Stockton to unveil multimillion-dollar bids

By Cheryl Miller
Record Staff Writer
Published Sunday, September 8, 2002

Costly problem of aging pipes, pumps drives privatization

Stockton on Monday will finally unveil the multimillion-dollar proposals of three corporate suitors vying to operate the city's water utilities.

Sewage, storm runoff and water delivery hardly seem like enticing assets, but the three multinational companies have poured thousands of dollars into technical bids and public-relations campaigns designed to woo the city into a 20-year public-private operations marriage.

Which partner the city chooses -- if any -- could have far-reaching impacts: what Stocktonians pay for water; how millions of gallons of Delta-bound wastewater are treated; and the fate of 130 city utility jobs.

"The stakes in terms of service and costs can be quite high," said Neil Grigg, a Colorado State University engineering professor who specializes in urban water affairs and has written extensively about privatization.

Any partnership also promises to catapult Stockton into an increasingly divisive international debate over the privatization of long-public water systems. Just last week, environmental groups rallied at the World Summit on Sustainable Development in South Africa to protest the emergence of corporate interests in water utilities throughout the world.

Public Citizen, one of the protesting groups, worked with Stockton residents critical of privatization and the League of Women Voters to gather more than 18,000 signatures to force the local water-contracting issue on to the ballot. The measure could go before voters early next year.

But even with all that is at stake, any resident who doesn't possess an engineering degree may struggle to understand just what each beau is offering. Mayor Gary Podesto, the father of local privatization efforts, expects the bids released Monday to contain thousands of pages of obscure water-talk.

The city is paying a Boston-based consultant to analyze the documents, but that report won't be available until October.

Sizing up the candidates themselves is another challenge. A review by The Record found conglomerates linked to the world's largest private water companies, an increasingly consolidated handful that operate facilities on four continents. Often, the companies were invited to serve cities struggling to comply with pollution laws or with lengthy histories of private-utility operations.

With such corporate size comes enormous financial and capital assets. But like any prospective partner, many of the companies have incidents in their past or embarrassing corporate relatives they'd probably like to hide.

The bidders

The would-be contractors are:

* Stockton Water Service Co., a partnership between the publicly traded California Water Service Co., which already delivers water to 41,700 Stockton customers outside the city's municipal service area, and United Water, a subsidiary of French water giant Suez.

Atlanta is reviewing its 4-year-old water-treatment contract with United Water after residents there complained about brown-colored water and problems establishing new service.

* OMI-Thames, a joint venture of Denver-based Operations Management International Inc. and Thames Water, the United Kingdom's largest water and wastewater company.

German utility giant RWE acquired Thames in 2000 and serves 43 million customers worldwide.

* USFilter Operating Services, the child of French company Vivendi Environnement, the world's top water distributor. Vivendi Environnement's estranged cousin, Vivendi Universal Entertainment, has been dogged by questions about its accounting practices and heavy debt.

Although Vivendi Universal continues to hold 40 percent of the environmental-company's stock, USFilter executives continue to insist the sagging fortunes of the entertainment division will not hurt its operations.

The companies are competing to run a complex set of pumps, pipes and ponds that serve tens of thousands of Stocktonians every time they turn on a spigot or flush a toilet. At stake is the operation of 80 stormwater pumping stations, 35 water wells, 620 acres of sewage ponds and more than 2,000 miles of pipes that carry sewage and water throughout the city.

Although an estimated 85 percent of U.S. residents are served by public water and wastewater agencies, many cities, including Indianapolis and Atlanta, have contracted with private companies to run their water utilities. But far fewer cities have handed over stormwater, water and sewage oversight to one company at the same time.

"The (private) operators cannot claim that they've operated a similar system anywhere, because there isn't one," said Morris Allen, the director of Stockton's municipal utilities. Some of Allen's employees have criticized the city's pursuit of privatization.

Water systems throughout the United States are grappling with the expensive problem of aging pipes, pumps and valves. A 2001 study by the American Water Works Association estimated that utilities will need to spend a combined $250 billion over the next 30 years just to provide safe drinking water.

Increasingly strict regional, state and federal rules governing wastewater will only add to the costs. Stockton expects to spend somewhere between $150 million and $200 million to upgrade its Navy Drive wastewater-treatment plant to meet new pollution-discharge rules adopted by regional regulators this year.

Private technology

And that's where Podesto sees a private operator stepping in. Ratepayers ultimately will pay the cost of any improvements. But the mayor believes the price tag will be smaller if a private company is running the plant.

"These companies have experience in technology, not just throughout the country but the world," Podesto said. "We'll say, 'These are the permit requirements, private sector. Tell us how you're going to meet the requirements and guarantee it will work.' "

In a thick, three-volume request for proposals, the city asked companies to explain how they would design, build and operate a wastewater plant that meets regulators' rules as well as how they would oversee Stockton's water and stormwater operations -- all at a fixed price that includes cost savings to the city of at least 15 percent.

The competitors, Podesto said, "have been trained to be efficient and effective, and we (government) are not. In some ways, government just flounders along until the pressure is on. They don't compete."

The city's flirtation with privatization comes at a time the corporate world faces enormous public scrutiny after a string of accounting scandals and alleged management misdeeds made headlines.

Privatization critic Jane Kelly, director of Public Citizen's California office, says profit-driven corporations have no business managing a resource such as water.

"The proponents of this project believe business brings competition to the table and that necessarily leads to a reduction in the price of service," Kelly said.

"But once you enter a 20-year contract, there is no pressure anymore for them to be competitive. They've got the contract, they know what it costs to service the debt, what it takes to pay the shareholders, and they know what they need to get that kind of revenue stream. That really can skew the financial savings that anyone thinks they're going to see."

Safety clauses

The city has included a number of so-called safety clauses in its proposal, although the bidders can negotiate their contents. Stockton wants any bid winner to supply a $10 million line of credit to draw upon should any disputed expenses arise.

The city contract also includes a buyout provision that would let the city out of the deal for any reason in exchange for $1 million. The private operator also must agree to hire the utility's nonmanagement workers at their current wages.

The City Council would continue to set water and sewer rates, and the city would continue to retain control over all of its water rights.

"Contracting with someone to turn the pump on doesn't mean we're giving them the water," Podesto said.

Grigg, the Colorado State professor, said the success or failure of private water operations hinges on a city's ability to draft a tight contract that requires specific performance standards and maintenance expectations.

"When privatization first came out, it was a great thing, because you had a lot of (public) entities that weren't paying as much attention to (operations) as they need to," Grigg said.

When a deal goes bad, however, "it's almost the same thing as if you took a contract from a homeowner and you rented that house to somebody and never made any improvements, and at the end of the time period you handed it back and it was a pile of junk."

Can a private company operate Stockton's water utilities safely for less money? Podesto said the municipal operations already have trimmed $5 million from their budget since the city began eyeing a private contract, although the wastewater facility has fewer employees than the U.S. Environmental Protection Agency recommends for a plant its size.

A private company will always look for ways to cut costs, but with a public operation, "if it's not an interest of the next council, I guarantee you that $5 million will slip away," Podesto said.

The mayor has appointed a committee of civic and business leaders that will be charged with reviewing the bids and reporting back to the City Council in late October.

Committee members include former Stockton City Manager Frank Fargo; representatives of the San Joaquin Business Council, the Building Industry Association and Operating Engineers Local No. 3; University of Pacific finance professor Paul Tatsch; an official from Posdef Power Co.; and privatization critic Dale Stocking.

The City Council could choose a private operator by Nov. 12 with the selected company taking control in April.