Housatonic Water Works logo. Photo via the company’s website.

PETER MOST: Negotiation 101

The Mercers’ position is akin to the deep-sea fishing boat that brings its catch back to the lone fish dealer at the dock. Not selling a deteriorating asset is not an option for the fishing boat. The same goes for the Mercers’ deteriorating HWW.

It is with some measure of embarrassment that I acknowledge that the only class in graduate school in which I had the top score was negotiation. This is nothing to be proud of. Worse, it was a final year, second semester class, so the goal for the other students was simply not to fail a class taught by a professor that had never failed a student. I took the class because then, as now, I find the art/science of negotiation fascinating (and don’t get me started on game theory). In graduate school, this put me in a class by myself.

After I graduated, I took my A+ in negotiation to buy a car and got my clock cleaned. If you want an education in negotiation, learn from a car salesperson. I still ponder how I concluded that trading in a running, used car for $10 made sense. In my defense, that would be about $22 today and, this is key, in the early 1990s, the negotiating parties to a car purchase had unequal information. The internet has largely solved this problem.

The international rules of negotiation generally apply to buying a car or a house. Each side may not have perfect information, but each is largely able to evaluate the market. There is a knowable wholesale price, including the rebates paid to car dealers, and the buyer has to assess how badly the dealership wants to get the car off its lot by the end of the month. In a high interest rate environment, the dealer may agree to take a price hit to avoid ongoing carrying costs. Home sellers evaluate the bird-in-the-hand question; that is, whether the offer is good enough against the length of time they may need to continue to carry the house waiting for a better offer. These are run-of-the-mill negotiation considerations.

Consider then the negotiations between Great Barrington and the Mercer family, owners of Housatonic Water Works (HWW), for the potential purchase of HWW. This is far from a typical commodity transaction, although each side comes armed with nearly perfect information. Great Barrington has conducted extensive due diligence, appraised the entity’s market value, and is aware of HWW’s myriad failings. The Mercers understand the difficulties of selling to a budget-constrained public entity. Fair to say, unequal information will not affect the negotiation. The two main drivers of this negotiation are HWW’s lack of marketability and the Department of Public Utilities’ (DPU) February 29 settlement deadline. Of the two, marketability is key.

Unlike the car dealer or home seller, HWW has but one potential purchaser. It is unlikely any third entity is interested in purchasing an aging brown water/haloacetic acid (HAA5) distribution system in need of at least $35 million in repairs/upgrades over the next 20 years. No doubt to the Mercers’ dismay, the HWW sale is subject to the rules of monopsony, a market in which there is a single buyer. Generally, when there are multiple buyers and sellers and time is not of the essence (as it is here), supply and demand forces affect the negotiated price. But in a monopsonistic situation, the sole purchaser holds the cards. Here, think Royal Flush.

In a monopsonistic negotiation, the buyer greatly influences price and other terms, and the seller, with limited or no bargaining power, solely has the choice to sell or not sell. But the Mercers’ position here is even more impaired than a typical monopsonistic negotiation, as they lack the “not sell” option. The Mercers’ position is akin to the deep-sea fishing boat that brings its catch back to the lone fish dealer at the dock. Not selling a deteriorating asset is not an option for the fishing boat. The same goes for the Mercers’ deteriorating HWW.

Both the town and Mercers know that if the town does not proceed with the purchase, the DPU is unlikely to approve HWW’s proposed 120 percent rate case application and will assuredly deny the Mercers’ $2 million deferred compensation request. The reason the DPU will treat HWW’s rate application unkindly is that HWW has already exceeded reasonable rates. HWW currently bills its users $11 per month more for its “mineral-enriched water” than the state average for the delivery of non-HAA5-infused turbid water. Let’s agree that the DPU will not approve an application seeking to force HWW ratepayers to pay nearly $25 per month more than the state’s median water cost of $35 per month, particularly where the median income in HWW’s service area is about half of the state’s median income. The DPU permitted HWW to charge an exceedingly high rate in the past, but that well has run dry.

Just when you thought it couldn’t be any worse for the Mercers, there is yet another price-depressing factor: Town Meeting. In graduate school, this would have been defined as an “asymmetrical negotiation” due to the extreme power imbalance and market conditions. In the monopsonistic fishing boat/fish dealer situation, if the fish dealer abused its pricing power, the fishing boat would have the option to combine with other fishing boats to wholesale their catch or potentially move to a new dock. The fact that those options exist should force the fish dealer to act reasonably with its suppliers, which is certainly the case if the dealer wants to conduct business long term.

Here, the Mercers face a one-off sale requiring the approval of two-thirds of Town Meeting voters. Although the town is unanimous in the belief that we must resolve the Housatonic water crisis for the 850 households that have been suffering for quite some time with horrid water, no doubt there will be some sizable portion of Town Meeting voters not interested in rewarding the Mercers for failing to properly maintain HWW. Moreover, concerned about bearing future costs of repair, some voters will not want to pay much for the razor (HWW) when they know the actual cost is the blades down the road (system repair). Given this, even a rational negotiation between the town and the Mercers can go off the rails in the Town Meeting approval process. Call this a monopsonistic-plus situation—sole purchaser with overwhelming market power governed by a daunting authorization process. That is a formula for price depression to the nth degree. Much like timeshares, let’s just say the Mercers are going to have a tough time getting rid of HWW at any price.

As I have followed HWW’s demise over the last couple of years, I have noticed an incongruity. The very people who discuss HWW with increasing levels of disgust often express very warm feelings for Jim Mercer. Mr. Mercer is and has been a member of various town boards and, through words and deeds, has shown great interest in bettering Great Barrington. Given Mr. Mercer’s reputation as a very decent individual with deep concern for the town, it is fair to wonder—particularly in light of the negotiation hurdles described above—if he will simply agree to turn over HWW’s keys to the town. To be sure, we would all raise a glass to that kind gesture.