In a final order approving the Madison Water Utility’s 30.6 percent overall rate increase, state regulators are requiring the utility to produce a financial improvement plan and demanding greater accountability.
Wisconsin’s Public Service Commission issued the formal order Nov. 1. It follows a discovery in April that the utility is facing a $6 million deficit created by a multi-billion-dollar water main replacement project, the loss of big water consumers like Oscar Mayer and successful conservation methods.
The PSC sets water rates, which are requested by utilities to cover the costs of providing service. Madison's rate increase is expected to generate $10.4 million for a total $45.5 million in expected revenue in 2019.
“This is an accurate reflection of what it costs to run a water utility that spends significant dollars to replace all the underground aging mains,” Water Utility Board chair Lauren Cnare said.
Water charges typically make up about a third of a residential customer’s entire bill. Other charges on the Madison Municipal Services Bill include those for sewer, stormwater, urban forestry and landfill services.
The increase in rates would be used to replace aging water infrastructure, including mains, well facilities, fire hydrants and reservoirs. The utility is also building new infrastructure, including a tower on the far west side, and it recently replaced a tower on the north side.
"Next year we’ll be spending $6.5 million to replace aging water mains in Madison and $1.3 million to build new mains in areas where Madison is growing," Madison Water Utility spokesperson Amy Barrilleaux said. "It’s been more than a year since we first applied with the PSC to increase revenues. We haven’t raised rates at all in three years."
PSC spokesman Matthew Spencer said in a statement that a large rate increase is needed “to ensure that the utility remains financially sound moving forward.”
The order, which uses pointed language in some areas, points to cost overruns and unauthorized construction projects as reasons for the utility to create a plan detailing steps to strengthen its financial condition.
“The Commission hopes that MWU, as Wisconsin’s second largest water utility, will start setting the standard for operating excellence and not be an example of poor management,” the order states.
According to the final order, the water utility conducted test well siting, acquired property and began construction, all totaling $1.7 million, at Well No. 31 prior to PSC authorization. Additionally, the water utility initiated reconstruction of the Paterson Operation Center prior to receiving a certificate of authority for the project.
The unauthorized construction “indicates a casual disregard” for the PSC’s rules and statutory requirements, the order states.
However, Barrilleaux said there is no way to amend the initial estimated cost for a construction project with the PSC. In the case of Paterson Operation Center project, Barrilleaux said greater costs associated with contaminated soil were discovered after the project was underway.
Cnare is confident the water utility is not flouting the rules, but she did say board members will be checking construction cost estimates more closely. In addition, the utility is in the process of hiring a chief financial officer.
“We do think we need to take their concerns very seriously and help them feel confident once again in this utility,” Cnare said. “There’s no mismanagement happening in the Water Utility. They don’t know that though.”
But Ald. David Ahrens, District 15, a member of the Water Utility Board, said the utility needs third party oversight to keep it in check.
“It just runs against the grain, the notion that we’re good, old, efficient, smart Madison that manages everything well,” Ahrens said. “However good you think some system is, there’s always some part of it that will go off unless it’s really monitored and everything needs to be managed.”
Required financial planning
In response to the multi-million dollar deficit, the Madison Water Utility Board recommended not renewing general manager Tom Heikkinen’s five-year contract in August. However, the City Council renewed it on a 14-4 vote.
Contingent on the renewal, Mayor Paul Soglin directed Heikkinen to get a rate increase finalized by the end of the year, determine excess utility property that can be sold, formalize a loan to the utility from the city and institute quarterly financial reports.
With the PSC’s final order, the utility must create a financial plan that includes options for the utility to better balance debt and equity and identify measurable goals with expected timelines and financial or operations metrics, which will be monitored by commission staff.
“It goes a little beyond what we typically do, but the commissioners felt it was important that Madison follow up with the commission on a financial plan to ensure that these situations with overruns and unauthorized construction projects aren’t something that continually arises,” Spencer said.
The plan must be submitted to the PSC within 60 days of the effective date of the final order and finalized within 90 days.
“The plan will be the beginning of their process to bring themselves back into financial health by improving their financial management,” Spencer said in the statement. “Having a better-managed utility will benefit Madison ratepayers.”
In addition, the utility will work with the commission to evaluate the use of a surcharge as a future tool for improving the utility’s financial situation.
PSC staff also recommended that the utility be required to submit an application for a conventional water rate increase no later than two years from the effective day of the final decision.
The water utility previously applied for a 26 percent overall revenue rate increase in October, but the PSC recommended the utility increase the request to 33 percent to generate more funds to provide sufficient bond coverage.