Annual Privatization Report 2004

Environment
Water/Wastewater
This year has been challenging for water privatization. Despite the cost
savings available through privatization, at least two jurisdictions have
reversed pursuing privatization, and time will tell how much these
moves will cost taxpayers.

In New Orleans Mayor Ray Nagin announced in May that the city has
scuttled all plans to privatize the system. The decision ends years of debate over which entity could best
handle a crumbling infrastructure and federally mandated repairs that included a Ralph Nader “Public
Citizen”-led initiative to stop privatization (see http://www.rppi.org/apr2003/navigatingthepolitics.html and
http://www.rppi.org/neworleanswater.html). Two private companies and a group of public managers were
vying for the contract, which would have been worth $1 billion.

Nagin had originally turned to the private sector because New Orleans’s decrepit water system needs
billions of dollars worth of repairs. Nagin did not answer how the city would finance or complete the
repairs required by the federal government.

In Kentucky, Lexington-Fayette Urban County Government (LFUCG) is attempting to condemn the

Kentucky-American Water Company (part of the German utility RWE AG) from its rightful owners and
convert it into a government entity because of political and philosophical reasons. Using eminent domain,
the county seeks to strip the company of its assets. Why? The county asserts that water should not be
treated as a commodity, nor operated by a foreign-owned company. Also, the LFUCG claims the profits
earned by Kentucky-American Water are “drained” from the pocketbooks of Fayette county water
customers, and should be retained for their benefit.

This scheme offers Fayette County’s taxpayers a lose-lose proposition. Not only will they be stuck with a
multi-million dollar legal bill necessary to pull this off, but they also will be forced to pay increased water
rates to subsidize a bond issue needed to complete the transaction. How can LFUCG deliver water at the
same rate to its citizens if it substantially increases its costs?

George Raftelis, LFUCG’s hired gunslinger, predicts it will cost taxpayers $158 million. Raftelis also
estimates that municipal bonds issued at an interest rate of between 4.75 percent and 5.25 percent are
necessary to complete the transaction. Given these parameters, the annual principal and interest payments
on this bond would approximate $10 million per year. Is this a realistic estimate? Not if LFUCG pays the
market price for these assets.

Normal acquisitions of corporate assets generally are priced on a reasonable valuation agreed to by a
willing seller and an able buyer. Kentucky-American Water Company believes its market value to be
between $500 million and $750 million, and it has no interest in selling.

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Given this huge difference in price estimates between the buyer and unwilling seller, only the legal system
can ascertain what this plunder would cost water customers. No one—not taxpayers, Raftelis or the
government—knows what this takeover would ultimately cost.

The water company earned a profit of $5.3 million in 2002. Assuming it earned that same profit during
each of the next 30 years, LFUCG would still have to find $4.7 million every year to make up the difference
between the estimated $10 million bond payment and the expected annual profit. That gap is sure to be
filled by water customers forced to pay much higher rates to cover the astronomical costs of condemnation.

Perhaps in response to municipalities struggling with water contracting, last September, the Water
Partnership Council (WPC) issued a “blueprint” for public-private partnerships to mayors and other
municipal officials at the U.S. Conference of Mayors’ Urban Water Summit in Chicago. The handbook,
Establishing Public-Private Partnerships for Water and Wastewater Systems: A Blueprint for Success
(http://www.waterpartnership.org/), offers guidance to communities considering whether to partner with the
private sector and how to manage public-private partnerships to meet their water and wastewater needs.

WPC President Don Evans noted that the handbook “is the result of our members’ three decades of
experience in serving communities across the country—it presents the facts about water and wastewater
partnerships and the value they can provide to communities.” Chapters cover everything from the basics of
partnering and cost savings, to taking care of employees and developing an effective contract.

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