Pete Perry, yes that Pete Perry dissected and analyzed the review of the Siemens' contract and the Jackson water/sewer system that was recently provided to the Jackson city council. He is a civil engineer by training and sits on the Sales Tax Commission as Governor Bryant's appointee. The review was one of the main factors in the city council's decision to investigate the contract. Mr. Perry reviewed the report and attempted to make it easier to understand in his column posted below for JJ. The actual report is posted at the end of the column.
Raftelis Financial Consultants, Inc. (RFC) recently submitted its report of the first phase of their engagement by the City of Jackson to review several issues related to the City’s water/sewer system. The review included the Siemens contract. RFC is a respected consulting group from North Carolina that specializes in utility, financial, and rate analysis. A short, simple summary of the report is that current and future revenue created by the water/sewer operation is not adequate to cover the current costs, ongoing maintenance and bond debt retirement, even with the rate increases enacted by the city in late 2013. RFC makes many recommendations addressing this problem along with other recommendations that should be implemented
The majority of the fifty-eight page report discusses the current billing system and related issues. While the Siemens work includes the creation of a new Oracle-based billing system to work in concert with the automated water meters, many of the issues outlined by RFC will not be corrected by the implementation of the new Siemens system. Most of these issues have existed for years, if not decades, and have continued through multiple administrations.
The Intel technical attachment mentions another possible issue – the fact that in conducting Intel’s analysis the city was often only able to provide most but not all of the specific individual accounts, work orders, or other items requested as they tested sample accounts for review (i.e. requested 40 sample accounts labeled as ‘no present occupant’ and were provided information on 38; requested 37 sample accounts that were “exempted” from being cut-off and received the additional information on 33 of them.) While there might be a good explanation of why additional information could not be provided on all of the account samples, there was no further discussion in the report. To an outside reader this leaves the impression that the city either didn’t have any information on these accounts or for some reason chose not to provide it to the consultants.
Strategic Planning: This is probably the least interesting aspect of the report to a reader outside of the Public Works Department and City leadership. The principal result of this effort was to develop a matrix of issues that need addressing within the department, prioritizing them and identifying steps to be taken over time to improve their operation.
Revenue Sufficiency: This appears to be one of the main reasons for enlisting the aid of a consulting group such as RFC that specializes in utility rate structures. The City did not meet its FY2013 rate covenant obligations associated with the $91 million Siemens revenue bonds and also to address the deficiencies noted by Moody’s in its November 2014 downgrade of the City’s bond rating.
The 2013 revenue bond issue was issued to pay the costs associated with
(1) the implementation of advanced metering infrastructure ($51.2 million) including not just the installation of new remote read meters but also the needed equipment to collect the data and develop a new customer billing system;
(2) improvements to the City’s two water treatment plants ($11 million); and
(3) replacement of several major sewer collection lines and other sewer infrastructure($15.8 million) - all of which are included as part of the Siemens contract. (The remaining $13 million of the contract is for costs related to these three components.)
When the City entertained the proposal from Siemens, they were “assured” that the debt service would be covered through operational savings and additional revenue stipulated in the contract – approximately $7.8 million per year once the projects were finished – combined with a moderate rate increase. Despite this “performance guarantee”, the City was unable to meet the bond obligation in 2013.
RFC made several assumptions – many different from the assumptions used by Siemens in their project proposal – to determine the system’s annual cash needs for the next five years, including debt service, O&M expenses, and cash funded capital projects. These include a 10% escalation of wage costs for 2016 due to the minimum wage increases recently enacted by the City; 3% of most budget line items for anticipated cost increases; and other additional O&M costs needed to eliminate water loss, reduce the number and volume of leaks and breaks, and to address reliability issues. For reasons outlined in the report, they did not assume any operational savings from the Siemens performance contract.
In projecting the revenues from the water/sewer customers, RFC found a large discrepancy between the amounts billed and the amounts received – approximately 12% uncollected revenue resulting from account adjustments and delinquent accounts. RFC assumed that the total amount of uncollected revenue should decrease in future years resulting from the new meters and from the implementation of the new billing system along with the recommendations made to internal billing office procedures. RFC’s projection is that the uncollected amount will be 5% by 2020 – but notes that the industry average is 1%.
Unlike Siemens, RFC did not include any increase in billable flow resulting from the new Siemens meter accuracy nor did they assume an increase in the number of customers or in the per capita usage. They noted that the industry trend is a declining per capita consumption which RFC’s analysis assumed would offset any increase from better meter accuracy.
In reviewing the debt service coverage RFC used a two prong test that included 100% all debt (all bond service including reserve and other debts payable out of general revenue) rather than the assumption used by Siemens which was 120% of the Siemens bonds
The system will be in a detrimental financial position if current water/sewer rates remain unchanged. ‘Under these rates and the current costs, the system is barely able to meet the debt service requirements in 2015 and future coverage is compromised.” RFC suggests that the city needs to implement additional rate adjustments (note: this same observation was made by DPW director Powell early in her tenure, prior to the employment of RFC) and that the level of the adjustments will depend on whether the City implements the recommendations resulting from the findings of the RFC project team including improving collection efforts, addressing the number of adjustments given to customers, enforcing the cut-off policy among other recommendations.
RFC compares the results of its review to the consulting engineer report that was a part of the official statement for the Siemens bonds. The engineer’s report indicated that once the projects were complete and operational the City would achieve operational savings and revenue enhancements of $7.8 million per year which would cover the new bond debt service. The engineer’s report demonstrated the City’s ability to meet the 2013 bonds; however due to several poor assumptions included in the report (Siemens only installing 30% of new meters by October 2014 where report assumed 100% by end of 2014; debt coverage calculation projection not adequate; estimated operational cost escalation too small; and the increased rates not resulting in increased revenue) not being accomplished, the City did not meet its 2013 debt service coverage.
Siemens Performance Guarantee and Contract: The stated purpose of the RFC review of the Siemens contract was to develop recommendations of actions the City could take to maximize the value of the contract. According to the contract, the anticipated benefit of the automatic metering upgrade would include improved revenue resulting from more accurate water meter data, along with savings resulting from deferred maintenance and reduced staff requirements.
Siemens “guaranteed” that the City will receive savings in four areas: additional revenue from greater accuracy of the small meters installed and additional revenue from the accuracy of the large meters (see later discussion as to why small and large meters are differentiated); operational savings from meter reading and billing; and the ability to defer maintenance at the water treatment plant and the sewer collection system. According to the contract, Siemens guaranteed a total savings of $123 million over the life of the bonds.
Siemens is required to file an annual report that itemizes the savings realized during each prior year and compare those savings to the guaranteed savings. BUT – only one category of savings is subject to annual verification in that the savings. Any savings from the large meter installations, the operational benefits and the deferred maintenance are stipulated to have occurred REGARDLESS of whether any actual savings can be demonstrated to have occurred.
Only the savings relative to the small meters is actually guaranteed – which over the term of the contract is approximately $43 million. The other $80 million guaranteed savings are - for contract purposes - assumed to occur and therefore are not subject to the performance guarantee from Siemens. The savings attributable to the one component that is to be measured – the small meter consumption – is determined by comparing the predicted usage from continued use of the existing meters and the usage by using the new meters – a function that is based on the measured accuracy of the new meters.
While the City will realize savings from all areas, it is important that it takes action to maximize said savings. The new meters should be installed as quickly as possible – all of the anticipated savings are contingent upon the entire system being equipped with remote read meters and until they are all installed the City will need to maintain staff necessary to manually read and locate meters and to discontinue and restore service. The City must also make the staff reductions that are anticipated by the Siemens contract.
Siemens is replacing a number of large meters with the new remote read meters and the anticipated savings attributed to these meters is to come from additional revenue that will result from greater meter accuracy just as with the small meters. But, unlike the small meters this component is not based on testing the actual accuracy of the new meters – instead it is assumed to occur regardless of whether or not more revenue is generated. It is not clear why the contract does not treat large meters in a similar manner as the small meters and provide a guarantee of additional revenue based on the large meter accuracy.
As of October 2014 Siemens had invoiced the City a total of $74 million – approximately 82% of the contract value and included charges for approximately 89% of the new meters. As of that date:
• the water treatment plant projects were 76% complete
• the sewer collection projects were 89% complete
• approximately 40% of the new small meters had been installed
Billing System Data Review: This facet of RFC’s task exposed interesting - and disturbing - concerns about the current processes and the billing system itself. It details multiple problems found within the utility’s accounting, billing and collection offices and lack of controls therein - procedures that have evidently been carried forth for decades or have developed within the legacy accounting systems.
Collection rates fell significantly over the past two years and current revenues are significantly below what was projected. The RFC team attempted to identify possible reasons for this drop, particularly in light of the 2013 rate increases. Acknowledging that the Siemens performance contract included the development and implementation of a new billing system, RFC attempted to identify changes that need to be made so that problems in the current system will not be transferred into the new programs.
Some of the problems identified in the report as related to customer accounts, billing, collection, data collection and entry, and accountability include:
• Payment increases have not been tracking with expectations, evident especially with cashier payments. As a result outstanding balances are on the rise and collection rate is decreasing
• Increased adjustment activity and decreased collections have resulted in reduced revenue stream
• Approximately 3% of water charges to accounts were not receiving bills
• Many instances of invalid entries in data fields, including whether inside or outside the city, conflicting information on an account, multiple units noted as single family or with incorrect number of units denoted (and vice versa), values assigned that are not associated with the data field, and other invalid combinations – all that cause concern about data maintenance and data quality
• Lack of adequate supervisory review for account adjustments and need for adjustments to be made with more care in calculation
• New meters not properly recording usage – some that were causing no consumption to be billed; others that were causing dramatic increases from historical usage
• New meters that are ‘stuck’ and not reporting any consumption, despite this problem supposedly having been addressed by better quality control of the installation
• Lack of quality assurance standards deployed during meter reading process even though the hand held equipment has some built-in ability to assist if it were used
• Accounts can be set to a non-bill status even though service is available and water is still being used resulting in there being no charge for water or sewer
• Incomplete or inaccurate customer information, which could lead to unenforceable collection actions
• Accounts where customer is noted as “No Present Occupant” and no bill being sent but with consumption registering regularly; recognized that this could in some instances reflect issues related to a change in customer status but resulting in accounts where the vacating customer didn’t settle their final bill
• Accounts where no bill should be generated because no consumption is allowed but where there actually was consumption occurring; lack of appropriate follow-up and action on these accounts
• Inadequate service order and work order process; lack of timely action on work orders including those to pull a meter or tie-in; lack of monitoring of work order actions, completions and recording
• Multiple examples of how the system allows for opportunities for service usage without a bill
• Inadequate control or process over accounts designated as being “exempt”; data field being improperly used in legacy system and lack of control over who or when such designation is made on an account
• Potential fraudulent activity possibilities, including improper adjustments, intentional service orders to stop billing when not required, accounts being placed on non-bill status, falsified meter reads, field tampering / meter bypassing, and disconnect bribes.
• Lack of adequate accounting oversight – data only indicates what payments were made and registered, but no correlation with how much money was deposited to the bank. This could allow for accounts to be denoted as having been paid when in fact they had not, or for payments to be made and credited to the account but not deposited. Current operations do not provide for an auditing process over payments.
RFC’s data study found that while the rates for customers outside the City (which are customers who only receive sewer services and whose rates must be approved by the Mississippi Public Service Commission unlike those of customers within the City) were being charged the increased rates resulting from the 2011 and the 2013 rate increases. It appears that the City may not have gotten approval from the PSC for one or both of those rate increases. These customers may have been overcharged by the City for one to possibly three years and the City will probably have to be refunding these increased charges to these customers.
RFC also identified a significant misapplication of current billing “policy” and identified it as being one of the most critical finding in this part of the project. Customers are billed bimonthly for water, sewer and garbage collection. The sewer charges are established by City ordinance with minimum monthly fees (based on meter size and water usage) – but the city is charging the monthly rate in the bimonthly bill. This means that all users below the minimum threshold are charged only half the proper charge.
Recommendations of RFC team: The report makes recommendations as to each of the sections, many of which obviously would apply to the problems found in the billing operation. These include implementing some standard operating procedures and oversight procedures before going online with the new billing system. Without the implementation of these procedures the new system will inherit many of these problems existing in the legacy system. The recommendations include the establishment of common control procedures and oversight to be used in:
• Calculating and applying adjustments - in addition to a thorough edit review and approval process, it should include the establishment of a threshold for adjustments above which additional approval is necessary
• Logging and verifying work orders, including detail on their issuance and completion, and insure that all recording of work orders is done timely
• Appropriate use of User ID’s for computer data entries and security controls on all ID’s
• Collection procedures for aged account receivables
The City should insure that the new billing system is established and tested so that failures in the current system (miscoding of accounts, lack of controls of data entry fields, etc.) will not be carried into the new system and that proper controls are within the new system so that they cannot be included within it.