Jury's out on whether to sell MUD - Omaha.com
Published Sunday, January 5, 2014 at 12:30 am / Updated at 12:36 pm
Utility privatization
Jury's out on whether to sell MUD

Underfunded pensions. Multi­billion-dollar sewer repairs. Much-needed school upgrades.

State Sen. Scott Lautenbaugh of Omaha says he can fix all three with a single deal: selling Metropolitan Utilities District to wipe out $3 billion in burdensome expenses.

But if similar attempts in other cities are any indication, it would be complicated.

Such a sale would be a novel turn in Nebraska's long history with public utilities, creating the first privately owned community water system in the state, according to the Nebraska Department of Health and Human Services, which oversees water quality issues.

But the idea of selling off public utilities to private companies to fund major repairs or to improve services has been tried in communities across the nation, with mixed results. Cities such as Milwaukee, Wis., and Lansing, Mich., have seen the issue raised and then quashed over concerns about higher rates and loss of local control.

“It is very tempting to look at a utility as a cash cow, a chance to get this one-time windfall,” said Janice Beecher, director of Michigan State University's Institute of Public Utilities. “But you do have to realize it is a one-time windfall that has long-term consequences.”

Omaha is one of more than 770 cities ordered by the U.S. Environmental Protection Agency to overhaul their sewer systems — work that has cost billions of dollars in some areas. As public officials stare down deadlines on those projects and grapple with shortfalls in other departments, utilities can start to look like a promising source of cash, Beecher said.

“It's an enticing asset,” she said. “Utilities generally, whether they're water or wastewater or energy, could be viewed that way.”

But it's not a simple fix.

In 2010, Indianapolis sold its water and sewer systems to Citizens Energy Group, which also runs the city's gas and steam utilities. The deal netted the city $425 million, but it also meant the city had to pay a $29 million termination fee to Veolia Water, with whom the city had signed a 20-year, $1.5 billion contract eight years earlier.

City leaders hoped the sale would help hold down rates while raising cash for roads, bridges and a costly sewer project.

“This made a big dent,” said Marc Lotter, a spokesman for Indianapolis Mayor Greg Ballard. “It got a lot of big projects taken care of.”

Lotter said water and sewer rates will continue to rise as the city grows, but not as much as they would have if the city had kept its contract with Veolia.

“The problem was rates were always (previously) determined by politicians,” he said. “So the rates never kept up with the needs.”

It hasn't all been roses, though: Citizens Energy came under fire this year when large pay increases for executives were revealed at the same time the utility was seeking double-­digit rate increases.

Colorado Springs, Colo., also faces growing infrastructure costs with no easy way to pay for them.

Last year, the Colorado Springs City Council, which doubles as the board of the municipal utility, entertained a proposal to sell off its electric unit to raise the hundreds of millions of dollars needed to repair its ailing stormwater system.

The utility was asked to study the plan. But citizens rebelled against the loss of local control and the prospect of higher rates, and when a new council was seated last spring, its first vote was to cancel the study.

“It was a real short-term outlook,” said Colorado Springs City Councilwoman Jan Martin, who opposed the plan. “Look at it from a business perspective: Any time a business starts selling off its assets for short-term gains, it's not a good sign.”

In other cases, cities have privatized utilities in an attempt to improve service.

After the federal government ordered Atlanta to improve its water system in the late 1990s, the city signed a 20-year deal with a private company. The switch exacerbated problems with water quality and service delays, and after just four years, the city resumed control.

In 2002, Stockton, Calif., signed a $600 million, 20-year contract with a private consortium to manage some of its utility systems. The controversial plan was meant to find efficiencies and root out government waste, ultimately saving ratepayers money.

“That turned out not to be the case,” city spokeswoman Connie Cochran said.

Five years later, facing a court challenge from citizen groups and outside activists, the City Council dissolved the contract and returned control of the utilities to the city. The city's financial problems ran deeper than inefficient utilities, however, and in 2012 Stockton filed for what was at the time the largest municipal bankruptcy in U.S. history.

Grand Island, Neb., also was looking to improve efficiency and bring down costs when it proposed contracting out the management of its wastewater system — to Veolia, the same company that once ran Indianapolis' water and sewer utilities.

The Grand Island City Council shelved the plan amid a citizen outcry, instead opting to hire a couple of professional engineers to run the plant.

“That's started to pay dividends,” Grand Island Public Works Director John Collins said.

Generally, utility privatization has been met with a chilly reception in Nebraska.

Lautenbaugh first floated his plan to sell MUD in 2012, but nothing came of it.

A decade ago, State Sen. Kermit Brashear pitched selling off the state's public utilities. He estimated that the electric utilities would bring in $3.5 billion, which would spin off about $150 million in annual income for state government. Local utilities officials warned that that would bring higher rates.

The bill never made it out of committee.

Food and Water Watch, an advocacy group that opposes water system privatization, estimated that water companies raise rates three times greater than inflation after acquiring public systems, though industry groups dispute that figure.

“The magnitude of the rate increase is proportionate to the up-front cost,” said Mary Grant, a researcher with the group.

In that sense, she said, the sale price is more like a long-term loan that eventually will be recouped at ratepayers' expense. Shareholders need to be paid, and the utility has lost its ability to issue tax-exempt bonds for capital projects.

If MUD were sold, it would rank among the largest sales of a public water system in recent memory, Grant said.

It's unclear how the proceeds from such a sale would be distributed. Beecher said redistributing money intended for water treatment plants and pipes to pension payments or school support doesn't necessarily make sense.

MUD's boundaries go beyond the City of Omaha and Omaha Public Schools.

“I'd be worried about the equity implications,” Beecher said. “It really is moving the pieces around, not necessarily creating some magical new sources (of revenue).”

MUD opposes the plan, echoing complaints that privatization would lead to higher rates and less accountability for utility managers. “It's a terrible idea. It would most certainly result in a long-term, lifelong rate increase for ratepayers,” board Chairman Tim Cavanaugh said.

So far, other government officials have given only general responses to Lautenbaugh's latest proposal — not embracing it, but not rejecting it, either.

Gov. Dave Heineman, speaking at a press conference Thursday, said it was “an idea worth talking about,” but declined to go further.

Omaha Mayor Jean Stothert agreed. The city has an $850 million pension problem and the sewer separation mandate from the EPA, she said.

“And it is going to cost a lot of money,” she said of the sewer work — $2 billion is the estimate. For that reason, she said, the city should be willing to explore other ideas.

Neither OPS administration nor the Omaha school board has taken a position on what could be a substantial windfall. Lautenbaugh proposed earmarking some of the money from an MUD sale for security and technology upgrades in OPS.

“This is a proposal that is much larger than OPS,” the district said in a statement provided by spokesman Todd Andrews. “It's a community issue that would require an extensive conversation.”

Legislative reaction ranged from intrigued to adamantly opposed.

State Sen. Heath Mello, who represents South Omaha, has come out in opposition, citing problems in other cities. But Sen. John Murante of Gretna said he finds the idea “intriguing and promising.”

Omaha-area business leaders have been kicking around the privatization idea for years, arguing that it could spur innovation and competition, said Sen. Brad Ashford of Omaha.

He called Lautenbaugh's proposal an “interesting” way to deal with the cost of the sewer project and Omaha's looming pension costs.

“I wouldn't discount it out of hand,” he said. “I wouldn't say never.”

World-Herald staff writers Paul Hammel and Martha Stoddard contributed to this report.

Contact the writer: Cody Winchester

cody.winchester@owh.com    |   402-444-1216    |  

Cody Winchester is a metro-area watchdog reporter. He covers Douglas and Sarpy Counties.

Contact the writer: Erin Golden

erin.golden@owh.com    |   402-444-1543    |  

Erin covers the Omaha City Council and the Mayor's Office.

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