Lowell City Council met for approximately 50 minutes on Monday night to discuss two agenda items. Those items were valuations of the city’s water and wastewater treatment systems. All councilmembers were present for the meeting, which was held in City Hall.
Local Officials Work to Address Infrastructure Needs
There have been ongoing discussions between the City of Lowell and Lowell Charter Township regarding water and wastewater utility service.
Currently, the township is a wholesale customer of water and owns 18% capacity in the wastewater facility. As the township grows, there is increasing demand for these services, to the point where system upgrades will be needed to accommodate new customers. An issue facing local leaders is how those expenses will be paid.
One idea that has been floated is the possibility of Lowell Charter Township purchasing the water and wastewater treatment facilities from the city, and the city then buying these services from the township. As a part of exploring this option, the City of Lowell contracted with PFM Financial Advisors to create a valuation report of both treatment systems.
Utility Sale Seems Unlikely
Ben Kapenstein, a senior managing consultant with PFM Financial Advisors, joined the meeting via Zoom to present the findings of the valuation report. They were not encouraging.
The water and wastewater systems can be broken down into two parts: treatment and distribution. The treatment system includes the physical plants, equipment and technology required to prepare water for drinking or process wastewater. The distribution system includes all the pipes and drains that funnel water to customers and wastewater away from them.
Since Lowell Charter Township has apparently only expressed an interest in purchasing the treatment systems, PFM broke utility revenue data down into two parts for its valuation. The “ready to serve” charge on water and sewer bills pays for the distribution system and the commodity charge – which is the amount based on usage – applies to the treatment system
While the distribution system for the water utility has a positive $216,000 cash flow, the treatment system had – on paper – a $59,000 annual loss. The situation was only slightly better for the wastewater utility where the treatment system has a positive cash flow of just $17,000 for the year.
“The whole system is doing ok on its own, but when you break it out, the treatment’s not doing great,” Kapenstein said. “The treatment seems to be subsidized by the distribution system.”
What’s more, the wastewater treatment facility requires significant capital improvements that are expected to cost $9.2 million in the coming years. Plus, there is an anticipated plan expansion that could run another $7.8 million. Kapenstein combined these numbers to a total investment of $17 million needed for the system in the foreseeable future, but City Manager Mike Burns later clarified that there may be some overlap between the two figures, bringing the total cost down.
Taking all that into consideration, Kapenstein said the valuation for the water treatment system is $4.5-$6 million, and the valuation of the wastewater treatment system is $7.245 million.
The catch is that these valuations assume significant increases to water and sewer rates. “It’s tough to value a negative cash flow,” Kapenstein said.
To address the negative cash flow in the water system, rates would need to be increased an average of 7.6% annually over a 10-year period. To compensate for necessary capital improvements in the wastewater system, rates would need to go up an average of 14% per year during that period.
“The Reader’s Digest version is that there really is no circumstance where selling the facility makes any sense to the city,” Burns said. He added that doing so would require a vote of the people.
Councilmembers seemed to agree and no further action was taken on the matter.
The next regular meeting of Lowell City Council will take place on Tuesday, September 7, at 7pm.
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