The debt is in the details: Key facts behind our public information campaign

On February 17, 2016, Missoula blogger Pete Talbot published a post in which he discussed our recent public information campaign in the Missoulian and the Missoula Independent, and specifically an ad in which we discussed the financial consequences for local citizens if the city takes over the water system. In his blog article and follow-up discussion, Mr. Talbot addressed some important issues – and misperceptions – related to the financial impacts of condemnation.

Following is a response penned by Mountain Water’s president, John Kappes. We’ve interspersed some of Mr. Talbot’s comments in order to provide context; you can read his entire blog post and follow-up comments at this link.


From the blog:
“Mountain Water Co. has been spending big bucks on an advertising campaign vilifying Missoula’s efforts to purchase the city’s water supply.”

From John Kappes:
I was born, raised and educated in Missoula. For over 25 years I have been able to work for Mountain Water, a conscientious employer that has always worked to provide good, safe, clean water to this community.

I feel it’s important to address some of the points brought up in Mr. Talbot’s blog, in hopes that we can all engage on this complex issue in a fully informed way.

“Some not-so-subtle threats are included in the ads.”

In no way are we intending to threaten our community. We are pointing out what it is going to cost for the city to take our system. City officials have not been forthcoming with this information, and until recently we were prevented by the court from discussing it. Regardless of a person’s viewpoint on condemnation, we believe this is critical information for the community to understand.

“(Mountain Water is) going to string this (court case) out as long as possible to [expletive] you, the citizens of Missoula.”

As the owners of private property we’re not threatening the community by defending that property. We’re exercising our constitutional right to keep or be compensated fairly for our property. Surely if the city wanted to condemn your home against your interests, you’d exercise every avenue at your disposal as well.

We do not gain from dragging out the battle – only the attorneys do. Only the city can back out of the lawsuit and stop all the future legal fees this community will need to pay.

“And do you think the ploy of the international equity firm, The Carlyle Group, to sell the water company to Liberty Utilities (the new owner of Mountain Water) without PSC oversight was some half-baked scheme? Of course it wasn’t. This will just keep the sale in the courts that much longer, this time with Montanans living outside Missoula picking up the tab for extraneous PSC and court costs as the suits and counter suits wend their way through the system.”

We did not want to have to disengage from the Public Service Commission process to review the purchase of Western Water Holdings by Liberty Utilities. However, the city involved itself in that process to the point it took the PSC to court, which put into question the whole ability for that process to move forward in a timely fashion. The Montana Legislature has refused at least three times to give the PSC statutory authority over transactions of this type, so once the city decided to take the process out of the PSC’s control, a business decision was made to finalize the transaction and get Mountain Water back under the PSC’s regulation of rates and service. Nothing has changed for the Mountain Water users or for our regulatory commitments due to this upstream stock transaction. Nothing will change, other than we now have a committed long-term owner with deep experience in regulated utilities.

“Some other scare tactics include estimates for massive infrastructure improvements, to the tune of about $6 million, the city will have to undertake. But wouldn’t Liberty Utilities have to make these same improvements?”

It is correct that Mountain Water will need to continue to put funds into the system to maintain it as a reliable part of our community’s infrastructure. In fact, we have continued and will continue to invest back into the system in a way that balances system needs with community concerns about rate impacts.

The significant difference is that Liberty’s investment will not impact public debt or bonding capacity. Every dollar the city puts into buying and maintaining the system will be borrowed, which creates more cost (as interest) and debt. It also hurts the city’s ability to bond for other community needs. That’s much different than having a regulated water utility as this community always has had. This community has never had to leverage its borrowing capacity for its water infrastructure. Leaving more flexibility to bond for other needs.

“… what Missoula water users won’t have to pay for, if we eventually end up owning the system, are the profits Liberty has to make to keep the shareholders happy.”

Under the city’s plan, make no mistake, there are investment returns, now and into the future. Those returns go to the investors of the bonds. And, under condemnation law, bond investor returns will be higher for Missoula’s ratepayers because the returns are based on the fair market value of the water system. As a regulated utility our returns on investment have and will only be based on the original cost of our investment – not the fair market value of those assets today.

Unlike our investors who must get approval by the PSC for future rate increases, the city will need to raise water rates automatically if the system’s net revenues can’t meet the investors’ returns. So, for example, any reductions in local water use through conservation would result in an automatic rate increase to make up the lost revenues.

“One expert pegs the system’s water loss at 4.6 billion gallons a year.”

As for leakage, that number includes hundreds of miles of pipe Mountain Water doesn’t own. We only own the distribution mains. The lines that run from the distribution mains to Missoula homes and businesses are owned by the property owners. Same as will be the case under city ownership, as is with sewer lines. Studies show at least half of the leakage comes from those pipes. We can’t force people to replace those pipes, nor can the city. We are working to reduce leakage on our system and have improved significantly over the past five years through new detection technology and infrastructure. But as long as there is leakage from the pipes we don’t own, the system will leak water.

In Missoula’s case we’re really fortunate. Water leaked from service lines or mains filters back through the gravel and rock and goes back to the aquifer, just like rain would. So water is not wasted. It comes down to what is the most cost-effective decision for main replacement. Just because a main is leaking, doesn’t mean it will fail. It could still have years of cost-effective life ahead for the community. We are committed to replacing all the main that needs to be replaced to ensure continued reliable service.

Speaking of the aquifer, one last point: Montana citizens own it already. Mr. Talbot mentions that our campaign is telling Missoula residents that they shouldn’t own their own water supply – but they already do and always will under the Montana Constitution. Mountain Water simply owns and maintains the infrastructure to bring that water supply into homes and businesses.

As all this continues to play through, Mountain Water and its local, long-serving employees will continue to provide reliable, safe water service to our community. Our record of service is impeccable through the decades and our ability to serve through these last few years of distractions continues to show our commitment to serve our community in a local, responsive, caring way.

Liberty has committed to allow us as employees of Mountain Water to stay together to continue that type of local service into the future. The city has been the exact opposite. Even though the city says they are working to take on all the employees, their continued actions show different. If this highly trained and knowledgeable group of employees is lost because of all this, it would be the highest cost of condemnation to our community.

All of this said, I understand why some citizens believe in municipal ownership. However, getting there through condemnation equates to significant public debt. In our minds this isn’t the community against a corporation. It’s about community priorities: where to take on new debt, and whether the city would run the water system better than the people who have run it reliably, efficiently and affordably for decades.

We believe the community needs to understand both sides, so we’re running some newspaper ads.

Additional Comments Discussion

Mr. Talbot asked:
“What did the Carlyle Group pay for Mountain Water?”

From John Kappes:
By law and by logic as well, that’s not the relevant question right now.

First, Carlyle bought the parent company of Mountain Water (which included much more than just Mountain Water) five years ago, in much different circumstances. And second, that transaction has no relation to the fair market value today, and our fair compensation.

The price paid by Liberty Utilities earlier this year – $327 million for the stock of Western Water Holdings – is arguably the only relevant fair market price. But there’s no simple way to divvy that up between the three water systems included in that transaction.

A court-appointed commission has pegged the fair market value for Mountain Water at $88.6 million as of May 2014 (the date the city filed its condemnation suit). There are good reasons why we do not believe this is a fair price; however, all of the math mentioned in our ads is based on that number for now.

The May 2014 date is important to note. State law says that, starting with that date, 10% interest must be applied each year as the condemnation proceeds, to prevent the need for constant reevaluation of the property every month. So, every month, the fair market value of Mountain Water’s assets goes up $740,000.

The reality check to this statutory concept is that at the end of 2013 our taxable value was $59 million. At the end of 2015, our taxable value was reassessed by the state at $101 million. Even though taxable value is not the fair market value of property, it can fairly accurately represent the appreciation that occurs over a period of time.

“During the negotiations between Park Water Co. and the Carlyle Group, the city was told it would have first right of refusal if Carlyle were to resell the business. Nothing on paper – a big mistake in my opinion – but that’s what I believe transpired.”

The agreement between Carlyle and the city was in writing. That agreement also stipulated that any disagreements would be resolved through arbitration. Instead the city chose the much more expensive and litigious option and proceeded with condemnation. The city refused to follow the options and arbitration procedures it agreed to in that agreement.

Carlyle did follow the agreement under all scenarios: It provided the city with the required 120 days notice of its intent to sell Western Water Holdings. It also considered all the city’s offers for Mountain Water alone. Those offers (first for $65 million and later for $50 million – a curious negotiation strategy by the city) were deemed too low. As evidenced by the court-appointed commission’s much higher valuation, Carlyle was reasonable in feeling Mountain Water should be valued higher than what the city was willing to offer. The city had every right to challenge the decisions and actions relating to that agreement under arbitration, but chose not to.

“I didn’t quite follow your rationale for bypassing the PSC when selling Mountain Water to Liberty … The sale probably would have been endorsed by the commissioners, since they’re pretty pro-industry, so my only conclusion is it was done to continue dragging out the process.”

This conclusion puts the blame on the wrong side for intentionally “dragging out the process.”

The city of Missoula had no reason to insert itself in the Liberty sale, other than to drag out a process that was otherwise moving along just fine. The Liberty purchase of the stock of our grandparent company is completely immaterial to the city’s quest to own the Missoula water system. That transaction changes nothing about the status or future of the condemnation case. If you look at where the case stands, there have been no motions or judgments as a result of this transaction. It has not added any time or cost to the condemnation case.

Where it does add considerable cost is to the PSC process, which the city has now derailed. This is an instance where the city’s lawyers are taking local taxpayers for a ride. They saw an opportunity to increase their billable hours by throwing a wrench into our work with the PSC. And, unfortunately, local water customers and taxpayers are the ultimate victims – first because they have to pay for it in legal fees and second because it derailed a process that was moving along appropriately and providing clarity to state regulators and local water customers.

We agree with Mr. Talbot’s comment that the PSC would have approved Liberty as a good owner. But because the city succeeded in halting that process and putting us in a position where we could not see an end in sight, Liberty made a business decision to withdraw from the review process and close (finalize) the transaction. Mountain Water and Liberty have no reason to extend either the PSC or court process; quite the contrary, it is in our best interests to get this all behind us as soon as we can.

“Concern about Mountain Water employees being retained by the city is legitimate. I would imagine there isn’t a lot of redundancy in Mountain Water staff and city employees. I would hope the city would pay similar wages and offer substantial benefits to former Mountain Water employees. Note to the city: that should be a part of the deal.”

We appreciate the supportive comments regarding the employees. I really wish the city would settle with the employees. In the city’s filing to the PSC in November 2015, the city’s own expert witness showed major reductions to payroll and benefits to even make it affordable for the city to purchase the water system at $50 million.

The employees have had to pool their own personal funds for legal representation in this process – and the city continues to fight compensating them for those costs. Those costs are tiny compared to the total costs of condemnation but have been a real strain on the employee group – a group that additionally faces pay cuts and possible job losses in the future if the city wins its case.

I challenge the mayor and city council to justify why the employees – who city officials say are so important to running the water system – should each have to bear thousands of dollars in personal costs from this process.

“So only 2.3 billion gallons are being lost through Mountain Water lines? That’s not acceptable. And perhaps the city can be more proactive in working with home and business owners to mitigate their water leaks.”

As I have mentioned, we recognize it is an issue that must be addressed. We also recognize how it came to be – a function of our very unique valley geology. We are making real progress in reducing the leakage on our system. New technology and infrastructure replacement processes are allowing us to make significant gains.

I encourage you to read the article at this link, which explains why eliminating all leaks in our system would save customers $366,000 annually – and cost customers more than $128 million in the process. The city cannot replace mains any less expensively than we can. But they will have to take on additional public debt to do that work.

I will add that the issue with leakage from service lines will exist regardless of the owner. The city could have helped out service line owners in the past, but have not. One quick example is that the city charges asphalt penalties to service line owners if a service line needs replacing. These fees are in addition to the owner having to pay to have the street repaved. Plus the cost of the line repair itself between the water main and the business or home connection.

“There was a great letter in the paper the other day asking, basically, do Missoulians want to own their water or just rent it.”

The rent argument actually goes back to my earlier point about the costs of condemnation.

If you can pay rent on a house based on regulated rent set on the original cost of the owner’s investment, that may be much better for you than buying that house at the current fair market value plus closing and financing costs. You see this in major cities with rent control provisions: Many residents would never be able to purchase the residences where they live or anything remotely comparable; but thanks to rent control they can continue living there indefinitely while keeping their finances free for other priorities.

So that analogy works both ways. We believe ownership in this case will be much more costly for the community. That’s one of our main points in our necessity appeal. There was no assessment in the original trial of where it becomes less affordable for the city to own the system. We actually were prevented from providing that evidence to the court.

The city testified that its cutoff point was $77 million. That is why the city is now fighting all the costs mandated under Montana law, and not conceding to any. They are fighting the statutory interest. They are fighting the legal fees, including those paid by the employees – even though, again, the law and basic fairness would say that if the government tries to take what is yours, it should have to pay for your costs of defending yourself. And they are fighting paying for infrastructure that we are putting in during the condemnation trial.

Bottom line, by the city’s own testimony, the “rent” option is the least costly option for the community at this point. It results in no new debt load on the community, and it guarantees that an experienced utility company and long-serving local water professionals will continue providing you with the same quality water and affordable service that has been provided in Missoula for decades.

I encourage anyone with further questions or concerns to get in touch directly. We are right here in Missoula and do our best to make ourselves available to address concerns or questions from customers and the broader community. I can be reached by calling our customer service number at 406.721.5570.

John A. Kappes
President, Mountain Water Company