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LCA Settlement Approved

08/13/2020
LCA Settlement Approved
Allentown City Council has approved a settlement with the Lehigh County Authority (LCA) ending years of disputes and litigation and solidifying the partnership between the city and the Authority on the concession lease of Allentown’s water and sewer utility systems through 2063.

The vote was 6-1, with Councilperson Ed Zucal dissenting.

The settlement, which is the product of years of negotiations, now goes to LCA bondholders for their approval.

The settlement brings to an end a number of disputes that were in various stages of resolution. The settlement also includes compromises on issues that developed over time due to differing interpretations of terms of the lease document.

The settlement ensures that the exceptional quality of drinking water and treated sewage effluent are continuously maintained serving city and suburban customers. It ensures funding from all beneficiaries is available for all necessary capital improvements to the water and sewer systems and provides for LCA’s continuous and financially sustainable operation of the system.

Mayor Ray O’Connell told council, “This settlement avoids many risks, uncertainty and expensive legal costs going down the road. Both sides have come to a mutual understanding and have moved substantially from their original positions.”

At the heart of the disputes, and the new settlement approach developed by the city and LCA over the past two years, is a concern about how the city’s vast network of water and sewer system assets will be maintained, and who will pay for the necessary upgrades as the system ages. LCA estimates about $150 million in system improvements are needed over the next 10 years, which is normal for a system the size and age of Allentown’s.

The settlement revises a 2009 water purchase agreement on the costs paid by LCA for water for its suburban division, supporting a regional approach to water supply management. City customers use an average 11 million gallons a day while suburban customers use an estimated 7 million gallons of water from the city’s water treatment plant each day, and an additional 3 million gallons per day from local groundwater sources. LCA will now pay for water purchased from the city system based on actual production costs and will pay a proportionate share of the cost of all capital improvements at the water treatment plant in Allentown. These are costs not currently shared with LCA’s suburban division based on the terms of the prior agreement. The updated agreement will increase LCA’s city division revenues and lower the cost of those projects to the city customers.

LCA will also phase in the higher rates already included in the lease for city customers over a period of four years while maintaining a quarterly billing cycle. New rates applied beginning in October will result in an approximate $88 increase per year to most customers. By 2024, with the full rates in place, the approximate increase will be $176 per year plus inflationary increases.

A key component of the settlement, in addition to these near-term changes in rates and cost sharing, is long-term rate stability to be provided by LCA. If the agreement is approved, LCA will provide “rate relief” to city customers upon achievement of key financial benchmarks including meeting bondholder requirements and achieving adequate reserves for future system improvements. Rate relief included in the agreement will come in the form of frozen rates or potential rate reductions in the future, a new provision that is not part of the current lease agreement.

To support the city’s administration of the lease along with the city’s other related water and sewer expenses, LCA will contribute $400,000 annually beginning in 2021. Those costs are currently borne by the city’s General Fund.

The terms of the settlement also address issues such as minimum annual pipeline replacement, calculation of the Capital Cost Recovery Charge, rate adjustments and capital improvement funding. They also address procedures to be followed as the lease nears its end.

The LCA Board approved the settlement late last month.

Approval of the bondholders will be sought in time for implementation on October 1, 2020. 

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