Hercules' Red Ink Could Bleed into Pinole

A Hercules Patch investigation of a pending civic fiscal crisis has moved the City of Pinole toward reconsidering its existing arrangement to buy electricity from the Hercules Municipal Utility, Pinole City Manager Belinda Espinosa said. The HMU provides electricity to the Pinole-Hercules Water Pollution Control Plant, which is due for permit renewal and a planned expansion.

The article exposed complications that could jeopardize the $42 million expansion, which is necessary to comply with regulations on water discharged into San Pablo Bay.

As proposed, a series of future rate increases on wastewater bills would pay for the expansion. But bonds would have to be issued for upfront engineering and construction costs, and Hercules' bond rating is in serious trouble.

For decades the two cities have jointly operated the treatment plant, and the Hercules-run utility has been delivering electricity to the plant for several years. Now the utility is facing deep and complicated financial distress that could dissolve that arrangement.

Pinole city officials had been confident that the wastewater plant was insulated from Hercules' budget troubles because the plant relies on revenues from ratepayers, not from the respective cities' general fund budgets.

But the article outlines serious difficulties at the HMU. With anticipated Hercules housing and commercial development projects on hold, the utility doesn't have enough customers to break even, let alone make a profit as originally envisioned. For Pinole, that instability could mean a re-examination of the arrangement to buy energy from the utility.

Espinosa said the current arrangement with HMU will be placed on the September agenda of the board that oversees the wastewater plant. She emphasized that the two cities have been cooperative partners with respect to the plant.

"They're our partners, so right now we have a wait-and-see attitude," Espinosa said.

Besides dealing with its troubled utility, Hercules is carrying heavy loads of debt and bond payments, downgraded bond ratings and is perched on a precipice of potential financial insolvency. On Thursday, Hercules Patch reported that State Controller John Chiang announced that state auditors would investigate the city's financial records.

"If we hadn't seen those (Patch) articles, we wouldn't know anything" about the severity of the HMU's status Espinosa said.

Dean Allison, Pinole's public works director, said that the plant paid about $450,000 for electricity in the 2010-11 fiscal year. Within the past three months, Pinole asked PG&E if it could offer a competitive rate for power; PG&E said it could not, Allison said. Over the years, the HMU has provided relatively cheap and reliable service.

"The current HMU has been a good deal for Pinole for a long time," Allison said. "They've done a very good job. I believe we've gotten as good or better service than we would have gotten from PG&E."

Still, if the HMU is forced to sell, arranging to buy electricity from PG&E or another source would take about six months, Allison said. Equipment owned by the HMU would have to be purchased by the new provider and voltage adjustments on power delivery could be required.

"You can't just flip a switch," Allison said.

The Hercules Patch article noted that bond ratings agency Standard & Poors has downgraded two of Hercules' bond issues to junk or near-junk status. That makes borrowing more difficult and more expensive.

"If they're downgrading their bond ratings, they could look at other enterprise funds," Espinosa said. "I don't think we know that yet."

With the outcome of the state audit of Hercules' books unknown, it is unclear if Hercules will be able to pay capital costs of the plant expansion. Bonds would have to be issued for upfront engineering and construction costs, to be recouped with future rate increases.

"The upgrade is very capital-intensive," Allison said. "We have to be really sure when we begin this. It's difficult with the financial uncertainty swirling around Hercules."

The sewer treatment plant operates as an enterprise fund, separate from the general funds that pay for typical city services such as parks and public safety. It has a separate budget that is supported by the fees paid by residential, industrial and commercial customers.

After exploring a plan to abandon the Pinole-Hercules plant and send its sewer waste to the West County Wastewater District instead, Hercules city council members voted on Aug. 9 to continue its partnership with Pinole.