City of Cleveland Frank G. Jackson, Mayor Office of the Mayor Cleveland City Hall 601 Lakeside Avenue, Room 227 Cleveland, Ohio 441 14 2l6/664-222O Fax 2l6/420-8758 June 26, 2018 The Honorable Ryan Smith The Honorable Larry Obhof Speaker of the Ohio House Senate President 77 s. High Street, 13th Floor 1 Capitol Square, 2nd Floor Columbus, Ohio 43215 Columbus, Ohio 43215 Dear Speaker Smith and President Obhof, I am writing to express the City of Cleveland?s opposition to HB 602. As the owner of the largest drinking water utility in the state of Ohio, and one that would likely be classi?ed as a ?Noncompliant Municipal Corporation? under HB 602, we are opposed on the grounds that this designation, required rate changes, and associated penalties for failure to comply, would: i Marginalize, and potentially undo the cooperative effort that exists with the communities we serve by risking progress towards economic development and badly needed infrastructure investment; 0 Incentivize sprawl and outward migration from urban areas while increasing costs to some of our region?s lowest income residents; and Undermine the ?nancial position and home rule authority of municipalities that assume the financial and operational risk associated with owning and operating a utility system. At the Cleveland Division of Water (CWD), we are responsible for providing a reliable supply of safe drinking water to 1.4 million people across 80 communities in Northeast Ohio. The City of Cleveland has worked to build out the CWD system over the past 160 years of operation. Over the past 30 years alone, we have invested more than $1.6 billion to ensure safe drinking water is there when all of our customers regardless of municipality need it. As the owner of the CWD system, the City of Cleveland has ?nancial and operational liability that our member communities do not share. If there were a catastrophic event that negatively impacted our ability to deliver a reliable supply of safe drinking water, the ?nancial burden to remedy would immediately be carried by the City and its residents. An Equal Opportunity Employer Due to the size, and more importantly, elevation change in the CWD service area, CWD owns and operates an extensive network of infrastructure to deliver a reliable supply of drinking water that meets and exceeds all state and federal standards for safety and quality. This includes: 0 Four interconnected water treatment plants; 0 A complex series of pumps, tanks and towers in our distribution system to ensure adequate pressure to protect water quality, public health, and ensure adequate fire ?ows are available to protect public safety; and 0 5,300 miles of water mains. As a result, CWD works to recover costs from customers based, as closely as possible, on the actual cost to deliver water to their home or business. Because of the historical investments necessary to operate and maintain the system, the risks associated with system ownership, and the extensive delivery infrastructure in the CWD system and more importantly, the electricity to operate it we have a rate structure that recovers costs through four different levels. These rate differentials CWD implements for our four rate districts are calculated in line with industry de?ned best practices for rate setting. CWD follows the American Water Works Association?s (AWWA) utility basis approach to ensure all costs are recovered appropriately. This approach, outlined in Manual M1 Principles of Water Rates, Fees and Charges, is recommended because it allows for appropriate operating and maintenance cost recovery, provides a stable method to recognize the use of the utility?s invested capital in providing the service, and the risks to the owners of the system in providing the service outside of its corporate boundaries. As drafted, HB 602 is contrary to these sound and accepted rate-making principles. The existing method of calculating rates for our communities has been well established with our suburban partners. 68 of the suburbs we serve have a direct service relationship with CWD. These direct service relationships are governed by a standardized Water Service Agreement (WSA). These agreements provide a transparent and predictable rate-making process. They were signed by each party willingly and contain detailed language regarding how costs will be recovered and how rates will be calculated. The size of the rate differential between what is charged to customers in the City of Cleveland and the other three suburban rate districts is governed explicitly by the WSA. Under the WSA 4.01 in water rates charged by the City of Cleveland to any Direct Service Customer shall not exceed the dollar amount of the increase for any direct service customer within the City of Cleveland by more than 75% in the Low or First High Service District outside the City of Cleveland; by more than 100% in the Second High Service District outside the City of Cleveland; or by more than 130% in the Third High Service District outside the City of Cleveland.? In our 2010 rate study, we began voluntarily equalizing rates between the City of Cleveland and our suburban service areas due to changes in cost of service. Currently, the rate differential is 30%, 60%, and 75% for Low/First High, Second High, and Third High respectively well below the differentials permitted under our WSA. Additionally, we are in the midst of another cost of service and rate study, and it is less than clear whether these rate differentials would be permissible under HB 602. Without the ability to recover costs as outlined in the negotiated WSA, other collaborative efforts between the City of Cleveland and the suburban communities we Serve could be in jeopardy. Over the past ten years, 39 of our direct service communities have voluntarily signed the Restated WSA. The Restated WSA includes multiple agreements regarding capital replacement, asset ownership and economic development cooperation that may be negatively impacted by this proposed bill. These collaborative efforts have resulted in tax sharing agreements when businesses relocate from one municipality to another, as well as spurring over $120 million in direct infrastructure spending in the suburban communities served by CWD. Additionally, proponents of HB 602 are arguing that differing rates between municipalities that own water systems and those that do not are hindering development and harming economically vulnerable populations. This is not consistent with our experience. In the CWD system, we are unaware of any instances where our cost of service based rates have negatively impacted any local communities? economic development efforts. In fact, HB 602, with its requirements and penalties, would further incentivize sprawl by, forcing communities that own water systems to subsidize service outside of the municipal boundaries and, potentially, by reducing the ability to recover all costs under the industry- standard rate making practices we follow. Similarly, the requirement to equalize rates would result in increased water rates for a signi?cant number of customers in the CWD system. We have seen proponents of HB 602 assert that rate differentials are negatively impacting economically vulnerable residents. This, again, is not consistent with our experience in the CWD system. The increases that would result from the passage of HB 602 would disproportionately impact many of our most economically vulnerable residents many of whom are concentrated within the municipal boundaries of the City of Cleveland and many of our inner ring suburbs. For example, the 2016 median household income in the City of Cleveland is, according to US. Census Bureau, $26,583 compared to the statewide median of $52,334. Under HB 602, despite having a median income approximately 50% of the state average, individual customers in the City of Cleveland would see their rates increase. HB 602?s proposed penalties are also potentially damaging to municipalities that own and operate a water and/or sewer service utility. Under HB 602, municipalities would see substantial reductions in local government fund (LGF) payments if they fail to come into compliance. These penalties would further erode State support of many municipalities by 20% for ?Noncompliant Municipal Corporations? and 100% for ?Predatory Municipal Corporations.? The City of Cleveland has already experienced a precipitous drop in LGF funding from the State since 2009, and any further cuts will impact our ability to deliver essential services to residents. Finally, HB 602 further diminishes our Home Rule authority. Municipal governments are best positioned to address issues of local concern, and this bill represents another State-level intrusion into the operation of municipally owned assets. If you have any questions regarding my position on HB 602 and its impact on the Cleveland Division of Water, please contact Valarie McCall, Chief of Government and International Affairs and Acting Chief of Communications via email at, Thank you for your consideration. Sincerely, cc: The Honorable John Eklund, Ohio Senate District 18 The Honorable Sandra Williams, Ohio Senate District 21 The Honorable Michael Skindell, Ohio Senate District 23 The Honorable Matt Dolan, Ohio Senate District 24 The Honorable Kenny Yuko, Ohio Senate District 25 The Honorable Frank LaRose, Ohio Senate District 27 The Honorable Marlene Anielski, Ohio House District 6 The Honorable Thomas Patton, Ohio House District 7 The Honorable Kent Smith, .Ohio House District 8 The Honorable Janine Boyd, Ohio House District 9 The Honorable Bill Patmon, Ohio House District 10 The Honorable Stephanie Howse, Ohio House District 11 The Honorable John Barnes, Jr., Ohio House District 12 The Honorable Nickie Antonio, Ohio House District 13 The Honorable Martin Sweeney, Ohio House District 14 The Honorable Nicholas Celebrezze, Ohio House District 15 The Honorable Dave Greenspan, Ohio House District 16 The Honorable Kristina Roegner, Ohio House District 37 The Honorable Marilyn Slaby, Ohio House District 38 The Honorable Stephen Hambley, Ohio House District 69 The Honorable Sarah LaTourette, Ohio House District 76 Sharon Dumas, Chief of Staff and Director of Finance, City of Cleveland Darnell Brown, Chief Operating Of?cer, City of Cleveland Valarie J. McCall, Chief of Government International Affairs, City of Cleveland Jason Wood, Chief of Public Affairs, City of Cleveland Department of Public Utilities Alex Margevicius, Commissioner, Cleveland Water