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Chicago infrastructure trust – and water privatization?

A new report on private equity takeovers of public infrastructure focused on privatization of water services highlights Chicago’s infrastructure trust and warns of higher costs, degraded service, and diminished accountability.

“The infrastructure trust makes us more vulnerable to a public-private partnership” either to finance water system repairs and upgrades or for an operation-and-maintenance contract, said Emily Carroll of Food and Water Watch, which released the report.  “Taxpayers should be wary of getting a raw deal,” she said.

Mayor Emanuel has said he opposes the sale of Chicago’s water system, but the infrastructure trust is set up specifically to foster public-private partnerships, which Food and Water Watch considers a form of privatization, Carroll said.  In so-called P3s, public control over infrastructure is lost and ratepayers are on the hook for private financing costs, she said.

She points to the experience of Atlanta, which canceled a contract with a private corporation for water system operation in 2002 after huge problems with repairs, including emergency responses, and inflated charges for work done.  When only half the promised savings were realized and revenues fell short, the city requested the company’s billing records and was refused, according to FWW.

Water rates

And while Emanuel recently raised water rates to pay for repairs and upgrades, he could later come back and say more money is needed – and the higher rates would make the system more attractive to private investors, Carroll said.

In investment industry surveys, water systems are rated among the most desirable kinds of infrastructure, according to the report.  One of the Chicago trust’s participants, Macquairie Infrastructure and Real Assets, spent $578 million to purchase a private water company in 2007 – the largest private equity water service deal listed by FWW.

The report cites a trade publication describing Chicago’s $1 billion infrastructure trust as “an industry-backed deal to establish PPPs as a politically and financially viable business.”

Currently “private equity vehicles are armed with over $100 billion” seeking highly profitable investments in public infrastructure around the world, in an attempt “to exploit the lagging recovery of the public sector,” according to the report.

About Chicago it says:  “The city’s primary motivation appeared to be the desire to take debt off city books to give the illusion of reducing its liabilities.  ‘We have a tool here that takes some of the pressure off taxpayers,’ Emanuel claimed.  ‘Use somebody else’s money for a change, rather than theirs.’

“In the real world, however, banks do not provide free lunches.  Chicago will have to repay the private capital investment with interest through user fees.

Read the rest of this entry »

EPA to MWRD: Stop polluting

After years of dilly-dallying by the Metropolitan Water Reclamation District, the US EPA has stepped in with a determination that will require disinfection at two of the district’s three sewage treatment plants, the Tribune reports.

The Tribune report neglects the crucial work of area environmental groups, which have battled the MWRD in rulemaking hearings before the Illinois Pollution Control Board for years.  The district has spent $13 million fighting a proposed ruling, throwing up every argument it could muster that it should be allowed to continue polluting.

Just last week the Natural Resources Defense Council, the Sierra Club, and the Prairie Rivers Network filed a federal lawsuit under the Clean Water Act, seeking to stop the MWRD from dumping raw sewage and phosphorous in the the Chicago river system.

There may be a pattern here.  Last July, NRDC and the Sierra Club were among environmental groups announcing they would sue Midwest Generation under the Clean Air Act to force the company to clean up its coal-fired power plants.  A few weeks later the US EPA, Department of Justice, and the Illinois Attorney General initiated legal action against the company.

It’s one of the strengths of the Clean Air and Clean Water Acts that they allow citizens to sue for compliance, said Josh Mogerman of NRDC.

The US EPA’s determination calls for “expeditious” action, and as NRDC’s Ann Alexander points out in a Switchboard post, that puts the onus on the MWRD to “stop squabbling.”

Alexander agrees with the federal agency that disinfection is more urgent at the two targeted MWRD treatment plants, which discharge into the North Branch of the Chicago River and the Cal Sag Channel.   But she says the Clean Water Act will eventually require action at the district’s Stickney plant as well.

Also yet to be addressed in the environmentalists’ lawsuit is MWRD’s failure to remove phosphorous from its stormwater discharges.  Like disinfection, it’s a matter in which Chicago lags other metropolitan areas.

Water privatization called a bad deal

“For years, there has been talk of privatizing all or parts of Chicago’s water system, including the Jardine and South filtration plants, city pumping stations, water billing functions or just the sewer system,” according to Fran Spielman in Monday’s Sun Times.

She’s reporting on a Civic Federation report to the next mayor on the city’s finances.  It reiterates the group’s call to “pursue alternative service delivery to reduce costs” and institute protections for revenues from asset leases.

A new report from Food and Water Watch lists Chicago among cities where water privatization is under active consideration.

The number of communities considering water privatization is up dramatically due to widespread budget crises, particularly among larger cities concentrated in the Rust Belt, according to the report.

Privatization is “not a smart way to balance budgets,” the group says.  While the public pays higher rates, cities often get less than full value for their assets, and the long-term costs of the lump-sum lease payments are significantly higher than the cost of municipal revenue bond financing.

In addition, it can undermine public pensions by transferring employees to the private sector, leaving fewer workers paying into public plans.

In fact, a number of communities are buying back privately-owned water systems in order to save money, according to the report.  Evansville, Indiana, is one; the city expects to save $14.5 million over the next five years after bringing water services in-house.

Food and Water Watch opposes all forms of privatization, including sale or lease of water systems as well as operation and management contracts with private companies, said organizer Emily Carroll.  “They have many of the same problems,” she said.  “Staffing is cut drastically in order to cut costs and boost profits” and “there simply isn’t enough staff to maintain water systems.”

Water main ruptures increase and water quality is jeopardized, she said.

Carroll points to Indianapolis, hailed by the water industry as a success story for privatization.  Under private operation since 2002 there have been boil warnings, lawsuits charging overbilling, and state and federal investigations of environmental violations.

In community meetings in Chicago, she said, “almost everyone we talk to is completely outraged at the idea.  If there’s one thing they don’t think should be privatized, it’s water.”

According to the group’s report, public opposition has derailed many attempts at water privatization.

Another coalition, spearheaded by Illinois PIRG, continues to push for a taxpayer protection ordinance that would require independent evaluation and public hearings on major long-term leases.  Last year 19 aldermen signed the coalition’s pledge for transparency and accountability in asset-lease deals.

“What we got from the parking meter deal was malfunctioning meters, rates that quadrupled overnight (and continue to climb), and the possibility that we are out about a billion dollars in lost revenue,” said Celeste Meiffren of Illinois PIRG. “Can you imagine if this happened with our municipal water system?”

Related:

Chicago water for sale? (October 20, 2009)

Water and privatization (April 18, 2010)

Passed: Bill to aid public takeover of water systems

A bill to ease municipal acquisition of private water and sewer systems passed both houses of the General Assembly yesterday.

SB 3749, a version of an earlier bill sponsored by State Representative Renee Kosel (reported here in April) changes the way water and sewer systems are valued in eminent domain proceedings.  Previously valuation was based on projections of annual earnings; under the new law they would be based on the cost of acquisition for the existing utility.

That would remove the value of facilities built by developers and paid for by homeowners. The bill also allows depreciation to be taken into account.

Food and Water Watch is calling on Governor Quinn to sign the bill.

Dozens of suburban and downstate communities served by Illinois American Water Company, complaining of high rates and poor service, have discussed municipal takeovers.  According to the Tribune, IAW’s rates are more than four times those of neighboring communities with municipal ownership.  (For more see last October’s Newstip.)

In April, IAW rates in Chicago suburbs went up by 26 percent.  Yesterday IAW announced it would refund customers in Pekin who were charged nearly double the approved rates, the Peoria Journal-Star reports.

(In 2004 the Illinois Commerce Commission denied a petition by the City of Pekin to take over its water system from IAW.  Pekin cited high rates, burst pipies, and malfunctioning hydrants.  In 2006, mayors across the state backed a bill that eliminated the requirement of ICC approval for municipal takeovers of privately-operated water systems.)

Meanwhile, Melrose Park Mayor Ron Serpico announced today that seven communities served by the Melrose Park Water Consortium will receive rebates of over $700,000.   Northlake, Maywood, Melrose Park, and other communities contribute to retire debt incurred when the system was rebuilt in 1997, and the rebate is possible because “strong management practices have minimized the need for repairs and new equipment,” Serpico said.

Over the past three years the consortium has refunded over $3 million to member municipalities.

Earth Day notes

Today Food and Water Watch is celebrating the fact that bottled water sales declined for the first time ever last year– and Color Lines features reports from the World People’s Conference on Climate Change, with 20,000 people gathered in Cochabamba, Bolivia.

Cochabamba is the site of the water wars of 2000, after the World Bank demanded that Bolivia privatize its water systems, and massive protests led to a state of emergency — and the repeal of the privatization law.

Forum on water privatization

Leasing the city’s water system to a private company would provide a quick infusion of cash, but Chicagoans would pay for it for decades – not only with higher rates but with reduced service, as the company cuts staffing levels in order to bolster its bottom line, according to a new analysis from Food and Water Watch.

Over a 20-year period, consumers would pay two to three dollars for every dollar the city receives in an up-front payment, FWW estimates.  The city could save 20 to 50 percent of capital costs by using municipal bond financing instead of private financing with a lease deal, according to the analysis.

It was released in conjunction with a public forum Monday night which attracted a standing-room-only crowd at the Chopin Theater (see previous post re. nonprofits’ views — and suburban experiences — on the issue).

Ald. Scott Waguespack (32nd Ward) warned that although the city isn’t talking publicly about a water deal, “these things happen fast” so “we’ve got to be on our game.”

He recalled asking if he could see the city’s economic analysis before the December 2008 parking meter lease vote in the City Council.  “They said no, you can’t.  That made it an easy ‘no’ vote.”

He urged audience members to contact their aldermen about an ordinance he’s proposed to add transparency and taxpayer protections to asset leases by the city.

Waguespack said he first became aware of water issues while serving with the Peace Corps in Kenya.  “I saw what happened when private interests control water,” he said.  “Here in the U.S., rates go up, but in African they can just shut the water off.”

Rachel Weber, an urban planning professor at UIC, said private infrastructure investment funds grew dramatically with the end of the last decade’s economic boom, as investors became skittish about other markets and long-term, stable revenue-producing assets became more attractive.  At the same time, fiscally strained cities and states grew desperate for cash infusions.

“The process for privatizing assets is often not transparent,” she said, and “investment firms often serve as both advisers and financiers.”  The potential for undervaluing assets is great, she said.

Often investment banks advising cities on such deals are paid success fees, giving them an incentive to push a deal, so they “aren’t always a fair arbiter,” said Jon Keesecker of Food and Water Watch.

In many cases revenue streams from asset leases are securitized and sold off in bond markets, said Phineas Baxandall of U.S. PIRG.

Asset lease deals often involve “clear conflicts of interest,” while the efficiencies that privatization is supposed to bring “often turn out to be illusory,” he said.

Keesecker said a lease of the water system would involve a loss of local control, including the ability to decide where to build water lines and whether to sell water to other communities – or to water bottlers.  Such activities could be restricted, but that would make the asset less valuable and reduce the city’s concession fee, he said.

The panel was moderated by Abigail Singer, a new organizer focused on water privatization with Little Village Environmental Justice Organization.  It was co-sponsored by Illinois PIRG.

Speaking from the audience, Kathy Cummings urged concerned residents to get in touch with a new group, Citizens Act to Protect Our Water.

 

Related:

Chicago water for sale?

Water and privatization

While Chicago suburbs served by a private water company face steep rate hikes – and several communities band together to buy out the company’s pipeline – organizing around water privatization steps up in Chicago, and legislation promotion transparency in privatization deals is proposed in the City Council and state legislature.

A community forum on water privatization (Monday, April 19, 7 p.m., at Chopin Theater, 1543 W. Division) features Ald. Scott Waguespack along with two national experts on the subject, Jon Keesecker of Food and Water Watch and Phineas Baxandall of U.S. PIRG, who co-authored a report on privatization in Chicago issued last October by Illinois PIRG.  The event is free.

Food and Water Watch will be releasing an economic analysis of water privatization in Chicago.  The group, which assists local groups battling for public control of water around the world, recently opened a Chicago office.

FWW maintains water privatization leads to constant rate hikes and declining water quality.  It’s also a bad economic deal for cities, said Emily Carroll, FWW’s new Chicago organizer.

“Governments get a big lump sump up front – that’s the appeal of these deals,” she said.  “But in the long term, private companies do not give taxpayers what the asset is worth – that’s how they make money.  And these are really long-term leases.”

Groups weigh in

Since the parking meter controversy last year – and a Newstips report in October, which revealed the city’s consideration of water privatization – other local groups have weighed in on the general issue of privatization.

In February, Dennis Gannon of the Chicago Federation of Labor and Jerry Roper of the Chicagoland Chamber of Commerce wrote an op-ed calling parking meter privatization “a great success for Chicago’s businesses and the public” and urging renewed efforts to privatize Midway Airport.

The CFL’s major concern in protections for incumbent workers, said spokesperson Nick Kaleba.

Though it has criticized the excessive use of proceeds to cover operating budget deficits, the Civic Federation continues to advocate consideration of privatization as a means of reducing the city’s operating expenses and increasing efficiency, said Lawrence Msall.  He reiterated the guidelines proposed in a 2006 issue brief – deals should require competitive bidding and involve non-core services, and proceeds should be used to reduce long-term obligations, not operating costs.

Is water a core service for the city?  Msall thinks not, pointing out that many municipalities are served by private utilities.  “I don’t know that the citizens of Chicago care very much who is providing their water as long as it’s of high quality and safe,” he said.

The Better Government Association has urged greater transparency in privatization deals.  The problem with parking meter privatization was not the concept but the process, said Andy Shaw.  “The problem is when things are done in the dark of night,” he said.  “Give us transparency and information — and time for public input.”

Legislative protections

Two groups are backing legislative efforts to increase transparency in privatization deals —  though one hopes to restrain the process and the other to spur it.

Illinois PIRG is organizing support for an ordinance introduced last fall by Waguespack which would require the city to inform aldermen when a consultant is hired to consider a privatization deal; mandate a public hearing 30 days before a City Council vote on a deal; and limit leases of assets over $1 million to 30 years.

While some privatization deals may be appropriate, much more transparency and taxpayer protection is needed – and the city’s water system should be kept public, said Brian Imus of Illinois PIRG.

The Metropolitan Planning Council is backing SB 3482, sponsored by State Senator Heather Steans (D-7th), which would provide authority to the state’s transportation department, tollway authority, and municipal airports to enter public-private agreements to finance new transportation projects and lease existing infrastructure.

The bill would require prior authorization of deals by the General Assembly and independent review by the state’s government accountability commission, and it would require that proceeds go to a transportation fund.

“As a tool privatization can be good, though our experience in this region raises a lot of concerns,” said MPC vice president Peter Skosey.  With the state hard-pressed for cash, public-private partnerships could raise funds for high-speed rail, bus rapid transit in Chicago, or a new road providing western access to O’Hare, he said.

Privatization of water systems should be considered, he said, though any money generated should be reinvested in the water system.  Long-term sustainability of the region’s water supply is a major concern for MPC (the group issued a report on the subject last year, and is sponsoring a forum next month), and Chicago’s aging water infrastructure – over 4,000 miles of pipes, much of it dating to 1890 – is a significant source of water loss.

In addition, private utilities are required to include the full cost of providing water in their rates, while public utilities can tap other public funds.  Higher rates reflecting the true cost of water would discourage waste by consumers, Skosey said.

“There are towns in the region that lack the resources to upgrade and repair their water infrastructure,” he said.  And “some towns are very happy” with private water service, he said.

Another rate hike

That wouldn’t seem to include towns served by Illinois American Water Company, the largest private water utility in the state and a subsidiary of American Water Company, the largest private water utility in the nation.

On April 13, the Illinois Commerce Commission approved a $40 million rate hike for IAW’s 317,000 customers; about 37,000 customers in Chicago’s suburbs will see rates go up by 26.4 percent.  IAW had requested $61 million.

An IAW request for a 5 percent statewide increase to fund infrastructure improvements is still pending.  IAW’s last rate hike was August 2008.

The ICC expressed “serious disappointment” with IAW’s refusal to comply with the commission’s request for more support documentation.  “IAW can’t view Illinois ratepayers as an open checkbook,” warned ICC chair Manuel Flores.

Opponents of the rate hike included State Representative Renee Kosel (R-81st), the assistant minority leader.  She’s teamed up with Attorney General Lisa Madigan to sponsor an expert review of IAW’s operations which found the company was overcharging for management fees (paid to another American Water subsidiary) and cited problems with billing, metering, customer service, and fire protection. Kosel and Madigan argued IAW should decrease, not increase, their rates.

Citing “serious and pervasive” errors in the company’s record keeping, making it impossible to track water purchases and sales, in 2006 Madigan called for a comprehensive audit of the company.  “If the company can’t keep accurate records, we need to question everything about the fairness of their rates,” Madigan said.

Municipalities have also opposed IAW’s rate hikes over the years – one official said the relationship with the utility has been “adversarial most of the time” —  and the village of Homer Glen filed several complaints with the ICC.  In 2007 the ICC upheld complaints regarding inadequate inspections – including no records concerning fire hydrants – and billing irregularities.

In recent weeks village boards in Homer Glen, Bolingbrook, Woodridge, Romeoville, and Lemont have approved a Northern Will County Intergovermental Agreement to pursue acquisition of the 18-mile pipeline owned by another American Water subsidiary that brings water from Lake Michigan to the communities.  Individual communities are studying acquisition of distribution systems.

“The only solution to these outrageous rate increases is to buy the system,” Homer Glen Mayor Jim Daley told the Homer Horizon.

Broken hydrants

In addition to high rates there are issues of service and water quality, said Bolingbrook village attorney James Boan.  “The biggest thing is that a private company’s drive is for one thing – profit for its shareholders,” he said.  “A municipality’s drive is to provide a public service.”

He said a feasibility study recently completed by the communities found they could take over and operate the water at current rates – “and that was before this rate hike.”

A bill by Kosel to make municipal takeovers easier has attracted bipartisan support (and backing by the Illinois Municipal League).  HB 5485 would remove water infrastructure built by developers (and paid for by homebuyers) from the value of a water system in eminent domain appraisals.

IAW called the bill “an alarming attack on the value of private property,” the Horizon reported.

The notion that conservation is promoted by laws that let private utilities charge for all water costs – including water lost in leaks and unmetered construction sites – doesn’t make sense to IAW customers.  The company “has no incentive to conserve water because whatever it loses due to leaks in its pipelines, it makes up for in its charges to customers,” Kosel told Phil Kadner of the Southtown Star.

Boan recalls a water main which burst on a Saturday in Bolingbrook.  “They let it go all weekend, because we paid for the lost water and it was cheaper to bring in a crew on a Monday and avoid paying overtime,” he said.

In another example of the profit motive undermining the public interest, he cites a 2007 investigation by CBS2 which found that numerous fire hydrants operated by IAW were out of order, including hydrants outside schools in Lisle and Mount Prospect and a nursing home in Bolingbrook.  A subsequent inspection in Mount Prospect found that 50 percent of hydrants had problems.

Fire departments reported finding inadequate and conflicting records regarding hydrant repairs.  Lisle Fire Chief Tom Freeman said that because a private company owns the hydrants, the fire department has no authority to order them fixed.

American Water Company was bought by RWE, a huge European utility corporation, in 2001.  Four years later RWE announced it was selling off the company; by late last year RWE had reduced its holdings in AWC to 2 percent.

Minutes of an RWE board meeting leaked to US News and World Report by FWW showed the Europeans’ hopes of high growth were dashed “due to political resistance to water privatization in the U.S.,” in the words of CEO Harry Roels.  In addition, regulators were creating problems by demanding reductions in contamination by arsenic and lead in AWC pipes.

Roels estimated the company was losing 19 percent of its water value through leaking pipes – and that at the current rates of investment, it would take 200 years to replace all the distribution lines that need it.

In California, the Public Utility Commission’s ratepayers advocate opposed RWE’s sale of American Water, fearing the financial burden would be shifted to customers (pdf).

O’Brien: Keeping Lake Michigan clean?

“It’s my job to clean up our water and keep pollution out of Lake Michigan,” says MWRD president Terrence O’Brien in the first TV ad of his campaign for County Board president (watch it on youtube).  “It’s time to clean up Cook County.”

In fact, as Newstips reported last April, under O’Brien the MWRD has resisted calls to disinfect wastewater for nearly a decade.  In a letter to the Tribune last February, O’Brien claimed it would cost $2 billion; Newstips reported the US EPA’s estimate that it would cost at most $650 million, and perhaps as little as $250 million, over 20 years.

“Environmental groups believe MWRD is exaggerating the cost of disinfection as part of a strategy of delaying action,” we wrote, citing John Quail of Friends of the Chicago River.

Ann Alexander of the Natural Resources Defense Council pointed out that MWRD is spending millions of dollars on lawyers and experts in its effort to prevent the Illinois Pollution Control Board from implementing a recommendation by the Illinois EPA (endorsed by the city) to require MWRD to disinfect.

As far as “keeping pollution out of Lake Michigan,” here’s what we reported in August of 2003:

“During ‘extreme storm events,’ locks are opened and river system water is released into Lake Michigan.  ‘There is undoubtedly bacteria from the waterways system getting into the lake,’ said [Laurel] O’Sullivan [of the Lake Michigan Federation].

“‘The overall quality of the water sent out to the lake would be much higher if they disinfected.'”

UPDATE:  Last year we reported a ruling was expected by the end of the year.  Alexander now says she has no idea when a ruling will occur, noting this “has set the record for the length of a rulemaking proceeding.”

The delay results from MWRD’s effort “to contest the obvious,” she said.

“They’ve presented multiple purported experts before the pollution control board to defend the proposition that pathogens in the water aren’t really bad for you.” That’s forced NRDC to spend time and resources “to prove that in fact they are.”

It’s a remarkable story that to date has gone virtually untold.  Will O’Brien’s candidacy give it any currency?



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