Saturday, December 11, 2010

Water Water Everywhere

Kind of a bad day for water in Pittsburgh yesterday.  Beyond the seemingly unexpected resignation of the boss, there was also the bad news of rate increases along with some big water breaks as well.  I've heard of a few other big new breaks out there beyond what made the news.  Probably goes with the time of the year and temperature. Water line breaks will most likely be worse next week. All that on top of ongoing investigations and litigation.  I feel bad for PWSA board chairman Dan Deasy since he is relatively new on the job and most of the things leading up to most of these things happened on the previous guy's watch. 

Lots of other strange things related to the water authority of late.  Before Kenney resigned, there was the odd episode last week where he said he couldn't answer whether Pittsburgh Brewing had paid its water bill.  This was a big story and was a big $$ amount owed to the PWSA.  You would think he would have some idea the status.  Curious at best.  It also relates to another story some may have caught that former Pittsburgh Brewing owner Michael Carlow, is getting back into business and this time it's in the slag business.  Yes, slag.  There just has to be a joke in that.  He ran up a big PWSA bill as well along the way I do believe.  Water... beer... slag... bankruptcy..  perfect together?

Last month there was the recurrent bruhaha over the legacy payments made by the PWSA to equalize billing to the parts of Pittsburgh.  Make note of the water breaks above.  I hate to say this, and am a PWSA rate payer myself, but there is a simple answer to the whole American Water payment debate that keeps recurring.  Raise PWSA rates to the private sector rates set for the southern and western neighborhoods benefiting from the subsidy.  There is more than enough justification to spend any excess revenue into capital investments.  Remember this is an agency that fully acknowledges it can't account for 40% of the water flowing through its system.   I suspect that if anyone could put numbers on it, the city of Pittsburgh has the oldest working water infrastructure in the nation.  I've heard of a few places in New England that still have working timber piping, but other than that we really must take the prize. For a place that claims water is a huge competitive advantage, there is this little problem of getting the water to where it is actually used and taking it away afterwards.

What I just noticed reading the rate increase story is that one of the reasons given by the PWSA is that it was necessitated by, among other things, increasing credit costs.  Thing about that is most interest rates are historically low these days.  Raises some interesting questions why their credit costs are up.  Are they referring to their costs in the past resulting from the nearly disasterous variable rate debt they had entered into.  Remember, that was the debt that became insanely expensive when our friend JP Morgan unilaterally walked away from the credit backing the variable rate debt required.  Some huge irony in that some think JP Morgan is the city's saviour with the parking bid while at the same time would have been responsible for the collapse of the water authority if they had not been able to find someone to take their place.  It was far from a sure thing.  It cost the PWSA dearly to get through. Why would they act so benevolently in one case, and the opposite in the other?  There will be many issues of contention over the course of a 50 year lease and you want to have some trust in your counterparty. 

Which leads us to more questions.  Since the PWSA claims to have stabilized the variable rate debt problem with a new letter of credit.... then again why the increasing cost of credit?  May not have anything to do with anything, but still worth noticing by someone is that the credit rating on that letter of credit was downgraded a couple months ago.  Not just put on credit watch negative, actually downgraded.  You just have to wonder what else is in play here.

and remember...  think these are all city problems, and only city problems.  PWSA problems are the region's problems.


Blogger Bram Reichbaum said...

An amazing post -- but one bit obviously baits me for a response:

Some huge irony in that some think JP Morgan is the city's saviour ... Why would they act so benevolently in one case, and the opposite in the other? ... you want to have some trust in your counterparty.

I don't know if maybe I'm being too naive or too cynical (or somehow both at the same time?) but I don't think anyone's regarding LAZ or JP as a "savior" or relying on their benevolence. I wouldn't trust JP as far as I could throw them, but the same would go for PNC Bank or Isaly's. Trust no one. You try to strike deals which provide sound fundamental advantages, and structure them in a way that you're protected.

In the case of the water authority, it was probably unwise from the beginning to opt for inherently risk-laden "swaptions", though in that economy I guess there was some peer pressure to get rich with financial wizardry. And apparently it was a mistake to enter into a contract in which JP could "unilaterally walk away", or to have let them do that w/o a fight anyway. But that's all our fault.

In the case of the parking proposal, JP is actually the party taking on all our risk (such that they might make higher long-term profit, which is what's really steaming some people). There's not much risk in accepting a huge briefcase full of cash. I suppose they could renege on the agreement to fix up garages w/in X years, or to render unto us the % in revenue sharing that's now part of the deal, but those seem like straightforward clauses and hard to weasel out of. If there are problems and loopholes in the contract we should address those, but all the push-back I've seen has been more grandiosely essentialist in nature.

I'm trying to keep this comment reasonable in length, and at the same time not provide seeming PR for P3 (fail), but I'd argue these are different things and that we're slighting ourselves if we're never going to do business with investment banks because sometimes fools use them.

Saturday, December 11, 2010 12:58:00 PM  
Blogger C. Briem said...

I truly was not baiting you Bram. Can't say the main point was to bait anyone, but it is your perogative to accept the role of baitee.

I will only briefly retort to say that the 'our fault' with regards t the PWSA variable rate debt is at the very least a debatable point. The PWSA, and by extension the royal we, should at least be grateful there are more responsible financial instutions willing to step in where they were more than willing to leave us hanging.

Sunday, December 12, 2010 9:06:00 PM  
Blogger C. Briem said...

and thanks for the first comment..

Sunday, December 12, 2010 9:19:00 PM  
Blogger Bram Reichbaum said...

Well, I shouldn't have implied (I should have phrased differently) that you set out to "bait" "me" ... maybe I meant something like, "calls out for a response".

Monday, December 13, 2010 9:13:00 AM  
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