The Cadillac effect 

Could fixing Missoula's water pipes boomerang?

Watchdog organizations such as the Montana Consumer Council and the Clark Fork Coalition are warning that the proposed sale of Missoula's water supply to mega-investment firm The Carlyle Group could increase what locals pay for water.

Economist John Wilson, speaking on behalf of the Montana Consumer Council, points out that, according to documents filed by Carlyle with Montana's Public Service Comm-ission, the firm anticipates "a very large annual return" from operating and possibly selling Park Water. One way to cash in on ambitious earnings projections, Wilson says, is by turning Missoula's water system into the Cadillac of municipal water utilities.

"Given Carlyle's app-arent business strategy," Wilson says, "care should be taken in each of the company's (or its successors') subsequent rate cases in which new investments are proposed to be assure that the costs involved are, in fact, justified by their associated benefits."

click to enlarge PHOTO BY CHAD HARDER

Carlyle announced Dec. 22 that it intends to buy Park Water, the parent company of Mountain Water, which serves Miss-oula. Wilson's warning about the Cadillac effect is ironic in light of the fact that locals and regulators have long decried Mountain Water's leaky pipes. Roughly 20 percent of its pipes leak. Last winter, Mountain Water cited the need for infrastructure improvements and maintenance as among the primary reasons to increase water rates. In March, the PSC approved an 8.77-percent water rate hike.

Wilson cites numbers when cautioning that too much sprucing isn't a good idea. Mountain Water data indicates water loss from company-owned pipes in 2009 cost roughly $366,000. Replacing Mountain Water's aging pipes, he says, could cost $128.6 million.

Missoula is the only major Montana city that doesn't own its water system. Its residents pay on average some of the highest water rates in the state—for metered water users, $46.11 per month. That contrasts with Billings, where the average water user pays $22.42 per month, and Helena, where bills typically run $31.

Another expert who testified about the proposed sale before the PSC, on behalf of the Clark Fork Coalition, says the PSC should require Carlyle to sign an agreement with the city that guarantees Missoula will have first dibs if the equity firm sells the water system.

Park Water has not indicated any interest in selling to Missoula any time in the near future. In fact, Mountain Water executives have said that Carlyle's deep pockets are better suited to operate the utility, ensuring resources are available to invest back into the system.

If Park isn't willing to sell to the city this time around, the city would like a chance to buy when the utility again comes up for sale. "My priority," says Missoula Mayor John Engen, "the city's priority in this case, is going to be to ensure if there is another sale, if there is another transaction involving this utility, that the city is first at the table and has a real legitimate fair opportunity to buy the system."

Engen contends that if the city owed the water system, the profit incentive would disappear, leaving money to make needed infrastructure investments without hitting locals in the wallet.

Meanwhile, as the PSC's Sept. 26 hearing on the water deal approaches, Missoula PSC commissioner Gail Gutsche is trying to glean facts from hype as she sifts a pile of financial reports, articles and CEO testimony. "We do examine a company's fitness," she says.

There's a lot to examine. The Carlyle Group has an intriguing history. Its main office is nestled just down the street from the White House on Pennsylvania Ave. Carlyle employees have included political heavyweights such as former British Prime Minister John Major, former Secretary of State James Baker III, George H.W. Bush and George W. Bush. Since its 1987 formation, the firm has invested in many industries, including health care, defense and housing. Carlyle has drawn criticism from liberal muckrakers such as Michael Moore who question the ways that well-placed connections may shape the company's lucrative defense business.

Carlyle has roughly $106.7 billion in assets across the globe ranging from Hertz Rent-a-Car to Dunkin' Donuts and Baskin Robbins. In 2006, the company created a new investment fund, Carlyle Infrastructure Partners. Through that fund, Carlyle is now overseeing companies that deal in municipal waste, school buses and 23 highway service areas in Connecticut. If state regulators approve the sale of Park Water, the venture would be Carlyle's first foray into municipal waters.

Gutsche says if the PSC does approve the sale, it could have the power to impose a range of conditions, including a requirement that the city first be invited to bid on the utility if Carlyle opts to sell. Still, she cautions that the commission has a lot of research to do—and people to listen to—before it renders a decision. "I don't want people getting way ahead of the game yet," she says.

The PSC will hold a hearing to vet the proposed sale of Mountain Water in the Missoula City Council Chambers on Sept. 26 starting at 8 a.m. The public is invited to attend and provide comment.

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