What Are We Doing?

Councilors debate city’s effort to condemn MWCs (January 12, 2015)

It’s clear the economic costs of condemnation are a risk to the public.

But what are the intangible risks of having Missoula’s water, a necessity of life, turned over to a foreign nation?

If that doesn’t give folks a moment of pause, I don’t know what would, said Beverly McNamara.

McNamara participated in a sold-out City Club Missoula lunch on the topic of the city of Missoula’s bid to condemn Mountain Water Co. City Club is a nonprofit with a mission to inform and inspire residents and promote new ideas.

At the DoubleTree Hotel, Councilors Bryan Von Lossberg and Adam Hertz debated the merits of the eminent domain case, and audience members posed questions.

The city of Missoula took the local utility and owner The Carlyle Group to court this spring to try to force a sale of the water company to the city. The global equity firm subsequently announced its plans to sell Mountain to a subsidiary of Algonquin Power and Utilities Corp., a Canadian conglomerate.

Both council members addressed McNamara’s question about foreign control. Algonquin is based in Ontario, Canada, and Liberty Utilities is based in New Hampshire.

We’re not turning over the natural resource, Hertz said. The state owns the natural resource for the benefit of the people.

Von Lossberg, however, said he sees huge risks with the proposed transfer. The sale to the Algonquin subsidiary, Liberty Utilities, is pending with the Montana Public Service Commission.

This is a company that has not been around for the long haul, Von Lossberg said. This is a company that has been on this billion-dollar acquisition spree for 18 months.

In fact, he said, Liberty is an unproven corporation that’s been on a tryout in the financial market since 2009. It’s easy to go on a buying binge, but far more difficult to do a good job managing the acquired companies, Von Lossberg said.

At the debate, Von Lossberg made the case for public ownership. The water system is in ill repair, and he said the city would be in the best position to put the most money into fixing the pipes.

Our water system, no matter who owns it, is going to require tens of millions of dollars of infrastructure investment over the next couple decades, Von Lossberg said.

Failing infrastructure is a pressing issue nationwide because of the age and material of pipes, he said. In general, he said, water systems are in need of massive reinvestment.

The industry calls it the replacement era. It’s not business as usual, Von Lossberg said.

Additionally, Mountain’s leakage rate is high, some 40 percent to 50 percent, he said. And he said Carlyle’s managing director acknowledged to the Public Service Commission that leaks were high.

The plan to fix it, though, is shielded from the very people who use the water, Von Lossberg said: The action plan for your water utility ordered by your Public Service Commission (has) been marked confidential.

City ownership would provide more transparency, he said.

Ownership by Liberty, on the other hand, might cost ratepayers a bundle, he said. In Pine Bluff, Arkansas, the company that wants to buy Mountain is requesting a 28 percent rate hike for water customers, he said.

I see huge risk on the financial side with this company that’s been proposed to be our new partners, he said.

Hertz said he isn’t opposed to municipal ownership, but he’s against going about it through condemnation. In the 1980s, he said, the city tried and failed to condemn Mountain Water in a case that went to the Montana Supreme Court.

They say those who forget the past are doomed to repeat it, Hertz said.

He is open to city ownership at the right price and through fair negotiation, Hertz said. On the other hand, he is not in favor taking a private property owner to court an attempt to force a sale.

If we lose, the city has to come up with the money, and there are a few tricks I suppose the city has up its sleeve, all of which draw money from taxpayers, Hertz said.

If the city wins, it plans to roll its legal costs into a bond that will pay for the entire transaction. If the city loses, it will have to come up with millions of dollars in legal fees, Hertz said.

So far, the city is on the hook for some $1.4 million in legal fees, and a judge could order the city pay at least some of the defendants’ bills, too, he said. Mountain recently reported its legal bills had hit $1.4 million, and Carlyle’s costs were at $700,000.

I’m not sure we have a Plan B if this goes on for years and years, Hertz said.

The city wants to redirect profit into pipes if it owns the company. Hertz, though, said the profit could very well go into making the city’s interest payments instead.

There’s a lot of questions that haven’t been answered for me as far as the city’s operating plan, Hertz said. Does the city have the ability to increase capital expenditures without increasing rates?

In the meantime, he represents constituents who aren’t even Mountain Water customers. He said hundreds, possibly as many as a thousand, are on private systems.

One audience member wanted to know how much more money the city could put into fixing pipes as opposed to the roughly $4 million a year Mountain has spent under Carlyle.

Based on a purchase price of $60 million to $80 million, the city could put at least $4 million into infrastructure at current rates, Von Lossberg said. He said he would advocate for a higher amount, possibly $4.5 million.

Said the audience member: What about at a $110 million purchase price?

In the announcement of the pending sale, Algonquin noted a proposed purchase price of $327 million for three water companies including Mountain. Mountain accounts for roughly a third of all the customers in the package deal.

The city of Missoula believes the company is worth less; it offered $50 million and $65 million to buy the utility before it went to court.

Hertz said he doesn’t believe the purchase price is as low as the possible $60 million to $80 million presented to council members a year ago. It’s bound to be much, much higher.

In order to do capital improvements of $4 million a year or more, then water rates would have to increase significantly, Hertz said.

Dan Brooks wanted the council members to identify the threshold at which the costs of condemnation exceed the revenue advantages over the life of the bond. Councilors, though, did not have a specific number.

I don’t know what that exact amount is, Von Lossberg said.

Hertz said a detailed financial analysis with the figure was not available.

It’s an excellent question, Hertz said.

Walt Muralt wanted to know the fear behind continued private ownership. Under the current structure, he said, the public has a voice with the Public Service Commission.

One concern is the potential for a massive failure of the system, or multiple breakdowns, Von Lossberg said. Another is the inordinate amount of water leaking from the pipes – he said 50 percent is a problem in and of itself, and it’s also a problem if it indicates the overall health of the system.

It’s not even close to what you would consider industry standards, Von Lossberg said.

The trial is in March, but Geoff Badenoch said the case will surely be appealed, as it was in the 1980s. He asked for an upside figure on the legal costs and the city’s exposure.

Von Lossberg said the final amount will depend on judgments and appeals. He also said the defendants’ legal strategy has been less about the merits of public ownership as it has been a plan to outspend the city.

In response to the question, Hertz said the city’s exposure is one of his biggest worries with condemnation.

I think the city is lacking a risk management plan, and I’m very concerned about that, Hertz said.