HRG Addresses Oil City Council About Worth of Sewage System, Options including Selling or Leasing System

| January 12, 2018

OIL CITY, Pa. – Two representatives from HRG (Herbert, Rowland & Grubic, Inc.) – the firm hired by the Oil City Council to help determined the value of the city’s water water/sewage system – gave their report at the Thursday, January 11, council meeting.

(Photo: Bruce Hulshize of HRG addresses the Oil City Council Thursday)

Adrienne Vicari and Bruce Hulshizer of HRG gave the council three different estimates of what the system would be worth if the council decided to sell it and also some options the council could explore that wouldn’t include outright selling the system.

According to councilman Ron Gustafson, one of the main reasons the city is exploring its options is because there could be some large costs to upgrade the system coming up and having a larger customer base of a private company could help mitigate those costs.

HRG told the council that the sale of the system could generate anywhere between $18.4 million and $61 million dollars and would most likely generate at least $35 million.

The $18.4 million figure represents the Cost Approach (Book Value/Net Book Value) the system is worth. In other words, it measures the net investment in facilities made by its current owner (the city) and measures that by using what the reproduction cost of the current system would be minus depreciation.

The $61 million estimate is the market value of the system based off what a buyer may be willing to pay for the system based off of what buyers have paid for similar systems. This method can vary greatly on a case-by-case basis.

HRG also used an Income Approach (earnings value) of the system and estimated that to be $36 million. This method focuses on the discounted cash flows generated by the system over a 20-year period, discounted at the acquiring utility’s likely cost of capital.

In the end, Vicari estimated that an acquiring utility would most likely pay between $35 million to $50 million for Oil City’s system.

“We have seen a considerable increase in interest of the last couple of years for utility sales,” Vicari said. “But, there has also been a lot of fluctuation in the market over the last year.”

There are a lot of variables that could go into what the city could get for the system including whether or not the city sold the system under 2016 Pennsylvania Legislation Section 1329 of the Public Utility Code (Code 1329), according to the folks from HRG.

Basically, Code 1329, is a process to establish the fair market value of a utility using “utility valuation experts” from both the seller and the buyer to determine that market value. The act also sets requirements for certain things like a cost-benefit analysis for the customers of the system. The benefit of it is that the city might be able to get more money for the sale of the system if using 1329 but the negative being that there will be more costs associated with 1329. See 1329 for more in-depth detail.

According to Vicari, there could be considerable costs associated with 1329 because only three sales have been processed under it, and case law is still being set.

Oil City Manager Mark Schroyer said he heard that legal fees for that could be in excess of $1 million, although Vicari said she has heard of fees closer to $200,000.00, but it would depend on the purchaser and how much they want to pursue the matter.

Oil City Mayor Bill Moon was curious as to how long a sale might take, and Vicari said under the 1329 process it could take up to 18 months with current on-going sales looking at a timetable of around 14 months once bids are received.

Vicari also said that preparing bids for the system would most likely cost at least $20,000.00 and possibly more depending on the amount of time the city’s solicitor had to put into the matter.

Gustafson said he would like to be able to get bids submitted to see what someone would be willing to pay for the system before the city committed to spending a lot of money on the procedures of 1329.

According to HRG, Oil City’s current sewage rates are lower than rates they see in other similar places with rates being less than one percent of the median income of the residents in the system with the EPA considering between one and two percent to be reasonable.

“I’m surprised our rates are on the lower end across the state,” Gustafson said. “Our rates are going to have to raise whether or not the system is sold. We have costs that we are going to incur.”

There are options other than outright selling the system, according to Vicari.

Those options include leasing the system to a company or an authority or privately selling the system to an investor with an agreement that the system reverts back to the city after an “X” number of years.

Vicari used Altoona as an example of the option of leasing the system to an authority where the authority pays a set rental fee to the city and then runs the system. In order for that to happen in Oil City, however, an authority would have to be created as one does not currently exist.

Gustafson asked Vicari the benefits of having an authority, and Vicari said there are basically three reasons an authority is formed (1) Financial reasons, (2) Administration reasons, and (3) Juristical reasons.

The other option of selling the system to a private investor forgoing the bid process could have a couple of ways that it would be done. In one, the investor then leases the system back to the city and in the other, the investor actually runs the system for the city.

“In some cases, the investor takes on the risk/cost of capital improvements,” Vicari said.

Vicari also said that a public/private partnership could have some benefits when improvements are made including being able to have the benefits of a public contract which doesn’t include sales tax on the materials but also have the benefits of private contracts where prevailing wages and highest bids don’t need to be taken.

“It could reduce the cost (of improvements) by let’s say eight percent,” Vicari said.

Schroyer said one of the concerns he hears from residents in the city is that rates would go through the roof if the system is sold. But, he doesn’t believe this would be the case because whoever buys the system would still need to go through the Public Utilities Commission (PUC) for any proposed rate increases.

Vicari said this is true and that one of the benefits of being part of a larger system is that rate increases could be spread across the entire system. At the same time, she said that could also be a drawback because Oil City residents might have to pay for improvements on other systems.

“That is one of the concerns the Office of Consumer Advocacy has under Section 1329,” Vicari said.

Former City Manager Tom Rockovich addressed the council about his concerns about a potential sale.

“I have serious concerns about a sale,” Rockovich said. “They include, how will ratepayers be protected and how will assets be distributed. My interest is in the taxpayer/ratepayer being kept in consideration.”

Gustafson said the council isn’t taking the issue lightly, and earlier said he wants to be diligent in how the process plays out.

OTHER BUSINESS

In other business the council:

  • Heard from Wayne Sheffer, a resident of West Fifth Street for the last “30 or 40 years,” about his concerns of how renters are treating his property including their pets using his property as a “bathroom” and people driving on it. Gustafson said he hopes some of the new legislation the council passed at the end of 2017 will help address some of that including the landlords needing to take a closer at their tenants now that water bills will be going to the landlords instead of the tenants and the updated Disorderly House legislation that was passed that increases fines.
  • Gave permission to advertise the bids for the Zemke and Central Avenue Pump Station projects. The projects will be bid as one project and permits are in for both.
  • Held a swearing-in ceremony for City Treasurer Joseph Womer, Sr.
  • Was introduced to new police officer Jordan Anders, who was hired at the last meeting.
  • Accepted a retirement letter from Philip McNellie.

The next meeting will be held at 4:30 p.m. on January 25 in the council chambers at the City Building.


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