Indianapolis Department of Waterworks and City Government and Greg Ballard and Local Government and Veolia and Sewer and Energy & Environment and Water and Environment and Utilities and Government & Economic Development and Government and Public-Private Partnership

City receives host of sale, privatization ideas for water, sewer utilities

October 3, 2009
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City officials grappling with a water utility deep in debt and a sewer infrastructure needing upwards of $2 billion in upgrades now have no shortage of ideas of how to fix the mess.

The hundreds of pages of proposals submitted by 23 firms this summer to Mayor Greg Ballard can be boiled down to three major themes:

• Sell the city’s water and/or sewer utilities outright.

• Retain ownership but put them into a newly created not-for-profit with tax-exempt financing powers, and keep them under private management.

• Employ new private management schemes for all or part of the utilities’ functions.

The ideas submitted to Ballard and now being analyzed by the city’s Infrastructure Advisory Commission range from little more than corporate sales brochures to detailed plans that appear ready for scrutiny by city attorneys.

There were big names—such as from Australia-based Macquarie—which manages the Indiana Toll Road under a 75-year, $3.8 billion lease with the state.

Perhaps the most compelling offer out of the box was from Citizens Energy, a quasi-government organization that provides natural gas, steam and chilled water in the metro area. It wants to buy both utilities.

In a letter sent to the city, Citizens signaled it would pay about $1.5 billion for the utilities. The city bought the water utility seven years ago from Merrillville-based NiSource for $515 million.

Because Citizens’ offer also includes the sewer system, it’s hard to gauge whether the city would be earning back any sort of premium from its 2002 purchase of the water company.

Clearly, though, the water system is becoming a financial albatross. The acquisition boosted its debt, a problem exacerbated when variable-rate bond refinancing exploded following the collapse of financial markets last year. As a result, the water utility’s debt is now approaching $1 billion.

Citizens offered to assume existing debt of the utilities. It also emphasized that its charitable public trust structure would allow the utilities to continue to issue tax-exempt debt for capital projects. That capability is worth up to $82 million a year in savings as opposed to the cost of financing under a for-profit corporation, Citizens estimates.

Meanwhile, a privately held company also has offered among several ideas to buy the city’s water assets, according to its documents.

New Jersey-based American, the largest privately held water utility serving Indiana, also suggested buying only Indianapolis Water’s operations inside or outside Marion County.

American currently is in the process of buying most of the assets of Trenton, N.J.’s city-owned water utility.

In an apparent counter to the advantages of tax-exempt financing, American touts its much broader ability to obtain volume discounts in purchasing, noting its annual capital spending is roughly $800 million a year.

But American said it is also open to other ideas, such as working with Citizens, which has said it is open to the idea of tapping a private firm to help manage the utilities.

Not-for-profit concept

Meanwhile, the two companies that now manage Indianapolis’ water and sewer systems under contracts with the city—Veolia Water and United Water, respectively—propose managing but not owning them.

Veolia’s package of ideas filed with the city makes reference to Citizens’ purchase proposal. It says that, while a sale may be an attractive way to finance city infrastructure improvements, Veolia’s approach would amount to “avoiding some of the inherent consequences [to the city] in terms of permanent loss of control and oversight” of the utilities.

Veolia said the city could instead transfer the assets of the utilities into a not-for-profit entity, which could continue to issue tax-exempt debt.

It proposes modifying its existing management agreement with the city, which expires in 2022, saying there are likely “significant costs” of unwinding the existing management contracts (Veolia’s and United’s).

Veolia goes into extensive detail of how the city could structure the deal. Veolia spokeswoman Lou Ann Baker said that stems from the company’s attempt to land the sewer management contract when it was up for renewal a few years ago. “It is clearly something that we have contemplated before.”

New Jersey-based United Water, which has managed the city’s sewer utility since 1994 and won the re-bid, appears to offer a similar approach to Veolia’s. It notes that two government arms now regulate the two utilities—the Department of Waterworks and Department of Public Works—each with separate financing, operation and oversight functions.

United proposes a single entity known as a municipal utility corporation, to replace the two city agencies. United would manage the utilities.

The city would retain ownership and would enjoy cost savings from better coordination between the utilities—such as reducing the frequency of street cuts by scheduling work on water and sewer projects in the same location to occur simultaneously.

Other considerations

The potential of such synergies to create cash for non-utility infrastructure needs like roads and parks is one of the things city officials will have to weigh.

“In a major metropolitan area, it is theoretically possible,” said Peter Beering, former chief counsel of the water utility under NiSource.

But it’s often been in smaller towns where a single entity manages water and sewer systems, not in major metro areas, he added. Indeed, many of the firms that have made proposals operate water and sewer systems but don’t handle both in a major city.

One reason is the complexity of major water and sewer systems and their infrastructure, and ever-increasing environmental standards requiring system upgrades.

“The water utility in many respects is what drives economic development. Somebody has to have the bench strength, the financial horsepower to put money in to grow and stimulate economic development,” added Beering.

Some of the nearly two dozen proposals offer less radical approaches to ownership and control.

Kansas-based engineering and construction firm Black & Veatch proposes a “strategic management partnership” that would deliver savings to ratepayers by combining such things as planning and business processes conducted across both utilities.

B&V, which already works with the city in the planning of its combined sewer overflow deep-tunnel project, suggests a concession agreement and upfront payment to the city—perhaps $60 million to $100 million—for managing and operating contracts and capital improvement programs through 2025. In return, the city would pay the concessionaire a portion of revenue annually.

“We have some really interesting ideas. We have a lot of important decisions to make in the next couple months,” said Michael Huber, city director of enterprise development.

Debt, capital crunch

Driving the whole exercise are the water company’s financial challenges and the potential of billions in capital improvements in the sewer system—and the need to free up more cash for infrastructure improvements for streets and parks.

City officials estimate the sewer and storm water rates could rise more than 400 percent by 2025. As part of a consent agreement reached with the federal government in 2006, the city pledges to eliminate 97 percent of sewer overflow by 2025. Currently, the bulk of the city’s sewer system handles both raw sewage and rainwater. During storms, raw sewage can overflow into streams and rivers.

Planned is the construction of a nearly 20-mile tunnel under the city, between the state fairgrounds and the city’s Belmont and Southport treatment plants. At roughly 25 feet in diameter, the massive tunnel would collect wastewater and store it until it could be pumped up for treatment.•

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