Water privatization not bonanza Atlanta expected

NEW ORLEANS OFFICIALS, selling the benefits of a private contract to run the water and sewer systems, have pointed up Atlanta's cost savings from privatizating its water operations three years ago. Sewerage & Water Board consultants have even used Atlanta's request for proposals as a model for

But they talk little about the controversy that has surrounded Atlanta's 20-year contract with United Water Services, one of the three bidders for the New Orleans job.

The company and city official have sparred over $80 million in change orders and reimbursement that the company requested last year and the city, under a new mayor, has refused to pay. United Water and Atlanta also debate the city's actual cost savings and United Water's maintenance and billing record.

Facing federal mandates for a sewer system overhaul, Atlanta Mayor Bill Campbell, who left office in December, pushed the private water contract in 1997 and 1998 as a way to cut costs and free up capacity to issue more debt for capital repairs. It's similar to the time hummed in New Orleans.

The contract, like New Orleans', is not a true privatization: It covers all water operations, from treatment to bill collection, but leaves Atlanta with ownership of the century-old system and the responsibility for major repairs. "It doesn't really relieve the city of very much responsibility," says George Heery, all Atlanta architect and chairman of the Metro Group, a government watchdog.

Aggravating the problem is the limited staff the city has to oversee the complex contract. "The main reason it's not working very well is it relies on the city to administer it day in and day out," Heery says.

This situation has also slowed capital repairs, which will cost $3.5 billion by 2014. Atlanta faces three federal orders to address poor water quality, sewer overflows and its overall sewer system. By comparison, New Orleans faces one federal consent decree and $1 billion in water and sewer repairs:

Atlanta was counting on cost savings from its water contract to help pay for sewer repairs. It's privatization has stemmed some but not all rate increases. The city has hiked sewer rates more than 40% since 1998 to finance bond issues for repairs, while water rates have experienced minimal increases.

But the city now wants federal and state environmental regulators to lengthen the 2007 deadline on one batch of sewer repairs that could otherwise force a 260% combined water and sewer rate increase to garner the necessary bond money, says New York bond rating agency Fitch.

Cost savings dispute

United Water's $80 million request last fall for about $12 million in reimbursements and $4 million a year added to its operating fee for the remainder of the contract has prompted criticism of its original low bid.

Campbell approved the changes before he left office in December, but Commissioner of Water Remedios del Rosario refused to sign off. "They tried to get me to approve it. I resisted," she says.

Atlanta's new mayor, Shirley Franklin, has not yet taken action on the change orders; she is focused on the city's $82 million budget deficit.

Rich Henning, United Water spokesman, says the company hopes to hammer out the actual numbers with the city over the next two months. While change orders are not uncommon on large contracts, United Water faced thousands more work orders for leaks, fire hydrants and other repairs than it anticipated when it walked onto the job Jan. 1, 1999. "The workload has been close to three times what was specified in the contract," he says.

United Water's final offer of $21.4 Million a year for the operations and maintenance fee beat out other competitors, including USFilter and OMI/Thames Water - current and former bidders, respectively, in New Orleans.

A look at the bid calculation, according to city of Atlanta figures, shows that the contract award decision was heavily weighted toward projected cost savings. United Water had a lower technical score than OMI/Thames Water. But the final score was determined by dividing the technical score by the square of the final bid price, which was $21.4 million for United Water versus $25.9 million for OMI/Thames.

With a smaller denominator, United Water's final score surpassed that of OMI/Thames and the other companies. The city chose United Water, proclaiming savings of $20 million a year over current water operations, or $400 million over the life of the contract.

United Water followed through on cutting operating costs, eliminating more than 200 jobs through attrition. It has also invested more than $10 million in a computerized maintenance management program, new vehicles and engineering design tools, Henning says.

But del Rosario says Atlanta's true cost savings do not total $20 million a year. Atlanta must shoulder pass-through costs for electricity and fuel and for employees' accrued leave, as well as new costs it didn't have as a public operation: reimbursing United Water for sales and other taxes and buying insurance, a $600,000 a year premium.

In a November report on Atlanta's water and sewer bonds, Fitch, using city figures, puts Atlanta's actual cost savings from the private contract, at $7.9 million in 1999 and $15 million in 2000.

Parry Young, director of the public finance department for bond rating agency Standard & Poors, which has tracked Atlanta's water and sewer debt, says the savings haven't met the $20 million projection. But the city should reap long-term benefits from the contract. "I still think there is significant savings by doing this," he says.

United Water's Henning says lie can't speak to the city's savings, but Atlanta has given the company additional work outside the original contract, such as water meter repairs.

He says the city administration, water department and United Water have formed a negotiating team to discuss contract changes, a common industry practice. "These really are good mechanisms to ensure that both sides are protected," Henning says.

Bill collection, maintnance

Part of the city's lower cost savings, bond rating agencies say, also comes from problems United Water has faced with its new computer systems for customer billing and collection.

Collections have not met the 98% success rate required under the contract, but have fallen to 94%, according to Fitch.

Henning says United Water had to shift more than 140,000 customer accounts, more than 10% of its total nationwide, onto its billing system. "It was a new system, and we did have certainly some kinks to work out," he says, adding that United Water has formed a task force to improve customer service.

United Water has also missed some contract goals for maintenance.

The company's annual review of its contract performance, published in December, noted increasing maintenance backlogs. From June to August 2001, the backlog of corrective repairs doubled from 773 to 1,590. Repairing meter leaks has taken longer than the contract-required 15 days.

United Water says in the report that it is responding faster to leaks and it has experienced unexpected problems related to the growth of the water system, its age and Georgia's ongoing drought. In a drought situation, Henning says, more minor leaks must be fixed because water becomes more precious.

The company has also suffered from accidents caused by other city contractors repairing streets and installing fiber optic cables.