been undertaken by private firms, the $45 million market would be $52 million, 15% greater. Had private firms assumed the entire operating cost and debt cost of the five projects, the market would be $62 million, 38% greater.
Contract Increases-- One of the positive market forces is increases in revenues from existing contracts. Non-inflationary increases from current long-term contracts could exceed $0.5 million a year.
Generally, the annual fees in short-term contracts escalate with inflation and sometimes with increases in flow and loading. Long-term contacts, such as Hoboken (water) and North Brunswick, may set the private firm's revenues as a portion of the user fees whose rates are escalated over the contract term. In other cases, contract revenues rise with increases in flow and loading from system expansions. Manalapan is such a contract.
Figures 3 and 4 (see p. 16) show the estimated market share of the major private operators based on contract annual values for 1993 and 1997, respectively. Market share is an indicator of many factors, one of which is usually not performance. A firm can serve its current clients well but limit its marketing. Any one of the many large municipal projects currently in procurement could significantly alter market shares in New Jersey. The year 1993 was chosen because it represents the beginning of the rapid growth stage. In order to maintain market share during the four year span, a firm would have had to experience 250% growth.
Only two firms increased market share, United Water Resources (UWR) and Applied Wastewater Technology. The latter has a joint venture with Elizabethtown Water's Applied Watershed Management, although that subsidiary is not focused on the municipal contract operations market. AWM has gone from 2% to 4% market share. AWM is strong in the developer wastewater system market for which very little public information is available. Therefore, a series of assumptions and approximations were used to estimate its revenues. However, it is known that their growth has come, in part, from winning the Environmental Disposal Corp., Roosevelt Borough, New Lisbon Development Center and Jefferson Township projects. Basically, AWM has succeeded in specializing in the smaller system market.
UWR has gone from no market presence to 24% by focusing on the larger projects and long-term contracts with Hoboken, Jersey City and Manalapan Township. Hoboken and Manalapan are 20-year contracts. Jersey City is one of the largest water systems in the country under contract operation. The 143 utility employees of Jersey City were initially leased under a contract structure modeled after the contract U.S. Water Developed for Easton, Pa. Manalapan is a small system (180 homes) that is expected to expand to 5,000 homes.
Besides UWR, U.S. Filter Operating Services and Elizabethtown Water won their initial New Jersey contracts during the past four years. The pie piece labeled "Other" includes projects for which limited information is available plus a number of smaller firms that operate utilities in the state, some of them for quite a few years. They include D2L Associates, Turnkey, A.C. Schultes, Chapman, Green Environmental and Spectraserv.
Throughout this study, it was assumed that 5% of the market was unknown. That adds $2.26 million to the 1997 market value.
Description of the Market
The 1997 contract operations market in New Jersey can be categorized by the following categories and numbers of projects:
Information on 35 of the private wastewater projects operated for real estate developers had to be estimated. Four other systems were known, but not by name. These 39 projects had estimated annual contract values of $1.57 million. The other 51 projects were identified by name.
According to the above information, about 70 wastewater plants are contract operated, which is about 16% of the total. Approximately half of these are privately owned and half are municipally owned.
Design-flow information was obtained for 78 systems. A project may be comprised of multiple systems. The total flow for the 78 systems was 288 mgd. This is misleading because 160 mgd of this flow is associated with the two large water plants, Newark and Jersey City. As mentioned before, Newark recently reverted to municipal operations.
There are 38 contract-operated wastewater treatment plants with an average flow of 1.7 mgd. There are four surface water treatment plants with a total flow of 174 mgd and three projects with 94 mgd without Newark. There are 26 groundwater (drinking water) treatment plants with an average flow of 1.1 mgd. Ten systems are water distribution and/or wastewater collection systems without any treatment plant. Their average flow is 2.4 mgd.
Of the five long-term (20-year) contracts, only one, North Brunswick, involves a treatment plant of significant size (10 mgd). Two long-term projects involve small systems (<0.1 mgd)-Manalapan Township and Chester Borough. Two long-term contracts, Hoboken (4.1 mgd, water) and Edison (9.5 mgd), involve only distribution or both distribution and collection systems.
Effect of Plant Size on Operating Cost
Figure 5 plots the unit cost of private contract operation per million gallons per day against the treatment plant design flow. As expected, the unit operating cost decreases dramatically as the design flow increases from about 1 to 5 mgd. Water treatment plants, especially those treating groundwater, are less expensive to operate than wastewater treatment plants of the same size.
The two 80-mgd data points are the two large water systems. However, these two projects are vastly different. Jersey City involves the operation of the entire system: aqueducts, reservoirs, meter reading and replacement, water distribution, water treatment and billing and collection, currently utilizing 80 employees. PSG's Newark project was for the operation only of a filtration plant involving about 18 employees, which explains the 80-mgd data point of lower unit cost.