While the majority of our nation’s wastewater treatment operations are currently run by public entities, an effort is underway to move toward privatization. Many of these facilities are decaying and in need of capital to implement upgrades. At a recent conference focusing on privatization in the water treatment industry, it was estimated that the amount of capital needed across the US to meet current wastewater treatment requirements is $130 billion. The federal government has committed to only $1 billion in direct funding to date, and private capital is being approached as an obvious potential source of additional funding

A recent IRS regulatory change may have major impact. The most viable of the available options for financing facility upgrades from private capital has been through long term contracts between local governments and private companies for wastewater treatment plant operation and maintenance. However, one obstacle to this approach has been an IRS rule that removed the tax-exempt status of any municipal bonds which funded an operation under private contract for greater than 5 years. On January 10, 1997, the IRS amended this rule under pressure from interested parties to allow for contracts of up to 20 years to be signed by public entities without jeopardizing the tax-exempt status of their bonds. This ruling has already encouraged a flurry of renewed activity among treatment plants in the public domain to explore privatization opportunities.

Asset Sales

Asset sales represent another option. To date only a handful of public entities have fully divested both management responsibilities and capital assets of their wastewater treatment operations to private companies. However, interest in this approach is also growing.

According to “Evaluating Privatization” (1996), a publication of the Association of Metropolitan Sewerage Agencies (AMSA), the asset sale approach is an especially appealing option for federally-funded municipalities in light of a 1992 Presidential Executive Order (E.O. 1283). The publication goes on to say, “In essence, the Executive Order eliminated the requirement to repay the federal investment in full...”

Other Public Sector Precedents Encourage Privatizers

Private companies are interested in taking advantage of the public sector's interest in privatization because of the potential for profitability it represents. In the past, other governmental services have been successfully privatized -- e.g., solid municipal waste collection and building/grounds maintenance among others. It appears to be only a matter of time before water and wastewater operations follow suit.

Environmental Liability Issues

Removal of the Sovereign Immunity Defense: A change from public to private ownership may expose wastewater treatment operations to liabilities that would not have existed under the former ownership structure. Although recent court decisions have weakened or eliminated this defense in some states, public entities to some extent continue to benefit from some immunity from tort liability, whereas private companies performing the same functions do not. This lack of immunity may increase the costs and risks of the private company. For example, a lawsuit against a private entity for bodily injury or property damage resulting from environmental damage could have an impact on the financial stability and profitability of the private company. The private purchaser will benefit from securing environmental liability insurance to protect their assets.

“No Exemptions”: Public wastewater utilities are exempt from the Resource Conservation and Recovery Act’s (RCRA) Domestic Sewage exclusion. Under this exemption, wastewater utilities can treat hazardous waste without becoming subject to expensive RCRA oversight and reporting requirements. However, private companies that assume wastewater treatment operations could lose the exemption from the Domestic Sewage Exclusion. If subject to RCRA requirements for sludge residue, private companies would see increased operating costs or limited disposal options and would be required to show evidence of financial responsibility.

Little is known about the potential implications of RCRA on private companies operating wastewater treatment facilities. The EPA has indicated that decisions regarding extending this exemption to private operations would be made on a case-by-case basis.

XL Environmental Insurance Solutions

Clearly, private companies that provide wastewater treatment operations to public entities face new exposures and liabilities. Most significantly impacted are the environmental liability exposures associated with the treatment plant operation. Effluent discharges and overflows, chemical storage tank ruptures and contamination from sludge are some examples. XL Environmental has customized the Pollution and Remediation Legal Liability (PARLL) to fill the gap in traditional insurance packages and provide coverage for these exposures. In addition, we can enhance our PARLL policy to cover contingent professional liability exposures for a privatizing company that is taking over a municipal water treatment facility.

Our insureds also benefit from the comprehensive claims management capabilities of XL Environmental Claims. XL Environmental Claims is a third-party administrator handling property, liability and environmental claims. With a distinctive expertise in environmental claims, the attorneys and consultants of XL Environmental Claims contain the costs of environmental claims by investigating liability, hiring and supervising local counsel and environmental consultants, and negotiating with federal agencies. XL Environmental Claims' responsiveness to claims and their effective cost-recovery strategies minimize the overall financial risk associated with environmental claims.

The move toward privatization brings exciting opportunities for private companies, as well as significant concerns. XL Environmental has anticipated these challenges with products and services to protect private companies performing wastewater treatment against the threats to financial stability from environmental liability and assist in satisfying regulatory requirements.