Sued

It has often been said that for a two-car accident to happen, both drivers have to lose focus for the same moment. Unlike car crashes, the ?moments? that lead up to a lawsuit over water issues usually take years. Yet, those lawsuits still surprise us. Amazing!

Ten years ago a water district purchased its water from ?Watertown.? (This story is based on actual events that have been fictionalized to protect the litigants). A group in that region decided to look into forming a wholesale supply system to bolster water supplies. The district and Watertown both participated and the wholesale system was finally formed a few years ago. The district joined. Watertown did not.

After the district switched to buying most of its water from the wholesale system, Watertown sued them for breach of contract. You?re probably thinking, ?The district broke the agreement. It deserved to be sued.? Maybe, but there is a twist.

The written agreement nowhere mentioned any commitment to buy. The agreement only covered how water was to be priced, if it was sold. But the judge ruled that the district must continue past practices, too. That included purchasing substantial volumes from Watertown – their historical practice. Then he sent everyone away with instructions to work it out.

This story has three main points. First, you can?t always predict outcomes, even if the ?rules of the game? are written out in plain English. Second, if you want to continue functioning after the ?bad? thing happens, you need to avoid the pity party, reassess and find a good way forward.? And third, your ratepayers judge everything by how it affects their service and rates. You should make decisions, even legal ones, on that same basis. ?

Back to the story – there was another twist. Before the lawsuit popped onto the district?s radar screen, it had committed, in writing, to purchase the majority of its water from the wholesale system. Some of the district?s water purchases were now double-committed.

Point number one is history; it?s time to move on to points two and three. With the encouragement of their attorneys, the district and Watertown entered into legal mediation to resolve the dispute and write a new supply agreement.

To weigh settlement options subjectively, each party needed to analyze the rate effects of each proposal. That was accomplished with analyses for both systems that projected their finances, rates, and more importantly, payments to be made by the district to Watertown. Another model linked these analyses together. Table 1, a depiction of the money part of the final settlement, includes elements of that model.

Watertown put together a proposal that would have had the district pay a total of $4.3 million through 2025 (For reference, the annual budgets of the district and the water system of Watertown were about $750,000 and $300,000, respectively). Annual settlement payments would be locked in whether the district purchased water or not. But if the district did purchase water, Watertown would credit those purchases against the settlement payments. After all, water sales were what Watertown wanted.

The district?s offer was, understandably, lower than Watertown?s offer. It also placed more dollars on water sales. While different attorneys represented each side, one rate analyst, selected by both parties, prepared the analyses and settlement proposals for both parties and interpreted the effects of each for everyone. Awkward? No.

One of the best ways to resolve a contentious dispute is for the parties to first, agree upon who will help them resolve it. That approach helps to break down the ?us versus them? divide. Using one analyst also produces ?apples to apples? comparisons immediately, saving money and time. When parties can agree upon who will help them and how to examine the issues, they are half way to resolution.

The alternative is for everyone to hire more of their own experts to help them fight the war more vigorously. That strategy can work fine if the demise of your adversary (bankruptcy for the drunk driver who sideswiped your car) will not degrade your own future. In this case, the success of Watertown and the district were linked; they were a team but just didn?t know it. Team mates must communicate and cooperate. The best time to start that is from the beginning. The next best time is from a new beginning.

What effect did the final settlement have? Two?point?five?million?dollars! Ratepayers hate such numbers. But, well over half this amount was going to be spent for water purchases anyway so the real payout will be closer to $1 million by 2025.

One?million?dollars! That is still scary to 900 ratepayers. The value of point number three, figuring the rate effects, is inescapable. Ratepayers needed to see the effects in terms that meant something to them ? their water bills.

The bills for 5,000 gallon/month users, for example, are shown in Table 1. In the district, this customer?s bill needed to rise by 24 percent initially (In fairness, the district?s then-current rates were too low by 10 percent before the settlement). In the city, the 5,000 gallon customer?s bill went up by seven percent. Viewed in the millions, settlement seemed like a no-go. Viewed on a rate basis, the outcome is not so scary. Still, this never should have happened.

By now you should have concluded at least three things. First, I must make sure that such a bad thing never happens to us. That means I need to maintain good communication and cooperation with our customers and partners. Second, if something bad does happen, I need to move to resolve it quickly and humanely, using negotiation or mediation if possible. I should sue only as a last resort because partners get hacked off when they get sued. Then they don?t play nice. Finally, I need to consider the rate effects of any solution we examine. I?m not paying the bills – the ratepayers are.

Being sued sucks! Wallow in it today if you must, then get over it. Your job as a decision-maker or manager of the system is not to cry over the awfulness of being sued. It is to find the best way through this new landscape for the benefit of your ratepayers.

You should be wondering:

  • Why did Watertown not insist on rewriting the agreement to include a required purchase volume once it was clear competition was coming in? Scratch that. Why wasn?t it in there in the first place?
  • Why did the district not have a discussion with Watertown about its intent to jump ship before doing it?
  • Most important, are there landmines in my system?s contracts and practices?

The analyst discovered that over the first 10 years of the water supply agreement Watertown lost $155,000 because it (unknowingly) charged the district less than the contract allowed. (The losses have since grown by another $320,000). The statute of limitations has run out on the first 10 years so Watertown cannot recover those losses. Had Watertown hired a rate setting specialist perhaps three times over those years for perhaps $5,000 each time, results would have been different, including:

  • Watertown would not have under charged the district.
  • It would have kept in-town user rates in shape.
  • It would have guarded against losing its major revenue source ? the district.

Through 2025, by not investing $15,000 over the years, Watertown will end up losing at least $1 million. As for the district, it will now have to pay for one-third of its water twice, spending $1 million or more extra for lack of a few timely analyses.

Has this story revealed that a big, black Lincoln Continental is bearing down on you right now? Then wake up and take evasive action!

Carl Brown is President of Carl Brown Consulting, LLC, specializing in water, sewer and other utility rate analysis; and GettingGreatRates.com, home of many rate setting tools. Mr. Brown serves as the rate analyst in such disputes. Contact: (573) 619-3411; carl@carlbrownconsulting.com.

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