Letter to the Stockton City Council Regarding Privatization by Gary Wolff, P.E., Ph.D.

October 18, 2002

Mayor Podesto and
Council Members Johnston, Nickerson, Martin, Ruhstaller,
Giovanetti, and Nomura
City of Stockton
425 N. El Dorado Street
Stockton CA 95202

Honorable Mayor and Councilmembers:

I am writing to express concern about the City’s possible
decision to hire a private company to operate and maintain,
make capital improvements to, and provide billing services
for, water, wastewater, and stormwater utilities in Stockton.
Before expressing those concerns, some information about
my background and the Pacific Institute, my employer,
may be helpful.

I am a licensed civil engineer who has worked with municipalities
and special districts in California since 1984. I have
been involved in procurement processes with similar size
and structure to the one you are currently engaged in.
For ten years, I was a consulting engineer with about
10 employees. During that time period, my firm performed
the technical work necessary for several private companies
to submit bids of the type you are now reviewing. In fact,
my firm wrote the technical proposal for Western Waste
Industries that helped them to win the contract for solid
waste and recycling services in two-thirds of the City
of San Jose. I am not opposed to private involvement or
participation in provision of public services such as
water, wastewater, stormwater, or solid waste management.

The Pacific Institute is a non-profit, non-partisan,
independent environmental policy research organization
founded in 1987. We strive to improve public understanding
of resource issues and thereby promote higher quality,
fact based decisions. For example, our February 2002 report
(The New Economy of Water: the Risks and Benefits of Globalization
and Privatization of Fresh Water) filled an important
informational gap in the privatization area, and has been
very well received, worldwide. Similarly, our Economic
Evaluation of the Cadiz Groundwater Storage and Dry Year
Supply Project, Metropolitan Water District of Southern
California (July 2001) was quoted by many parties to the
debate over the Cadiz project, including the Wall Street
Journal. Both reports urge fact-based decision-making
rather than decisions based on abstract ideology such
as: “the private sector is more efficient” or “water must
be publicly provided.”

To put it plainly: neither the Institute nor I are for
or against privatization. We are against hasty decisions
that involve hundreds of millions of dollars of public
funds, based on apples-to-oranges comparisons. Please
consider each of these concerns:

Hasty decision-making

I am unaware of any procurement of this size (about $600
million) and duration (20 years) that has taken place
in California in the time frame being employed in Stockton.
Hundreds of pages of written proposals that took months
of effort and tens of thousands of dollars to prepare
were reviewed in weeks. This is unfair to the losing bidders
as well as to the public. To make matters worse, the scheduled
duration between a recommendation from the outside consultant
and a decision by the City Council is less than a month.
I wouldn’t be surprised if the average public works street
improvement contract in Stockton allows more time for
staff review and public input than is being allowed here.

Furthermore, some issues have not been reviewed at all.
CEQA requirements, for example, have not been addressed
adequately or recently. The environmental implications
of the three proposals and the “no action” alternative
of continued public operation are probably different.
The simplistic claim that all of the alternatives require
the operators to meet regulatory standards is an incomplete
and naïve response to the potential problem. There are
numerous instances of public and private entities failing
to meet their legal and environmental obligations due
to mismanagement, short staffing, or other governance
problems. But the review by City staff and consultants
has not even touched on this concern. For example, might
the lowest bidder’s bid be as low as it is because they
have underestimated what is required to satisfy regulatory
requirements? Is the risk of environmental damage higher
under one proposal than another, or under private operation
as opposed to public operation?

The claim that contractor will be financially and legally
responsible for any violations misses the point. CEQA
requires that the potential environmental consequences
of the project and its alternatives be investigated and
discussed through a public process, no matter how responsibility
for those consequences is allocated.

Given that the time allotted for review of technically
and financially complex documents is far shorter than
similar procurement processes elsewhere in the State,
and that CEQA issues haven’t been addressed properly,
I respectfully suggest that the current course of action
will expose the City and its citizens to costly and time
consuming litigation if a contract is consummated at the
pace currently anticipated. And even if litigation does
not occur, or fails, the rapid pace creates an enormous
risk that the City will have very expensive disputes with
your contractor in the future. Such disputes have taken
place in other instances where privatization decisions
were made rapidly.

Apples to Oranges Comparisons

The evaluation report prepared by Alternative Resources
Inc. and Hawkins, Delafield, and Wood (hereafter, ARI),
claims on page 7-1 that the proposal by OMI will save
the City about $154 million on a nominal dollar basis
over 20 years, or about $85 million on a present value
basis, in comparison with improved efficiency of public
operations. Potential savings of this magnitude are, understandably,

However, there are number of reasons to believe that
the claimed savings were not accurately estimated. The
ARI report and other bid-related documents contain apples-to-oranges
comparisons that must be resolved before an accurate estimate
of savings can be made. We describe a few of the apples-to-oranges
comparisons that stand out, below. However, our very limited
review of the documents suggests that many other such
problems exist; problems that should be addressed one
by one before the Council is called upon to take action.
“Sample” inappropriate comparisons:

  1. The labor cost comparison between public and private
    operation assumes that the current MUD staffing level
    for policy and planning and regular regulatory compliance
    will remain at the current level of effort. But common
    sense and experience show that regulating a private
    entity is more time consuming that planning and performing
    regulatory compliance for another “department” within
    a public entity. Regulating a private entity involves
    legal and procedural steps not required internal to
    a single entity. Consequently, the MUD staffing assumption
    unfairly favors the private alternative. As a historical
    fact, this “level of regulatory effort” issue was an
    enormous problem during the first five years of privatization
    of water services in England and Wales. The British
    regulatory agency overseeing the newly privatized companies
    (OFWAT) was overwhelmed during those years; and staffing
    for it needed to be and eventually was increased significantly.
  2. The capital cost estimates differ enormously between
    private and public operations. For example, OMI price
    proposal form 3 and Table A-2 of the HDR baseline analysis,
    suggest that capital repair and replacement costs for
    essentially the same facilities are about $0.8 million
    more per year for the public operation. Total capital
    cost estimates essentially the same facilities are about
    $63 million in the OMI proposal and about $112 million
    in the HDR estimate of public operations.These differences are simply too large to reflect “efficiencies
    of the private sector.” More likely, they reflect inappropriate
    comparison of City planning level estimates for budget
    purposes, versus competitive bid numbers. Those familiar
    with the budget process know how much pressure exists
    to be certain that planning estimates are not “too low.”Also, an inappropriate comparison is being made between
    the traditional public works approach of separate contracts
    for design and construction and the combined design/
    build contract approach. Or put another way, if it is
    feasible for OMI to design/build facilities for $63
    million, then it is also feasible for the City to hire
    a design/build team to do the same for a similar amount.
    So why didn’t HDR estimate public operations using the
    apparently more effective design/ build approach? Regardless
    of why, an apples-to-oranges comparison now exists.
  3. Similar problems may underlie the chemical cost line
    items ($1.81 million per year, public operation; only
    $1.16 million per year under private operation), and
    electricity ($3. 40 million per year under public operation;
    only $1.74 million per year under private operation).
    Either the private contractor is underbidding these
    items grossly and will press to recoup their losses
    later, or HDR’s “MUD Efficiency Initiatives” cost estimate
    (Table A-2) is too high.I suspect, based on experience, that chemical usage
    by City staff is higher than necessary. This is a common
    problem in municipal operations. But it can and has
    been solved in numerous cases without privatization.
  4. Finally, the “miscellaneous and other costs” line
    item estimates differ dramatically ($2.25 million per
    year under public operations; only $1.11 million per
    year under private operation). Again, either OMI is
    unaware of numerous such cost items, and will attempt
    to recoup their losses later, or the City operation
    has greater potential for efficiency improvements than
    shown in the HDR efficiency evaluation.

Correcting the discrepancies mentioned could eliminate
the supposed financial benefit of $154 million nominal
dollars over the 20-year contract term. They might even
reverse the outcome, with public operation (but much more
efficient than present) being less expensive the lowest
private company. This is what the City of Phoenix found
out a few years ago – they could save more by “re-engineering”
public operations than they could save by privatizing.
Until appropriate comparisons are made, the claim that
the OMI bid represents $154 million of savings compared
with continued public operations is premature and could
lead the City into a more, not less, expensive course
of action than continued public operation.

In summary, privatization is a decision with many potential
risks and benefits. I believe than any independent, professional
observer would agree that the risks and benefits in the
Stockton situation are not fully understood. Until they
are understood, the water, wastewater, and storm water
management alternative that is in the best interests of
the citizens and businesses of Stockton can’t be identified,
much less selected.

I believe that all of you care deeply about your City.
Please seriously consider doing the following:

  • Dramatically slow down the decision process.
  • Perform CEQA review.
  • Ensure that ambiguities in the technical and financial
    documents and proposed contracts are carefully and fully
    resolved, and that citizens and business representatives
    are satisfied that the ambiguities have been resolved.
    Similarly ensure that apples-to-oranges comparisons
    are not taking place.

Please note that the current public advisory committee
is not the right vehicle for this purpose. We are NOT
urging more advice from citizens and businesses. Instead,
we urge a process that leads to wider understanding among
citizens and businesses of the facts of the situation
and of the alternatives that exist. Not everyone will
agree about a final decision; but clarity about key facts
and alternatives is achievable and well worth the effort.

Please feel free to call me with any questions.


Gary H. Wolff, P.E., Ph.D.
Principal Economist and Engineer