Citizens Energy And The Proposed Utility Sale/Transfer

Yesterday, I had the opportunity, along with several other fellow bloggers of all political stripes, over lunch to meet with several representatives of Citizens Energy to discuss the proposed sale of the water and sewer utilities, including Chief Compliance Officer John Whitaker, Associate Counsel Aaron Johnson and PIO Dan Considine. Councilor Christine Scales, who I believe is the only Republican council member with an open mind and willingness to discuss all sides of this issue, graciously arranged the luncheon. The meeting was extremely informative to the participants, more so than the numerous staged dog and pony shows to date. Bloggers were able to question the executives on a host of issues without our questions being screened or buzzers going off because the 2-minute time limit had expired. I found the Citizens' representatives to be very candid in their comments and far more trustworthy than anyone who speaks on behalf of the Ballard administration on the proposed transaction, which is quite interesting given the latter is supposedly elected by the people and the former are not.

Before I dig into the discussion, a historical perspective on how we found ourselves facing this proposal is critical. When NiSource announced its intention to sell the Indianapolis Water Company a decade ago only five years after it had acquired it, the City of Indianapolis immediately announced its desire to purchase the company. Under a state statute enacted in 1939, Citizens Energy had a first right of refusal to purchase the water company from NiSource. Although Citizens expressed an interest in purchasing the utility, former Mayor Bart Peterson made it clear to the utility's executives that the City wanted Citizens to back off and let the municipal corporation purchase it, which Citizens voluntarily agreed to do. The City ultimately paid about $525 million for the utility, nearly double its actual value. NiSource ignored capital improvement needs during its ownership. As soon as Indianapolis took it over, it found itself having to borrow hundreds of millions of dollars to pay for the utility's capital improvement needs. Making matters worse, the City converted its 30-year fixed rate bonds to adjustable rate bonds a few years after it acquired the utility in an effort to save interest on its debt. When the bond market tanked, the City got squeezed with much higher interest rates and was forced to cancel and reissue new bonds after paying a penalty of at least $60 million. The City also turned over management of the utility immediately to the French-owned Veolia under a privatization agreement that has been criticized by the IURC as too costly and too one-sided. To say the least, the City's ownership of the utility has been less than successful.

It's important to understand who Citizens Energy is. It is a public benefit corporation with an existence dating back 139 years. As such, it is a nonprofit organization owned by the inhabitants of Marion County. Unlike many nonprofits, Citizens actually does some charitable work. It has earned accolades over the years for its efficient management of the gas company. You may be surprised to learn that Citizens pioneered the idea of reduced utility rates for low-income persons. Some detractors have claimed it's really an investor-owned utility that operates for a profit, but that is simply not the case. The City of Indianapolis is a municipal corporation created under the Indiana Constitution and state statute. Citizens is a public benefit corporation created by statute and has a perpetual existence. Over the years, Citizens survived unsuccessful attempts by former City-County Council President Beurt SerVaas to break it up. SerVaas has had a running feud with Citizens for what can only be described as a self-serving interest. He pushed the City's purchase of the water utility, along with former Mayor Bart Peterson, under the guise of preventing the utility from falling into the ownership of a foreign corporation, notwithstanding the fact that he fully knew the City intended to enter into an operating agreement with Veola. Despite his professed expertise in buying and selling businesses, SerVaas agreed to the inflated purchase price for the water utility. SerVaas never disclosed the fact that a company he owned had entered into an exclusive agreement with the water utility to develop a pipeline from Lake Monroe to Indianapolis to supply water to Indianapolis. Peterson, too, failed to disclose that a family-owned business operated a suburban water utility that benefited from the transaction as well.

With this understanding and background, it is really a mischaracterization to treat the transaction as a sale as opposed to a transfer. The residents of Marion County will own the utilities at the end of the day whether they are owned by the municipal corporation or Citizens Energy. Under either ownership, the utilities will be operated on a nonprofit basis. Ownership by Citizens Energy is also what was mandated under the state statute the City violated when it purchased the utility originally. Likewise, the cost of operating the utilities will be paid by the residents and businesses of Marion County. Given this understanding, it is extremely troubling that the Ballard administration and many other proponents, including the IBJ and Indianapolis Star, view the proposed transaction as a huge revenue-generating opportunity to fund needed transportation-related and other wish list projects without the need to raise taxes when this is simply not the case. To the extent Citizens Energy is required to pay any cash to the City of Indianapolis as a result of this transfer of the utilities, ratepayers will be required to dig deeper into their pockets to pay. As proposed, Citizens Energy will be required to borrow $263 million by issuing bonds on which it expects to have annual debt service of at least $15 to $18 million. The added debt service will be factored into future rate requests it submits to the Indiana Utility Regulatory Commission. In other words, you will pay higher utility rates rather than higher taxes to fund the projects Ballard wants to undertake as a result of this transfer of assets.

I'm a big proponent of fee for services. I object strongly to paying fees and having the revenues diverted to completely unrelated matters. If you are interested in achieving as much savings as possible for Indianapolis residents as Ballard claims he is, then a simple transfer of the utility is what should occur. Instead of that alternative, Ballard has presented a "take it or leave it" offer for Citizens to pay the additional $263 million to the City, along with Payment In Lieu of Taxes (PILOT) revenues the water utility already pays. The City has deposited these revenues in the general revenue fund and used them for a variety of purposes since the enactment of the PILOT back in the early 90s. Most recently, they have been used for public safety. Ballard now wants to use these revenues, along with the $263 million cash payment, to fund nearly a half billion dollars in new projects, mostly for streets and sidewalks. The City will issue up to $190 million in bonds to pay for the projects.

The savings to Indianapolis residents cannot be emphasized enough in considering this transaction. Due to EPA laws, sewer rates will have to be increased by several hundred percent by 2025 to cover the costs of improvements that must be undertaken to comply with the CSO. Water rates, too, will rise considerably in future years as they already have. Rates have already increased by 100% since the City acquired the water utility. The Ballard administration has a 38% rate increase pending before the IURC currently, which most observers agree will be shaved down to no more than 30%. Citizens anticipates it will be necessary to increase rates another 20% in a couple of years, depending on the outcome of the current rate case, simply to meet operating and capital needs of the utility.

Citizens believes it has the experience and ability to generate savings under the combined ownership of its current utilities and the City's utilities. I don't doubt that given their long track record of success in the utility business. Citizens pegs that savings at about $43 million a year, which is not chump change. What really bothers me with this transaction is the requirement that Citizens assume the current operating agreements the City has with Veoila for the water utility and United Water for the sewer utility. This requires an added layer of management with which Citizens will have to deal when it's the one with the experience and track record of success operating utilities, not these two private entities. As I've already pointed out, the IURC has been highly critical of the Veolia contract, which costs the City more than $40 million a year before bonuses are tacked on. The IURC has noted millions in bonuses have been paid to Veolia without any documentation they were earned. The City also assumed more than $40 million in employee retirement health costs under a 2007 amendment that included other costly changes that shifted costs from Veolia to the City. In its last rate increase, the IURC admonished the City to renegotiate the terms of the agreement. Instead of doing that, the City now wants to pass that agreement off to Citizens, the costs of which the ratepayers ultimately wind up paying.

This begs the question as to why the Ballard administration would insist on Citizens assuming these contracts if the purpose of the transaction is to achieve as much savings as possible for Indianapolis ratepayers. As I've previously pointed out, Ballard is being advised by a law firm that has two masters. He receives legal advice from Barnes & Thornburg's Bob Grand and Joe Loftus, two of the key driving forces behind the proposed transaction behind the scenes. Barnes & Thornburg also represents Veolia. Further clouding matters is the fact that City-County Council President Ryan Vaughn is employed by Barnes & Thornburg, who has been an active participant and advocate for the utility deal. Vaughn has been asked to recuse himself from deliberations before the council on the transaction by Democratic councilors, but he has refused to do so. He claims the council's counsel, Bob Elrod, and other attorneys have prepared legal opinions clearing him of any conflicts of interest on the matter. Interestingly, Melina Kennedy, the leading Democratic candidate for mayor in 2011 has refrained from discussing the deal because her law firm, Baker & Daniels, is providing legal services to the City on the transaction. She says that prohibits her from commenting on the proposed transaction. How could Kennedy as a candidate have a conflict of interest but the leader of the council not have one? It's a question that should be asked, along with who advised the mayor that he had to insist upon the assignment of the Veolia and United Water contracts to Citizens.

The Citizens representatives with whom I met agreed Citizens could achieve more savings if it did not have to assume these two contracts. How much is any body's guess at this point. Under the terms of the negotiations, however, Citizens was required to sign confidentiality agreements with both Veolia and United Water. As a consequence, its representatives are prohibited under that agreement from discussing specifics about those agreements. One possible saving for the ratepayers is if the IURC cracks the Ballard administration hard on its current rate increase for ignoring its request that it go back and renegotiate its contract with Veola to squeeze out more savings. Theoretically, the IURC could ultimately require this as part of any future rate increase it approves. It specifically cited the contract as the reason it reduced Ballard's last rate increase just last year. What this tells you is that Ballard is negotiating against the interests of the citizens of Indianapolis in this transaction. Is that attributable to Barnes & Thornburg's influence? Or is he simply so uninformed as to be incapable of making intelligent decisions? I don't know the answer, but either one is extremely troubling.

As I've made clear, I fully support ownership of the utilities by Citizens Energy. If Citizens had been allowed to purchase the water utility ten years ago, we wouldn't find ourselves in this current mess. Critics complain that Citizens' owernship will remove accountability Indianapolis residents have with the current water utility. I'm not buying that argument. Ballard accepts no responsibilty for the actions of the water company, passing the buck to the water works board or Veola just like he does with the CIB. He has demonstrated less concern for the public's interest these past three years as mayor than Citizens' leaders have during its long history and he was supposed to be a man of the people. Do you want a person who does the bidding for whoever shoves the most money in his or her pocket, or do you want a nonprofit board with a mandate to serve a public benefit at a break-even proposition? Having said that, I believe the transaction should be structured to achieve as much savings as possible for the ratepayers. Clearly, this is not the case with the deal the Ballard administration is trying to rush through after only 60 days of deliberation. This deal cannot be rushed. The contracts with Veolia and United Water must be revisited, and the $263 million Ballard intends to use to pave as many streets and sidewalks to win votes before the next election must be nixed. I have no confidence that Republican members of the council, save Scales, will exercise independent judgement in this matter. Many Democrats appear poised to insist upon some changes, although I think it is more political posturing on their part than concern for the common good. Chances are the transaction will be rammed through and the truth unraveled only after it is approved. As the famous saying goes, "Those who fail to learn the lessons of history are doomed to repeat them."