Value of Providence Water pegged at $404M

PROVIDENCE, R.I. (WPRI) – The assets owned and operated by the Providence Water Supply Board are likely worth $404.2 million, according to a long-awaited consultant’s report released Tuesday by the Elorza administration.

The report, prepared by MR Valuation Consulting, also identifies the state of Rhode Island, the Narragansett Bay Commission, SUEZ Rhode Island (formerly United Water), and surrounding water supply boards and districts as entities that could potentially buy or lease Providence Water.

“Based on the characteristics of Providence Water Supply Board and the population of market participants who are likely to invest in a water utility system, the most likely pool of hypothetical willing buyers or lessors of the Providence Water Supply Board includes governmental or quasi-state agencies as well as investor-owned utilities within the state of Rhode Island,” the report states.

The city paid MR Valuation Consulting $200,000 to analyze all of the assets that comprise Providence Water, including the 37-billion gallon reservoir in Scituate, 27 square miles of watershed property, all the water mains and pipes in the distribution system, more than 6,000 fire hydrants and a water treatment facility. The report was originally due April 24, but wasn’t released until this week.

The $404.2-million figure is based on the firm’s analysis of what it would cost to develop a new water system or rebuild the existing one. Other methods considered by the firm turned up lower values, including $317.2 million if the value was based on the original acquisition costs of the assets and $327 million if the value was based on four comparable transactions over the last three years.

The purpose of entering into a lease agreement with another agency “would be to generate a significant up-front payment to provide a foundation and path for fiscal stability,” according to the report. The firm said any agreement would need to consider a rate-setting regime, operating standards, the city maintaining ownership of the assets, fair treatment of employees and required capital improvements.

“Proceeds from the lease agreement of water assets owned and operated by the Providence Water Supply Board may be used to reduce [the city’s] long-term legacy costs, particularly its unfunded pension liability and to offset current support of their general fund,” the report states.

Mayor Jorge Elorza has repeatedly said he has no interest in privatizing the water supply, but he does want to find a way to generate revenue from the system in order to stabilize the city’s severely underfunded pension system. Providence Water provides drinking water to approximately 60% of Rhode Island, but the city sees little financial benefit even though it controls operations over the entire system.

Elorza asked the General Assembly this year to approve legislation creating a regional water authority that would have the ability to buy or lease water systems, but lawmakers took no action on the proposal after House Speaker Nicholas Mattiello said he opposed the bill.

In the report, the firm stressed that its valuation is not a real estate appraisal and did not factor in “water quality standards, the state’s reliance on this resource, or the intangible value associated with the need to preserve and maintain this essential resource into the future.”

The firm analyzed the entire Scituate Reservoir Complex – the sole source of water supply for Providence Water – including the 37-billion gallon Scituate Reservoir as well as five smaller reservoirs. It also reviewed the water treatment facility, several storage facilities and pump stations and the transmission and distribution piping system as well as the service area and meters.

The report determined that the highest and best use of the system is for “continued use as a public water utility company.” It noted that because the water system is subject to rate suppression and a “pay as you go” infrastructure program, Providence Water is “not allowed to earn a rate of return on its rate base.”

“Any monies approved by the Public Utilities Commission must be paid back with principal and interest and zero profit is allowed,” the report states.

This isn’t the first time the city has sought to profit from its water system.

In 1994, then-Mayor Vincent A. “Buddy” Cianci Jr. attempted to sell the system to the Narragansett Bay Commission for $500 million, but the deal fell through. In 2008 the city again considered a sale, with City Council members telling The Providence Journal at the time they believed Providence could receive a one-time payment of between $400 million and $600 million to help the pension fund.

Earlier this year, former City Council President Michael Solomon told Eyewitness News one estimate of the value to replace the water system was $1 billion, but he said it wasn’t clear that the city has the legal ability to sell the asset. (Solomon has since taken a job with Elorza.) During a trial involving a lawsuit that challenged Providence’s pension changes in 2013, former Mayor Angel Taveras testified that he didn’t believe the city could benefit from the sale of the water system because the proceeds would need to be returned to ratepayers.

A 2016 consultant’s report outlining ways Providence could improve its finances suggested the city should consider a one-time asset transfer worth at least $372 million – the value of the water supply’s assets in 2015 – or smaller annualized payments over time that could come as a result of a sale or lease. The study recommended the proceeds be used to improve the funding of the city’s struggling pension system, which was just 25% funded and faced $985 million in liabilities as of June 30, 2016.

Providence Water sells water directly to approximately 75,000 retail customers throughout the state and provides water to eight other wholesale customers. The city owns the land in Scituate used for its water operations. The taxable value of the land itself was $260 million in 2016, according to the town’s annual audit.

The Providence Water Supply Board has more than 240 employees on the city payroll, most of whom are members of Local 1033 of the Laborers’ International Union.

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Dan McGowan ( dmcgowan@wpri.com ) covers politics, education and the city of Providence for WPRI.com. Follow him on Facebook and Twitter: @danmcgowan