This section of the voter guide is Erika Malinoski and Ben Vitale’s best attempt to figure out what’s going on based on reading all the reports, attending the town halls, having additional meetings, and extensive correspondence with the Village, NJAW, and Food and Water Watch. However, neither of us are water professionals. Although we have done our best and asked parties on both sides to review the content for accuracy, this is a complex issue and we could be wrong. (Update 10/13: Please note that a TapINTO article erroneously reported that Erika previously worked with Food and Water Watch to lobby against the ballot measure. This is not true. Erika does not represent the anti-privatization side, and any conclusions or quotes from her should not be taken as representative of their views.)

Cost

South Orange Village needs to spend a substantial amount of money to make infrastructure repairs, replace lead service lines, and sustainably staff the water department. The Village can get this work done if it retains the water system. In fact, it has already done some of it. South Orange water rates have already risen over the past several years to pay for about $16.6 million in needed repairs (p. 7). However, the Village estimates that another $50 million in infrastructure investment will be needed by 2035 (p. 38). The Village estimates that getting the rest of it done, plus getting to sustainable staffing levels will necessitate rate increases on the order of 30% in the first year, and that rates will be 65% higher than current levels by 2029 and 125% higher than current levels by 2039 (estimated from slide 22). In addition, the approximately 250 residents who still have customer-side lead service lines would need to pay an additional $8,000-$10,000 each to replace their portion of the line. The Village recommends selling the system to NJAW on the assumption that greater economies of scale (including NJAW’s ability to use its size to negotiate better deals for supplies, etc.) and spreading costs out over a large rate base would keep costs lower and more consistent. Based on the contract negotiated with NJAW, the Village estimates that selling would mean that rates would rise only 9% in the first five years (17% including NJAW’s Lead Service Line Replacement Charge) and be 50% higher by 2039 (slide 22).

We (Erika and Ben) think that the actual costs of selling will be much higher, but sorting out what those costs are was so complicated as to necessitate building an interactive calculator to try to figure them out.  “Consideration #2: Costs” below walks the user through the assumptions, an analysis of the Village’s numbers, and how to use the calculator. Based on our extensive correspondence with people on both sides of this issue – and with the caveat that neither of us are water or finance experts – we believe that the most plausible set of assumptions would mean that selling the system would result in the average South Orange user’s water bill being 140% to 178% higher than it is now by 2039 while keeping the system would result in the average user’s water bill being 149% to 162% higher. Please be aware, however, that any predictions fifteen years out are extremely imprecise and vary wildly with small changes in assumptions.

Because NJAW’s rate structure differs from South Orange’s, selling the water system does mean that any percentage increases would be higher for low water users than for high water users (this may or may not be correlated to income). Assistance programs are available to low-income NJAW customers and may be available to municipal customers as well.

What voters might consider

• How impactful would the rate increases the summary table be for your household?

• Are there ways you can reduce your water bill by reducing your water consumption?

• Which estimates and assumptions make the most sense to you regarding rates?

• How much do you value retaining local control over rates?

• How will each option impact low or fixed income residents?

Quality

If we sell, concerns about NJAW cutting corners and providing bad service are probably unfounded. Because private regulated water utilities make their profit by buying municipal systems and investing in infrastructure, they have an incentive to overinvest in repairs, if anything, and to maintain a sterling reputation in order to persuade more municipalities to sell. Reports from neighboring towns about NJAW service quality are positive, and informal inquiries made to Maplewood residents are largely consistent with this. Furthermore, the NJ Department of Environmental Protection monitors and regulates all private utilities. However, were problems to occur after selling the system, South Orange would no longer be able to switch providers. On the other hand, problems with NJAW would affect many municipalities who could collectively lobby regulators.

If South Orange keeps the water system, most work would likely be contracted out to private companies – similar to our situation in 2024, where we contract NJAW to provide Operations and Maintenance (“O&M”). However, South Orange would retain oversight, as well as the ability to potentially switch companies (depending on the provisions of the contracts) and conduct competitive bidding. Quality would depend on the Village’s capacity to do this oversight well. It would also depend on residents’ willingness to raise their own water bills to fund needed repairs. There is the risk that if residents are too focused on keeping rates low (and on penalizing elected officials who vote to raise rates), that quality would deteriorate as needed repairs and replacements are not done.

Under either scenario, South Orange expects to continue to exercise its contract to buy water from NJAW’s Canoe Brook Reservoir in Millburn until at least 2076. NJAW sells water to many towns whose systems it does not own, and has expressed that it would continue to make this option available to South Orange even if we decline to sell.

What voters might consider

• How good a job do you think NJAW would do?

• How good a job do you think the Village would do in terms of oversight and planning?

• How willing are South Orange residents to permit rates to rise when needed?

• How much do you value retaining the ability to (potentially) switch providers?

• How much do you value retaining local oversight?

Information from the village (including reports, presentations, and town hall recordings) is available here. The Water Utility Task Force report is here. Food and Water Watch’s town hall is here. NJAW’s website lobbying in favor of the ballot measure is here. 

Much of South Orange’s current water system was built in the early 1900’s and is still in use today. South Orange maintained it, and sourced its own water, until the 1970’s/80’s when contamination prompted the Village to instead buy water from the East Orange Water Commission. After a 2013 scandal involving falsification of water quality results to conceal elevated levels of an industrial solvent, South Orange switched to contracting with New Jersey American Water (NJAW) to provide both water, as well as operations and maintenance (O&M). South Orange’s water is currently sourced from NJAW’s Canoe Brook Reservoir in Millburn. South Orange employs one part time Water Utility Administrator. All other operations are outsourced. 

The Village’s current contract with NJAW to provide operations and maintenance expires July 2026. NJAW claims it will not bid to provide O&M services after the contract expires because it has shifted its business model to focus on purchasing water systems. There is no way to verify this claim, but it is the case that NJAW has sold or ended most of its current O&M contracts. (South Orange has been one of the last remaining ones due to its proximity to NJAW owned systems in surrounding towns.) South Orange will still source its water from NJAW, but it will need to find another option for O&M. 

At the same time, the water distribution system also needs significant upgrades to replace aging infrastructure, key components of which are over 100 years old (see slides 24-26), and to replace lead/galvanized steel lines as required by state law. The Village has released the topline numbers for a Capital Improvement Plan (p.38) recommending approximately $50 million of investment between 2023 and 2034 in addition to the approximately $16.6 million repairs that have already been done and are being paid for via current water bills (p. 7).

As laid out in the South Orange Water Utility Task Force report, there are a few different options available:

1. South Orange could retain ownership of the water system and either

   1. Hire another company to provide O&M or

   2. Hire approximately 12+ staff members for the Village to provide O&M.

2. South Orange could sell the water system to New Jersey American Water as West Orange, Maplewood, Millburn, and Irvington have done. (A second bid was received from Veolia, but it was much lower).

In July, the South Orange Village Council voted 4-2 to put a measure on the ballot requesting authorization from voters on the November ballot for the second option, to sell South Orange’s water distribution and transmission system to NJAW for $19.7 million.* If the measure passes, the Village can sell the utility, but is not required to do so. If it fails, the Village’s options are to contract with another company to maintain it, to hire enough staff for the village to operate and maintain the water system, or to do some combination of those two options.

*By law, this money must first be used to pay off $18.3 million in water utility debt followed by applying the remainder to paying off $1.4 million of general municipal debt. The sale price will not be going into the general budget.

Water Quality

South Orange will continue to buy its water from NJAW’s Canoe Brook reservoir in Millburn until at least 2076 regardless of whether the Village sells the water system or not. Quality will remain regulated by the Department of Environmental Protection.

Operations and Management

In some cases where NJAW has stopped providing O&M services, other water utility companies (such as Veolia, which also bid to purchase the South Orange Water system) have taken over those contracts instead. The Village has not yet solicited bids for this option, but expects to be able to find another O&M contractor if needed. The Village would continue its current separate contract to buy its water from NJAW. The Village Council would continue to vote on water rate increases and capital investments, as recommended to them by the Water Utility Administrator.

The Village hired Remington and Vernick Engineers to estimate what costs residents could expect if the Village retained ownership. The report has not been released to the public, but some details are available on page 43 of the Task Force’s report. The first scenario would be for the Village to continue more or less as is by finding another contractor for O&M. The report assumes that this contractor would provide services at a comparable cost to NJAW, an assumption that may or may not be true. Communications from the Village indicate that they are confident they would receive multiple bids. However, there’s no way to know at this point how competitive those bids would be.

Being able to find an O&M contractor who charges the same rates doesn’t mean costs would stay the same, however. The Village would need to hire additional staff because the current model is entirely dependent on the deep knowledge of one dedicated Water Utility Administrator (who is paid part-time but works significantly more than that) with no backup in case of illness, injury, or retirement. This is not sustainable. The report estimates an increase in O&M costs of about 2.6% simply because more people are needed to appropriately staff the water system. Because South Orange is so small (the total water budget is only about $5 million spread over 4,655 Village water accounts, p. 28), increased costs quickly have a noticeable impact on water bills.

The second scenario would be for the Village to do O&M itself. This would require hiring 12+ new staff members. In addition, the Village would need to pay for equipment, parts, office space, etc. This option is more expensive than outsourcing O&M (see page 43) and is not likely at this time. A hybrid option is possible.

Capital Investment

In addition to Operations and Management, the Village will need to increase rates to replace aging infrastructure and lead/galvanized steel lines. Slides 24-26 identify water infrastructure that is near or past its life expectancy. The Village’s Capital Improvement Plan (p.38) recommends approximately $50 million of investment between 2023 and 2034. This would require taking on more debt (and increasing water rates to pay for it) on top of the ~14.3% of our water bill that currently pays for the last round of infrastructure investment. (see Village Budget, 2023, Debt Service on page 43).

Were the Village to retain ownership, it would need to continue to contract out infrastructure work. Village staff time would also be needed for oversight. Residents would need to be willing to allow their water bill to rise substantially in order to make needed investments. If residents are not willing to do so, the quality of the system would deteriorate, and more would need to be spent on emergency repairs.

Lead Line Replacement

Two parts of each lead line need to be replaced, the “utility” portion from the water main to the sidewalk, which is owned by the Village, and the customer-owned portion from the sidewalk to the building (see image). Cost for replacing the Village owned portion is included in the Capital Improvement Plan, but it has not yet been fully implemented. 

The Village estimates that there are approximately 250 consumer-side lead lines to replace. For consumer-side lead lines, property owners are currently responsible for replacement costs, which vary based on line length and average $8,000-$10,000 for lots in South Orange. Other municipalities such as Newark have put in place loan or grant programs to fund this replacement. South Orange does not currently have plans to implement a similar program, but if it did, it would need to borrow additional money (again paid for as part of the debt service in the water bill) to cover the program. All lead lines are required by law to be replaced by 2031. Some federal funding may be available, but about half of that fund is prioritized for disadvantaged communities.

Current Rates

Currently, South Orange residents pay a minimum use fee of $16.67 per month (charged as $50 per quarter). Once a household uses more than 1,620 gallons per month, they start paying $8.00 per 100 cubic feet of water, or $10.695 per 1000 gallons. Currently, the average South Orange customer uses 9,000 gallons per month (p. 28) for a bill of $95.60 per month.

Future Rates

The Village estimates (slide 21) that after one final year at its current $5.15 million level, the total annual water budget would increase by approximately $1.5 million in 2026, and then by smaller amounts each subsequent year. Because these costs are spread over a small rate base of only 4,655 households, the Village estimates a 30% increase from current rates in the first year, a 65% increase from current rates by 2029, and a 125% increase from current rates by 2039 (slides 21-22). We do not know if these projected costs would change substantially were voters to reject the sale and the Village were to do more detailed planning about this option. Small changes in assumptions may also impact these estimates dramatically, similar to how they do in the discussion of NJAW rates in the next section.

This option would mean that over time, South Orange’s water experience would largely match that of surrounding towns (such as Maplewood, West Orange, Irvington, and Millburn) whose water systems has been owned by NJAW for decades. With the exception of rates (discussed below), it would also be similar to what South Orange consumers currently experience, since the Village currently buys its water from NJAW and contracts with them for operations and maintenance.

Understanding Utility Companies’ Incentives

Often when consumers are concerned about privatization, they worry that companies, having been paid a set amount for their work, will be tempted to cut corners because they get to keep as profit any money they don’t spend. However, the incentives for private utility companies are actually reversed. When a company like NJAW buys a municipal water system or invests in infrastructure, the entire cost (not including things like advertising), plus an allowed profit (7% according to the Village, 9.6% according to Food and Water Watch, both based on page 4 of this document), is paid for by ratepayers. This means companies are incentivized to buy as many systems as they can, pay top dollar for those systems, and do as much infrastructure work as possible. While quality and safety are important, and regulators do keep an eye on those, the bigger concern from a consumer’s perspective is likely to be reining in infrastructure spending and preventing companies from doing unnecessary work that needlessly drives up rates. Evaluations of the options should be done with this in mind.

Water Quality

South Orange’s water would continue to come from NJAW’s Canoe Brook reservoir in Millburn as it currently does. Quality is regulated by the Department of Environmental Protection and would be the same whether we keep or sell the system.

Operations and Management

Since NJAW currently provides O&M for the Village, the experience and quality should be similar to what we currently experience.

Infrastructure Investment

If South Orange sells the water utility, NJAW has expressed its intention to take over the Capital Improvement Plan drawn up by the Village. The contract specifies that NJAW will invest $50 million over the first ten years, with $35 million of that being spent in the first five years. This is on top of the infrastructure work that has already been completed recently by the Village (approximately $16.6 million). 

Lead Line Replacement

Lead line replacement would be paid for via the Lead Service Line Replacement Charge discussed below. This includes the property owner’s portion of the line. Progress on Maplewood’s lead line replacement can be tracked on the interactive map available here. All lead lines are required by law to be replaced by 2031.

What NJAW Customers Pay: Current Rates

NJAW’s rates and surcharges must be approved by the Board of Public Utilities (BPU). Going forward, South Orange would be part of a group of almost 190 municipalities whose water systems are owned by NJAW (including Maplewood, West Orange, Irvington, and Millburn) and who are able to lobby the BPU. However, they do not control its decisions. BPU Commissioners are appointed by the Governor and confirmed by the State Senate for staggered six-year terms, meaning willingness to approve rate changes can change with the composition of the Board.

As of the most recent rate changes in September 2024, an NJAW customer paying “A-1” Tariff rates for a ⅝” meter (the typical household) pays $8.8724 per 1000 gallons plus a $22.65/month fixed fee (see page 36 here). Tariff increases are approved approximately every two years by the Board of Public Utilities (BPU) through what is called a “rate case,” in which the utility makes a case for what rates should be, the BPU holds hearings, and the BPU Commissioners ultimately vote on what the rates should be.

In between rate cases, NJAW can also request approval for additional surcharges. Private regulated utilities have been shifting their costs away from rate increases toward more surcharges, which have a less strict approval process. These charges are paid monthly and typically rise every six months until the next rate case, at which point two of them are incorporated into the overall rate and reset to zero. The five surcharges are:

• Lead Service Line Replacement Charge (LSLRC): $0.8791 per 1000 gallons. This was first assessed Feb 2023 and will continue through 2031. It may fluctuate as work is completed. (e.g. NJAW has applied for an increase to $0.8981 per 1000 gallons here, but it has not yet been approved).

• Distribution System Improvement Charge (DSIC): First assessed in 2013, the DSIC builds incrementally every six months in between rate cases and then gets rolled into the rate case and reset to zero each time a new rate case is passed. The most recent rate case went into effect September 15, 2024, so the surcharge is currently zero. Historically, it has built up to a range of $3.32-$3.67 per month before resetting.

• Resiliency and Environmental System Investment Charge (RESIC): Created in a new 2023 law, this surcharge is currently zero. It will build incrementally similar to the DSIC, and by law cannot exceed 5% of a customer’s water bill.

• Purchased Water Adjustment Clause (PWAC): If NJAW needs to purchase water from other suppliers, those are passed on to all NJAW customers at cost. The amount of this surcharge fluctuates. A Maplewood NJAW bill from September 2024 lists the PWAC as $0.5289 per 1000 gallons, while official documents from 2018 list it as $0.4817 per 1000 gallons (p. 85). South Orange will NOT pay this charge for the first five years, but will pay it after that.

• (Special Project Charge: South Orange will NOT pay this charge, but from June 2024-June 2027, bills of NJAW customers like Maplewood who received service during the pandemic will include an additional surcharge to recover COVID related costs. A Maplewood NJAW bill from September 2024 lists it as $0.0551 per 1000 gallons.)

Adding all these up, an NJAW customer in Maplewood using 9000 gallons per month (South Orange’s average) currently pays $22.65 as a fixed fee plus $10.3355 per 1000 gallons (including all current surcharges). Total bill: $115.67. This is about 21% more than South Orange residents currently pay.

Low vs. High Water Users

One other consideration is that the Village and NJAW apportion costs differently. Both South Orange Village and NJAW charge a fixed fee ($16.67/month currently for the Village and $22.65/month for NJAW). However, the Village does not start charging a per gallon fee until users reach a threshold that averages out to 1620 gallons per month. In contrast, NJAW charges a per gallon fee for all users. This means that low water users will experience a higher percentage increase switching to NJAW than high water users do. While low and high water users are not necessarily correlated with low and high income residents, the equity impacts of this should be considered.

Here is an example of how much a monthly bill would rise if current South Orange customers at each usage level wer instead paying 2024 NJAW rates (thresholds for minimum, low, average, and high water users taken from pp. 27-28):

• Zero water users (0 gal/month): $16.67/month paid to South Orange currently would become $22.65/month paid to NJAW, an increase of 36%.

• Minimum (1,620 gal/month): $16.67/month would become $39.39/month, an increase of 136%.

• Low (5,423 gal/month): $57.33/month would become $78.70/month, an increase of 37%.

• Average (9,000 gal/month): $95.60/month would become $115.67/month, an increase of 21%.

• High (11,282 gal/month): $120.00/month would become $139.26/month, an increase of 16%.
  

Note that this is NOT what South Orange residents would actually pay if we switched because the Village has negotiated lower introductory rates (see below). However, it gives an illustration of the impact the different fee structures have on users of different amounts. To the extent that utilities minimize per gallon rate increases and instead rely on flat-fee surcharges, this discrepancy could worsen. The impact of different levels of water use on rates can be explored using the calculator. NJAW does offer discounts to customers with household income below 200% of Federal Poverty Level.

South Orange’s rates would be lower than the average NJAW customer until 2039

NJAW and the Village have negotiated a deal whereby NJAW would take over South Orange’s current rate structure, freeze rates for the first two years, and then increase by 3% annually for the next three years. South Orange residents would also pay the Lead Service Line Replacement Charge (currently $0.8791 per 1000 gallons, and not included in the 3% negotiated increase), but not any of the other surcharges for the first five years. If the LSLRC remains at current levels, the average water user’s bill in 2029 will be about 17% higher than it is now (9% rate increase plus the surcharge).

After 2029, South Orange’s rates will gradually converge with the rates other NJAW customers (such as Maplewood) pay until we’re part of the same A-1 Tariff and surcharges as everyone else in 2039.

Future Rates

Predictions for future rates vary dramatically based on small changes in assumptions. When estimating what NJAW customers will be paying at the end of that 15 years, the Village’s 2023 report assumed a 3% annual increase based on the last six years of tariff approvals (p. 28). Erika and Ben attempted to replicate this number based on publicly available information but were unable to do so (see analysis). Instead, we found average annual increases ranging between 6.4% and 7.7% depending on whether or not surcharges were included (analysis here). We consulted with NJAW, who transparently shared their calculations for the annual increase in rates for each rate case for our requested range (2018-2024). Those ranged from 5.0% to 10.8%.

The Village stands by its 3% increase, arguing that the larger increases were due to periods of high inflation, and it is appropriate to estimate that future rates will rise more or less at the rate of inflation (estimated as 3%). Food and Water Watch argues that rates will rise much faster than this. They point to legislation passed in NJ in 2015 (WIPA) that changed the regulatory environment, and they argue that similar changes in Pennsylvania kicked off a spate of water companies rapidly acquiring municipal systems and then raising rates between 44%-166% over only five to seven years. (A report on Pennsylvania’s experience is available here.) They also point to research by themselves and others finding that private utilities consistently charge more than public utilities. 

We tested these claims by calculating how much NJAW’s rates have increased beyond inflation since 2011 (calculations here, please note that these numbers are very approximate and depend a great deal on estimates about inflation and appropriate time periods to make calculations). We find that NJAW rates did rise more than the rate of inflation, but we don’t see evidence that they’re doing so at an increasing rate, at least not so far. There does seem to be a difference before and after 2018 (the first rate case where the legal changes Food and Water Watch point to would have had an effect). Prior to 2018, rate increases were approximately 1.1% above the preceding period’s inflation. After 2018, rate increases (depending on whether you run the calculations with or without surcharges) have been in the neighborhood of 2.4% to 3.5% above the rate of inflation, but have remained stable. Whether they will continue to remain stable is unknown. NJAW is beginning a period of rapidly acquiring NJ municipal water systems, which Food and Water Watch predicts will result in increasing rates since it passes the cost of purchasing and repairing systems on to rate payers (plus a profit). If this happens, rates could rise much more dramatically.

Based on these admittedly very rough calculations and the same estimated 3% annual inflation that the Village uses, we think rate increases between 5.4% and 6.5% annually are reasonable estimates. If there is upward pressure on rates either from the cost of acquisitions or from more state mandates regarding water quality or from inflation, a number like 7.7% is not unreasonable. 

Depending on which set of assumptions you use, the average NJAW customer’s rates by 2039 could be anywhere from 74% to 225% higher than what South Orange residents currently pay. For low and minimum water users, this percentage increase would be higher

Explore the impact of different assumptions using this interactive calculator. An explanation of how to use the calculator is under “Consideration #2: Cost” below.

As discussed above, when consumers are concerned about privatization, they often worry that companies, having been paid a set amount for their work, will be tempted to cut corners because they get to keep as profit any money they don’t spend. However, the incentives for private utility companies are reversed. When a company like NJAW buys a municipal water system or invests in infrastructure, the entire cost (including advertising to win support for ballot measures) is paid for by ratepayers plus an allowed profit. Because private utility companies both decide what work is needed and profit from doing it, there is the risk that companies will do unnecessary work that needlessly drives up rates. In contrast, when a municipality owns a system, elected officials are incentivized to keep rates low to avoid backlash from residents. 

In essence, opponents of privatization argue that the difference between selling the system and keeping the system is like the difference between taking your car into the dealership for repairs, where the mechanic tells you that just to be safe you really ought to replace the whole brake system, and taking your car to your local mechanic who gives it a look and tells you to bring it back when it starts to squeak. NJAW is incentivized to determine that a lot of work needs to be done and to charge ratepayers lots of money for doing it.

However, keeping rates accountable to voters carries its own risks. In order to raise enough money to do needed investments, voters have to 1) be willing to raise their own rates when needed and 2) have a source that they trust to tell them when it really is time to spend a bunch of money on repairs. If residents oppose all rate increases, they risk ending up in a situation where infrastructure is neglected until it fails and forces disruptive and expensive emergency repairs.

Considerations:

• How much are you concerned about overinvestment vs. underinvestment in infrastructure?

• How effectively do you think NJAW will be reined in from overinvesting?

• How willing do you think South Orange residents will be to pay for needed repairs?

Many of the cost estimates discussed here involve very large percentage increases. It is important to consider your household’s current financial system and how much of a burden your current water bill is. In an extreme example, a bill that rises from $1 per year to $5 per year is a 400% increase, but it is unlikely to cause hardship. Significant dollar amount increases also make a big difference if they occur on a one year time frame or a fifteen year time frame. For all the comparisons below, please keep the dollar amounts and your financial situation in mind as well as the percent increases. For example, water rates in Maplewood (whose system is already owned by NJAW) rose 55% over the past six years for the average user while South Orange’s rates rose 35%. How burdensome were those increases? Assistance programs are also available to low-income NJAW customers and may be available to municipal customers as well (though the state aid program is not currently accepting new applicants).

The following section walks through how to use our bill calculator to estimate the impact of keeping vs. selling on your water bill. The dashed blue line in the calculator is the Village’s estimate for costs if we keep the system. The dotted green line is what other NJAW customers pay. The solid orange line is what South Orange residents would pay if we sell to NJAW as part of its negotiated deal.

Explore the calculator here

Step 1: What kind of water user are you?

Because South Orange currently does not charge a per gallon rate for water until users meet a certain threshold, lower water users will see a bigger percentage increase from switching to NJAW. Experiment with this step to see the impact. For the purposes of discussion, we will focus on the average South Orange water user who uses 9000 gallons per month. This is higher than the NJAW average of 5600 gallons per month. Tips for reducing water consumption can be found here.

Step 2: What starting rates to use?

The average South Orange water user currently pays $95.60 per month or $1147 per year. This will be the starting point for rates both if we keep the system (dashed blue line) and under NJAW’s negotiated deal (solid orange line). 

Determining a comparable starting point to use for other NJAW customers (the dotted green line) is complicated. The Village’s initial report was completed in 2023 prior to the most recent rate increases from NJAW. The estimate in the report includes the fixed and volumetric rates from the 2022 rate case, plus the Lead Service Line Replacement Charge (LSLRC). It omits the DSIC and PWAC surcharges that were in effect in Maplewood as of 2023. It also omits the Special Program Charge that went into effect in June 2024 and the RESIC, which will go into effect June 2025. The Special Program Charge will sunset in June 2027, the LSLRC will sunset in 2031, and the PWAC is variable. So determining what surcharges will be in effect and how much they will be in 2039 when we are paying them all is tricky. It’s also important to note that South Orange residents will never pay the Special Program Charge, and the LSLRC would be the only surcharge paid during the five year initial rate stabilization.

We recommend using the most recent September 15th, 2024 rate case with all the surcharges as the starting point for estimating what NJAW ratepayers will pay. Although some of the surcharges will sunset, others like the RESIC are being added. Please be aware that all numbers are estimates, however, and should be taken with a grain of salt. Toggling between the two options can give you a sense of how much of a difference these assumptions make.

Step 3: Add the Lead Service Line Replacement Charge (LSLRC)?

The deal negotiated by the Village starts with South Orange's current rates and locks in rate increases of 0% for the first two years and 3% for the following three years. However, because NJAW would be replacing our customer-side lead lines, we would still need to pay the LSLRC on top of that. We recommend including this charge in calculations. This changes the graph mainly only for the first five years, however, since after that South Orange’s bill would be converging with the surcharge-inclusive bill paid by other municipalities anyway.

Step 4: What growth rate do you think is plausible for NJAW rates in the future?

The Village’s report estimates that NJAW rates will rise at approximately the rate of inflation (estimated 3% per year). We don’t think this is the case. Based past rate cases and discussion with all groups involved, we think the most plausible estimates are that NJAW rates have been rising 2.4% more than inflation (excluding surcharges) or 3.5% more than inflation (including surcharges). Putting this together with an estimated 3% inflation rate going forward, we think the most plausible estimates for rate increases are 5.4% annually excluding surcharges or 6.5% annually including surcharges. We also include a 7.7% high estimate based on Food and Water Watch’s prediction that rates will rise faster as NJAW starts a period of rapidly acquiring water systems. (See discussion under “What would it look like if South Orange Sells; Future Rates” for why we picked those dates and analysis).

These estimates are available for you to explore and see what impact they have. A key takeaway is that any attempt to make predictions fifteen years out is extremely tenuous and jumps around a lot. Be cautious about any claims that one option is definitively going to be cheaper than the other long term. Also, be prepared to pay more either way. Doing all the work that needs to be done for the water system isn’t cheap.

It is also important to note that because the Village will continue to purchase water from NJAW, increases to NJAW rates will also impact the Village even if we keep the system. Currently, about 60% of the water budget is the purchase of water (p. 43). This percentage will alter as more gets spent on infrastructure, and estimates are very rough, but as rates for NJAW rise, the cost to keep the system also rises. The calculator reflects the assumption that the portion of the budget that goes to purchasing water (which is itself an estimate) will at the same percent as NJAW rates.

Which assumption is the best? The Village’s original projection is illustrative of what happens if all cost increases (including O&M if we keep the system, including NJAW rates if we sell) match inflation. Their estimate highlights the cost of all the new work the Village would need to do if we keep the system, and they keep estimates simple because (as shown) once assumptions start to vary, both lines start jerking around wildly. Erika and Ben had access to public records to explore NJAW’s rates, but we don’t have access to data to similarly challenge the assumptions underlying the scenario where we keep the system. We were able, for example, to incorporate the fact that if NJAW’s rates rise, the amount the Village pays to purchase water will rise, but we were not able to incorporate the impact of the approximately 250 customer side lead line that someone still needs to pay to replace, nor were we able to vary assumptions about whether we’ll have to pay more for O&M. Even if the 3% is not strictly accurate, the Village argues that the relative costs will move together as assumptions change, and selling will still be much cheaper.

The reason you may want to explore the other assumptions is that the prospect of rapidly rising rates is one of the major dangers Food and Water Watch warns of when municipalities are considering privatizing. And indeed, the data show that rates are clearly rising above the rate of inflation (with some variation based on whether or not surcharges are included). 

Whether to include surcharges or not is complicated by the fact that the biggest surcharge (for lead line replacement) will be sunsetting in 2031, so may not be appropriate to include in long term calculations. However, it would also be reasonable to include it as a stand in for other surcharges that seem likely to be added in the future. Three new surcharges have been added since 2023, one of which (RESIC) will go into effect in 2025 and has not been included in any calculations so far. 

Finally, you may wish to use the high estimate if you are persuaded by Food and Water Watch’s argument that NJAW is beginning a period of rapid acquisition that will lead to rates increasing more quickly.

Considerations:

• What assumptions in the calculator do you find most plausible for estimating rates? (With the caveat that they are all estimates).

• How much are you concerned about short term vs. long term rates?

• How burdensome would rate hikes of the magnitudes discussed above be for your household?

• Do you have lead lines that you would need to pay to replace if we kept the system?

• What would you be willing to pay more for? (e.g. to retain local control, to have NJAW handle everything so the Village doesn’t need to manage all the moving parts, etc.)

Water Quality

South Orange Village currently sources its water from NJAW’s Canoe Brook Reservoir in Millburn and expects to continue doing so until at least 2076 under all scenarios. Water quality is regulated by the NJ Department of Environmental Protection and will continue to be.

Day-to-Day Service Quality

O&M services are currently provided by NJAW. If the water system is sold, emergency repairs, responses to quality problems, and other day-to-day issues would presumably be similar to what they currently are. NJAW is actively trying to grow and has an incentive to ensure that its existing towns give good reviews when new towns are considering a sale. There’s no obvious incentive to start providing worse day-to-day service once it owns the system. The Water Utility Task Force spoke to administrators in other municipalities that sold their systems to NJAW (page 15 of the Task Force’s report), and reported that “everyone was generally pleased with the service received from NJAW.” Maplewood’s administrator estimated 2-4 consumer complaints per year, which is consistent with what SOMA Action was able to surface by putting out a call on Facebook to ask about any negative experiences.

If South Orange retains the water system, the Village would need to hire a different company to provide O&M, since NJAW is exiting the O&M business and has indicated it will cease to provide services after the existing contract ends in 2026. We do not have information on the cost or quality of services provided by other likely contractors, but the Village’s report identified multiple potential bidders. Other towns, such as Edison, NJ, have taken a similar path of rejecting a sale, continuing to buy water from NJAW, and outsourcing O&M to a different vendor.

Capital Improvement Quality

NJAW has expressed its intention to take over the Capital Improvement Plan already drawn up by the Village. The contract specifies that NJAW will spend an additional $50 million over 10 years (with $35 million being spent in the first five years). This is on top of the approximately $16.3 million that the Village has already spent on repairs. Ultimately, decisions about maintenance and replacement would be made by NJAW. If NJAW does not follow the contract, South Orange would be able to sue, but not to reclaim ownership. Accountability would be based on BPU supervision, and NJAW’s desire to preserve its reputation as it seeks to expand. Since NJAW currently does much of the service work, presumably the quality would remain relatively similar or even improve, as private utilities have an incentive to over-invest.

If South Orange retains the water system, the Village would likely hire external contractors to do the work. The Village would be responsible for oversight and accountability, and it would retain the power to switch contractors if necessary (subject to the provisions of the contract). Quality would depend on the outcome of a competitive bidding process and the Village’s ability to monitor the work done. Since this is the model the Village has experience with and is currently using to do the most recent round of infrastructure investment, quality would likely continue to be similar.

Lead Line Replacement/Future State Mandates

Much of the same analysis applies to lead line replacement, which state law mandates that all entities must complete by 2031. 

NJAW’s portal and interactive map for their lead line replacement project is here. If South Orange retains the water system, the Village would be responsible for creating similar progress reporting. Quality of repairs and communication is unknown, but would presumably be relatively similar to what it is now, with some variation based on what quality of work and communication residents are willing to pay for.

Likelihood of catastrophic failure, contamination, or malfeasance

Some of the reason we’re in this situation is that South Orange’s publicly owned system closed in the 1980’s due to our wells becoming contaminated. Then the (publicly owned) East Orange Water Commission sent us contaminated water because employees were falsifying the water tests, and the Village switched to NJAW. If we sell the system and NJAW’s reservoir were to become contaminated or too frequently depleted by drought, or if there were a scandal involving testing or maintenance, we would be unable to switch again. On the other hand, a problem with NJAW would affect an enormous number of municipalities and New Jersey residents, and public outcry would be immense.

If we don’t sell, the Village will remain in much the same position that it is now. Over the past 50 years, we have had two major contamination problems, both of which were resolved by switching suppliers. Since the plan is to continue sourcing water from NJAW for the foreseeable future, any major problems with NJAW would still affect us, but the Village would potentially retain the ability to switch if the problem was not effectively resolved (depending on the provisions of the contract). Similarly, switching contractors would potentially remain an option if infrastructure repairs or operations and maintenance were unsatisfactory. We don’t know if another O&M contractor would offer better or worse service. Keeping the system does run the risk, however, that infrastructure quality could substantially deteriorate if residents are not willing to raise rates enough to do necessary investment.

Considerations:

• How good a job do you think NJAW would do?

• How good a job do you think the Village would do?

• How willing do you think South Orange residents are to permit rates to rise when needed?

• How much do you value retaining the ability to potentially switch providers?