Thursday, October 28, 2010

Surprise, You're Paying $29 Million To Veolia For A Poorly Done Job Just To Go Away

The city's operating agreement with Veolia has been a lose-lose situation for Indianapolis water ratepayers from the day the city purchased the water company from NiSource for more than $500 million, about double what it was actually worth at the time. The city turned over management of the water company to Veolia in a one-sided deal that netted the French-owned company about $50 million a year and included tens of millions of dollars in performance-based incentive payments the IURC concluded in a rate decision last year were without merit. After incurring more than $700 million in debt after taking over the water company, the Ballard administration decided last year to transfer ownership of the water company and the sewer utilities to Citizens Energy. That agreement required Citizens to assume about $1.5 billion in debt and pay $460 million to the City of Indianapolis, which plans to use the money to fund the ReBuild Indy program, a major public works program the Ballard administration has envisioned paying for street and sidewalk improvements.

During the debate over the transfer of the water utilities, opponents of the deal as proposed, including myself, contended it made no sense to believe Citizens Energy could ever come close to reaping the tens of millions of dollars in annual savings it said it could squeeze out of its management of the city's utilities because it was being forced to assume the one-sided operating agreements the city had entered into with Veolia for the water company and with United Water for the sewer utility. The Ballard administration insisted its hands were tied and that it could not undo those long-term agreements with the private operators without paying a huge penalty. Citizens Energy went along with the gig until we learn today surprise, surprise, that the city is paying a $29 million termination fee to Veolia despite its documented record of poorly managing the company from the beginning of its contract. As the IBJ's Chris O'Malley reports:

Veolia will no longer have a role in operating Indianapolis Water after the city sells the utility to Citizens Energy Group—but the company will walk away with $29 million in the form of a contract-termination fee.

Meanwhile, Citizens plans to make job offers to “substantially all” of Veolia’s 436 employees at the water utility.

The contract-termination agreement announced Thursday, which must be approved by the Indiana Utility Regulatory Commission, came as somewhat of surprise. Citizens has been in talks with water system operator Veolia since at least July, when City-County Council members approved the sale.
This is just another example of the Ballard administration lying to the public to get a deal through the city council by withholding relevant information from the public while the debate is taking place. We saw this with the bailout legislation for the CIB last year when the public was repeatedly assured the new revenues being raised from higher hotel taxes, state revenue sharing and a state loan would not be used to provide any payments to billionaire Herb Simon's Indiana Pacers in order to secure City-County Council approval. Later, we learned the city had planned all along to divert excess property tax revenues from a downtown TIF district to make possible a $33.5 million give-away to the Pacers. Now we learn that the city planned all along to pay a huge termination fee to Veolia it said was not advisable in order to secure approval of its controversial utility transfer deal from the City-County Council.

It cannot be doubted that both Citizens and the Ballard administration knew this was to be the outcome. The Ballard administration expects us to be happy with the termination fee because it says it won't lead to higher utility rates. Higher utility rates were already a foregone conclusion because the Ballard administration insisted Citizens pay it $460 million as part of the deal, the cash payments for which Citizens simply plans to borrow the money and pass on the costs to ratepayers in the form of higher rates. Chris Cotterill, Ballard's chief of staff, defends the move because he says the $29 million fee is being paid out of an escrow account the administration had set up last year to cover "unanticipated costs". Isn't it funny how there are always these surprise pots of money sitting out there that magically appear when the money needs to be found?

This is what really makes this termination payment stink. If you read last year's IURC order, it totally panned Veolia's management of the water company. Clearly the city had grounds for terminating the agreement with Veolia based on cause. And lest we forget about the class action lawsuit Stewart & Irwin has filed against the water utility and Veolia for over-charging water customers. That case was originally scheduled for mediation in September, but Veolia's attorneys at Barnes & Thornburg called it off at the last minute. Now we discover the city has agreed to pay City-County Council President Ryan Vaughn's law firm's client $29 million to terminate the agreement. Gee, I wonder how much Vaughn's law firm is receiving for negotiating that termination payment? To the extent Veolia is held liable for its role in over-billing Indianapolis water ratepayers in the class action lawsuit, guess who is going to be paying the damages? Yes, Veolia will have this big pot of money with which the city has rewarded it for a job poorly done to pay the ratepayers as its damages. Mayor Ballard picks the pockets of Indianapolis taxpayers to pay damages suffered by Indianapolis water ratepayers. And then tells you what a great public service he has performed on your behalf.

I hope for the public's sake there is somebody at the IURC who is scrutinizing the Citizens Energy utility transfer deal with a fine-toothed comb. If the IURC is looking out for the ratepayers, they would reject requiring the ratepayers to shoulder the cost of funding Indianapolis' ReBuild Indy program that has absolutely nothing to do with maintaining the utilities. Of course, a big cloud hangs over the IURC now as the investigation continues into the hiring of the IURC's top lawyer by Duke Energy, which resulted in the firing of the IURC's Chairman. I would also point out that the new IURC Chairman, Jim Atterholt, sat on the Indianapolis waterworks board that approved the Citizens Energy deal so he may not be able to participate in the case now. This could get really interesting. This comment on the IBJ's website aptly describes what is taking place:

The truth is that this transaction will provide no cost savings, will increase water/sewer bills, and raise the debt burden on the new entity to an unsustainable level.

The new debt and Payments in Lou of Taxes (PILOT) wont even be used to lower water/sewer customer bills by making the require EPA consent decree sewer overflow improvements.

The Mayor intends to create a huge slush fund for unrelated construction projects.

They are using this utility rate increase as a way to raise revenue and get around the property tax cap. Problem is Utility payments are not deductible, so utility customers will get a double hit.

The Indiana Utility Regulatory Commission should reject this proposed Water Company sale.
UPDATE: According to numbers Citizens Energy furnished to the Star's Jon Murray, the utility says it will save another $17 million a year by disposing of Veolia. That's indicative of just how much the city has been over-paying Veolia all of these years to manage the water utility. Murray writes:
The trust's officials had said earlier this year that they hope to a achieve $43 million in annual savings by taking control of the city-owned utilities, but now they are forecasting $60 million in annual savings within three years.


Blog Admin said...

Has the IURC approved the sale/transfer from the city to Citizens yet?

And if I read the IBJ article correctly, IURC has to approve both the transfer AND the firing of Veolia, correct?

How come when I lose a job I never get a multi-million dollar "going away" package?

Gary R. Welsh said...

Or better yet, Indy Student, why does the CIB say the huge break-up fees the Pacers' lease for Conseco Fieldhouse provides doesn't exist in reality? Yes, the IURC must approve the deal. The firing of Veolia makes IURC approval more palpable based on its expressed views of the poor job Veolia has done managing the water utility.

Had Enough Indy? said...

It just doesn't stop. There always seems to be tens of millions of dollars available to this Administration - to spend on what they find important.

And, you are correct; they absolutely had to have been working in this direction since the very beginning.

I am disgusted more and more every day.

Guest said...

Veolia needs to go no matter what the cost.

Paul K. Ogden said...

If I were a councilor I'd be furious that they withheld this informtion from me before the vote.

Gary, when Citizens and the bloggers were at that meeting at council headquarters and you or someone asked about Veolia, I got the sense that Mr. Lykins and the other Citizens reps were very uncomfortable with the issue. I thought they were pretty refreshing in their openness at that meeting, then to hear them suddenly clam up on that issue and basically say they didn't have a choice but to keep Veolia. NOw looking back, I think they new then the City had a plan to pay Veolia off and they were sworn to secrecy.

Paul K. Ogden said...

Gary, when does ownership transfer? If it aleady has then wouldn't the contract have been transferred and then it would be Citizen's responsibility to pay and not the City? I know of course that we the public pay either way. That's what was so frustrating about the supposed sale. We the public are responsible for paying for a 30 year loan to fund the sale so the City can make improvements that will last 10 years.

Jeff said...

I've reached the point where I can't even stand to listen to Mayor Ballard speak. He is so condescending and full of himself that I can hardly believe he's the same man who originally ran for the office. What an arrogant bag of wind!

artfuggins said...

Another great chance for Jackie Nytes to assist Mayor Ballard and reap the rewards.

Citizen Kane said...

Typical Indy contract - They always are in favor of the contractor since the only goal of this and past administrations has been to disperse as much largesse as possible.

At least, one of my prayers has been answered - Veolia's gone - I wonder if they were getting feedback (behind the scenes), that the deal had no chance of getting approved by the IURC unless they jettisoned Veolia.

Now, if only the IURC would tell the city that they will approve the Citizens deal sans the theft of a half-billion dollars from ratepayers.

HEI, if I wrote or publicly verbalized the real level of my disgust - just with the Water deal alone - I might be subject to arrest.

Gary R. Welsh said...

Paul, The deal has always been contingent upon IURC approval. No transfer of ownership can take place until that occurs. Now they are saying that likely won't happen until next Spring, which raises another question. We were told the deal had to be rushed through so they could take advantage of those Build America bonds before they expired. This approval schedule sits outside that date, but remember we were told the new hospital for HHC had to be approved in calendar year 2009. We had a special election last November instead of waiting for the May primary. Then the Citizens deal came along and we heard it had to be approved this year to get the Build America bonds. Now we know it's not going to be approved until 2011. These people lie at will to us without consequences.

guy77money said...

I pretty much surmised that Veolia would be shown the door. I actually thought the dollar amount would be more then 29 million. Now all we have to wait for is the rubber stamp by the IURC. The truly sad part of this deal is the Water Company should have been under the Gas Company instead of city control the first time around. I suspect it would have saved the rate payers about 1/2 billion dollars if Peterson and Servas would have done the right thing.

Downtown Indy said...

I predict this bit of history will be repeated -- with ACS.