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August 17, 2010

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Cash Flows in Water Deals
Cities Seek New Funding Streams With Plans to Privatize Municipal Systems
As Reported by Amy Merrick with The Wall Street Journal.

The newest wave for cash-strapped cities seeking money: Tapping their water.

Indianapolis is selling its water and sewer systems to a public trust to get money for crumbling streets and bridges. San Jose, Calif., fresh from cutting 49 firefighters, might take its water utility private. "Excess" tap water in Sacramento, Calif., is helping supply a Nestlé SA bottling plant.

Such deals are bringing some money to cash-strapped cities. But they are also stirring a debate about how much control governments should cede over valuable resources—even in hard times. Some critics question whether water quality will take a hit and rates will jump, as was the case in earlier privatization arrangements.

"We have fundamental problems with profiting from water, which is a public resource," said Emily Wurth, water-program director at Food and Water Watch, a Washington, D.C., research and advocacy group that opposes privatizing water utilities and bottling water.

Most U.S. residents still get their water from a utility owned by a local government. But more than 70 million people are served by a private company or a municipality involved in a public-private partnership, according to the National Association of Water Companies, a trade group.
Meanwhile, a growing proportion of bottled water sold in stores is coming from municipal tap systems, rather than spring water. Last year, 47.8% of the most common type of bottled water sold by retailers came from city tap water, up from 32.7% in 2000, according to Food and Water Watch.

The Indianapolis city-county council voted 19-10 last month to sell its water and sewer utilities for $1.9 billion, including the assumption of about $1.5 billion in debt, to a charitable trust.

Under orders from the Environmental Protection Agency to fund about $1.7 billion in utility improvements, Indianapolis was projecting skyrocketing rate increases if the city kept running the systems.

The deal with Citizens Energy Group, which already provides local natural-gas service, is expected to minimize rate increases if the company can find savings of at least $43 million a year, partly by consolidating call centers. Indianapolis will use cash proceeds and borrowing to fund $435 million in infrastructure repairs.

Milwaukee decided not to act on a proposal last year to study leasing its water utility, but Comptroller W. Martin Morics said the idea still is worth examining amid tight budgets. Pittsburgh also is considering privatizing its water system, as Mayor Luke Ravenstahl hunts for $200 million to shore up city pension funds.

In June, San Jose Mayor Chuck Reed directed the city manager to study privatizing the water utility, which serves about 10% of residents. The city recently closed a $118.5 million budget deficit, laying off firefighters and other city workers, cutting employee pay and outsourcing janitorial services.

A lot of people think the city should retain ownership of "at least some part of the municipal water system, because of the importance of water policy," Mr. Reed said. For him, "it depends on the money."
Water privatizations in the U.S. have occasionally brought spotty service and significant rate increases. Atlanta privatized its system in the late 1990s, but after four years the city reclaimed control, following problems with water quality and cost overruns.

In Illinois, numerous cities, consumer groups and Attorney General Lisa Madigan criticized the state's largest water company, Illinois American Water Co., for requesting an across-the-board rate increase of more than 30% this year. The company, which began buying municipal water systems in the 1980s, argued that it needs the revenue for infrastructure improvements. The state commerce commission in April granted rate increases of 17% to 26%.

Chris Kemp, manager of Nestlé's water-bottling plant in Sacramento, Calif., looks through a venting panel during construction last year.

Ryan Vaughn, president of the City-County Council of Indianapolis and Marion County, said selling the water and sewer systems to a trust, rather than a for-profit company, would reduce pressures to raise rates. "They're never going to have to earn a return to satisfy shareholders, so they can charge a lesser rate."

Jim Rinehart, Sacramento's economic-development director, said the Nestlé water-bottling plant, which began operating in February, is providing $14 million in financial benefits to the city, including goods Nestle purchases locally and 40 full-time plant jobs paying $40,000 to $80,000 each. The plant currently generates less than 0.2% of the city's water demand.

The proposal drew opposition last fall at a time when residents were being asked to conserve water. Some opponents also raised environmental concerns over the use and disposal of plastic bottles.

"The greater good for the public is served when you have a job-creating company move in," Mr. Rinehart said. "The marketplace will determine whether the product is purchased or not."


Somerville tests new pipe-repairing technology that could save N.J. water companies millions
As Reported by Victoria St. Martin/The Star-Ledger

Robert Sciarrino/The Star-Ledger | A technician from 3M uses a remote camera to inspect the inside of a water main. Workmen and engineers from New Jersey American Water, along with a technicians form 3M, are lining the inner walls of a water main located under Davenport Street in Somerville.

SOMERVILLE — For decades, water companies have repaired old pipes by pouring cement down the metal and letting it dry. If the pipe moved and a new crack developed, the cement would often crack, too.

Thanks to technological advancements, that method is being replaced.

As part of a pilot project with 3M, New Jersey American Water Co. has begun lining some of its pipes with polyurea, a synthetic resin, that hardens to a plastic coating and it doesn’t break when bent.

Water mains along a three-block residential area in Somerville are the first in the state to be tested with the new technology, said Michael Wolan, senior engineering project manager with American Water.

"Cement has a thickness, but as the pipe settles it could possibly crack," Wolan said last week as he waited for workers to begin spraying a 10-inch pipe with the polyurea. "This increases flow and structurally adds to the pipe."

Richard Barnes, a spokesman for American Water, said testing has begun and the water mains in Somerville should be in service late this week or early next. The company, which serves 17 of New Jersey’s 21 counties, will evaluate the project and could begin using the polyurea elsewhere, he said.

Polyurea, which is applied in liquid form, has been used to seal pipes in Baltimore, Syracuse, N.Y., two small towns in Pennsylvania, as well as in some European and Canadian cities.

As part of the project, American Water is working with 3M, which manufactures polyurea, and the Environmental Protection Agency’s Aging Water Infrastructure Research Program.

While the new repair process is a bit more expensive than cement — $134 per foot for polyurea versus $75 to $100 per foot for cement — it could save water companies and municipalities hundreds of thousands of dollars over the long-term by giving ancient water pipelines new life and reducing the need to plug leaks, Wolan said.

Robert Sciarrino/The Star-Ledger | Dave Southward, a technician from 3M, center, explains to Michael Wolan, senior project manager with New Jersey American Water, right, the workings of the epoxy system used to line the inside of a water main.

New Jersey’s water system is among the oldest in the nation, one that is in increasing need of repair. The oldest pipes in the state are more than 100 years old and the challenge for many utility companies is how to rehabilitate the system at a low cost and without disrupting service.

"They were built up as the population developed," said Fred Sickels, assistant director of water supply permitting at the Department of Environmental Protection. "If you go to some of the oldest towns in the state, you’ll find some of the oldest water systems."

The issue has captured the attention of Congress. U.S. Rep. Bill Pascrell Jr. (D-8th Dist.) is sponsoring legislation that would free up an estimated $180 billion to help refurbish aging water systems across the country.

Many companies are turning to innovative technologies to figure out the aging puzzle. Some companies have placed PVC pipes into water mains or lined them with cement and mortar to stop the aging process.

Bernadette Sohler, vice president of corporate affairs for Middlesex Water Company, calls the lining approach "angioplasty for water mains."

"It can extend the life for another 50 years," said Sohler, whose company serves nearly 400,000 customers. "It’s about extending the life of the system for future generations, while enhancing water quality, flow and saving money."

Michael Deane, executive director of the National Association of Water Companies, said water companies are continually searching for new ways to save the old water mains, which are sometimes neglected because they’re hidden from sight.

"You can see a bridge or a pothole deteriorating," he said. "You can’t see a pipe deteriorating underground."