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Madison Water Utility gets huge rate increase, criticism

November 7, 2018

The state Public Service Commission has granted the Madison Water Utility a whopping 30.6 percent rate increase but also hammered the beleaguered utility’s fiscal practices.

The PSC, in a decision dated Nov. 1, authorized the utility’s requested rate hike, which will raise the typical residential customer’s bill from about $20 to $27 a month and generate an extra $10.4 million for a total $45.5 million in expected revenue over the next year. New water rates will show up on customer bills starting in mid-December and January.

But the PSC blasted the utility for its fiscal practices, particularly for cost overruns on two recent projects — Well No. 31 on the Southeast Side and reconstruction of the Paterson Operations Center on the Near East Side — and ordered the utility to produce a plan detailing how it will shore up its finances.

“A large rate increase like this is needed to ensure that the utility remains financially sound moving forward,” PSC spokesman Matthew Spencer said. “The Madison Water Utility did not put its ratepayers in an ideal situation. However, commissioners felt an additional future rate case, coupled with a financial plan, would force Madison to follow through with improving their management and protecting their customers.”

The decision reflects a preliminary decision last month.

The utility is about 15 years and 100 miles into a multibillion-dollar, decades-long and — so far — largely debt-funded project to replace about 400 miles of aging water mains. That along with successful conservation efforts, the loss of large water users such as Oscar Mayer, and a historical reluctance to increase water rates left the utility with a deficit — identified in an April audit to be about $6 million.

The rate increase will let the utility proceed with borrowing for 2018, which will cover capital expenses for 2017, 2018 and 2019, as well as repay the city for a $6 million loan made from its general fund that the utility used to cover the cash deficit, said David Schmiedicke, city finance director.

The utility is already adjusting to fiscal realities, spokeswoman Amy Barrilleaux said.

“Although rebuilding and renewing Madison’s aging water infrastructure remains a critical part of our mission, we have reduced spending in our capital improvement program with the goal of building cash reserves over time and reducing our reliance on debt financing,” she said.

The PSC’s most stinging comments related to the Well No. 31 and Paterson Operations Center construction projects.

In those cases, the PSC determined that the utility had cost overruns exceeding 10 percent and is disallowing a total $3.9 million in costs for those projects, meaning the utility must cover those costs from cash reserves or look to the city.

For Well No. 31, the commission authorized costs of $5.9 million but the utility spent $8.1 million, the decision says. The utility began construction on the Paterson Operations Center before receiving a certificate of authority for the project. The commission eventually authorized costs of $12.9 million but the utility spent $16.5 million.

“The commission has noted its concerns about MWU’s pattern of construction cost overruns in recent years,” the 37-page decision says. “The commission finds this pattern of cost overruns above 110 percent of authorized costs is unacceptable to utility rate payers.”

There is no way to amend an original cost estimate for a construction project with the PSC, Barrilleaux said.

With the Paterson Street Operations Center rebuild, for example, the utility asked for construction approval from the PSC before the project began, but once the project got underway, the utility discovered there was more contaminated soil at the site than early borings suggested, she said.

In addition to the financial plan, the PSC required the utility to provide notification of any project cost exceeding the authorized amount by more than 5 percent — halving the usual 10 percent threshold — and ordered the utility to submit an application for a conventional rate increase within two years.

“We have ordered the Madison Water Utility to develop a plan to return to financial stability,” Spencer said. “This plan is to be completed and returned in 90 days, and Madison Water will periodically update commission staff on their progress over the next two years. The plan will be the beginning of their process to bring themselves back into financial health by improving their financial management.”

Citing poor management of the utility, the Madison Water Utility Board in August recommended not renewing utility general manager Tom Heikkinen’s five-year contract, but the City Council did so anyway on a 14-4 vote and with a raise to $151,011 a year.

As part of the renewal, Mayor Paul Soglin directed Heikkinen to address the utility’s debt by the end of the year and meet other requirements.

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