Private Equity Ownership of Public Water Supplies in Montana Presentation

7/31/2019 Private Equity Ownership of Public Water Supplies in Montana Presentation

1/40

Private Equity

Ownership of

Municipal Waterin MontanaLessons from the Sale of Mountain Water

to the Carlyle GroupBy Ada Montague


2/40

Water Privatization

What most people think of...


3/40

The Carlyle Group's Purchase ofMountain Water

Missoulian Headline Jan. 2, 2011:

"Carlyle Group: Major player indefense, aerospace set to buy

Mountain Water Co."
http://missoulian.com/news/local/carlyle-group-major-player-in-defense-aerospace-set-to-buy/article_42e4007e-163a-11e0-aa5b-001cc4c002e0.htmlhttp://missoulian.com/news/local/carlyle-group-major-player-in-defense-aerospace-set-to-buy/article_42e4007e-163a-11e0-aa5b-001cc4c002e0.html


4/40

Will this be Missoula's Future?


5/40

ThesisThe sale of Mountain Water to Carlyle is a keyholethrough which to view the limited body of knowledge inMontana on private equity ownership of municipal water.


6/40

Background on Research

Community Service
https://www.google.com/analytics/web/https://www.google.com/analytics/web/https://www.google.com/analytics/web/https://www.google.com/analytics/web/


7/40

Understanding the Sale ofMissoula's Drinking Water

Four Parts to this Talk:

1. Facts: History of Missoula's Water Supply up throughrecent Sale of Mountain Water to Carlyle

2. Issue: What does it mean for a private equity firm to own acity's drinking water supply in Montana?

3. Rule: Law andRegulations at Stake

4. Analysis: Improvements to Montana's Regulations


8/40

Part I: History of Missoula'sDrinking Water

Early Days

Transfers of Ownership City's Attempts at Ownershipo Missoula v. Mountain Water Co.

236 Mont. 442, 447 (Mont. 1989).

Sale to Carlyle

One-Eyed Riley or John Wayne?


9/40

Key Players in the Sale

1. The PSC

2. The City of Missoula

3. Park Water & Mountain Water4. The Carlyle Group

5. The Montana Consumer Council

6. The Clark Fork Coalition
http://etalnews.org/missoulawater/key-players-2/the-public-service-commission-psc/http://etalnews.org/missoulawater/key-players-2/the-city-of-missoula/http://etalnews.org/missoulawater/key-players-2/mountain-water-park-water/http://etalnews.org/missoulawater/key-players-2/the-carlyle-group/http://etalnews.org/missoulawater/key-players-2/the-clark-fork-coalition/http://etalnews.org/missoulawater/key-players-2/the-clark-fork-coalition-2/http://etalnews.org/missoulawater/key-players-2/the-clark-fork-coalition-2/http://etalnews.org/missoulawater/key-players-2/the-clark-fork-coalition-2/http://etalnews.org/missoulawater/key-players-2/the-clark-fork-coalition-2/http://etalnews.org/missoulawater/key-players-2/the-clark-fork-coalition/http://etalnews.org/missoulawater/key-players-2/the-clark-fork-coalition/http://etalnews.org/missoulawater/key-players-2/the-carlyle-group/http://etalnews.org/missoulawater/key-players-2/the-carlyle-group/http://etalnews.org/missoulawater/key-players-2/mountain-water-park-water/http://etalnews.org/missoulawater/key-players-2/mountain-water-park-water/http://etalnews.org/missoulawater/key-players-2/the-city-of-missoula/http://etalnews.org/missoulawater/key-players-2/the-city-of-missoula/http://etalnews.org/missoulawater/key-players-2/the-public-service-commission-psc/http://etalnews.org/missoulawater/key-players-2/the-public-service-commission-psc/


10/40

Outcome of the Sale

1. Negotiations

2. Agreements

3. Stipulationsa. Ringfencing

4. Approval

""If I could negotiate in good faith with Park and Mountain today to purchase the

utility, I would jump at the chance. Unfortunately, I'm left to take a leap of faith

based on my understanding of business models, an old letter and hope that this

process gives Carlyle what it needs to consider a sale to the City of Missoula when

the times is right. I hope that time is much sooner than later."

- Mayor Engen, PSC Proceedings re. Mountain Water sale to the Carlyle
http://etalnews.org/missoulawater/2011/09/27/ring-fencing-overview/http://etalnews.org/missoulawater/2011/09/27/ring-fencing-overview/http://etalnews.org/missoulawater/2011/09/27/ring-fencing-overview/


11/40

Mountain Water's Water Rights

Water Uses 68 municipal

10 irrigation

1 multiple domestic well

Priority

Dates

22 from 1868-1899

15 from 1900-1950

41 from 1951-19941 undated

Sources 47 from groundwater

16 from Rattlesnake Creek

9 from Miller Creek

7 from wells

Flow Rates Total CFS: 226.37

Total GPM: 42,549.43

Total

Volume

Diverted

177,081.50

AF/yr


12/40

Part II: Issue

What does it mean for a private equityfirm to own a city's drinking water

supply in Montana?


13/40

Part II: Issue

1. Private Equity vs. Privatized Water

2. Other Sales to Private Equity Firms

3. Conditions Imposed by Other Communities


14/40

Private Equity


15/40

Traditional Privatized Water Models


16/40

Companies

in the World

Two companies, both based in France, control the majority of privatized waterin the world:

Veolia Environment with subsidiaries in seventy-seven countries Suez Environnment with thirty-three

subsidiaries on six continents.


17/40

Private Water Companies in the US

The United States isexperiencing a trend towardsprivatization of public waterservices.o In 2000 private water companies

owned about 16% of the nation'scommunity water systems.

o In 2009, 33% of all community watersystems were privately held,

approximately double the numbersince 2000.


18/40

Private Water Companies inindividual States

The regulation of private municipal water is done by the individual states.The level of regulatory control varies greatly from state to state. Many states enable public entities to contract with private ones for long-

term operation or lease of public water works facilities, or even to sellthese facilities to private buyers, in some cases with few to no significant

conditions to safeguard the public. However, other states have comprehensive privatization statutes thatdetail the types of privatization authorized, mandate specific standards andconditions, and provide procedures for the governance of local privatewater services.

The New Jersey Water Supply Public-Private Contracting Act, for example,has a series of twenty-seven statutes dealing with the provision of privatemunicipal water.
http://www.nj.gov/dep/watersupply/statut_58.26-1.pdfhttp://www.nj.gov/dep/watersupply/statut_58.26-1.pdfhttp://www.nj.gov/dep/watersupply/statut_58.26-1.pdfhttp://www.nj.gov/dep/watersupply/statut_58.26-1.pdf


19/40

Traditional Models HaveSometimes Proven Problematic

Atlanta, GA. 19991. 20 year contract with United Water

2. $21.4 million/year

3. Canceled after 4 years

4. an epidemic of water-main breaks

and occasional boil only alertscaused by brown water pouring

from city taps.


20/40

Private Equity Ownership ofMunicipal Water

1. New Trend

2. Only three other similar sales since 2005

3. Commission Reviews and Conditions
http://www.globalwaterintel.com/news/2011/34/deal-flow-belies-private-equity-interest-water.htmlhttp://www.globalwaterintel.com/news/2011/34/deal-flow-belies-private-equity-interest-water.htmlhttp://www.globalwaterintel.com/news/2011/34/deal-flow-belies-private-equity-interest-water.html


21/40

Other Private Equity Sales

AIG Global Investment Group (AIGGIG)

Conglomerate of international companies, managing approximately $532.9billion in assets, with more than 1,600 employees in 44 offices around theworld.

AIG Highstar Capital II, L.P. (Highstar) is AIGs equivalent of CarlylesWestern Water Holdings.

Highstar acquired Utilities, Inc., with approximately 305,000 customers infifteen states. The review of the sale was subject to the review of each of the fifteen

states public utility commissions and their various conditions.


22/40

Conditions

Pennsylvania:

Commissioner Wendell F. Holland issued a statement that AIGs corporate structure is complex

and lacks transparency. It may not be in the public interest to have these regulated utilities as a part ofan organization structured in this manner." Nevertheless, the Commission approved the sale.

Kentucky:Highstar must "adequately fund, construct, operate and maintain Water Services treatment,

transmission, and distribution systems; comply with all applicable Kentucky statutes andadministrative regulations; and supply the needs of Water Services customers."

Florida:

In Florida, a citizen of one of the sixteen utilities in the state objected to the sale based on two issues;(1) lack of response to water quality, which exceeded state standards for levels of trithalomethane(TTHM), and (2) that the lack of operational utility experience of the buyer. The Florida PSC

found that the citizen did not allege facts sufficient to show that he has a substantial interest in

the outcome of the proceeding and that the buyer had provided sufficient details to show it was

experienced in water and wastewater operations.


23/40


Macquarie Macquarie is a global provider of banking, financial, advisory, investmentand funds management services with more than 70 offices in 28countries."

Aquarion operates in New England and was one of the ten largest privatelyowned municipal water suppliers in the US at the time of the sale. The sale fell under the purview of the public utility commissions ofConnecticut, Massachusetts, New York and New Hampshire.


24/40

Conditions

Settlement Agreement:o Maintain the companys current management structure

o Maintain a customer advisory councilo Not seek to recover costs of the acquisition or maintenance of pension

plans through rates

o To continue to maintain an office for bill payments and customerservice in New Hampshire

Required New Hampshire Public Utility Commission tomake a finding that:o Indirect acquisition of Aquarion-NH by Macquarie would not result in

adverse impacts on rates and was consistent with the publics interest.


25/40


JP Morgan/Water Asset Managements

merger with SouthWest Water Co. (SWWC) in 2010. JP Morgan is a private equity firm, but its investment strategy is based

solely on real estate and infrastructure.

As of June 2010 the company had approximately $44.6 billion in realestate and infrastructure assets under management. SWWC is based in Los Angeles, CA. and operates 130 regulated waterand wastewater systems representing about 160,000 residential andbusiness connections in Alabama, California, Mississippi, Oklahoma andTexas.

The merger was negotiated for approximately $275 million in cash. The merger functioned similarly to the ones previously discussed in thissection, with individual state utility commissions review and approval.


26/40

Conditions

Settlement Agreement:o 19 general conditions

o 16 transaction rules

Conditions:o customer service, basis for rates, outstanding debt, and the capital

needed to run the public utilities in question

Transaction rules:o access to information, treatment of employees and affiliates, transfer

of property and debt, confidentiality and pricing of services


27/40

California Public Utilities CommissionReview of Park Water Sale to Carlyle

Settlement Agreement:o Sets forth the regulatory practices and policies that will govern rates

and that rates will only be increased in accordance with CPUCapproval.

Adjudicatory Judgement:o Mojave Basin adjudicatory judgment applied to the water rights heldby Park Waters subsidiary, Apple Valley Ranchos Water Company.

o These water rights cannot be encumbered, diminished, or transferred

by Ranchos, Western Water Holdings LLC, Carlyle Infrastructure

Partners Western Water L.P., or Carlyle Infrastructure Partners, L.P.,without specific order by this Commission.

Conditions:o Submission of a proposed plan for orderly transition by Carlyle within

eighteen months of the transactions completion

The provision of water is not like the provision


28/40

The provision of water is not like the provisionof goods and services typical of the privatesector.


29/40

Part III: Law and Regulations

Public Trust Doctrineo Background law based on Jus publicum-

Roman legal principle that certain aspectsof the land, such as water were held bythe government in trust for the public.


30/40


Montana Constitutiono Mont. Const. Art. IX, 1 (2011)

"The state and each person shall maintain and

improve a clean and healthful environment inMontana for present and future generations."

o Mont. Const. Art. IX, 3(3) (2011)

Inalienable right to basic human necessities such

as water
http://data.opi.mt.gov/bills/mca/Constition/IX/1.htmhttp://data.opi.mt.gov/bills/mca/Constition/IX/3.htmhttp://data.opi.mt.gov/bills/mca/Constition/IX/3.htmhttp://data.opi.mt.gov/bills/mca/Constition/IX/3.htmhttp://data.opi.mt.gov/bills/mca/Constition/IX/3.htmhttp://data.opi.mt.gov/bills/mca/Constition/IX/3.htmhttp://data.opi.mt.gov/bills/mca/Constition/IX/3.htmhttp://data.opi.mt.gov/bills/mca/Constition/IX/1.htmhttp://data.opi.mt.gov/bills/mca/Constition/IX/1.htmhttp://data.opi.mt.gov/bills/mca/Constition/IX/1.htmhttp://data.opi.mt.gov/bills/mca/Constition/IX/1.htmhttp://data.opi.mt.gov/bills/mca/Constition/IX/1.htm


31/40


Montana Statuteso Regulation of municipal water

Mont. Code Ann. Title 7, Chapter 13, Parts 43 & 44

o PSC authority to review sales

Mont. Code Ann. Title 69 69-3-402. Action to challenge commission order. (1) Any party

in interest being dissatisfied with an order of the commissionfixing any rate, fare, charge, classification, or joint rate or anyorder fixing any regulation, practice, or service may, within 30days, commence an action in the district court of the propercounty against the commission and other interested parties asdefendants to vacate and set aside any such order on the groundthat the rate, fare, charge, classification, or joint rate fixed in suchorder is unlawful or unreasonable or that any such regulation,practice, or service fixed in such order is unlawful or

unreasonable.


32/40


Montana Administrative Ruleso Admin. R. Mont. 38.5.2506: PSC Review
http://www.mtrules.org/gateway/Subchapterhome.asp?scn=38.5.25http://www.mtrules.org/gateway/Subchapterhome.asp?scn=38.5.25


33/40


Settlement Agreements & Stipulations Agreement with the Mayor and the Clark Fork

Coalition

o Right of First Refusalo Protection of watersource

Agreement with the MCCo Ringfencing


34/40

Part IV: Analysis

The privatization of municipal water is best authorizedthrough comprehensive state legislation that sets forththe types of privatization authorized and the standards,conditions and procedures for approval and governance

of locally privatized municipal water.


35/40

National Regulatory ResearchInstitute - Red Flags

If the new company operates less efficiently or at a higher cost Is forced to sell necessary assets to buy down acquisition debt Installs management unfamiliar with a regulatory environment Compensates that management based on performance criteria

inconsistent with the utility's public service function Cuts costs in areas necessary for the maintenance and improvement itsservice quality

If the change of control is able to effect substantial cost savings, and thosecost savings are not passed on to customers


36/40

Part IV: Analysis

Improvements to Montana's Regulations1. Enumerating what types of water privatization is

permissible and under what conditions.

2. Linking the PSCs review to Montanas existingenvironmental and health oversight bodies may improveaccountability to the public.

tandem review between PSC and the DNRCo

future rate change decisionso any future negotiations to purchase

o future sales of municipal water supplies

tandem review between PSC and the DEQo already implicated in the review of Carlyles ownership of

Mountain Water through its Public Water Supply Program


37/40

Analysis: Improvements toMontana's Regulations

WaterCoordinator

Position


38/40

Conclusion

The PSC's approval to sell Mountain Water tothe Carlyle Group may result in:

1. Improved infrastructure

2. The chance for the Cityto finally obtain ownership


39/40

Conclusion

It may also result in:1. Increased rates

2. Lack of public control for the foreseeable future

3. Poor service


40/40

Now What?

Only Time Will Tell....

1. Stay informed

2. Contact your representative at the PSC withyour concerns

3. Be aware of DNRC's pending adjudication ofthe Missoula Valley

Private Equity Ownership of Public Water Supplies in Montana Presentation

Documents

Transcript of Private Equity Ownership of Public Water Supplies in Montana Presentation