Utility critics say buyouts drain talent
After 2 years, city's water deal still under fire

By Scott Olson
IBJ Reporter

Two years after the city purchased the former Indianapolis Water Co., its manager is no longer bound by an agreement to keep roughly 200 non-union employees on staff.

As a result, about 30 of them have accepted a buyout offer that includes six-months pay and are in the process of leaving, including nine members of the engineering department. There are no plans to offer another package, according to Tim Hewitt, president of the city-owned utility Veolia Water Indianapolis LLC.

But former water company executives wonder whether the utility has lost valuable experience.

Mayor Bart Peterson, who led the charge to acquire the company's assets, stands behind the utility's manager, California-based Veolia Water North America.

He said the two-year agreement was included in the contract to offer the employees some protection during the transition in ownership.

"It's not for [the city] to tell [Veolia] how many employees to have," Peterson said. "If we were going to do that, we shouldn't have contracted [operations] out in the first place."

The city closed the deal April 30, 2002, by paying $515 million to buy the utility from Merrillville-based NiSource Inc. Peterson cited a decades-old law allowing the city first rights to negotiate a "fair" value for the water company. The city awarded a 20-year, $1.1 billion management contract to Veolia, called USFilter Corp. at the time.

Former IWC President Joseph Broyles, who retired a year before the city completed its transaction, doesn't like the changes. He cited the pension plan no longer available to non-union employees as an example, noting the company used to promote union workers to non-union, supervisory roles. That way, they already knew the system and could be called upon in case of an emergency, he said.

"Who would be so foolish as to give up the protection of the union and take a pay cut, losing the pension and benefits in the current scheme, to become a supervisor?" Broyles asked. "It's a strange situation."

Non-union employees who lost their pension in the ownership change are suing the city and Veolia in an attempt to recover $50 million they claim they will lose in benefits over the next 25 years.

Meanwhile, union employees fighting to keep current benefits are embroiled in a 4-month-old contract dispute with management. A federal mediator will attempt to settle the squabble during negotiations scheduled for May 4-6.

Opponents complain Veolia has driven away water company veterans whose utility experience is irreplaceable. All of the 12 officers either left before the transaction was completed or are gone now. The company in June hired Hewitt, who had been president and CEO of the former Indiana Gas Co. He offered no apologies for the company's management style.

"Nearly all of these employees worked for a regulated utility," he said. "That era ended May 1, 2002. These employees of the old, regulated utility are working for a for-profit company. There has been a lot of change that has surfaced because of that."

Veolia waited until late last year to begin offering the buyout package so employees could have a chance to become acclimated to Hewitt's management style. Otherwise, he said, "100 or 200" employees might have accepted the package. The utility has 191 non-union employees.

Hewitt said the company will continue to search for ways to become more efficient. Service won't suffer, he said, because Veolia has to meet certain incentives to collect the entire amount of its contract with the city.

But critics cite the lawsuits, the union contract dispute and the buyout package to bolster their argument that employee morale is suffering under the current regime.

Alan Kimbell, a former vice president who retired from the water company in 1997, agreed with Broyles.

"I am really concerned about the capacity of who's left there," he said. "There's a bench-strength issue."

Kimbell served on the seven-member Indianapolis Board of Waterworks until June, when he resigned under pressure because he's a plaintiff in the non-union employees' class action against the city and Veolia.

The waterworks board oversees water company operations for the city. Beulah Coughenour, a former City-County councilor who supported the purchase and who now chairs the board, said the board would take action if its members didn't think Veolia was performing up to expectations.

"I absolutely still think this is one of the best things we did for Indianapolis ratepayers," she said. "If someone else bought it, you would have no say. You can't fire them if they buy it, but you can fire them if they run it."

At the time, the $1.1 billion contract was the largest of its kind and was cited as a model for future public-private partnerships. Indianapolis is one of only a few large municipalities that contracts the operation of its water utility to a private firm.

But problems surfaced quickly, first in the water company's billing unit. The president of the water company, chosen by Veolia, left amid the turmoil. The city is seeking $2 million from NiSource in a lawsuit to recoup its investment to fix the billing snafus it claims it inherited from the previous owner.

Another suit filed against the city on behalf of local taxpayers claims its acquisition of the water company violates the Unigov statute. The taxpayers argue management of the utility should have been placed under the same public charitable trust that operates Citizens Gas & Coke Utility. The city has moved to dismiss that suit and the one brought by the non-union employees.

Supporters of city ownership, however, cite a five-year rate freeze, investments to control taste and odor problems, and customer service improvements as positive developments a private owner could not guarantee.

"I continue to believe it was a good deal for the people of Indianapolis," Peterson said. "We got off to a little [bit] of a rocky start, but had [the city] not bought it, we would have seen massive rate increases."