On June 22, something momentous happened in Missoula, Montana: The city officially took ownership of its water system after it had been under private control for more than a century.
The acquisition, when it finally came, required a lengthy and complicated court-supervised eminent domain (the right of government to take private property) proceeding after decades of effort by city leaders. Mountain Water Company, as it was known, had been operated by a sole proprietor for many years, making Missoula the only city in Montana that did not control its own water system.
The water system was sold in 2011 to the Carlyle Group, a global investment firm, which then quickly sold it to Liberty Utilities, part of Algonquin Power & Utilities Corporation, a private utility conglomerate based in Canada. All the while, says Mayor John Engen, the absentee owners had been raising water rates on Missoula residents while cutting back on maintenance, resulting in a water system that was slowly deteriorating.
About 12 percent of Americans get their water from a privately owned water company. Some would rather see their water controlled by local government, which offers far more transparency and accountability.
Water Deeply recently interviewed Engen and Missoula’s chief administrative officer, Dale Bickell, to learn more about how the city pulled this off.
Water Deeply: Why was it important for the city to acquire the water system?
John Engen: There’s long been an interest among Missoulians, and the city of Missoula in particular, in owning our water system. We were, until June, the only large municipality in the state that did not control its own water system.
This system was in the hands of a private party – in effect, a sole proprietor – for many years. It was very clear the opportunity to purchase the company from the sole proprietor did not exist. Then, when the company changed hands, that opportunity presented itself. As a function of that opportunity, we began in earnest to understand more about the system and its weaknesses.
And we started to understand the nature of these private investment groups and their philosophy around acquiring public utilities – water systems, in particular – and extracting as much value out of them as possible with no benefit to the community. We learned a number of things: One is that these utilities are coveted by investors; that the regulatory environment makes them extraordinarily profitable; and that investors have very little interest in the quality or the long-term operational efficiency of the systems. They are really about a quick return on a buck.
All of those things came together along with the fundamental notion that water is essential to life. And a city that does not control its destiny through water is likely to suffer in the long term.
Water Deeply: What problems led the city to acquire the water system?
Engen: This system, under private ownership, leaked more than half of the water that it pumped – to the tune of 4 billion gallons (18 billion liters) a year. The first company that bought the system had a business plan wherein they would raise rates on an annual basis by 5 percent. What happened was, rates go up, the system further deteriorates and the value increases.
So if we were not to pursue ownership, we were setting up the community to have a system that, at some point, most likely would fail by virtue of lack of investment.
Water Deeply: Did the public support the acquisition?
Engen: There was a base level of support from folks who recognized the importance of water and the delivery of that essential element of life. But like most communities, if you’re not experiencing some apparent harm as a function of private ownership, you’re going to be a little bit skeptical.
We commissioned a statistically valid survey to understand whether folks thought we were on the right track. And a full 70 percent of folks surveyed agreed that public ownership was preferable to private ownership.
Yet we still had folks saying – you know – what kind of socialists are you? It ain’t broke therefore we don’t need to fix it. But as the case wore on and evidence was presented in court and other arenas, it became more clear to folks that they were, in effect, getting robbed by the private investors and that trend wasn’t going to change without public ownership.
Water Deeply: Why did the city use eminent domain?
Engen: We had a letter of agreement with Carlyle Infrastructure Partners [part of the Carlyle Group] that, in effect, gave the city of Missoula a first right of refusal in the event Carlyle elected to sell the utility. When we exercised what we believe was our right under that agreement, we pushed $65 million across the table – after a lot of research around value – and that was rejected out of hand.
Water Deeply: How much did the city pay for the system, and where did that money come from?
Dale Bickell: We paid $88.6 million for the system. Plus attorney’s fees and some other costs; all in we borrowed $95 million.
Under municipal operation and efficiencies, we can buy the system and make debt service payments, we can more than double the amount of capital expenditure in the system, we can pay off legal fees – and maintain our current rates. We’ve had the system now since June, and we don’t have a rate increase in our five-year model.
Water Deeply: What assets were acquired, exactly?
Bickell: All of the assets of the Mountain Water Company: the entire system, real estate, rolling stock, water rights – the whole enchilada.
It’s a groundwater system, and what’s important is Missoula is situated in a closed basin. All the water rights are fully adjudicated within the watershed we have. To have that under local control is incredibly important. The water rights the city was able to acquire are among the most senior water rights in the basin. We hired all but two of the employees who were full-time employees at Mountain Water Company – 33 employees in total.
Water Deeply: How will maintenance of the system change?
Engen: We have a capital improvement program that will invest $6 million this year, and we’re planning on investing $6 million a year in the system until we achieve an industry standard for leakage. We’re also currently engaged in a system plan update. We’re working on rate models and more.
Water Deeply: How big an effort was it, logistically, to take over the system?
Bickell: The mechanics of the accounting, billing, customer service transition was a heavy lift. There were a lot of technical issues with data transfer. But in terms of the transition from the customer perspective – apart from the fact that some folks couldn’t do electronic bill payment early on – it was easy.
Water Deeply: What advice do you have for other communities in a similar situation?
Engen: Well, we’ve been asked, and we’ve been on a couple of community visits. We were in Charles Town, West Virginia, and we were in Monterey, California – two communities looking to remunicipalize their water systems. Our advice is you are right to want to acquire the system, because the folks who own them recognize they are cash cows and will do everything they can to keep them. So don’t give up.
Water Deeply: During condemnation, did you get pushback from the corporate owners or from the community?
Engen: We certainly got input from the [corporate] side. They took out full-page ads in the local newspaper alleging we were wasting money. They did these town hall meetings. They said really mean things about us. It was hard to take at times. There was some noise and people had some legitimate concerns about the expense.
Fundamentally, I have settled on the idea that it would have been irresponsible of me and us not to pursue condemnation. Kicking the can down the road, in this case, was not an option. So we had to kind of lead through it. What we had to do was fairly relentlessly educate people, and then actually do what we said we were going to do. We’re operating the system today, we’re paying employees, we’re investing $6 million fixing it up, we’re paying the debt service on the borrowed money and we’re not raising rates.
Water Deeply: Is the city in a better place now because of the acquisition?
Engen: We’re not in the business of resting on our laurels. But frankly, doing this is the most significant thing I’m ever going to be involved with. Generations of Missoulians will benefit from this effort. And it’s something that they simply won’t have to worry about. It’s something they can take for granted, appropriately so. And I’d do it again in a minute.