Did City of Portland breach a water bond covenant?
We noted yesterday that the City of Portland is not disclosing, to prospective buyers of its latest round of water bonds, its contract for cut-rate water sales from the Columbia well fields to its cozy private contractor, Carollo Engineers. We stumbled across the Carollo deal last September, and have written about it in a number of posts. The salient facts are these:
Who's the second largest consumer of water purchased from the Portland Water Bureau?... [I]t's an outfit called Carollo Engineers. In the year ended June 30, 2010, that firm purchased 291.5 million gallons of water, more than 60 million gallons more than the parks bureau and more than 125 million more than the public schools. Carollo is second in consumed volume only to Siltronic Corp., the silicon chip maker, which purchased 549.2 million gallons that year.
So who in the heck is Carollo Engineers, and what are they doing with all that water?
As best we can tell, Carollo is a private company that designs, tests, and oversees construction of ultraviolet treatment equipment that other private companies, such as Berson, Calgon and Wedeco, build and sell to municipal water systems that need UV treatment. Carollo has built a central testing facility out at the city's Columbia well fields (out beyond Costco on Airport Way), and it runs all those hundreds of millions of gallons of Portland water through the facility in order to test the effectiveness of the manufacturers' equipment before it is shipped off to the water system customers around the country, and even overseas....
Carollo is getting a darn good price [for the water]. It's no. 2 in usage, but it's no. 17 in what it paid the city for water. For its 291 million gallons, it paid the city just $0.000643 a gallon. Compare that with what the school district was charged for its 165 million gallons: $.003688 a gallon. The schools got charged more than five times as much per gallon as Carollo. The parks bureau paid about the same as the schools -- $0.003428. Siltronic, the city's top non-wholesale customer, paid $.003227 a gallon -- again, five times what Carollo paid.
One reason for the price disparity is that Carollo gets untreated water, whereas the city's other customers get treated water. But regardless of that, the question whether the Carollo contract is a good one for Portland ratepayers and taxpayers is open to a wide range of opinions.
We've been through all of that before, and nobody in town really seemed to care much. What's more interesting to us at this time is whether the Carollo deal, which was struck in 2002 and 2003, violates the promises that the city has been making to investors when it has gone to the bond markets to borrow money for the water system over the years. In the current bonds, being sold next week, the city promises bondholders that it will "[n]ot enter into any new agreement to provide Water System products or services at a discount from published rate schedules or to provide free Water System products or services (except in case of emergencies)."
That covenant is not new. Even back in 2000, when the city was selling an earlier version of the water bonds, its covenants included a promise that "it will not enter any new agreement to provide Water System products or services at a discount from published rate schedules or to provide free Water System products or services (except for fire suppression and in case of emergencies)."
Does the Carollo contract violate those covenants? At least as to the bonds that were issued before the Carollo deal was entered into, it would be interesting to hear the city's argument that there was no violation. Maybe they'd say that the untreated water is not a "Water System product"; maybe they'd say that there was no "published rate schedule" for that type of water, and so the city didn't deviate from such a schedule. But whatever the excuse, it may be a moot point. The 2000 bonds have now been paid off, and the oldest water bonds now outstanding are from 2004, after Carollo started up its sweetheart operations. And as to the outstanding bonds, the Carollo deal was not a "new agreement."