Official: Promised rate reduction key in $1.9B city water, sewer deal

March 10, 2010

The deal with Citizens Energy Group seems impressive: $425 million in cash flowing into city coffers and $1.5 billion in city debt obligations cascading out the door.

But is Mayor Greg Ballard’s $1.9 billion proposal to sell Indianapolis’ water and sewer utilities to Indianapolis-based Citizens, announced Wednesday, the highest and best offer among 24 proposals considered by the city?

It was if you factor in the expected rate savings to customers, said Michael Huber, the city’s director of enterprise development and a key player in the deal.
Huber said some of the proposals could have generated a higher upfront cash payment to the city, but that rate mitigation made possible through annual cost savings ultimately tipped the deal in favor of Citizens.

The company estimates combined water and sewer rates will be 25-percent lower by 2025 under its ownership than if the city pursued other options.

Citizens projects $40 million in annual savings through the combination of the city utilities with its own gas, steam and chilled-water operations.

Citizens has been considered the front-runner since Ballard last year said the city would study potential benefits of unloading the water and sewer utilities, which face more than $5 billion in infrastructure improvements in the years ahead.

Part of that burden is to comply with federal mandates to eliminate the city’s combined sewer and storm-water system that sends raw sewage into creeks and rivers during heavy rains.

None of the other proposals involved combining three utilities–-water, sewer and Citizens Gas, he said. The combination offers more potential savings, such as reducing three similar back-office functions to a single one, officials said.

Also, since the mayor announced the review of water and sewer operations seven months ago, Citizens has been touting its ability to conduct tax-exempt financing—reducing borrowing costs in a way a private firm cannot.  

That Citizens is a public charitable trust, without private shareholders to enrich, also was key in the decision, Huber said.

“This is really in the best long-term interest of the community,” he said

That claim likely will be challenged in the months ahead by the City-County Council and in public hearings in which Ballard plans to reveal more about the non-binding memorandum of understanding reached with Citizens.

Publicly, some on the council are already lamenting the loss of city oversight for rates, while critics of city control say the water and sewer utilities have long been bastions of political patronage.

“With this we will take politics out of running our water and wastewater systems,” Ballard said Wednesday morning.

Ballard’s predecessor, Democrat Bart Peterson, led a city buyback of Indianapolis Water from Merrillville-based NiSource Inc. in 2002. Ballard said the city “flatlined” rates for five years “while simply taking on more debt than the system is worth.”

Indianapolis Water now is seeking a 35-percent rate hike for capital improvements, on top of an 11-percent emergency rate hike that the Indiana Utility Regulatory Commission approved last year.

The emergency hike was sought to pay more than $25 million in additional debt-servicing costs stemming from the utility’s inordinate amount of variable-rate bond debt approved years earlier. The Indianapolis Bond Bank drew much of the blame for the bond fiasco, but the city’s waterworks department and its board have been faulted for past oversight.

The mayor touted the $425 million in upfront proceeds under the Citizens deal as a bonanza for road improvements, bike lanes and other capital projects, calling it “the equivalent of a massive jobs bill.”

It’s unclear specifically how the city will wind down its existing management contracts with Veolia, which operates the water system, and with United Water, which manages the sewer system.

“We anticipate they will continue to play significant roles in the operations” of the utilities, Citizens CEO Carey Lykins said.

Ballard plans to file legislation with the City-Council Council on April 16 to transfer the city’s water and sewer utilities. The deal also needs approval from the city’s Board of Water Works and the Board of Public Works—and the Indiana Utility Regulatory Commission.

Among the other firms that offered proposals to acquire and/or operate the city’s utilities were Macquarie, the Australian firm that operates the Indiana Toll Road under a 75-year, $3.8 billion lease, and American Water, the New Jersey-based company operating water utilities statewide.

A consultant’s report filed as part of the water company’s rate case pending before state regulators blasts the city’s oversight of the water utility, saying the Department of Waterworks too often relied on its board, on consultants and on private operator Veolia rather than on the department’s own staff “to ensure safe and efficient operation, maintenance and management” of Indianapolis Water.


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