Citizens Demand Fairness in Water Rates!

Fairness in Water Rate Structuring for 40 % of the State of Michigan

Recently, I became aware of our household water charges increasing and, as a result,  located water rate information from the DWSD (Detroit Water Sewer Department).   The document in question was available as a downloadable pdf file from the DWSD web site and entitled “FY 2014-2015 Wholesale Rates”.   After studying the rates for the 82 communities that are supplied by the DWSD, I noticed what seemed to be an alarming disparity in the rates that various communities were being charged.   I began an investigation into the structuring of these rates by visiting Northville Township and talking to officials of my concerns.  The officials offered some possible explanations that had been passed on to them from various interactions with the DWSD but were unable to quantify the large variations in the DWSD rates.  I then attempted to meet with the Chairman of the DWSD Water Commissioners, Jim Fausone.  He indicated that it was not in his purview to meet with his customer’s customer but he would be willing to meet with Northville Township officials with citizens such as myself present.  Unfortunately, a timely formation of such a meeting was not possible due to many fast moving conditions such as the formation of the “Great Lakes Water Authority”, an organization that was intended to better represent communities and counties that buy water from the DWSD.  (More about that later.)  My next attempt to acquire knowledge that would explain the excessive differences in what communities were being charged for water was a FOIA (Freedom of Information Request) to the DWSD. This was answered, albeit partially, on June 16, 2015.  The depth of the information presented was insufficient for this writer to determine the engineering justification for the aforementioned disparities. 

I decided to apply a clinical version of the scientific method:

1. Determine the nature of the phenomenon that is observed : Why are the differences in water rates so large? 
2. Develop one or more hypotheses, or educated guesses, to explain this phenomenon:    There is an unfair and overly large skewing of water rates for communities in Western Wayne and Oakland Counties.
3. Devise experiments to test the hypotheses:  I decided to perform a Comparative Analysis of Water Rate Structuring of Water Providing System  in the Great Lakes area. 
4. Analyze the experimental results and determine to what degree  the results fit the predictions of the hypothesis:   This was done and the results will be discussed in detail as follows.

Discussion

When a Corporation needs to hire an individual, they usually will conduct a Comparative Analysis of fair and reasonable salary requirements by comparing the salaries of various individuals in other corporations performing similar functions. Likewise, a professional Realtor will perform a Comparative Analysis of Similar homes to determine the appropriate pricing of a piece of Real estate. (AKA Comps) 

I began by seeking out Water Departments in the Great Lakes Area that had data available online.  I was able to find sufficient data for Cleveland, Grand Rapids and Milwaukee. 

Before I continue, it is necessary to discuss basic reasons for Water Departments to charge different rates for residential customers.  It is generally agreed by all the information that I have researched and persons that I have had discussions with, that the cost of providing water is directly related to the distance from the source of water and the elevation that water has to be pumped “uphill”, so to speak.  That rings true in my Mechanical Engineering mind.  On this general principle, there is no disagreement.   But, as they say, the” Devil is in the Details”.  When I compared the ratio of the highest water rate to the lowest water rate for each water authority, an amazing set of numbers was observed:

Ratio of Highest to Lowest Water Rate

Detroit:          10.1 to 1

Grand Rapids:   1.6 to 1

Milwaukee:        1.3 to 1

Cleveland:           1.8 to 1

What is the significance of these ratios you ask?  The answer is intuitively obvious.  If we assume that the other three water regions are generally correct in their allocation of costs, which is, after all, the purpose and philosophy in any Comparative Analysis, then we can see that the highest priced communities in the Detroit System are paying too much and the communities at the low end are not paying their fair share.  If this hypotheses is correct, it would go a long way to explaining why:

1.     Brooks Patterson, Executive of Oakland County,  has pushed so hard for fairness by backing the Great Lakes Water Authority  (fairness would drive down Oakland County’s excessive rates) and why

2.    Mark Hackel, Executive of Macomb County, has been so vehemently opposed to the formation of the GLWA (Fairness would increase Macomb and Detroit rates).

One of the more remarkable items of the Comparative Analysis was the

Number of specific rate zones per water authority:

Detroit:           82

Cleveland:        4

Milwaukee:       2

Grand Rapids:   9

I am reminded of the old saying: “Divide and Conquer”.   It has been essentially impossible for any one community to counter the power of the Detroit Water Department.   One of the facts that needs to be recognized is that the DWSD services 40 % of population of the state of Michigan.  It is one of the largest water departments in the country! 

Fairness in Water Rate Structuring

The next item to be discussed is the concept of fairness and transparency.  In 2010 Janice A. Beecher, Ph.D. Institute of Public Utilities Michigan State University, prepared a report entitled ““Water Pricing Primer for the Great Lakes Region”.  It this study the following points are made:

1.    “Avoid excessive complexity”

2.    “The hallmarks of sound ratemaking include basic principles of transparency and communication. A good rate should be unambiguous in meaning and easily understood by customers in terms of intent and purpose.”

3.    “Overpricing suggests that the utility is building excessive reserves or providing transfer payments to another entity, including local governments.”

4.    “Protecting captive consumers from the abuse of market power in the form of excessive pricing and profits is the basis for economic regulation of private utility monopolies. In some states, economic regulation is also extended to publicly owned systems to promote cost and price accountability.”

5.    “Public utilities, regardless of ownership, are monopolies that must be highly transparent and accountable to the public they serve.”

This author agrees with Janice Beecher’s assertions.  The DWSD has taken a universally accepted concept that the cost of water should be prorated according to the cost associated with distance and elevation from the source of water but then distorted that number to an extremely wide band width.  This distortion has led to a redistribution of wealth in South East Michigan. 

 

Natural Monopolies and Regulation

The next item that needs to be highlighted is the regulation of water rates.  To begin a discussion of this we need to define a natural monopoly:   Wikipedia describes it as follows: 

A natural monopoly is a monopoly in an industry in which it is most efficient (involving the lowest long-run average cost) for production to be permanently concentrated in a single firm rather than contested competitively. This market situation gives the largest supplier in an industry, often the first supplier in a market, an overwhelming cost advantage over other actual and potential competitors, so a natural monopoly situation generally leads to an actual monopoly. This tends to be the case in industries where capital costs predominate, creating economies of scale that are large in relation to the size of the market, and hence creating high barriers to entry; examples include public utilities such as water services and electricity.

Protection of Citizens from Natural Monopolies

I believe that natural monopolies need to be regulated to protect the citizens.  That being said, the state of Michigan agreed between 1967 and 1995.  “Michigan Water utilities came under MPSC jurisdiction through Public Act 19 of 1967. Commission jurisdiction over these utilities was repealed by Public Act 246 of 1995.”

A “Political Problem” with the structure of the Great Lakes Water Authority

It is intuitively correct to assume that Macomb County will look out for the best interests of communities of Macomb County.  It is intuitively correct to assume that Oakland County will look out for the best interests of Oakland communities.  It is not accurate to assume that Wayne County will look out for the best interests of non-Detroit Communities.  We can debate these facts until the cows come home, but these are the political realities.  These facts over score the importance of returning to a State Overview of Water Rate regulation for 40 % of the population of the Great State of Michigan.  Fairness and transparency demands this!

I recently asked our Michigan representative, Kurt Heise, why the state ended regulation in 1995. He did not know the answer but indicated that he believed that it should be and  he has re-introduced legislation to regulate water rates for any water department that represents 20% or more of the citizens of the state of Michigan.  Since GLWA supplies 40 % of the state of Michigan, we fall under this proposal.  Representative Heise has assured me that “My current bill in the Michigan Legislature does allow for MPSC approval of rates and charges issued by the newly-created Great Lakes Water Authority.  The authority needs to be regulated just like any other public utility/monopoly.  “

From Hesie’s web site;

Heise, an environmental lawyer and former Wayne County environment department director, said legislative action may now be the only course of action to protect ratepayers from shouldering needless rate increases while bringing deliberations into the open.

“I’m continually amazed at how the Wayne County Commission signed off on this deal, with some commissioners at the time actually boasting about how it would help our communities,” Rep. Heise said.  “We were promised lower rates but they just keep going up with no accountability and little explanation.

“I’ve worked on this issue for nearly 25 years now in many capacities and I’ve had countless conversations with ratepayers, legislators, administrators and executives. Public servants aren’t happy. Ratepayers aren’t happy. Something has to change, and the guiding words are representation, transparency and fairness.”

Rep. Heise’s proposal would create a regional water authority, the Southeast Michigan Water Quality Alliance, to address concerns with the methods of the Detroit Water and Sewage Department. The new authority would favor regional representation by a nine-member executive committee made up of elected officials from the 124-community customer base.  Wayne, Oakland, Macomb, and Genesee Counties, and the city of Detroit would have permanent membership status, with other community officials rotated off the committee on a periodic basis.

“Without oversight, the people of Detroit and the greater metropolitan area are effectively watching millions of their own hard-earned dollars get flushed down the drain, not knowing where they end up,” said Rep. Heise. “The current pattern of corruption, unreasonable rates, no-bid contracts and bloated bureaucracy might work for a handful of Detroit and Wayne County politicians, but it’s no good for anyone else.”

 

Conclusion

I, therefore, am asking all of all our citizens and representatives to back Kurt Heise’s legislation (or any other substitute that is needed) to bring fair water rate structuring to 40% of the citizens of the state of Michigan.  This is one of the basic purposes of any government.

Respectfully,

Bob Cushman             06-21-15

Mechanical Engineer- Purdue University

Resident- Northville Township, MI