FIRST DRAFT

For Immediate Release June XX, 1998

 Contact: Lawrence Chertoff/Water Industry Council — (718) 625-6500
Ben Esner/Sacks Communications, Inc. — (212) 644-9200, ext. 115

Water Industry Group Warns of Privatization Slow Down Under New EPA
Guidance; Local Decision-Making Thwarted
Chilling Effect of EPA Interpretation and Additional Administrative Burdens

 New York, NY June XX In a strongly argued letter to the U.S. Environmental Protection Agency, the Water Industry Council (WIC) warned an EPA official that options for localities to privatize wastewater facilities will be seriously constrained by new rules issued by the agency. Under a draft Guidance Document covering privatization of publicly-owned wastewater treatment facilities issued by the agency’s Office of Water, an unnecessarily broad range of privatization agreements will be subject to extensive review by EPA staff The document was created to try to make EPA procedures consistent with the requirements of Bush Administration Executive Order 12803 that concerned privatization.

"The water industry is eager to offer municipalities the widest range of possibilities in structuring privatization agreements," said Lawrence Chertoff, Executive Director of the Water Industry Council. "EPA is trying to capture review and approval authority for privatization arrangements outside the scope of EO 12803, potentially closing off options available to localities." The Water Industry Council represents the leading private water and wastewater service providers in North America, including American Anglian, OMI, Severn Trent Environmental Services, United Water and US Water.

The Guidance Document confuses different types of privatization arrangements, a confusion that may prevent local governments from choosing the most financially attractive offer when privatizing operations at wastewater treatment plants. Typically, privatization takes three forms: a facility is sold to a private party, a facility is leased to a private party or a private party is contracted to operate the facility over a multiyear period. Authority granted in Executive Order 12803, issued in April of 1992, clearly gives EPA the right to review and approve sale and lease arrangements, while not addressing the question of contract operations.

In its document, "Guidance on the Privatization of Federally Funded Wastewater Treatment Facilities," EPA arbitrarily created a fourth privatization option, called "leasetype arrangements." EPA includes in this category any arrangement that provides for the up-front payment of a concession fee to the municipality or "design, build, operate" agreements for new facilities. These kinds of arrangements are proposed to be subject to the same level of agency review as sales or leases. Concession fees are paid to localities as part of some contract operation agreements; the fee amount is based on a discounted present-value calculation of anticipated savings over what a locality is currently spending on wastewater operations.

The EPA document details the kinds of information required to be submitted to the agency for review of sales, leases and "lease-type arrangements." This list is exhaustive, and includes financial information, an explanation of the proposed privatization agreement, a description of the contract selection process, a summary of public hearings and/or meetings as well as other types of required documentation. The document includes no explanation of what EPA will do with this information, how long the review and approval process will take or, most importantly, what criteria the agency will apply in making determinations.

[Danbury or other example]

"WIC’s members are very concerned about the impact of subjecting privatization proposals to an open-ended review process," Chertoff said. "The level of uncertainty that this document creates in the water industry marketplace will really have a chilling effect on new operating agreements going forward. I anticipate that there may be some rethinking of what private sector partners can offer municipalities."

[Follow-up quote from local elected official]

EPA argues in its Guidance Document that Office of Management and Budget regulations, EO 12803 and EPA grant requirements prohibit the disposition or encumbrance of assets constructed with federal funds. However, providing a concession fee to a locality as part of a privatization agreement does not give a private operator any rights with respect to the ownership of a wastewater facility or any rights with respect to the land on which the facility is located. In fact, a private operators rights in these respects are expressly limited by specific contract terms.

WIC’s counsel, Roger Feldman of Bingham Dana, noted, "A concession fee does not transform the obligation to operate a facility in return for a fee into a right of leasehold occupancy. An operating agreement is merely a contract between two parties whereby one party agrees to operate and manage the assets of another party. No leasehold interest or estate is vested in the operator." Mr. Feldman went on to note a wealth of case law supporting this position. He continued, "at most, concession fees could be said to create a license. Even so, a license does not grant possession of property—it only grants the right to use the property. Leases or sales convey an interest in land and encumber property: concession fees do not."

"We certainly understand the federal government’s concern about agreements that might remove an asset from public control that was built with public money," Lawrence Chertoff added. "However, as a legal matter, concession fees do not create that kind of situation. EPA, outside the scope of Executive Order 12803, is creating a platform to intervene in what otherwise would be a straightforward contractual arrangement. The quantity and kind of information EPA is seeking to review will slow down privatization in many pans of the country and severely limit local government flexibility when considering contract operations for wastewater service."

The Water Industry Council intends to persuade EPA that its legal position is extremely weak with respect to "lease-type arrangements" and to urge the agency to be more specific about how it will evaluate and approve privatization proposals. "We are optimistic," Chertoff concluded. "EPA is run by reasonable people, and this industry is making a reasonable argument."

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