REPORT: Why Water Bills Just Went Up Again

By DORIE SOUTHERN
Cape Charles Wave

August 8, 2013

Yesterday Cape Charles residents received their first water bill with the huge new sewer increase – formerly $35.45, now $60.85. The rate hike is to pay debt service on the Town’s new sewer plant.

This is not the first double-digit rate increase caused by the new plant: In March 2009 Town Council hiked the $25 minimum sewer charge to $34.

The minimum sewer charge might not be the highest in the state, but other high-rate localities are “more affluent than Cape Charles,” according to USDA Rural Development official Kent Ware. The Town’s new $108 minimum monthly combined water bill is a burden on low-income and fixed-income residents, and appears likely to continue to drive them out of town.

How did the Town come to charge such a high rate? The answer is that plans for a new sewer plant were based on the assumption that the developers of Bay Creek would contribute significantly to the cost. When that didn’t happen, the Town went ahead and built the plant anyway, leaving ratepayers to shoulder the cost.

Town Council also raised, but then lowered, water and sewer connection fees for new service that are intended to pay capital costs of new water and sewer infrastructure.

How did it all happen? The Wave has unearthed some pieces of the puzzle. It begins 25 years ago with the mega-construction company Brown & Root, who decided to develop a large tract of land to be called Accawmacke Plantation and incorporate it into the Town of Cape Charles.

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Having lost the ferry and related jobs and commerce, the Town was struggling and could not even afford its own lawyers to negotiate the annexation agreements. Brown & Root offered their own law team, which the Town accepted.

The 1991 Commission on Local Government report saw the Brown & Root planned development as giving Cape Charles a boost, as well as a means for the Town to supply municipal services to the development. The Commission recommended annexation with certain conditions:

“Brown & Root has predicated its development plans on the incorporation of all its property into the Town of Cape Charles and on the expansion and utilization of the Town’s utility system. To this end, Brown & Root has entered into an agreement with the Town by which it has committed itself to supporting the proposed annexation and to investing its resources into an expansion and enhancement of municipal facilities,” the Commission wrote. [Annexation Action Report, February 1991, page 11]

On November 25, 1991, Brown & Root signed an Annexation Amendment agreeing to all the Commission’s proposals, including that it commit to “investing its resources into an expansion and enhancement of municipal facilities.”

Also among the agreed proposals is the statement that “Brown & Root and the Town agree that any reservation of treatment capacity in or from the Town’s water or waste water systems, as provided in the Prior Agreement, for the use of Accawmacke Plantation shall be derived from the capacity created by investments in the Town’s water and/or waste water systems, made by Brown & Root.”

Brown & Root further agreed to apply for a permit on behalf of the Town to the State Water Control Board for the initial expansion of the sewer plant within 90 days of annexation. But that never happened.

Brown & Root never undertook any water or sewer improvements and never carried out its development plans for Accawmacke Plantation. Instead, in September 1996 the company sold the whole works to Richard “Dickie” Foster, who went on to build Bay Creek.

But the original annexation agreement specified that “The obligations of Brown & Root, contained herein  . . .  shall run with the land and be binding upon the subsequent owners of Accawmacke Plantation, which owners shall assume all of the obligations and relieve the prior owner thereof.”

That means that when Foster bought Bay Creek, he signed on to all the agreements made between the Town and Brown & Root. Those agreements place financial obligations on the developer and its successors — not on individual property owners. The agreement explicitly states [paragraph 8]: “It is the intent of the parties not to impose the obligations of Brown & Root contained herein upon the consumers who purchase lots, condominiums, and/or memberships within Accawmacke Plantation.”

No action was taken on the wastewater treatment plant until 2008, when the EPA began tighter enforcement of the Clean Water Act. With the real estate market in a building frenzy, it was believed that the Town would need to upgrade its wastewater plant, and preparations were made to get Bay Creek to pay its fair share.

A March 6, 2008, letter from then-Town Manager Joe Vaccaro to the construction manager at Bay Creek presented two options for Bay Creek to pay its share of future water and wastewater capacity expansion: Bay Creek could make a one-time payment of $21.1 million, or it could pay $8.9 million up front, and the Town would increase water and sewer connection fees for new residences to $10,047. The Bay Creek construction manager was Steve Bennett, who two months later was elected to the Cape Charles Town Council.

“A settlement agreement must be concluded and payment made by June 30, 2008,” the letter stated. Vaccaro told the Wave that although the letter went out over his signature, he believes that Town consultant Bob Panek wrote it. Vaccaro said that when he was hired in 2007, he was instructed to leave all water and sewer business to Panek. “Water was the elephant in the room,” Vaccaro said — “Panek did a good job [handling it].”

However, the second option in the letter would appear to violate the terms of the annexation agreement under which the developer  was to pay for expansion. Raising the connection fees pushes costs onto owners, not the developer.

But Bay Creek did not pay anything. At the September 2008 Town Council meeting, Vaccaro read into the minutes the following report by Panek:

“Bay Creek did not accept the settlement proposal concerning the water and wastewater system expansion, but the Town informed Bay Creek that the billing for their share of expansion costs would commence in July. An invoice dated July 31, 2008, to Bay Creek for approximately $42,000 for their share of the design costs has yet to be paid. The Town has commenced the comprehensive design and engineering phase that will produce the bid documentation leading to awarding of a construction contract which will cost approximately $1.8 million and conclude in June 2009. Bay Creek will continue to be invoiced their share of costs as they are incurred.  If Bay Creek does not pay their share of the costs, the Town will need to consider alternative revenue sources.”

Bay Creek CEO Oral Lambert wrote a letter to the Eastern Shore News published January 28, 2009, entitled “Bay Creek Clarifies Water-Works Obligation.” The Wave has not obtained a copy of that letter, but does have the following relevant letter from Dick Foster to Mayor Sullivan, dated December 11, 2008:

Hon. Mayor Dora Sullivan
Town of Cape Charles
2 Plum Street
Cape Charles, Virginia 23310

Re: Annexation Agreement

Dear Mayor Sullivan,

I appreciate the opportunity you provided for me to meet with you and the members of council to discuss my views on the Annexation Agreement. In your letter to me of December 2 you express disappointment that you were hoping for a more constructive response. You go on to say, “ . . . there does not appear to be any movement on the fundamental issues.”

The fundamental question of the Annexation Agreement seems to be when Bay Creek is obligated to pay its share of the cost of expanding the wastewater treatment facility. We believe we are obligated to pay when the facility reaches its permitted capacity. We are not obligated to pay for replacing the plant anymore than any other business or property owner in Town is obligated to pay. During our meeting with the council on December 1 it was expressly stated by your consultant that the reason a 500[k] gpd plant was being considered has to do with protecting the existing permit, not because the plant has reached capacity.

I want to understand what you expect of me? What “movement” are you looking for? I have said that we will pay our fair share of expanding the plant per the terms of the Annexation Agreement. Please let me know specifically what you feel needs to happen to indicate “movement.”

Sincerely,

Dick Foster

Mayor Sullivan responded to Foster in a letter subsequently published in the January 29, 2009, official Town Gazette:

January 5, 2009

Mr. Richard S. Foster
Owner
Bay Creek Resort & Club
1 Club House Way
Cape Charles, VA 23310

Dear Mr. Foster,

This is in reply to your letter of December 11, 2008, in which you provide your opinion of when Bay Creek is obligated to pay for their share of wastewater treatment capacity expansion and ask what is expected of you to indicate movement on this matter.

The Town has previously addressed the issue of when Bay Creek is obligated to pay several times, both in meetings and in correspondence, including our September 12, 2008 letter. We do not agree with your opinion that payment should occur only when the existing plant reaches permitted capacity; i.e. 250,000 gallons per day (GPD). The Annexation Agreement states, “Brown & Root agrees to pay the cost of the physical expansion of the Town’s sewer and water treatment systems, i.e. collection, distribution and treatment, to accommodate the additional treatment demands of the Brown & Root Property beyond the limits of the Town’s current permitted capacities.”

It is clear that the Annexation Agreement defines what Bay Creek is obligated to pay for, i.e. accommodation of additional treatment demands beyond the limits of current permitted capacities, not when. In this regard, we agree that Bay Creek bears no responsibility for replacing the existing capacity. That is why we have discounted the Bay Creek share by half (34% vs. 68%), in recognition that the first 250,000 of the 500,000 GPD capacity of the new wastewater treatment plant (WWTP) represents replacement of existing capacity. As you know, 68% represents the share of projected treatment demand beyond current permitted capacity that is attributable to Bay Creek property subject to the Annexation Agreement. If we were only building new capacity, the Bay Creek share would be 68% instead of 34%. We have explained this in our letters of July 11, 2008 and September 12, 2008.

The Town is responsible for planning for the replacement of existing facilities and providing additional capacity to accommodate projected growth. In the case of the WWTP, timing is complicated by state regulations that require the Town to meet the specified nutrient waste load allocation by January 1, 2011 in order to maintain the permitted discharge of 500,000 GPD. If we don’t meet the deadline, our waste load allocation will be reduced to the capacity of our existing plant; i.e. 250,000 GPD. Any treatment capacity beyond that will require reuse of the effluent, rather than discharge into the bay. Effluent reuse is significantly more costly than discharge because of the need to build reject storage, pipelines and off-season storage. Our growth projections indicate that the 250,000 GPD capacity will be reached in 2013, only three years after the waste load allocation compliance date. Because of these cost and timing implications, we are currently designing and planning to build a 500,000 GPD WWTP. These planning considerations dictate when the Town needs to incur costs and, consequently, when Bay Creek is obligated to pay their share under the Annexation Agreement.

You state in your letter, “I want to understand what you expect of me? What “movement” are you looking for?” In short, I expect you to pay the bills for the Bay Creek share (34%) of design and construction of the new WWTP as they are rendered by the Town. After application of anticipated grant revenues, we expect the Bay Creek share will be about $3.5 million to $4.5 million. As indicated in our September 12, 2008 letter, absent these revenues the Town will need to consider downsizing the WWTP to minimize the financial risk to existing wastewater customers. This will result in significantly higher costs in just a few years, as noted above, to build capacity beyond 250,000 GPD. The greater portion of these higher costs, 68%, will fall to Bay Creek.

I hope the above provides sufficient information to spur movement on this issue on the part of Bay Creek.

Sincerely,

Dora Sullivan
Mayor

The above letter from the mayor states: “If we don’t meet the deadline, our waste load allocation will be reduced to the capacity of our existing plant; i.e. 250,000 GPD.” But if the Town had indeed allowed its waste load allocation to be reduced, its case for requiring added capacity (partially funded by Bay Creek) would have been much stronger.

Despite the mayor’s importunity, Bay Creek remained unmoved. Considering the millions of dollars at stake, one might assume that the matter would go to court. But there is no record of Town Council’s even considering legal action against Bay Creek. Instead, the Town completely capitulated, choosing to attempt to pay for a new sewer plant through higher connection charges and user fees.

At a March 12, 2009, meeting, Town Council voted to double connection charges, from $10,000 to $20,000. Council also voted to raise minimum monthly sewer charges from $25 to $34. Mayor Sullivan issued a statement on March 20, 2009, to “owners of unimproved lots, residential buildings without connection, and commercial buildings” alerting them to the doubled connection charges effective July 1. “These charges have been increased to fund the cost of providing future water and wastewater system capacity,” she wrote.

But the $20,000 connection fee did not stick.  Minutes of Town Council’s January 28, 2011, annual retreat state:

“Council reviewed the facility fee analyses for wastewater and water. Councilman Bennett questioned the assumption of no payment under the Annexation Agreement and added that he did not remember any opposition for payment once the Town reached current capacity. Mr. Oral Lambert stated that he had spoken with Bob Panek and Heather Arcos and Bay Creek was willing to work together with the Town. Mr. Lambert stated that it was always good when fees could be reduced, but added that the fees would be what they had to be to pay for the plant and expressed his desire to help with the review of the water plant. Heather Arcos stated that the figures would be revised to take into consideration the Annexation Agreement which may further reduce the fee but the Town still needed to build a reserve.”

On March 10, 2011, Town Council held a public hearing and then voted to drop connection charges to $12,350.  According to the ordinance passed, “the new estimates assume significant payment for such capacity expansion pursuant to the Annexation Agreement.”

There was no explanation for the assumption of “significant payment” by Bay Creek – nor, of course, has there been any payment. The new sewer plant was funded by grants and a $5.2 million loan, with annual debt service paid from users’ fees – in other words, the water bill.