Unanswered Questions about the contract with Aquarion

The process for this privatization is severely flawed, and this flawed process

may result in deeply flawed decision-making.

   ?    Full and open competitionTo make a rational and sound economic decision

   requires full and open competition, and a clear alternatives that provide

   leverage for the city to get the best deal.  The City has not prepared an

   alternative cost estimate for operating the waste water treatment plant itself

   and addressing CSOs.  Aquarion knows that.  The City has limited leverage

   in these negotiations.

   ?    Basis for decision making is flawedThe consultants hired by the Mayor

   took the least efficient operations as a baseline cost, which appears to be

   inflated, and used it to justify a potential 6% savings over 20 years.  The

   Special Legislation does not provide for the City to use this method for

   decision making.

   ?    Consultant lacks credibilityOne of the consultants hired by the City,

   Malcom Pirnie and Associates, was severely criticized by the Inspector

   General for overstating savings to the city of Lynn from a 20 year design

   build contract. Why was a firm with tainted credibility hired by Holyoke to

   evaluate this proposal?

   ?    City Council Needs Assistance--The City Council will need to hire its own

   consultants to assist it in evaluating this 700 page contract and the

   alternatives available to the city.

   ?    The City Should Follow State Policy as the Basis for Decision Making--

   The Pacheco-Menard Act (MGL Ch 7, Sec 52-55) is the state policy which

   guides privatization decisions by state agencies. It requires competition and

   a comparison using the most efficient public agency approach versus bids

   solicited from the private sector.  This 10 year old law has guided numerous

   privatization decisions, including one at the Holyoke Community College.

   This same methodology should be applied here because it will produce a

   more reasoned decision than the approach used by the consultants. They

   have created illusory savings by setting up a straw man that can be readily

   knocked down.

   ?    Alternative City Proposals Non Existent--When the City Council asked for

   the Water Department to prepare an alternative, the mayor ridiculed the

   Water Department. The Mayor should explain why the DPW has not be

   required to prepare a competitive proposal for municipal operations.

   ?    Mayor¹s Special Legislation Strips City Council AuthorityWhen the

   Mayor proposed Special Legislation to the City Council to allow a 20 year

   design build contract, he sold it as a way to gather market based information

   on privatization alternatives, and assured us that this legislation would not

   prejudge the outcome. Nor would it affect the Council¹s authorities to

   approve or deny a contract.  After the legislation was enacted, the City

   Solicitor opined that this Special Legislation stripped the City Council of its

   authority to vote up or down on this particular contract. All other contracts

   longer than 3 years require city council approval.

   ?    Earlier this year, the City Council passed a Home Rule Petition to reinstate

   its authorities to approve or deny this contract by a 14-1 margin, but the

   Mayor refused to sign it and send it to Boston. The Mayor has offered no

   explanation. However, it would be fair to ask the Mayor why he didn¹t

   declare up front that the City Council was losing its authorities under the

   Special legislation. The Mayor should be asked why he opposed

   reinstatement of the checks and balances provided by the City Council. The

   Inspector General made a number of recommendation in the aftermath of the

   fisaco with the City of Lynn 20 year DBO contract. However, removing city

   council authorities was not recommended by the Inspector General. The

   Mayor should explain who drafted this Special Legislation for him.

   ?    By stripping the City Council of its authorities, rate payers have lost an

   essential voice in the decision making process.

   ?    Reserve Fund is a Company Funded Cookie Jar--The Aquarion contract

   contains a $1 million Reserve Fund to ³be funded and maintained by the

   Company for the benefit of the City to pay certain costs in connection with

   this Service Contract at the sole discretion of the city, all as more

   particularly described therein.² The Reserve Fund Agreement does not

   describe the purpose of this fund, except to restate the previous sentence.

   ?    Authority to Approve Rate IncreasesAlthough the City Council lost its

   authority to approve the contract, the City Council has been repeatedly

   assured by the Mayor and the Council President that the Council retains its

   authority to approve this contract by reviewing and approving sewer rate

   increases.

   ?    Contract Award--I have reviewed this contract, and I find no provision

   which conditions  the commencement of this contract on appropriations or a

   sewer rate increase.  The Mayor needs to clarify the question we have raised

   over and over: What happens if the Council does not approve the sewer

   rate increase? Will the contract we awarded or not?

   ?    Mayor May Seek to Use Other FundsIf a rate increase is not approved, the

   Mayor may seek to use other appropriated funds, or the Reserve Fund to

   initiate operations of the Aquarion contract. This legally questionable

   approach could allow the Mayor to circumvent the need for City Council

   approvals in the short term, and could allow the contract to commence. 

   ?    Consequences of Default--However, additional funds will eventually be

   required to feed Aquarion, if the sewer rate increase is not approved.  This

   could involve requests for transfers of Free Cash or Rainy Day Funds to

   cover the costs of the Aquarion contract or a renewed request for rate

   increase.  If such appropriations are not granted, the City would be unable to

   pay the service fees required under the contract. Under the Aquarion

   contract, the city would then be in default, and liable for a liquidated

   damages fee of 5% of the cumulative value of the Aquarion Service Fee over 20 years.

   ?    The Mayor should provide an estimate of this default cost assuming default

   incurs during the first 5 years. My best estimate is $7 million, but given that

   there are 4 pages of algebraic formulas to calculate the liquidated damages,

   this estimate could be low.

   ?    Possible Blackmail--Faced with a $5-7 million default judgement, the city

   council may be coerced into approving funding for the privatization

   contract.

   ?    Ratepayers should be alerted that the potential for this sequence of events exists real.

--Since EPA is not putting any money into covering the costs of this unfunded

mandate, they have no standing to rattle a sabre at a poor community like Holyoke.