And that, dear readers, was the other shoe to drop.
Last week, Housatonic Water Works (HWW) letter-bombed Great Barrington, earnestly pleading that we all work together “to address an issue of great importance to our community: the future of our water supply and delivery system.” Something more dear than clean water, HWW wrote, is on the line: Our “overall quality of life” is at stake. Fail to act at your peril, and so forth.
Gosh, an issue of such magnitude should have been addressed earlier perhaps. Not sure how we all overlooked the importance of delivering clean, carcinogenic-free water to Housatonic. Of course, Great Barrington will respond to HWW’s call to arms. All for one and one for all. Strength in unity. United we stand, divided we fall, and all that, right?
No, not right. There is a disconnect between HWW’s call to arms and the suggestion that we are one team with one dream.
In HWW management, we have true visionaries who chose an unconventional path to personal prosperity. HWW management said, when no one else would consider thinking it, “let’s run HWW into the ground for profit.” On its face, this strategery is more “The Producers” than B-school business plan, but if management is able to pull this off, generations to come will pore over how to achieve in business through active decay. More than that, basic business tenets are being rewritten before our eyes: Invest in your business; strive to deliver a quality product; maintain good customer relations; and, of course, carcinogens bad.
HWW management has been playing the long game. It took decades for HWW to become the water utility it is today. And then in June 2023, satisfied that HWW was in sufficient disrepair, HWW filed a rate-case application with the Department of Public Works (DPU) seeking to more than double its average customer’s water bill to $96 per month, nearly triple the state’s average monthly water bill.
After a prolonged fight, on July 31, the DPU approved HWW’s modified rate request, granting a robust 90 percent increase over the next five years. Not quite the 112.70 percent increase HWW initially sought, but that was just a (deteriorating) pipe dream. HWW management was no doubt pleased to nearly double its ratepayers’ costs.
Folks, the next step is where HWW management’s plan goes off the rails. With a near doubling of its revenue, HWW must have thought it could justify a high sale price based on an income-approach valuation. The income approach is both the most common and most objective method to value a business. It assesses how much one would pay for the stream of expected future cash flows. Relying on math and management projections, you need only determine the firm’s free future cash flow, calculate a discount rate, and apply an anticipated growth rate. The result is what a willing buyer would consider fair market value for the income stream. Easy peasy.
In January 2023, Great Barrington paid for a valuation of HWW. The appraiser opined at that time that HWW, based on the income approach, had a valuation of $2.22 million, and based on other valuation methods, HWW had a valuation of $2.3 million. HWW management, therefore, had reason to believe that, given the approved 90 percent rate increase, that HWW’s fair market valuation might exceed $4.2 million. It had labored (at doing nothing) for so long to achieve that result.
And this helps explain HWW’s October 1 letter, imploring all Great Barrington taxpayers to buy the firm for the good of the town. The price will presumably be at or about $4.2 million, as HWW will want the firm valued strictly on its expected future cash flows. But we know two things. First, that in 2021 AECOM recommended capital upgrades totaling approximately $31 million to take place over 20 years (which amount might exceed $40 million today due to construction cost inflation). Second, and this is what HWW management overlooked, all of its efforts to enhance its income stream were meaningless.
Occasionally, one opens a time capsule to find mostly muck (too soon, Rotary Club?). But occasionally, our ancestors leave us gifts that are extraordinarily valuable. And, occasionally, Stockbridge Select Board member Patrick White will call to let me know that both HWW management and I are improperly valuing HWW based on the income approach. Thanks go both to the Great Barrington Select Board, 1897 edition, and Patrick White for the following.
In 1897, Great Barrington approved “An Act to Incorporate the Housatonic Water Works Company.” No need to get up; you can find a copy of it here. The portion pertinent here is the purchase-price provision set forth in Section 6, which provides in sum and substance as follows:
- The town shall have the right at any time to take, by purchase or otherwise, HWW, on payment of the actual cost of the property, plus five per cent per annum.
- If the cost of operating HWW shall exceed the income derived from the corporation, then such excess shall be added to the total cost.
- If the income derived from HWW exceeds in any year the cost of maintaining and operating HWW for that year, then such excess shall be deducted from the total cost. (To which HWW management now says about nearly doubling its income, “oops.”)
- If HWW has incurred indebtedness, the amount of such indebtedness outstanding at the time of such taking shall be assumed by the town and shall be deducted from the amount required to be paid for HWW.
- The authority to purchase HWW shall be approved by a two-thirds vote of the voters.
So now you ask, reasonably, what should Great Barrington pay for HWW utilizing the 1897 purchase-price provision? This is where you would expect me to calculate the purchase price based on the 1897 formula, demonstrating it is a fraction of $4.2 million income-approach valuation. And the answer is… the inputs for the formula have been withheld from public disclosure.
While the intervenors in the DPU rate case—the towns of Great Barrington and West Stockbridge and Patrick White on behalf of Stockbridge—were provided access to the inputs subject to a confidentiality order, the information is unavailable to Great Barrington taxpayers. We would not expect the intervenors to release confidential information, but we do expect HWW to release this critical information prior to the October 16 meeting called for in its October 1 letter. If HWW wants Great Barrington taxpayers to approve its purchase, it certainly needs to provide potential purchasers with its detailed financial information. No one can reasonably expect taxpayers to make an uninformed purchase decision.
One additional matter should be addressed at the upcoming meeting: Whether HWW’s owners continue to claim, as an item of “incurred indebtedness,” their purported $2 million in “deferred compensation” claimed in a 2023 DPU filing. In its submission, HWW stated that in recent years “management commitment to provide safe, adequate, and quality service has received priority over the compensation” of officers of the company. Do you think one might quibble with that statement, as there have been hundreds of complaints lodged with the DPU contesting the suggestion that HWW provides safe water and quality service? Let us assume the town rejects as an input in the 1897 Act purchase-calculation consideration of the Mercers’ decision to bonus the Mercers in an amount set by the Mercers. HWW ratepayers have certainly fairly compensated the Mercers at approximately $120,000 per year not to maintain HWW. There are no doubt more than a few HWW ratepayers who would have done absolutely nothing for less.
Taking HWW management at its word, nothing could be more important than seeing HWW revitalized through the proposed sale to the town. Given the approximately $40 million it will take to repair the system over the next 20 years (a cost borne by ratepayers) and for the good of us all, maybe at the October 16 meeting HWW management announces that it will transfer HWW to the town without payment. While that is unlikely, prior to the meeting, HWW management must provide to the taxpayers it is asking to purchase HWW with audited financial information establishing the sale price pursuant to the formula set forth in the 1897 Act’s purchase provision.
Unquestionably, Great Barrington taxpayers should approve the purchase of HWW. Similarly, we should all agree that the Mercers, who have done so much to so many for so long, should not be paid anything more than is due under the 1897 Act. When taxpayers convene on October 16 with HWW management, let us consider the purchase based on the currently undisclosed financial information. While the fear tactics of the October 1 letter may drive us to the meeting, only an honest analysis of HWW’s cost based on currently unavailable information will sway taxpayers to want to close the deal.
Survey Monkey Questions
Here is a link to the following Survey Monkey poll:
Question 1: “Would you vote to approve the purchase of HWW for $1 million?”
Question 2: “Would you vote to approve the purchase of HWW for $2 million?”
Question 3: “Would you vote to approve the purchase of HWW for $3 million?”
Question 4: “Would you vote to approve the purchase of HWW for $4 million?”
Question 5: “Would you vote to approve the purchase of HWW for $5 million?”
Survey Monkey Results
A recent column asked the following survey question: “Should Great Barrington form an Infrastructure Committee and give it a prominent seat at the table?”
As of publication, 80.77 percent of respondents said “yes.”
Days Great Barrington has held Community Access Fees hostage: 215