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JM Eagle Whistle Blower Lawsuit
February 12, 2010
We are all well aware of of the expense to repair and replace water lines. Utilities expect these assets to last 50 years with little to no problem, but many are seeing failures in recently installed JM Eagle PVC water pipes. Nevada, Virginia, Delaware, Tennessee and over 40 water authorities in California experienced these failures and joined a pending whistle blower lawsuit against JM Eagle.
An employee of JM Eagle, John Hendrix, uncovered substandard materials going into the production of pipes, as well as cost saving manufacturing techniques that diminished pipe quality and durability. After raising his voice to superiors, and refusing to accept “acceptable business risk” as an excuse, he was fired. Since his dismissal, Mr Hendrix has filed a lawsuit to stop the “intentional” production of faulty pipes. Mr Hendrix asserts that more than half of all pipes sold since 1996 are of substandard quality. If this is the case, many more utilities have seen and will see premature pipe failures. We recommend reviewing past and proposed water line projects to make sure your utility is not impacted by this lawsuit.
The news story can be found here:
Bursting Pipes Lead to a Legal Battle
Utilities are faced with tough decisions when it comes to capital replacements. First, many utilities struggle to identify, schedule and finance these system repairs to begin with. Stepwise recommends implementing an asset management program to ensure repair and replacement becomes a priority to your utility. This program can be as simple as having annual meetings with operations staff to identify aging infrastructure to be replaced, or as complex as implementing an electronic system to monitor the age, criticality and probability of failure for each individual asset. Small to medium size systems can use CUPSS (Check Up Program for Small Systems), which is a free software package available through the EPA (http://www.epa.gov/cupss/).
Assets don’t last forever and failure is inevitable. Once you can accept this hard fact, you can manage the associated costs. However, when suppliers don’t hold up their end of the bargain, an expensive, labor intensive process becomes even worse. We hope that JM Eagle is found to be free of impropriety, but in the meantime keep an eye on this trial and on your assets!
More Private Water Company Rate Problems
October 27, 2009
Privatization is thought by many to be a panacea for lowering costs for water and wastewater systems. Yet, here we have again another example of how a private owner/operator, in this case Indiana American (subsidiary of American Water, NYSE: AWK), seeking a very large increase in rates (click here for the news story). We have reported on this same issue a couple of times already in just the past few months. In “Corporate Water Rates – Show Me the Efficiencies” we cited a case involving Illinois American (also a subsidiary of American Water); and in “Private Does Not Mean Better Water Rates” we discussed the huge increase proposed by Veolia (NYSE: VE) as the private owner/operator of the water works in Indianapolis, IN.
The predominate cost of owning and operating a water or sewer utility is the cost of capital. Municipal entities have access to low-cost and tax-exempt debt, private operators may or may not have such access. Private owners can issue stock to raise capital, which could be an advantage except those stockholders expect a return on their money that is higher than the interest rate paid on debt, and the private utility gets to include those returns in the rate you pay (they have a constitutional right to do it). In order for a private operator to produce lower rates in the long-run, they would have to drive operating costs down significantly. They would have to generate about 20% savings just to account for the additional cost of income taxes that private owners have to pay (your municipal system does not pay taxes), and then they would have to save even more to account for profits paid to shareholders.
A perfectly good question to ask if your community is looking to privatize is whether the private owner/operator really can lower your bills and sustain those savings over time. We are seeing evidence right now that private owners are not able to perform any better than public owners, and the cost savings do not appear to be sustainable either.
Private Does Not Mean Better Water Rates
October 1, 2009
We often hear how private utility companies can achieve efficiencies in their water and sewer operations that will result in community benefits (like lower water and sewer rates). For a period of time in the US there was an active market where major cities were selling their utility concessions to private corporations. Veolia was one such company, and one of the concessions they purchased was Indianapolis Water. Fast forward several years, and we get this latest story about the company requesting a 35% water rate increase . The increase, we are told, comes on the heels of yet another 11% increase implemented just a few months ago.
The question worth asking now is whether or not the City of Indianapolis would have been better off with or without Veolia. Even if you believe that government is inherently inefficient, you still have to ask whether a private company can operate a utility service so much more efficiently as to produce a water or sewer rate that is less than it would have been even with an inefficient (i.e. government) operation. Before you answer though, you should understand that the rates set by the private company are not set at absolute cost; the rates include cost as well as profits and taxes. That means that the private company would have to produce surplus efficiencies in order for it to outperform a supposedly inefficient government utility. One of the ways that private companies “produce” so-called efficiencies is to defer investment in infrastructure and maintenance. Defer those things long enough and you are bound to get a big rate increase at the end of the road. Is that what has happened in this particular case? Maybe not, but the story does say that the increase is needed for “necessary upgrades to the system.”
The Value of Simple Rates Cannot be Overstated
September 4, 2009
Intricate rate designs can be helpful in reaching certain community goals, but elected officials in particular should never underestimate the value of simplicity. In this example from Frankfort, KY (http://bit.ly/11h0OB) we see how customers can become easily confused with their utility bills and how that confusion can increase when multiple utilities are billed together. In this case too, each of the utilities implemented rate increases at the same time, further compounding the issue. Simplicity is not only valuable, but it is also many times the best rate structure alternative as discussed in a presentation we made at the American Water Works Association earlier this year.
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