May 20, 2018

The Intercept: From Pittsburgh to Flint, the dire consequences of giving private companies responsibility for ailing public water systems

By Sharon Lerner and Leana Hosea for The Intercept.

THE LEAD CRISES in Flint and Pittsburgh have many unfortunate parallels. Residents of both cities unknowingly drank water with high levels of the potent neurotoxin, which has long-term health consequences. The rise in lead levels was preceded in both cases by a miscalculation related to chemicals used to control corrosion in water pipes. And in both places, officials have faced criticism for their inaction and failure to alert the public.

The two lead crises have another important thing in common: a private water company named Veolia. The world’s largest supplier of water services, Veolia had contracts with both Flint and Pittsburgh around the time that lead levels rose in their drinking water. And in both places, Veolia wound up in legal disputes over its role in the crises.

In Flint, where Veolia had a small contract to improve water quality in 2015, Michigan Attorney General Bill Schuette sued the company in 2016. Though the initial elevation of lead levels there has been traced to the city’s decision to switch its water source from Lake Huron to the Flint River, which occurred before the city hired Veolia, the pending case charges the company with “professional negligence and fraud, which caused Flint’s lead poisoning problem to continue and worsen, and created an ongoing public nuisance.”

In Pittsburgh, where Veolia had a contract managing water provision between 2012 and 2015, the Pittsburgh Water and Sewer Authority sued the company in October 2016, charging that “Veolia grossly mismanaged PWSA’s operations, abused its positions of special trust and confidence, and misled and deceived PWSA.” Pittsburgh sought damages of $12.5 million, the sum of what the city water authority had already paid or still owed Veolia. Essentially, the city was asking for its money back.

But by this past January, it appeared Veolia had largely avoided responsibility for the lead crisis that occurred during its oversight of the Pittsburgh water system. After more than a year of closed-door arbitration over the charges, Veolia and the Pittsburgh Water and Sewer Authority issued a joint statement concluding that neither party “admits or concedes any allegations or claims made.”

The joint statement attributed increased lead levels to “a range of factors including aging lead service lines in the system and plumbing in the buildings connected to the system and factors such as sampling cohorts, rather than any particular actions taken by either the PWSA or Veolia.” As part of the agreement, Veolia also dropped charges in a countersuit claiming the Pittsburgh water authority had defamed the company.

“Veolia was pleased to put the issue behind us,” Veolia spokesperson Kristin Blake wrote in an email to The Intercept. “Veolia would never recommend delaying important capital projects or cutting costs at the expense of water safety.” Blake disputed the allegations in the Michigan suit. “Our work in Flint was extremely limited,” Blake wrote, adding that “lead issues were excluded.”

Veolia U.S., a subsidiary of the French company Veolia Environnement, had offered itself as a solution to some of the drinking water problems in both cities. But, in both, people who worked closely with or monitored those water systems say, the company either failed to address the lead problem or worsened it.

“Time and time again, Veolia is shirking responsibility when it comes to mismanaging these water systems,” said Alissa Weinman, national campaign organizer for Corporate Accountability, which pointed to the industry’s failure to protect against lead in Flint and Pittsburgh back in 2016. According to Weinman, the growing number of cities that struggle to maintain their water systems are particularly vulnerable to the promises of private water companies. “Veolia is preying on cities that aren’t getting the federal investment they need to upkeep their systems.”

Now, the Trump administration is trying to make it easier for private companies to control public water systems while also seeking to cut federal funding for water protection. The president’s 53-page infrastructure plan, released along with the budget in February, relies on a $100 billion fund incentivizing private sector involvement in public utilities to address aging pipes, aqueducts, and other critical pieces of hardware essential to the provision of drinking water. Though overarching infrastructure legislation is unlikely to pass this year, on May 18, congressional Republicans introduced the first of what may be several bills to enact Trump’s plan. One of the administration’s “priority goals” by September 2019 is to increase the nonfederal dollars leveraged by the Environmental Protection Agency’s water infrastructure program by $16 billion, according to the agency’s budget brief.

When evaluating grants, the EPA, which would allocate the portion of the $100 billion fund going to water expenditures, would prioritize applications that rely on “nonfederal revenue.” Criteria used in the past — whether grants improved public health, made water more affordable, and improved water quality — are not on the proposed list.

EPA Administrator Scott Pruitt has promised a “war on lead.” But a summit he convened to address childhood lead exposure excluded many of the EPA staffers who have worked on lead for years. And the agency’s budget, which took a 26 percent cut in the most recent budget proposal, would undermine many of the EPA’s existing efforts to protect water and prevent lead exposure.

Among the programs targeted for reductions are the Safe and Sustainable Water Resources program; surface and drinking water protection programs; grants to states to supervise drinking water supplies; and water quality research grants. The budget would also eliminate the EPA’s Lead Risk Reduction program and state grants that protect children from lead in paint. The EPA declined to respond on the record to questions about the administration’s infrastructure plan or proposed EPA budget cuts.

Trump is projecting his infusion of cash to the private sector will “enable Americans to build their lives on top of the best infrastructure in the world.” But veteran water experts point to the recent travesties in Flint and Pittsburgh as evidence of what can go wrong when profit-driven companies are given responsibility for ailing public systems.

THE PROMISE OF saving money has been central to Veolia’s appeal to cash-strapped cities and towns struggling with water provision. That was certainly the case in Pittsburgh, where the water authority was facing more than $720 million in debt when it decided to contract with Veolia in 2012.

The contract was based on Veolia’s “peer performance solutions” model, in which the company is paid based in part on how much it cuts costs. Though there was a set fee — PWSA would pay Veolia $1.8 million for its first year, according to their initial contract — the deal also promised the city significant savings, which Veolia projected would run between $1 million and $4 million per year. According to the contract, Veolia could keep half of all the savings it made PWSA in the first year and 40 percent of any savings thereafter.

At least at first, the company delivered. Within two years, Veolia helped PWSA identify $2.5 million in new revenue, $3 million in annual operating savings, and an additional $2 million in savings from speeding the rate of debt refinancing, according to a 2014 announcement from the National Council for Public-Private Partnerships.

But to achieve those savings, PWSA underwent a series of changes designed to cut costs in the months and years before lead levels shot up in Pittsburgh’s water.

Tonya Payne, a former employee safety manager at PWSA, described the water authority as firing or pushing out key employees and experts after Veolia came on board. “When they first came in, they immediately fired the head of engineering and the head of finances,” Payne said. “I knew we are in trouble then.” By the end of 2015, 23 PWSA workers had been laid off or fired, according to Wired, including safety and water quality managers and half of the laboratory staff responsible for water testing.

Stanley States, a former water quality director, retired in 2013 after working at the water authority for 36 years. “With me, they kind of pushed me out of the way,” States said. “They moved me to another department, and that’s why I retired.”

“Veolia were very controlling and completely in charge,” States added. “They even said that’s how they run things, they come in, get rid of management so they are in charge.”

Jay Kutcha, who served as the chief microbiologist at PWSA for over 30 years, left his job in January 2014. “My opinions were insignificant to Veolia,” said Kutcha. “My idea of water treatment is that you have people who do it empirically depending on the water. We went from there to having this company coming in and making maybe a one size fits all — we treat the water this way in one place, so we’ll do the same in this other city. I’d have been more receptive if they listened to us or accepted that water was different from place to place.”

The Pittsburgh water authority also switched to lower-cost corrosion control chemicals when it was under Veolia’s leadership. In April 2014, PWSA replaced soda ash as a way of preventing the leaching of lead and other heavy metals into drinking water with a less expensive product, caustic soda. The change was made without approval from the Pennsylvania Department of Environmental Protection, which is required by law, and without informing PWSA’s board of directors.

In the protracted dispute leading up to January’s settlement, the city and Veolia each sought to pin responsibility for the treatment change on the other party. Emails obtained by a local TV station suggest that PWSA employees may have been the first to suggest the switch. In an email to The Intercept, Blake, the Veolia spokesperson, emphasized that point. “Lead concerns arose after PWSA employees, without Veolia’s knowledge, changed the chemicals designed to prevent corrosion and kept this information from Veolia for months,” she wrote. Blake noted that “PWSA, through its board of directors, retained decision-making authority about all investment decisions regarding equipment and infrastructure.”

Lead levels in Pittsburgh’s water had already been inching up before the switch. Many of the water pipes leading to homes are made of lead and need to be replaced. But the amount of lead in water shot up dramatically while Veolia was managing the system. In 2010, the 90th percentile of all samples tested contained 10 parts per billion of lead — problematic, because no amount of lead in water is safe, but still below the federal action level of 15 ppb. By 2013, the number had risen to 14.8 ppb. The next time the water was tested, in June 2016, the level was 22 ppb — well above the EPA action level.

It’s unclear how many children have been affected by the lead exposure, which causes developmental problems, including reduced IQ and learning difficulties. The percentage of children in Pittsburgh tested for lead who were found to have elevated blood levels climbed between 2013 and 2015.

Allegheny County Controller Chelsa Wagner acknowledged that multiple factors likely played a role in the escalating lead levels in Pittsburgh’s drinking water but said that the switch in corrosion control chemicals “either caused or accelerated the problem.”

Pittsburgh Mayor William Peduto has pointed to the broader problem with the city’s contract: Veolia was pocketing money that Pittsburgh would otherwise have been able to use to maintain staff and services. “Back in 2012, when PWSA went into this contract, they actually incentivized a private company to save money and they would be paid more,” Peduto said at a public hearing in March 2017. “So where do you save money? You lay off people. You don’t do the investment that’s needed.”

“The water authority had issues already,” said Payne, the former employee safety manager. “We used money we should have been using to address the water problem to address other problems. It’s neglect.” Still, she added, Veolia “caused more hell and made the problem worse by 100 percent.”

As in Flint, where water rates were the highest of any city or town in the country by 2015, the cost of Pittsburgh’s water skyrocketed even as its quality was deteriorating. In 2013, a year after the city hired Veolia, the water board approved a 20 percent rate increase over four years. By 2015, PWSA was swamped with complaints over 50,000 inaccurate bills, many of which were related to new water meters introduced under Veolia. Some customers were wrongly charged thousands of dollars for their monthly water.

IRONICALLY, VEOLIA TOUTED cost savings in Pittsburgh when it made a pitch in January 2015 to work on Flint’s water. In February that year, the company began work on a $40,000 monthlong contract to study the city’s water quality issues. Veolia proposed having greater control, which, the company predicted, would come with considerable savings, as it had in Pittsburgh.

“Veolia has assisted the PWSA in realizing more than $5.5 million in annually recurring revenue and efficiencies,” the company wrote in its bid. In Pittsburgh, the Veolia presentation explained, the company had established “financial controls that limit spending and increase accountability and identify opportunities for operational efficiencies having a direct impact on the utility’s bottom line.”

But by the time Veolia was making its pitch, a full-scale public health crisis was underway in Flint. Lead levels had been shooting up since the city switched its water source from Lake Huron to the Flint River in April 2014 and neglected to add any corrosion control. Residents of the small city northwest of Detroit had been asking for help with their water since the summer of 2014, complaining of rashes after bathing in the smelly, discolored water and retching after drinking it. In October that year, General Motors stopped using Flint water at its factory because it was corroding metal parts.

But when Veolia began work on its contract in Flint, it didn’t tackle the lead crisis that was already well underway. Instead, in an interim reportVeolia presented to the Flint City Council Public Works Committee, the company that bills itself as “the world’s leading provider of environmental solutions” said that Flint’s water was safe, dismissing the concerns that had bubbled up around Flint and failing to even mention lead.

Though Flint residents had been holding up containers of brown water at public meetings, the company assured the committee that Flint always had some discolored water. “Doesn’t mean the water is unsafe,” the report said. Veolia also suggested that, if there were problems, they might reside with particularly vulnerable individuals. “Some people may be sensitive to any water,” offered the report.

In March 2015, Veolia submitted a water quality report to Flint that found that “the water is considered to meet drinking water requirements.” Still, the company recommended increasing the amount of a chemical, ferric chloride, to the water to address the discoloration. According to the suit filed by Michigan Attorney General Bill Schuette, the chemical only added to the corrosion problem. “The treated water became significantly and dangerously more acidic after and due to defendants’ direction to add more ferric chloride,” the suit charged, arguing that “as a direct result, the Flint water crisis continued and worsened.”

“This was such a gross mess-up,” said Noah Hall, special assistant attorney general for Michigan and one of the attorneys who filed the suit against the company. “It wasn’t, ‘Oh, the engineers missed something,’” said Hall. “They essentially walked into a building that was collapsing and said, ‘It looks good to me!’”

Indeed, the lead crisis in Flint has led to countless cases of lead poisoning, more than a dozen deaths from Legionnaires’ disease, fertility rate decreases, and an increase in the number of fetal deaths throughout the city.

In an email to The Intercept, Veolia spokesperson Kristin Blake emphasized that lead issues were excluded from the company’s work in Flint. “At Flint’s direction, Veolia’s analysis was focused on levels of disinfection byproducts (TTHM), discoloration, and taste-and-odor issues,” she wrote. Yet, as the Michigan attorney general’s suit pointed out, “According to Veolia’s 2015 interim report, the only issue not in Veolia’s scope of study was ‘why the change from [Lake Huron water via the Detroit system pipeline] or the history of the utility.’”

Blake also wrote that the official report from the Flint Water Advisory Task Force assigned the company no blame or responsibility for the current crisis. But when asked about the report’s findings, Eric Rothstein, a member of the task force interviewed over the phone for this story, said the task force didn’t directly look at Veolia’s responsibility. “I would not say our report either accused or exonerated them. The discussion we had with Veolia was a very limited and background thing,” Rothstein said. “We did not dig into Veolia at all.”

DESCENDED FROM THE French conglomerate CGE, which began providing drinking water to Paris in 1853 and expanded to include wastewater services in the early 19th century, Veolia, which operates in more than 50 countries, has long made its money from water and other public utilities. Its profitability has increased in recent years as a worldwide lack of clean drinking water has worsened.

In the U.S., 12 percent of people struggle to afford drinking water. Due to pressures from climate change and aging infrastructure, that number is projected to triple in the next five years.

Veolia has successfully promoted itself as a solution to this global water crisis despite the fact that water systems don’t necessarily stabilize when they’re taken over by the private sector. Nor do private water companies usually bring down costs. While public providers can’t profit on water, private entities can. And they tend to charge more for drinking water — sometimes much more.

On average, privately owned water systems charge 59 percent more than publicly owned water utilities, according to a 2016 report by Food and Water Watch. In Rialto, California, where Veolia teamed up with a private equity firm to lease the city’s water system in 2012, prices jumped 68 percent. In New York, water provided by private companies costs more than twice what publicly provided water costs.

Veolia Environnement has more than $30 billion in revenue and its stock price has more than doubled over the past five years, as it has positioned itself as a fix for struggling water systems around the world. At least some of those profits may be stowed in an offshore company Veolia set up in the Bahamas, according the Paradise Papers database.

Dozens of U.S. cities and towns have contracted with Veolia for water or waste services in recent years. Among them are New York City; Woodridge, Illinois; Dayton, Ohio; and Houston. These arrangements range from small contracts in which Veolia serves as a consultant to agreements in which the company controls most or all aspects of decision-making and operation around drinking water.

Some of these relationships haven’t turned out well. In Whitesburg, Kentucky, a dispute over unpaid bills led Veolia to sue the town. In Burlingame, California, an environmental group sued Veolia over sewage spills, and in Angleton, Texas, the city sued the company charging that it insufficiently staffed its wastewater facility. In Indianapolis, customers of the public water authority sued Veolia, alleging that the water company billed them unfairly. In Plymouth, Massachusetts, where Veolia had a contract to handle wastewater, the state’s attorney general, Maura Healey, sued the company for failing to properly maintain wastewater mains that led to a 10-million-gallon raw sewage spill in 2016.

In an email, Veolia’s Blake disputed Healey’s claim, saying that Veolia intended to prove in court that a defect in the Plymouth water main over which the company had no control “caused the pipe to rupture, and we had raised this design concern with the town repeatedly over a period of years prior to the incident.” Blake did not provide comment on other lawsuits in the U.S. involving Veolia but added, “We seek to provide outstanding service to every one of our clients and have an outstanding track record of achievement.”

The company’s methods have also come under scrutiny outside the U.S., with controversies in CanadaFrance, and Gabon. In 2015, Romania’s anti-corruption agency launched an investigation into Veolia’s Romanian subsidiary, Apa Nova Bucuresti, and individual executives for allegedly running a multiyear, multimillion-euro bribery scheme in order to dramatically raise water rates. Veolia’s subsidiary allegedly used sham contracts to funnel over 12 million euros to public officials or their affiliates in order to get approval for water rate hikes. The investigation has since expanded to France and the U.S. Securities and Exchange Commission.

As Maude Barlow sees it, these disputes are an outgrowth of the larger problem of water privatization. “They cut the number of workers, they cut corners,” said Barlow, an author and water expert who served as a senior adviser on water to the United Nations. “They have to because the same amount of money that would be going to a nonprofit utility has to give them enough money to pay their shareholders.”

As the Trump administration plan is being hashed out, more private companies will likely profit off public water systems. Yet when something goes wrong with their provision of basic services, the public has little recourse other than to end their contracts, according to Barlow. “It’s very hard to hold a private corporation accountable for this or any other kind of travesty,” she said. “Governments make bad decisions too, but we can hold them accountable” by voting them out of office.

Clearly some Pittsburgh officials are feeling stung by their interaction with Veolia, particularly the way it ended. “While this settlement largely lets Veolia off the hook for Pittsburgh’s ongoing lead crisis, PWSA customers remain on the hook for protecting themselves and fixing the problem,” Chelsa Wagner, the Allegheny County controller, said in a statement.

Indeed, though the legal mess has been cleaned up in Pittsburgh, the city’s lead crisis remains serious. The most recent home lead testing results, which were released in January, showed a 90th percentile lead level of 21 ppb, still considerably higher than the federal action level of 15 ppb.

Though Veolia made $11 million between 2012 and 2015 from its oversight of PWSA, the company will not spend that profit addressing the city’s ongoing lead problems. As part of the agreement struck in January, Veolia agreed to withdraw its claims of more than $4.9 million from PWSA relating to its management services, as well as contribute $500,000 to a fund to help PWSA’s most vulnerable customers. But that donation won’t help PWSA pay the $2.4 million in fines levied by the Pennsylvania Department of Environment Protection at the end of 2017 for numerous violations, including the unauthorized switch of corrosion control chemicals and the exceedances of the federal lead action levels, both of which occurred under Veolia’s watch.

In the wake of all this bitter fighting, Flint and Pittsburgh have yet another thing in common: For now, both cities have switched control of their drinking water systems back to public entities. Though the possibility of privatization remains, late last year, a Blue Ribbon Panel addressing Pittsburgh’s water crisis recommended transferring control of the water authority to an independent public trust. In Flint, the city entered into a 30-year arrangement for the Great Lakes Water Authority to provide its drinking water.

Veolia, too, has decided to make significant changes. After its contract in Pittsburgh ended in dispute, the company failed to secure any other peer performance contracts in the United States, according to the industry journal Global Water Intelligence, which described the company as shifting away from the model based on sharing cost savings with utilities. Instead, Veolia is turning its attentions to storm-related contracts, like the one it was awarded last summer in the wake of flooding in New Orleans, and provision of water, waste, and other services for refineries, chemical plants, and manufacturers.

In the meantime, Veolia is still facing litigation in Flint, where residents learned last month that the state would be discontinuing its distribution of free bottled water. Special Assistant Attorney General Noah Hall is hopeful Michigan will get the company to pay for at least some of the harm he believes it caused. “We want to take from their profits for trust funds to help rebuild the community and provide social services and health care,” insists Hall. But if Pittsburgh’s deal is anything to go by, he and Flint residents are likely to be disappointed.




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