Saturday, May 09, 2009

Need For Indianapolis Water Rate Hikes Challenged

Business and consumer groups are challenging a proposed 18% utility rate hike sought by the Indianapolis Water Company in the wake of it paying $85 million in prepayment penalties because of its asinine decision to place 60% of its more than $800 million in debt in variable rate bonds backed by interest rate swap notes. Under the proposed rate hike, water utility users will pay an additional $22 million a year for water. The IBJ's Chris O'Malley cites a business group as claiming the rate hike should be no more than 7.7%, or $9.4 million a year. The Indianapolis Water Industrial Group notes that the company's annual capital budget historically ranged from $6-10 million. The proposed capital budget this year calls for $12 million in spending, although that is considerably less than what the water company has spent the last couple of years for capital projects. The article doesn't mention it, but the rate increase filing indicated that the water company plans capital outlays of more than $200 million from 2009-11.

Here's a point the industrial group raises that will really get your blood boiling. "Industrials also question a proposed increase in management fees for Veolia, the French company the department hired to operate the city-owned water system," O'Malley writes. "The proposed $2.5 million, or 5 percent, increase in management fees are not necessary, industrial customers say." About a third of the water company's budget is consumed by this costly 20-year privatization deal the Peterson administration entered into with Veolia, which was represented by several Democratic lobbyists with close ties to the former mayor. The company is paid more than $40 million a year to manage the water company. The idea that the water company is considering paying a dime more to this foreign-owned company is a complete outrage. We're already being raped by them, but I'm sure Peterson's fat cat friends made off like bandits in sticking us with this burdensome contract, which should have been the first order of business for the Ballard administration to terminate. Unfortunately, Ballard reneged on promises he made to his supporters to clean up the water company.

The IOCC, which represents consumer interests, questions the data supporting the rate hike request. It suggests the water company should draw down some of its $26 million in cash reserves, but the water company fears its already deteriorated credit rating will be further downgraded, leading to higher borrowing costs, if it draws down its cash reserves. As O'Malley's story makes clear, the entire reason behind the rate increase is to pay for the risky bond strategy the company chose to take during the Peterson administration. We've never had any explanation from anyone on why these risks were taken. O'Malley's article suggests the water company converted its fixed rate bonds to variable rate bonds in order to free up $45 million in extra cash to pay for capital projects. You see, Peterson had some big campaign contributors who he had to reward with costly new capital projects, but the deal he entered into to purchase the water company froze water rates for five years. Peterson wanted to be able to have his cake and eat it too. I suspect there are financial advisors somewhere in the mix who stood to make tens of millions off the deal who had a lot to do with this, but because Ballard's administration refuses to conduct an investigation, we may never know. Ballard, incidentally, is now collecting big contributions from those same contributors who helped drive those ill-fated decisions in the Peterson decision.

To make its case for a rate hike, the Ballard administration is relying on the Indianapolis Bond Bank's executive director, Kevin Taylor. He is a former executive of AIG, the financial firm whose bailout has cost U.S. taxpayers more than $170 billion to date. Although Taylor is not personally responsible for the AIG mess, he's a pretty poor choice of an advocate for the water company's position. Taylor even defends his predecessor's decision to go the variable rate bond route. "Yet the riskier, variable-rate bonds 'likely were hard to ignore' when the utility was trying to raise cash, said Taylor, who arrived at the bond bank after the deals were struck," O'Malley quotes Taylor as saying. “The department likely was under considerable pressure to keep costs at a minimum and variable rate bonds would have been a good vehicle to keep interest expense as low as possible when the bonds were issued,” Taylor said. "Then came the deterioration of credit markets, something that would have been deemed 'a very remote risk' when the variable rate bonds were issued," he added.

Every story I've seen to date in the media focuses on the emergency, 18% rate hike. There is also a general rate hike increase that will take place as well. I would really like to know how much that rate hike is, but nobody ever seems to mention it. There is so much more the public needs to know, but the Ballard administration has chosen to cover up everything that went wrong during the Peterson administration. Instead, the taxpaying public is told to shut up and dig deeper into their pockets, whether it's the Capital Improvement Board, the Indianapolis Water Company or you name it. What a disappointment Mayor Ballard has proven to be.


Unknown said...

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Gary R. Welsh said...

Anonymous said...

"Kevin Taylor. He is a former executive of AIG, the financial firm whose bailout has cost U.S. taxpayers more than $170 million to date."

should that read $170 billion?

thanks for sharing this information!