Roundtree responds to water-increase questions

At the July 25 City Utilities executive committee meeting, CU General Manager Robert E. Roundtree read into the record his responses to issues raised by Springfield businessman Neal Ethridge regarding the original proposed water rate increase. A new 7 percent across-the-board increase has since been proposed.

Here are the issues Ethridge raised and Roundtree's responses, edited for space and readability:

"Per CU's annual report for the year ended Sept. 30, 2000, CU has $176 million in cash and government securities."

Response: True, but the $176 million reflects the combined funds of two separate and distinct financial entities: the public utility and the water utility. The water utility's share of the total is about $30 million committed to its general account which is divided into $5,558,000 for working capital in the general account; $11.7 million in committed projects; and $12,682,000 which is required for bond funds. "This again explains why these funds are not available for future additionally required capital projects," Roundtree said.

"CU reported $34,008,000 net income for that same fiscal year."

Response: True, but the net income figure for the water utility, a stand-alone operation, was $4,294,000. "As to net income, I would like to share with the board again that City Utilities, not unlike other proprietary businesses, must earn an appropriate net income if it is to survive." Without that, CU couldn't pay its "debt service, nor could it pay for required capital extensions and additions for the water, gas, electric, telecommunication and transit system."

"CU financial documents from 1982 through 2000 indicate an average operating profit margin in the water department very, very close to 50 percent."

Response: Roundtree said Ethridge confused operating ratios with operating profit margins. The operating ratios are between 45 percent and 55 percent. "(Ethridge) seems to be suggesting that the higher the operating ratio, the higher the profit margin, when in fact, just the opposite is true. There is an inverse relationship between the operating ratio and profit margin which means that generally the higher the operating ratio, the lower the profit margin."

"... In March 1998 CU prepaid $26,086,000 of water bonds."

Response: True. "This was a very good and prudent business decision ... In March 1998, based on economic benefit to our water customers, an advance refunding of $26 million effectively retired a portion of the water utility's outstanding debt."

This was made possible when the Stockton Lake project came in below cost, allowing approximately $11 million raised by bonds for the project to be used to pay off old debt. Also, final payment of the original issue Series 1957 Revenue Bonds was made in November 1997. "This final payment removed the requirement for the water utility to maintain the 1957 bond reserve fund, freeing the balance of $10 million ... The water utility's required annual debt service payments were reduced annually by $1.4 million and the final maturity of the 1993 bonds was moved up five years to 2018 from 2023," Roundtree said. This improved the water utility's income performance and annual cash flows, which were critical for strong credit ratings.

"CU made advance payments on (its) pension fund payments of approximately $21.4 million in fiscal year 1998."

Response: True. However, this payment was made by the public utility, not the water utility. "The $18.4 million payment in November 1997 and the $3.5 million payment in September 1998 were made by the public utility to the Missouri Local Government Employee Retire-ment System to partially pay down past unfunded pension liability." The independent auditors, PricewaterhouseCoopers, said, This payment was prudent and desirable since the funds managed by LAGERS may be invested in a broader and more productive range of securities than those funds managed by City Utilities.'"

CU prepaid the Corps of Engineers $4.8 million (Sep-tember, 1998) for the first 25,000 acre feet of water to be taken from Stockton Lake.

Response: "(CU) did not prepay for the first 25,000 acre feet of water... (it) did pay the federal government $4.8 million for the 1993 bond proceeds for our first 25,000 acre feet of storage capacity in Stockton Lake. (It) retains the right to prepay the federal government for our second 25,000 acre feet of storage capacity in Stockton Lake any time before 2016, or at such time as the additional storage capacity is needed to meet the raw water needs."

"The pipeline project to Stockton Lake (was to) have met our water needs for the next 50 years."

Response: True in terms of raw water needs. "Completion of the Stockton Lake raw water supply project would meet our raw water supply needs until 2040 or almost 50 years. The proposed water rate changes ... are related to treated water and its distribution costs to serve our customers and the other burdens which have been placed upon the Water Utility at the request of City Council."

"Since 1993 the water utility has paid down long-term debt by over $42 million or a little over 50 percent of total long-term debt."

Response: "This is almost a true statement. The ... outstanding long-term debt has been reduced from $82.3 million to $40.7 million for a reduction of $41.6 million." Of that, $25.5 million "relates to the previously mentioned economically beneficial funding transaction in March 1998, and the $16.1 million has resulted from annual debt retirement in accordance with the regularly scheduled debt service payments."

"If the (water) treatment costs are the same, how can you be asked to seriously consider a rate schedule whereby the highest residential rate in the summer is 398 percent almost four times that of industrial?"

Response: "In both the current and proposed water rates, use greater than 300 CCF is priced lower than other use because there are no longer any distribution costs included in the rate. (They) were collected from the large users in the first 300 CCF they used. (Now) the costs are recovered uniformly across all CCF used and the current rate design does not take into account that some CCF (those contributing to the increase in spikes in peak demand) are significantly more expensive to provide than other CCF used. (So) the new summer block and its significantly higher price were incorporated as a pricing signal."

Roundtree said Ethridge was correct that the water rate proposal "did not have conservation as its genesis. He is incorrect ... when he says the board and council are being asked to approve a new conservation rate structure." The conservation water service rate was adopted in 1980, but it is only applicable during crises and emergencies, he said, and it has never been used.

"Maybe CU should watch their expenses more closely. Production, distribution and transmission of the water utility totaled 18.8 percent of sales in 1993 and 20.3 percent for that same period in 1999. But general and administrative costs rose from 11.8 percent to 22.1 percent during that same period."

Response: "(CU) has been doing an excellent job of controlling expenses very rigidly, and that is part of the reason we have been able to go nine years without raising water rates while inflation alone has increased 24 percent ... Water production, distribution and transmission expenses totaled 18.8 percent of revenues in 1993 and 22.9 percent of revenues in 2000. (The year) 1999 just happened to be a year that included many extraordinary expense drivers related to Y2K and our new financial management information system."

Roundtree added that water maintenance costs were 12.9 percent revenues in 1993 and 16.3 percent in 2000. Operating income fell from 38 percent of revenues in 1993 to 19.8 percent of revenues in 2000. "Do you really need a clearer picture of the need for increased water rate revenues than these figures?"

"The 2000 annual report indicates the water utility made a net income of $4,642,000 interest income of $2,062,780 for a total of $6,738,780. CU stated ... (it) needed to make capital improvements over the next 10 years of (about) $11.5 million. Shouldn't we be asking why is any rate increase indicated? Maybe a decrease..."

Response: "The actual net income of the water utility was $4.3 million in 2000 including net interest income." Round-tree said Ethridge erroneously suggested the capital improvement needs for the next 10 years were $11.5 million they were $6.1 million for fiscal 2000 alone. "... Our needs for 10 years would be many times that. In addition ... scheduled debt service payments for capital expenditures in previous years totaled $3.9 million in fiscal 2000."

"CU has had plenty of money to fund Springnet, a multimillion dollar fiber optic network, $15 million to the joint city-county communication system, continuing expansion of industrial parks. But when it comes to providing the basic services, i.e. water to the owner-customers, you are asked to approve a rate increase."

Response: "(CU's) involvement with the ... trunked radio system and economic development is accomplished through the public utility not the water utility." In 1987, CU "could not receive from the investor-owned telecommunications pro-vider the quality of service, and reliability of service, required to provide acceptable voice, date and video service to a high technology utility at reasonable prices."

After "offering to build one fiber optic system to be shared by all users in Springfield, and being rebuffed by the investor-owned utilities, (CU) began constructing an advanced fiber network to provide acceptable voice, video and data services to (its) operating facilities at acceptable costs. (This) has provided the required level of service at significant cost savings since 1987 when compared to the difficulty and cost of purchasing those services from the private sector."

The additional capacity has been offered to CU customers, and the income from that side business "helps to keep the costs of providing electric, gas and transportation services lower because they significantly contribute to the coverage of fixed operating costs."

As for the joint trunked radio system, CU saves about $3 million in construction costs because it isn't building its own separate system.

As for CU's interest in the industrial park development, 20 industries have been established in the east park "resulting in improved electric load factor and over 1,600 new jobs and over $170 million in private investment." Roundtree said that improvements in the electric system load factor help to keep the costs lower for all customers. CU's original investment in the land was repaid in the spring of 1999 from the proceeds of lot sales.

"You are being told we will be faced with a declining bond rating if you fail to increase rates now ... but we have over $700 million of surplus bond capacity ... at the present time ... CU ... could pay off all outstanding bonds tomorrow."

Response: "The question of bond ratings goes to cost of borrowing not to the bond capacity available. The lower your bond rating, the higher your cost of borrowing ... (and) failure to pass this water rate proposal might well adversely affect the bond ratings of the water utility and collaterally the bond ratings of the public utility and the city ... It makes little sense to take that risk on such a relatively small ($1.5 million) water rate proposal. To pay off all outstanding bonds would be a foolish decision for the public utility and for the water utility an impossibility."

"You have been told that the water utility accounting is totally separate and there is no commingling of funds ... (this) is not supported by CU's own documents."

Response: Roundtree said that Eth-ridge was referring to a combined statement of cash flows for the whole utility. Year-end reports "are combined only for the purpose of presenting the total overall results for (CU). The underlying financial statements reviewed and presented by the independent auditors reflect the two separate ... financial entities that operated under the umbrella of City Utilities."

He added that "all financial transactions are segregated between the two separate and distinct financial entities and records are kept or maintained to support the assets, liabilities and equity on a separate financial basis." Roundtree also stated the utilities do participate in a pooled arrangement for investment purposes, but "investment pool ownership is proportioned to the public utility and the water utility based on the assets available for investment by each financial entity."