Misconduct Taints the Water in Some Privatized Systems

Special to The Times

INDIANAPOLIS -- In recent years, cities across the U.S. have turned over a vital public service -- providing safe drinking water -- to private enterprise.

Driving the trend was the idea that for-profit companies, mainly European conglomerates, could operate water and sewer systems efficiently, keeping water quality high and costs low.

In some places, private-sector management helped trim bureaucracies and replace decaying infrastructure, local officials say. But in Indianapolis, New Orleans, Atlanta and other cities, privatization has been accompanied by corruption scandals, environmental violations and a torrent of customer complaints.

In Atlanta, residents began complaining of brown, brackish drinking water soon after the French company Suez and a subsidiary began running the water system under a $428-million, 20-year contract. It later emerged that Suez had treated then-Mayor Bill Campbell, who championed the contract, to a $12,000 Parisian holiday.

In New Orleans, officials blamed a subsidiary of Veolia Environnement, another French company, for illegally discharging sewage into the Mississippi River on dozens of occasions. The president of a related Veolia subsidiary was convicted in 2002 of bribing a New Orleans sewer board member to support renewal of its contract.

In Milwaukee, a Suez subsidiary caused 107 million gallons of untreated sewage to be discharged into streams and Lake Michigan, a 2002 state audit found. The company triggered a series of overflows by shutting off sewer tunnel pumps during hours of peak electricity demand, saving itself $515,000, the audit said.

A lawsuit by Wisconsin's attorney general blames inadequate maintenance for an even bigger discharge in May 2004, when more than a billion gallons of sewage gushed into local waters.

Indianapolis reached a $1.5-billion, 20-year agreement with Veolia to run the city's waterworks in 2002. The contract is the largest of its kind in North America.

Within the first year, customer complaints nearly tripled and the company admitted mailing more than 15,000 incorrect bills. Inadequate maintenance caused hundreds of fire hydrants to freeze, hampering efforts to put out fires that consumed a church and other buildings.

Then, on Jan. 6, 2005, heavy rains swelled the White River and triggered a chain of system failures at the White River Treatment Plant. Officials issued a boil-water advisory, 40,000 schoolchildren took an unscheduled holiday and residents of the nation's 12th largest city learned they could no longer take their tap water for granted.

A federal grand jury, meanwhile, is investigating allegations that Veolia's Indianapolis unit falsified water-quality data.

Peter Gleick, president of the Pacific Institute, an Oakland think tank that studies water issues, said the rhetoric of privatization "has run into the brick wall of reality."

"I'm not opposed to privatization. I'm opposed to bad privatization," Gleick said. "If privatization is going to work, there really needs to be clear protection of the public good and clear standards for performance."

The water companies say the vast majority of cities are satisfied with their performance. In recent years, they say, more than 90% of municipalities with private water or sewer operators extended their contracts when they came up for renewal.

"We've had some jobs where we haven't done a fantastic job," said Scott Edwards, a vice president of Veolia Water North America. "But we have largely done a fabulous job.... We believe in what we do. We believe our story and we believe in the day-to-day results."

Veolia and Suez, the world's two largest water companies, moved aggressively into the American market in 1999.

Veolia spent $6 billion to acquire the nation's largest water company, USFilter. Suez, which already owned a third of United Water, a private firm based in Harrington Park, N.J., spent $1 billion to buy the entire company.

In 2003, Germany's RWE AG purchased American Water Works Co., based in Vorhees, N.J.

The European companies touted their size, financial wherewithal and expertise and they cultivated friends in city halls, state legislatures and Congress. They promised to provide solutions for cities struggling with aging pipes, tight budgets and tough environmental regulations. Over the last decade, major water firms have made more than $4 million in federal campaign contributions, according to the nonpartisan Center for Responsive Politics. The industry also has given generously to the U.S. Conference of Mayors.

The mayors' conference helped spark the industry's growth by lobbying the Clinton administration to strike an Internal Revenue Service rule that limited municipal utility management contracts to five years. The 1997 rule change cleared the way for 20-year deals.

The water companies say long-term contracts allow them to spread capital improvement and operating expenses over decades and provide lower-cost service. With the IRS change, the number of "public-private" water partnerships in the United States rose from about 400 in 1997 to 1,100 in 2003.

In pursuit of contracts, water companies have lobbied hardest at the local level, treating office holders to dinners, sports tickets, free trips and campaign contributions.

Companies competing to manage Atlanta's water and sewer systems in 1999 stocked their management teams with former city officials and political fundraisers for Campbell.

The City Council approved the $428-million contract with Suez and United Water in the hope that it would control costs and help the city comply with a federal consent decree aimed at stopping sewage overflows into the Chattahoochee River. The companies shifted hundreds of city water and sewer workers onto their payrolls.

Campbell called it "a great victory for the people of Atlanta," predicting that "every city in America will go to privately run water systems."

A few months later, Suez bankrolled a $12,000 holiday for Campbell and a companion in Paris, where the mayor posed for snapshots at Napoleon's Tomb and the Arc de Triomphe. Suez executives later said they'd intended Campbell's visit as a legitimate business trip, but Campbell met with company officials for just 2 1/2 hours during his five-day stay.

Meanwhile, complaints about water quality and unresponsive service proliferated, peaking in the summer of 2002.

Gordon Certain, president of a north Atlanta neighborhood association, said poor maintenance and equipment failures caused recurrent water main breaks and boil-water alerts, at times producing tap water "the color of very well-brewed tea."

Mayor Shirley Franklin, who succeeded Campbell in early 2002, said United Water and Suez neglected basic repairs, violated federal drinking water standards, failed to regularly flush impurities out of the system and billed the city for work not done.

Company officials blamed old pipes and power outages and said haphazard city records had made it impossible to calculate how much it would cost to run the system before they signed the deal.

The two sides agreed to terminate the 20-year contract in 2003, after four years. By then, FBI investigators were focusing on Campbell's relationships with a wide number of city contractors, including Suez.

In February 2006, during Campbell's corruption trial in federal court, a handwriting expert testified that Campbell had signed secret amendments to the contract that would have been worth as much as $80 million to Suez over the life of the deal. Campbell denied signing the documents or otherwise approving the $80-million increase.

In March, a jury acquitted him of taking bribes but convicted him of three counts of tax evasion, charges that prosecutors had supported with testimony about his extravagant lifestyle and trips paid for by Suez and other companies.

Suez officials say that their dealings with Campbell were proper and that he did not receive favors for helping the company on its contract.

Atlanta runs its own water system again and is spending $3.9 billion to upgrade the water-sewer infrastructure.

Atlanta and other cities looked to private companies after years of mismanagement and budgetary neglect left their public systems in poor shape.

In 1993, the failure of Milwaukee's waterworks to screen out a parasite led to a flu-like outbreak that sickened 400,000 people and killed more than 100.

Two years ago, Los Angeles agreed to a $2-billion sewer upgrade to settle allegations that the city had allowed thousands of spills.

Mayor Dean Mazzarella of Leominster, Mass., said private-sector expertise was a boon to his city of 44,000, which was struggling with a leaking waterworks until it struck a deal a decade ago with USFilter. The company designed and built a new treatment plant, and now Veolia, which bought USFilter, oversees Leominster's water and sewer operations.

"We've got nothing but good things to say," Mazzarella said. "They're such a big company, they have the ability to tap into a larger talent pool, to reach for people on the cutting edge of technology and understanding."

Water rights groups doubt such success stories will be widely repeated. Privatization breeds corruption and reduces accountability, they contend.

Earlier this year, residents of Toms River and Camden, N.J., complained about a lack of accountability after United Water admitted it had failed to warn customers about contamination of drinking water.

In Toms River, the company neglected to notify some customers for six months of elevated levels of naturally occurring radium in the water. In Camden, the company delayed reporting high readings of TCE, an industrial solvent that may cause cancer and liver damage.

New Jersey regulators fined the company $4,000 in Camden and $64,000 in Toms River.

Rich Henning, a United Water spokesman, said the reporting failure in Toms River was the result of confusion over a change in testing protocols. The company has replaced its local manager and is conducting an internal investigation.

"We have apologized profusely," he said. "We're doing everything we can to make sure that the water that gets to our customers meets all the requirements for safe drinking water."

Henning conceded that some privatization deals have disappointed customers because, in the push to win contracts, some companies took on too much risk. "We were kind of hitting each other in the head to get that next contract," Henning said. "I think now the companies that are still in pursuit of this marketplace are doing so in a much more refined, less risky and more mature way."

The industry's prospects for growth may hinge on whether Veolia's $1.5-billion contract with Indianapolis is judged a success.

Tim Hewitt, who took over as president of Veolia Water Indianapolis a year into the contract, said the company's early difficulties stemmed from a flawed billing system and other inherited problems that took time to fix.

But troubles have persisted, including the shutdown of the White River Treatment Plant in January 2005 and the federal grand jury investigation.

Roger Edlin, then the night shift operator at the White River plant, said the emergency developed when a computer glitch turned off a pump that adds disinfectants to the water. The problem overwhelmed the system, Edlin said, because Veolia had taken two reservoirs out of service and cut back on cleaning and repairing the plant's filters.

The company blamed Edlin for the shutdown and fired him. Edlin contends in a lawsuit that Veolia executives brought on the crisis by slashing maintenance and staffing to boost their bottom line.

Seven other current and former employees said in interviews that Veolia's budget tightening had left the waterworks in poor condition.

"You're sitting there holding your breath, hoping that your last pump didn't go down," said Jim Bullington, a plant operator who took early retirement in December 2004.

The company said its detractors simply can't accept the technological and managerial innovations Veolia brought to a tradition-bound work environment. Evidence of the company's progress, Veolia officials said, can be seen in a 2004 customer survey that showed 83% of customers were "totally" or "mostly" satisfied.

Hewitt said Veolia has invested in new equipment and fine-tuned operating procedures, improving water quality and allaying customers' long-standing concerns about the taste and odor of their tap water.

Federal and state authorities, however, are investigating whether the company has accurately reported results of water-quality testing.

Concerns about the company's testing prompted the Indiana Department of Environmental Management to conduct its own tests last fall.

Although the agency said it found no violations of safety standards, Thomas Easterly, head of the department, expressed concern that the readings showed higher concentrations of disinfection byproducts than the company had reported from its own tests for at least four years. The trace chemicals "raise a potential health concern," Easterly said.

Hewitt said he was confident the probe would find no wrongdoing.

Indianapolis is a showpiece for Veolia as it markets itself around the world, he said, and the company wouldn't jeopardize such an important contract by cutting corners.

"We have a lot at stake here," he said. "When our senior managers go to Beijing, they talk about Indianapolis. When they go to India, they talk about Indianapolis."

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Times researcher Janet Lundblad contributed to this report.

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