Phoenix OKs deal with private firm to run water plant

Tom Zoellner
The Arizona Republic
Jul. 4, 2003 12:00 AM

Water in the northernmost part of Phoenix will be treated and delivered by a German-owned corporation within four years.

The City Council voted Wednesday to give a $336 million contract to American Water Service Inc. to build and operate the new Lake Pleasant Water Treatment Plant.

The deal represents the city's first foray into privatized municipal water, a growing but controversial practice nationwide. The plant will also be the one of the single-biggest purchases in recent Phoenix history.

American Water Services, owned by RWE of Essen, Germany, was not the city's first choice and will wind up costing Phoenix taxpayers an estimated $50 million more than first expected.

The winning low bidder, Earth Tech, Inc. of Long Beach, Calif., pulled out of its "design-build-operate" contract after failing to provide the necessary financial guarantees that it could build the plant by June 2007 to serve 40,000 households in the burgeoning north Valley.

City officials said Earth Tech's problems were related to the financial mess at its parent company, Tyco International, whose former top executives have been charged with an array of financial chicanery.

Earth Tech's statements to Phoenix during the bidding process were less than reliable, officials said. "We found they were playing with Monopoly money when they were making their cost proposals," Councilman Claude Mattox said. An Earth Tech spokesman could not be reached for comment.

American Water Services lobbied the council for the right to pick up where Earth Tech left off, although its quoted costs were $50 million higher.

Phoenix's only other option was to construct the plant in the more conventional "construction manager at risk" method, and then allow its own
Water Department to compete against private companies for the right to operate the plant. This form of "managed competition" is already the system in another vital city service: garbage pickup.

American Water Services defused potential opposition to the $336 million water deal by making its own agreement with one of the project's biggest opponents, the American Federation of State, County and Municipal Employees union.

The company gave the union a letter guaranteeing its right to organize the 11 staff members who will run the plant, in exchange for AFSME dropping its criticism of private water.

"I had to go with the lesser of two evils," said Ray Oliver, the president of AFSME Local 2384. "Managed competition means you're going to lowball the plant. So if you're going to go private, you get the best you can."

City Manager Frank Fairbanks made no conclusive recommendation in his report to the council and noted a sharp difference of opinion among city staff.