IURC Should Reject $29 Million Termination Payment To Veolia

Attorney John Price has filed an objection with the Indiana Utility Regulatory Commission on behalf of Indianapolis water ratepayers to the Ballard administration's request to approve a $29 million termination fee to Veolia in consideration for the termination of its management agreement to operate the water utility. Throughout the debate over the proposed transfer of the water and sewer utilities to Citizens Energy, this blog wondered how the transfer could possibly result in any real savings to ratepayers as long as it was stuck with the one-sided management agreement with Veolia that paid the French-owned company service fees of more than $40 million annually, in addition to tens of millions in incentive payments the IURC had previously ruled in a prior rate case were not justified under the terms of the management agreement. Repeatedly, we were told it would prove too costly to terminate the agreement, even though the IURC itself had made a case for terminating it for cause.

The objection filed by the ratepayers raises a number of issues, any one of which could have served as a basis for terminating the agreement, including:

• Warnings made by Carlton Curry (former DOW director) of a need for “immediate attitude change” regarding water safety;
• EPA, FBI, IDEM and IURC all launched investigations into Veolia’s management of water company;
• Veolia management employees were visited at home by FBI agents to discuss Veolia’s operation of water company;
• Veolia’s failure to maintain operable water hydrants;
• Curry found Veolia on at least 40 separate occasions sought incentive payments for which it was not entitled;
• Veolia refused to pay for the Atrazine Monitoring Program as ordered by IDEM, causing the city to incur the expense of testing for the safety of the water supply;
• Failure of Veolia to properly manage the financial affairs of the water company, causing it to incur a $20 million shortfall the city had to furnish the water company from other sources;
• Termination of employee benefits for non-collective bargaining employees in contravention of an agreement with the city all employees would have benefits at least equal to, if not better than what they had previously; and
• The management agreement required Veolia to pay debts as they were incurred and it failed to do so by properly managing the financial affairs and paying benefits to all employees.

In 2007, the Peterson administration signed a First Amendment to the Agreement under which it provided more generous management fees to Veolia despite all of the problems it had encountered with Veolia's management of the water utility. The Peterson administration also repeatedly overruled Curry and paid the company incentive payments it clearly had not earned. That First Amendment contained a very important provision as it related to future termination of the agreement, which the Ballard administration completely failed to avail itself of during the negotiations that led to the agreement to terminate Veolia's management agreement after the City-County Council had already approved the transfer of the utility to Citizens Energy. Veolia specifically waived its right under the First Amendment to challenge the enforceability or legality of the management agreement or the First Amendment "on any basis."

Despite Veolia waiving its rights to contest the enforceability or legality on any basis under that provision of the First Amendment, the Ballard administration has maintained that it faced "protracted litigation" with Veolia if it did not agree to pay the company a termination fee. According to the filing, Citizens Energy conditioned its purchase of the water and sewer utilities on the termination of Veolia's termination agreement despite statements utility executives made to the contrary prior to the approval of the deal when questioned about the management agreement. The objection notes the termination agreement cites "insufficient funding" as the basis for terminating the agreement when there was absolutely no indication of a lack of funds to pay for Veolia's management fees, and it wonders why the City would not have exercised any one of numerous grounds for terminating the agreement for cause due to Veolia's "serial violations" of the agreement.

The agreement with Citizens Energy provided for an escrow fund of $40 million to cover claims that might attend the transfer of the water utilities out of which the Ballard administration is paying the $29 million termination fee. The ratepayers' objection notes the sanitation general fund already had a $90 million balance without the escrow fund. Particularly troubling is the complete lack of evidence the City, Citizens Energy or Veolia management personnel could furnish to the IURC to support the $29 million payment to Veolia. The Mayor's Chief of Staff, Chris Cotterill, said the payment reimbursed Veolia for start-up costs it incurred under the management agreement, but he could provide no itemization of what those costs were. Essentially, the figure was an arbitrary amount arrived at during a mediation settlement conference that should not have been necessary in the first instance since Veolia had already waived its rights under the clear terms of the First Amendment.

The motion filed by the ratepayers asked the IURC to do one of the following: (1) deny the $29 million termination fee; (2) reduce the amount of the termination fee; or (3) conduct a separate hearing to consider evidence in support of making a termination payment to Veolia before entering a final order in the case. Hopefully, the IURC will make a decision that takes into consideration the interests of ratepayers since it is abundantly clear the Ballard administration completely neglected their interests in arriving at the agreement to pay $29 million to Veolia. Cotterill, incidentally, is a former attorney with Barnes & Thornburg, which represented Veolia in the settlement discussions.