Troubled Water 

Six questions about the Indianapolis Water Company deal

Six questions about the Indianapolis Water Company deal
72-year-old retiree from IWC, has been hit hard by the changes that USFilter made in health coverage. His medical conditions include diabetes, congestive heart failure and kidney failure. Stevens is forced to file his own Medicare claims since USFilter?s HMO, CIGNA, doesn?t do that. This is especially difficult since he?s also legally blind. His bills at the drugstore have sky-rocketed. When he could no longer afford an expensive stroke medicine, his doctor told him ?aspirin is better than nothing.? Stevens blames Mayor Peterson for a lot of what?s happened. ?I know I?m not going to vote for him,? he says. Stevens understands he is lucky that Medicare supplements the USFilter plan. One distraught woman, whose husband is a current USFilter employee, is faced with dealing with USFilter?s health plan on her own. The woman, who asked that her name not be disclosed, is outraged at the way USFilter saves money. ?I?ve had to change every single doctor ? I?m behind on medical tests I need to have for my diabetes because of coverage ? plus we?re paying $160 per month for this crappy insurance,? she says. ?When they say it?s better coverage, they?re lying.? Jim Simons, a retired IWC employee and now a stroke victim, was forced to use duct tape and wooden sticks to repair his braces while waiting months to have new ones approved by CIGNA. Perhaps the most tragic example of the shortcomings of the employees? new insurance plan was revealed in testimony to the Waterworks Board and the Community Affairs Committee of the City-County Council. That testimony told of a woman cancer patient who became so discouraged at the added expense and hassle of changing all her doctors and labs that she quit her therapy and died. Her grief-stricken husband can?t even talk about it. Is USFilter taking shortcuts to maximize profits? Critics say USFilter?s quest for profits doesn?t end with cutting employee benefits. Michael Warburton of the Public Trust Alliance charges that ?USFilter tends to come in, get rid of local expertise and substitute remote judgment; in many cases local capacity to supervise is lost and system failures with far higher costs are possible ? USFilter is known for taking shortcuts to maximize profits.? That may be happening already in Indianapolis. International Brotherhood of Firemen & Oilers Union President Robert Reed notes that USFilter is already ?worried about getting money? and ?there?s not a whole lot of preventive maintenance or repair that I can see going on.? USFilter is also planning to install a computerized central control system called ?H2O Net.? At the USFilter presentation to the city search team in February 2002, the head technical advisor, John Machisko, said, ?The goal over the next two years is to get H2O Net up and operating ? with more automatically controlled flow of water ? as a way to save energy.? Why is the project framed with a two-year goal? Coincidentally or not, at the end of those same two years the company is allowed to begin ?downsizing.? Employees suspect that the energy Machisko is referring to is human energy, and that the first layoffs at IWC in 130 years are likely to follow shortly after the automation project is completed. The employees? union has responded vigorously to employees? complaints about changes implemented by USFilter. In previous years it was unusual for even a single labor dispute to be brought before the National Labor Relations Board. But in less than a single year of USFilter?s management, 14 charges have been brought against USFilter by the union. According to Chris Burton, business manager of the Fireman & Oilers Union, the labor board issued complaints to USFilter on all 14 issues. One of the most contentious issues involves the office and clerical workers who have been working without a contract since joining the union. The union charges that the company has not negotiated fairly. Union President Bob Reed indicates that an ?informational picket? is being planned within 30 days, with a stronger response possible later in the year. There hasn?t been a full In April of last year, the City of Indianapolis paid $515 million to purchase the Indianapolis Water Co. (IWC) from utility holding company NiSource. Some observers, including members of the City-County Council and the Indianapolis Waterworks Board, along with employees of the Water Company, still question the deal. They say the city?s actions taking charge of this crucial public resource were severely compromised by the way the purchase was handled and by the city?s decision to hire USFilter, a large multinational corporation, to manage the IWC. Some workers, consumer groups and lawmakers are even exploring ways, including a lawsuit, to take management of the IWC away from USFilter. Others inside city government may be belatedly questioning the terms of the deal. Kobi Wright, special assistant corporation counsel for the City of Indianapolis, confirms that the city has already made a claim for damages against NiSource for violating promises regarding the billing system and other matters. There is not yet any evidence that the quality of water Indianapolis residents consume has changed significantly since the sale, yet still people are talking about a bad deal and how to fix it. NUVO has identified six questions about the IWC deal and its aftermath: ? Did the city pay NiSource too much too quickly for the Water Company? ? Who profited from the deal to award the management contract to USFilter? ? What is the track record of USFilter? ? Are promises to IWC employees being kept? ? Is USFilter taking shortcuts to maximize profits? ? Is there a way to remove USFilter from managing the IWC? Did the city pay NiSource too much too quickly for the Water Company? NiSource is a utility holding company based in Merrillville, Ind. As a condition of Securities and Exchange Commission approval of its 2001 merger with Columbia Energy, NiSource was compelled to sell IWC. Alan Kimbell, a retired IWC executive and one of seven members of the Indianapolis Waterworks Board, which oversees the Water Company?s management, is critical of the way the city handled the purchase. ?The city allowed NiSource to out-negotiate them from beginning to end and paid too much for this utility,? Kimbell says. NiSource gave the city until April 2002 to close the deal or they would put the utility on the open market. But this deadline was essentially meaningless, Kimbell says. The city had the legal right to condemn the utility and take it over, so no private interests would have even considered a bid, he says. The chronology of the purchase offers support for Kimbell?s claim that NiSource ?took us to the cleaners.? ? 1997: NiSource purchases IWC for $288 million from local investors. ? 2000-2002: NiSource recoups part of its investment by selling off IWC assets, at a profit of $118 million. ? April 2002: NiSource sells remaining IWC assets to Indianapolis for $515 million. Since NiSource retained $80 million of long-term IWC debt and the city took on $132 million of the same, it appears that the city handed NiSource a net gain of over $250 million. To Kimbell, this represented ?the largest bond issue ever by the Bond Bank or city for any purpose whatsoever ? and it had one hearing at the [City-County] Council and they didn?t want to give it a full hearing at that.? The city and the Indianapolis Bond Bank paid over $8 million to consultants, appraisers and lawyers, ostensibly in an effort to secure taxpayers the best possible deal. Kimbell speculates that the city?s advisors may have acted hastily to close the deal and collect their fees. ?Their consultants ? engineering and financial and bond underwriters and bond lawyers smelled a pot of gold ? so let?s do it fast,? Kimbell says. ?It was their interest ? not the public interest, and they used the cover of the NiSource threat.? City officials say that they bought the utility for nearly $200 million less than the value attributed to it by its former owners. JoLynn Garing, press secretary for Mayor Bart Peterson, said that she had never heard anyone claim that the city had paid too much for the utility. ?Had it gone out for bid to other companies it would have been sold at a much higher price,? Garing said. ?When utilities go on the market, rates go up,? Garing added. From the city?s perspective, the Peterson Administration was trying to protect consumers? pocketbooks. Who benefited from the deal? After NiSource signed a letter of intent to sell IWC to the city, management proposals for the waterworks were due Feb. 8, 2002. Only 18 days later, after offering the second lowest bid, USFilter was recommended to the Waterworks Board by a review team made up of three staffers of Peterson, three appointees from the mayor and three appointees from then-Council President Beurt SerVaas. Why was USFilter so successful? Critics point to a link between the Peterson-influenced selection process and the company?s impressive list of prominent Democrat advisors. Those advisors hired by USFilter included Marion County Democrat Party Chair Ed Treacy, former state Democrat Chair Kip Tew and Tom New, former chief of staff for Gov. Frank O?Bannon. The USFilter proposal also listed former state Democrat Party Chair Robin Winston as leading their Community Oversight Committee. Pat Terrell, former political director of the state Democrats, and Winston?s business partner, was to assist Winston and USFilter in, according to the proposal, ?identifying? issues important to the community at large. Tew, New, Winston and Terrell gave a total of $5,300 to Peterson?s re-election campaign in 2002. Bose McKinney, the law firm which partners in government lobbying with Ed Treacy, deposited $11,250 in the mayor?s campaign war chest during the same year. Even beyond the consultants? ties with the mayor, the IWC deal spawned a get-a-contract make-a-contribution pattern that gives at least an appearance of quid pro quo. Law firms who worked on the deal were paid over $3.5 million, and gave nearly $40,000 to the mayor?s campaign in 2002. The firms include: ? Sommer and Barnard was paid $2.95 million by the Indianapolis Bond Bank and $109,000 by the Department of Waterworks. Sommer and Barnard?s 2002 corporate and individual contributions to Peterson?s re-election campaign total $10,285. ? Ice Miller was paid $909,000 for bond counsel by the Bond Bank. Three associates gave Peterson?s campaign a total of $7,050 in 2002. ? Baker and Daniels was paid $308,000 by the Bond Bank. Firm members gave a total of $36,000 to Peterson?s re-election campaign in 2002. ? Bose McKinney was paid $36,000 by the Bond Bank. Firm members gave a total of $11,250 to Peterson?s re-election campaign in 2002. Engineering firm DLZ Corporation was paid $1.3 million by the Bond Bank for ?due diligence? and $29,000 from the city for ?capital project oversight? on the deal. DLZ?s principals contributed over $18,000 to the mayor?s campaign in 2002. Bowen Engineering of Fishers, Ind., is part of USFilter?s ?core team,? and is identified as a USFilter partner in the company?s December 2001 Letter of Qualification. Bowen associates gave Peterson?s campaign $13,750 in 2002. Garing, Peterson?s spokesperson, denies that political connections or contributions had anything to do with USFilter getting the management contract. ?USFilter got the contract because they had the best overall package,? she said. ?We felt they were the best company.? What is the track record of USFilter? USFilter, a subsidiary of Vivendi Environnement based in Paris, France, was awarded the 20-year $1.5 billion contract to manage the IWC. (The usual figure quoted is $1.08 billion, but USFilter will get at least an additional $400 million from capital improvements projects.) USFilter impressed the search team, in part, by portraying itself as a company with vast experience in managing large municipal waterworks. This seems to be an exaggeration. The New York Times reported that when Vivendi bought them in 1999, USFilter lacked experience and had run very few municipal water systems. A week after the purchase, market consultant Frost and Sullivan wondered whether USFilter was a ?large house of cards waiting for a small breeze to make it tumble.? It turns out that, by its own admission, Indianapolis is the biggest project of its kind USFilter has ever undertaken. The experiences of other cities that have hired USFilter to manage their water systems offer a series of cautionary tales: ? Plymouth, Mass.: A year-old, $50 million sewage treatment plant designed and operated by USFilter has been plagued with problems, including inappropriate discharge of treated sewage, inadequate staffing, ?algae, floatables and scum? in storage tanks, faulty testing, strong odors and pump failure. One city official told the Plymouth Patriot-Ledger, ?I haven?t been happy with anything USFilter has done since I?ve been on the board.? ? New Orleans, La.: After a treatment plant caught fire, USFilter allowed untreated sewage to flow into the Mississippi River for several hours. City officials charge that the company knew there were equipment problems, but did nothing to correct them. ? Moncton, New Brunswick: After accepting junkets to England, France and three U.S. cities paid for by USFilter, city officials awarded USFilter a no-bid contract. Scott Edwards, vice president of marketing at USFilter, counters that other divisions of Vivendi Environnement are successfully managing large waterworks in Berlin, Paris, London and several U.S. cities. Edwards says that USFilter has addressed all the issues mentioned ? even sending in a corporate ?swat team? to clean up the problems in Plymouth, Mass. If USFilter has an uncertain waterworks record, it has proven to be quite adept at managing the political process. Until recently, a 20-year privatization contract like the one Indianapolis offered USFilter was unheard of, and cities could lose their tax-exempt status if a contract exceeded five years. After intense lobbying by the industry-sponsored National Association of Water Companies and the U.S. Conference of Mayors, the IRS raised the contract limit in 1997. The impetus for privatization from the mayors? conference seems understandable given the corporations that sit on the conference?s Water Development Advisory Board: American Water Works, United Water (which runs Indianapolis? wastewater treatment plants) and USFilter. The conference?s Web site even has a ?Meet the Mayors? feature ?brought to you by USFilter.? In the last two election cycles (1999-2002) the water industry tripled congressional campaign spending to $1.5 million. At the same time, the federal lawmakers have passed a tax law favorable to privatization and introduced legislation requiring that privatization be considered before any federal funds are dispensed to improve a public utility?s infrastructure. The money to be spent is substantial. According to industry observers such as the Water Infrastructure Network and the American Society of Civil Engineers, the country?s failing water infrastructure will cost between $150 billion and $1 trillion to repair or replace over the next 30 years. Since the federal government is only investing $3 billion annually, industry and free market advocates are citing that huge shortfall as a reason to privatize the ownership and operation of municipal water systems. Are promises to IWC employees being kept? In July 2002, shortly after the city closed the purchase deal with NiSource, Peterson sent a letter to IWC employees, in which he made a promise: ?Your benefits, such as vacation and sick time, paid holidays, medical benefits, life insurance and retirement programs, will not change.? In its management proposal, USFilter also reassured the employees. David Ward, vice president of human resources for USF, vowed that the company would be ?sensitive to the needs and expectations [of employees] ? We tailor and specialize our transition programs to those needs.? Ward said, ?We?re a very family-oriented company from the employee perspective ? lots of outings and social gatherings.? On May 1, 2002, the former IWC employees all became USFilter employees. Within days of USFilter getting the IWC contract, the employees learned that their most valuable asset, a ?defined benefit? pension, was being eliminated. A ?defined benefit? pension provides a set level of benefits to retirees for the rest of their lives. To cut costs, corporations began eliminating the ?defined benefit? 20 years ago, after lobbying Congress to create ?defined contribution? plans like the 401(k). Ward told employees that a 401(k) could be better than a defined plan, a claim the employees and many financial advisors dispute. Soon, other employee benefit cuts were announced. USFilter reduced the 401(k) plan to which employees had been contributing, and replaced the popular Anthem health plan with an HMO, which employees say is far more expensive and limits employee choice of doctors. Despite the mayor?s promises to the contrary, life insurance was slashed, vacation days eliminated, personal and sick days and holidays were reduced. The popular scholarship program was eliminated entirely. There is fear that many employees will be fired or transferred to USFilter?s Culligan division when the company?s contract allows it next year. ?Being fair does not mean having a job for life,? CEO Jim Keene told employees in a speech this February. A few days later, employees received a memo warning them against speaking to the media about USFilter. Tom Plummer, a 25-year veteran of the waterworks, has filed a federal class action lawsuit against the city. After he criticized USFilter in a television interview, Plummer was summoned by CEO Keene. Plummer says he was told ?any future comments about USFilter operations or city operations and you will be fired.? Plummer told Keene, ?I?m not going to lie for you.? The Plummer lawsuit on behalf of employees estimates that USFilter has cut average benefits by over $9,000 annually per employee or $4.3 million a year. The suit also alleges: ? USFilter is converting ?the value of the employees? benefits which have been terminated or reduced, in that the current rate base includes full benefits.? Under Indiana law, conversion is a legal term for theft. ? The city and USFilter committed fraud and made ?fraudulent misrepresentations of the Defendants ?? by promising those benefits. ? The ?city?s bidding process for Waterworks Management Agreement was fatally flawed, illegal and should be set aside by this court.? The employee plaintiffs are asking for triple the amount of diminished benefits plus attorney fees. If successful, the suit could amount to a substantial judgment against the city. The employees? attorney, John Price, has recently filed an updated lawsuit adding USFilter and three company executives as defendants. The city has refused to settle and now, in an April letter to Price, suggested the attorney and his clients may be held responsible for $200,000 in city legal expenses. Price charges the move is a ?litigation strategy to attempt to chill the free speech rights of my clients.? In February of this year, the Waterworks Board released a study of employee benefits by Katz, Sapper and Miller, which purports to show the employees have comparable benefits under USFilter. Board member Alan Kimbell charges that the ?report wanders all over the place and doesn?t deal with the issue ? it?s a classic case of garbage in, garbage out.? When asked about the cuts in employee benefits, USFilter?s Scott Edwards said, ?It?s easy to view us as ogres, but we very closely followed the procurement process the city set forth and went above and beyond.? Edwards said that thousands of dollars were paid to each employee to ?increase benefits and generate good will.? The mayor?s press secretary, JoLynn Garing, agrees. ?We feel [the employees?] benefits are equivalent or better than what they had before,? she said. Several employees disagree. Many USFilter employees won?t talk on record because they fear reprisals, but Plummer echoes the sadness and rage many of his fellow employees share privately. ?So now I will not have a pension, no health care and when I retire I?ll have to wait until I?m 68 to receive Social Security,? Plummer says. Bill Stevens, a-scale strike at the waterworks in over 25 years, but a strike appears possible in the near future. After recent negotiations broke down, USFilter stated in an April 14, 2003, memo that negotiation ?will become more difficult? now because each side put together the ?best they could do.? The employees are not alone in their concerns about USFilter?s management of IWC. Customer complaints have more than doubled since USFilter took over, including: ? 15,000 incorrect water bills sent out so far, a number confirmed by a city spokesperson. ? According to an Indianapolis Star report, dozens of fire hydrants froze last winter, after USF cut back on fire hydrant inspections and maintenance. Frozen hydrants prevented firefighters from extinguishing a fire that destroyed a church in Avon, a $70,000 house fire in Lawrence and a $150,000 blaze in Washington Township. The subsequent uproar caused USFilter to inspect 1,200 of the 35,000 hydrants. They reportedly found 400 frozen hydrants with some neighborhoods entirely frozen up. The Indianapolis Water Progress Report for February shows that almost 50 percent more hydrants were repaired during the winter before USFilter took over, despite the fact that the earlier was comparatively very mild. ? McCordsville cancelled its contract with USFilter?s billing arm UDC last December after a string of mistakes. ? In Zionsville, similar problems with billing resulted in calls from irate citizens that made town board members? ?lives hell,? according to The Indianapolis Business Journal, and prompted Zionsville to consider dumping their contract for USFilter?s sewer billings. ? Environmentalists are disappointed that USFilter rejected a proposed public, scientific and business advisory group designed to give citizens a voice in how the waterworks is operated. Former Environmental Protection Agency official Glenn Pratt alleges that USFilter feels the public ?has no rights to know or ability to participate? in the operation of their water utility. Besides employee benefit cuts, automation and cutbacks in inspections and customer service, capital improvements are an additional opportunity for USFilter to maximize profits in Indianapolis. According to their contract, USFilter ?shall be solely responsible for all activities associated with a Capital Project, including ? planning, all engineering, design, construction inspection/administration, construction and close-out services.? In addition, the contract states, ?The department may be able to fund an amount over $20 million, up to $40 million annually? for the projects, nearly doubling the value of USFilter?s contract. Reed says he is concerned that USFilter will lay off his veteran construction people when they bring in their own Engineering and Construction Division to work on capital improvement projects. In February, USFilter CEO Keene told employees, ?My view is that we should lay all of the pipe in all the public thoroughfares. We should take it right into the housing developments and right into the homes and we should have a Culligan [a subsidiary of USFilter] home unit right on back of the truck and take it right in all the way.? That statement strikes Marion County Alliance of Neighborhood Associations board member Clarke Kahlo as an unsettling proposition, considering that USFilter is already supposed to be providing clean drinking water for the public. ?Why should they have to peddle Culligan home units if they are really cleaning the public?s water?? Kahlo asks. The watchdog group Public Citizen worries about the long-term financial health of USFilter. ?USFilter could find itself cannibalized, squeezed and drained as the corporate parent tries to eke every last drop out of the ?cash cow,?? the group wrote in a recent report. In spite of reassurances from USFilter?s vice president of marketing, Scott Edwards, that Vivendi Environnement is ?one of the strongest companies in the world,? the French corporation reported over $12 billion in debt at the end of 2002. Last year, Vivendi began doing to USFilter what NiSource did to IWC ? selling off chunks of the company to offset debt. Those sales have altered the company?s image presented in its proposal to manage IWC, where USFilter boasted of ?making a significant contribution to the Indianapolis community through the following business activities: Culligan Bottled Water, USFilter Distribution Group and USFilter Water.? Seven months later the USFilter family shrank when Vivendi sold off the Distribution Group for $620 million, and its Plymouth Products business for an undisclosed amount. Earlier that year, USFilter?s filter and separation business was sold to the Pell Corporation for $360 million in cash. The Financial Times reported late last year that USFilter had not turned out to be as profitable as the chairman of Vivendi had hoped, prompting Vivendi to depreciate the value of USFilter by $2.3 billion. Is there a way to remove USFilter from managing the IWC? A growing grass-roots effort is calling on the city to cancel its contract with USFilter and turn management over to Citizens Gas. According to its contract, the city can terminate the contract with USFilter for various reasons, including ?labor unrest,? ?company default? or ?uncontrollable circumstances.? On April 24, yet another IWC-related lawsuit was filed, this one in Marion County Circuit Court, charging that state law was ?egregiously violated? by not allowing the public trust Citizens Gas to manage the waterworks. This action against the city was filed by former Water Company employees and asks that all ?control and operation of the Indianapolis Water Company be transferred to the Department of Public Utilities [Citizens Gas & Coke Utility].? City-County Councilor Jim Bradford also wants the publicly-owned Citizens Gas utility to assume management. ?Having Citizens Gas run the waterworks takes the political shenanigans out of the equation and puts the operation in the hands of the citizens,? Bradford says. Tom Plummer reports that all the employees he has talked with ?are absolutely thrilled? at the prospect of having Citizens Gas run the waterworks. Mayoral spokesperson Garing contends, however, that ?the whole Citizens Gas thing is a moot point? because the Indiana Regulatory Commission (IURC) already ruled on and settled the issue two years ago. ?The IURC said there?s no need to have it formed like Citizens Gas and the Department of Waterworks is legal. I?m not sure why that keeps coming up,? Garing says. But Mary Beth Fisher of the IURC counters that the Citizens Gas issue was never addressed in the settlement agreement ? only the sale of IWC to the city. Fisher said that on March 28, 2002 (one week after the USFilter contract was signed), the city told the IURC that it was hiring USFilter but didn?t ask for, or receive approval for, that move. Public Citizen, working in coordination with the Indiana Alliance for Democracy, Citizens Action Coalition and Hoosier Environmental Council, is circulating a statement of support to area environmental, labor, faith and community groups to demonstrate to the decision-makers that a broad range of organizations want their water under local public control. The Marion County Alliance of Neighborhood Associations (MCANA) was one of the first grass-roots organizations to sign on. With elections for mayor and City-County Council only a few months away, the fate of the Indianapolis Water Company ? and the answers to these six questions ? promises to become a major political issue. Jack Miller is a free-lance writer and co-author of To Market, To Market: Reinventing Indianapolis. He is also the volunteer board president of Hoosier Environmental Council, one of the organizations supporting local public control of the Indianapolis Water Company.

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