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State report: Public takeover of NY American Water 'feasible,' and 'in the public interest'

New York American Water in Merrick, July 3,

New York American Water in Merrick, July 3, 2018. Credit: Danielle Silverman

A public takeover of the New York American Water district is "feasible" and "in the public interest," according to a state study due out this week, as Gov. Andrew M. Cuomo’s administration advances legislation to create a new Nassau County Water Authority to begin the process.

In the best-case scenario, a fully public water system could save customers an average $433 a year, with most of that figure — $246 — coming from a proposed tax-law change exempting the utility from certain property taxes. The study proposes quick action to eliminate the taxes, even before a decision on municipalization, to stave off the looming impact of a May 1 rate increase of 26%.

A copy of the highly anticipated study and proposed legislation to enact many of its findings, provided to Newsday, shows a municipal takeover of the 124,000-customer system is feasible, even considering an anticipated $800 million cost to buy the utility, pay for the transaction and fund near-term infrastructure improvements.

Under proposed legislation, the Nassau Water Authority would be granted the authority to issue bonds and take over all or part of the service area spanning from Lynbrook to Sea Cliff. It could work with local municipal water districts to operate parts of the system, or management duties contracted to an outside entity.

The Suffolk County Water Authority has already submitted a proposal to do just that, a fact noted in the report, along with a potential plan to fund it. The authority’s books would be subject to audit by the State Comptroller.

The study suggests separate legislation that would exempt the utility from the $30 million in special franchise taxes now paid by New York American Water through customer rates. It would instead spread out those costs among all utility customers in Nassau County, through an increase in the franchise tax other private utilities pay to cover county programs that depend on it. For average gas customers of National Grid, for instance, bills would go up around $25 a year to recoup that revenue, while other utilities could make up the difference.

For local governments impacted by the loss of revenue as a result of the tax exemption, the study proposes a temporary charge paid by New York American Water or its municipal successor, which would be phased out over three years.

A second phase of the tax plan would reduce the water utility's remaining annual tax liability of $43 million to just $13.5 million, with the $30 million difference borne by all four classes of Nassau taxpayers, whose property taxes would increase "modestly," the study says.

The proposed Nassau County Water Authority, created under separate legislation, would have a board of six paid directors, all of whom would live in Nassau. The chairperson and three board members would be appointed by the county executive; two others would be named by majority-party legislators and one by the minority.

The Public Service Commission would not have jurisdiction over the authority, the new law proposes.

The study says current New York American Water customers would see "a significant reduction in their combined water rates and property taxes, while others in affected property-tax classes would see a modest increase in their tax burden as it would be evenly distributed among a much wider tax base."

The new authority would start with initial operating funds from a public debt offering of some $800 million, the bulk of which would be used to buy the water company. Liberty Utilities has a standing $607 million offer to buy New York American Water, a transaction that has been delayed by the state’s public-takeover review, which is being led by Rory Lancman, special counsel for ratepayer protection.

While suggesting short-term fixes, the study predicts a complex and potentially long road to municipalizing the system, noting "complex legislative, legal and financing issues" that would be worked out through the legislature, Public Service Commission, local governments and "potentially the courts."

The study notes the "very large disparity" in rates among not only American Water customers in Nassau, but also those customers and their public-water neighbors. Only around 4% of water in the state is delivered through investor-owned companies like American Water — most have local water districts or private wells.

"Customers of New York American Water have been unduly burdened with exorbitant rates for the water they use on a daily basis, driven largely by costs having nothing to do with the provision of water," Cuomo, who is fielding separate state probes alleging sexual harassment and a nursing home data cover-up, said in a statement.

The bills, which have been negotiated with the state legislators as recently as the weekend, appear to have support. "I believe this is a big step in the right direction," said state Sen. John Brooks (D-Seaford), who added he’s "very pleased" with Cuomo’s proposals. "It’s along the lines of what we’ve been talking about for the past several years."

The study says the pending rate hike provides an opportunity to devise an immediate plan to cut property taxes and take all or part of the district public "to solve the problem of high water rates for NYAW customers once and for all."

Even as the new authority would begin quick moves toward a public takeover, the study recommends allowing two entities that have already conducted separate feasibility studies of a partial takeover of parts of the system to continue. Sea Cliff Village and the Massapequa Water District have both begun that process, which would entail taking on 4,500 and 5,800 customers respectively.

The study examines a series of measures to reduce costs tied to both the Liberty acquisition and the fully public model. The greatest savings, some $433 per customer annually, comes from the fully municipal model, compared with just $47 a year if Liberty acquires the system and the state allows for elimination of the state special franchise tax.

Liberty and New York American Water officials, in a filing earlier this month, largely panned the notion of a public takeover, calling it the "riskiest approach" that would take "many years." American Water has long lobbied for an end to the state franchise tax on investor-owned utilities.

The report says one of the biggest potential factors for cost savings from the transaction could be the consolidation of water districts beyond New York American Water. It notes there are more than 30 separate districts already operating in Nassau, with separate billing, design, construction, supervision and maintenance functions. It points to "synergy savings" achievable through "consolidation of water services in the county."

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