September 3, 2013

For regulators and Nestle Waters, conflict by the gallon

All three PUC commissioners and Maine's public advocate have ties to Poland Spring's parent company, which is seeking a 25-year contract.

By Colin Woodard cwoodard@pressherald.com
Staff Writer

FRYEBURG - When the Maine Public Utilities Commission this week takes up a controversial 25-year contract between the company that owns the Poland Spring brand and the family-controlled utility that supplies its water, it will do so under troubling and unprecedented circumstances: All three PUC commissioners, as well as the state's public advocate, have ties to the company.

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A Poland Spring truck heads south on Route 302. Fryeburg’s quality water is the result of quartz-rich geology and clean runoff.

Photos by John Patriquin/Staff Photographer

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Fryeburg residents Bruce Taylor, left, an intervenor in the case, stands with contract opponents Cliff Hall and Nickie Sekera in front of the Poland Spring offices on Main Street in Fryeburg.

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Agreement between Nestle Waters and Fryeburg Water Co.
PUC recusal responses Oct 2012

The PUC will hear final arguments Tuesday on the contract between Nestle Waters North America and the privately held Fryeburg Water Co. But the proceedings are jeopardized by the commissioners' apparent conflicts of interest.

Commissioner Mark Vannoy, who has recused himself from the proceedings, worked on 20 Nestle Waters projects -- including 15 at Poland Spring facilities in Maine -- while employed as an executive and project manager by the engineering firm Wright-Pierce.

Before joining the PUC in 2011, Chairman Thomas Welch was an attorney at Pierce Atwood, where he represented Nestle Waters for several years, including during the 2008 reorganization of the Fryeburg Water Co. that set the stage for the current contract.

Commissioner David Littell was a partner at Pierce Atwood -- which currently lobbies for Nestle Waters in Augusta -- until 2003, although he didn't personally work with Nestle. Neither Welch nor Littell has recused himself.

Even the official responsible for representing ratepayers before the PUC, Public Advocate Timothy Schneider, has conflicts. Until his appointment in March, Schneider was a utilities attorney at Pierce Atwood who helped prepare the Nestle and Fryeburg Water Co. case now before the PUC. He has recused himself, and his deputy, William Black, is representing the Public Advocate's Office in the proceedings.

"Every commissioner on the PUC has been touched by Nestle," said Fryeburg resident Scot Montgomery, who manages a restaurant kitchen in the nearby White Mountains and has been involved in local water issues. "Everyone who's supposed to be looking out for the ratepayers, communities, and resource seems to have this other interest."

The Fryeburg Water Co. is seeking PUC approval of a proposed 25-year contract with Nestle Waters, a subsidiary of Switzerland's Nestle SA, the world's largest food and beverage company. Under the agreement, the water company would get a stable, predictable flow of cash for water Nestle pumps from its spring on Wards Brook, while Nestle would cement control of this key supply of spring water, possibly paving the way for investment in a multimillion-dollar bottling plant in Fryeburg. The contract can be extended for up to 40 years.

Proponents say the contract would stabilize a long-term business partnership that has served the town and its water customers well. Critics fear the leaders of the Fryeburg Water Co. are selling the community short, giving up a valuable resource for much less than it is worth now, better yet a quarter century or more hence, when population growth and climate change will tax water supplies worldwide.

Opponents of the contract have filed motions for a second time with the PUC asking Welch to recuse himself. He said he is reluctant to do so, because it will make it impossible for the PUC to rule on the case, as there would no longer be a quorum. By law, a solitary commissioner cannot make a ruling.

"This is the situation that you wish wouldn't come along," said Welch, who doesn't fault critics for being concerned about the appearance of conflict. "It's an uncomfortable case, and I wish in many ways that I could have nothing to do with it, but there's a strong case for allowing it to go forward."

It is rare when even one PUC commissioner has a conflict in a case but extremely so for multiple commissioners to have a conflict at the same time. Experts say the situation highlights the danger in appointing officials with overlapping backgrounds, creating the potential for overlapping conflicts that could undermine the PUC's credibility or render it unable to rule on some cases.

"That is pretty certainly remarkable," said public utilities scholar Sanford Berg, director of water studies at the University of Florida Public Utility Research Center. "It looks to me like a series of appointments has led to a situation where, in retrospect, you might wish to have more diversity and people with somewhat different backgrounds for addressing this particular case."

The commissioners and public advocate are all appointed by the governor and confirmed by the state Senate. Littell was appointed by Gov. John Baldacci, a Democrat who is now a senior adviser in economics and government relations at Pierce Atwood. Welch, Vannoy and Schneider were appointed by Republican Gov. Paul LePage.

Gordon Weil, a utilities consultant from Harpswell who served as Maine's first public advocate in the early 1980s, said governors should be more careful to avoid appointing commissioners and a public advocate with overlapping conflicts. "You can avoid this situation by not appointing people with the same background or who have connections to the same firms," he said. "Any appointee to a regulatory body has to be looked at in terms of how they fit with the whole panel, not just as an individual."

Peter Bradford -- who served on the Maine PUC for 11 years in the 1970s and 1980s, on the New York State PUC from 1987 to 1995, and on the federal Nuclear Regulatory Commission from 1977 to 1982 -- said that in all that time he recalls no more than five recusals of individual commissioners. "It's not an everyday or even an every-year occurrence," he said from his home in Vermont. "It's a really rare event, and to get two recusals on the same case is even rarer than that."

"I must say, I've never heard of a situation where so many appointees came from the same law firm," Bradford added. "When I was in Maine, it would have been something of an eyebrow-raiser to have had a couple of commissioners from either Pierce Atwood or Verrill Dana, because those firms represented something like 80 percent of the utilities that had business before the commissioners."

The governor's office said the Fryeburg case is an unusual event and that the potential for overlapping conflicts will disappear over time.

"To my knowledge, a similar situation has never materialized in Maine," LePage's spokeswoman, Adrienne Bennett, said in a written response. "The circumstance is what we consider a 'perfect storm."'

She said Vannoy had recused himself "based on financial interests" rather than ethical conflicts and that those "will be resolved in the near future rendering him able to serve should these types of matters come before the Commission again." Disclosures show he was a minority shareholder in Wright-Pierce when he was appointed in May 2012.

Bennett noted the tension between finding people with the technical knowledge and experience to serve on the commission and the potential for conflicts garnered while accumulating that experience.

"Governor LePage believes that the nomination of an individual to serve on the Commission is one of the most important decisions that he makes and focuses on finding competent and experienced individuals to serve," she said. "This is not an easy process nor is there an abundance of applicants who are seeking to serve on the Commission."

Others questioned the background of the public advocate. Weil, the first to hold the position, said it was unprecedented for the advocate to have a background representing utilities, rather than consumers. That is nearly so. There have been just five public advocates since the position was created in 1982. Paul Fritzsche, who served in the mid-1980s, had worked with Pine Tree Legal Assistance. Stephen Ward, who held the position for 20 of those years, had been a staff attorney in the Public Advocate's Office. Richard Davies, who succeeded him in 2007 and stepped down in February, had been a legislator and an aide to Govs. Joseph Brennan and Baldacci, but also founded a lobbying firm that represented both consumer groups and utilities. The other two public advocates -- Bradford and Weil -- had consumer-side backgrounds, Bradford having been described by The Washington Post as the "liberal mainstay" and primary nuclear power opponent on the NRC in 1981, when he left to become Maine's second public advocate.

"The regulatory process depends to a considerable degree on people's confidence in its integrity," Weil said, "and anything that might possibly undermine that confidence is not desirable."

Bradford, who also spent many years as PUC chairman, said Maine legislators should consider legal changes to allow for the appointment of alternate commissioners when a sitting one recuses himself. "This way of dealing with it puts less of a constraint on who gets appointed, and lets you not spend so much time trying to scratch your head and try to see the future in terms of potential conflicts," he said.

FRYEBURG CASE CONFLICTED

Many in this town of 3,500 people are especially sensitive to perceived conflicts of interest because they have cropped up so often among the entities involved in the case now before the PUC.

Fryeburg Water Co., which serves Fryeburg and East Conway, N.H., is unusual in that it is a privately held water utility. (About 15 percent of the nation's water utilities are privately held.) It was founded in 1883, but by the 1990s the majority of the shares were held by members of the Hastings family, whose patriarch, Hugh Hastings, has served as company president since 1969 and as an officer since 1950.

Recognizing that Fryeburg had excellent water -- the result of quartz-rich geology and clean, copious runoff from the Presidential Range in the White Mountains -- Hastings hoped some could be profitably sold to bottlers. But in the interest of fairness, the PUC prohibits utilities from selling water to any entity at a higher price than it charges its ordinary customers, so Hastings and a business partner, Eric Carlson of the engineering firm Woodard & Curran, came up with a workaround.

In 1997, Hastings and Carlson created a company, Pure Mountain Springs, that bought water from the utility at its ordinary rate and sold it to Nestle Waters at a much higher -- but undisclosed -- rate. Pure Mountain Springs was headed by Hugh's son, John, who shared ownership with Carlson. PUC filings show Hugh Hastings maintained power of attorney over his son for the first five years of the company's operation.

Between 2003 and 2007, previous PUC proceedings revealed, this pass-through entity had revenues of $3 million and paid Fryeburg Water Co. $700,000 in rents and water fees. Hastings wrote in 2004 that the initial capital financing was "over $100,000."

"Fryeburg's water had the right geological recipe for Poland Spring," said Mark Dubois, Nestle Waters' Maine-based natural resource manager. "But it also had entrepreneurs who saw the spring and invested in their business and started selling that water to us. Here was a willing seller; we were a willing buyer."

Cliff Hall, a longtime opponent of Nestle's operations who served on Fryeburg's Board of Selectmen from 2007 to 2010, takes a dimmer view of the situation. "They set up a nepotistic arrangement which bypassed the (utilities) laws that say if you take an excessive amount of money, you're supposed to reinvest it in infrastructure," he said. "It seems to me this was a dummy company set up ... to take the money and put it back in the Hastings' trust."

Others share these concerns. "A public utility is supposed to do the best they can for the customers, the public and the municipality," adds Bill Harriman, one of four Fryeburg-area residents who have formally intervened in the current PUC case. "And if you look at what these guys were doing back then, they weren't looking out for the people of Fryeburg."

PREDICTABLE CASH FLOW

This arrangement ended in 2008, when Nestle stepped in and bought Pure Mountain Springs, allowing it to purchase bulk water at the going rate, currently about one-tenth of a cent per gallon.

Welch, then at Pierce Atwood, advised the company on the deal. Simultaneously, Fryeburg Water Co. gave Nestle its contractually required five-year notice that it wanted to renegotiate their relationship, setting the stage for the current case before the PUC.

Under the proposed contract, Nestle will continue to draw water at a low "tariff" rate and pay lease fees to the water company, but will make a guaranteed minimum payment of about $144,000 every year, ensuring a more predictable cash flow. Nestle Waters' payments account for about 40 percent of the company's operating revenues.

"What we were looking for was stability in our revenues and a long-term contract that helps us make long-term capital improvement planning going forward," said Fryeburg Water Co. Vice President Jean Andrews. "This way we know what is coming in. That's really beneficial for us because (currently) it fluctuates so much based on weather conditions and the economy."

Nestle Waters likes the agreement because it gives the company long-term access to the springs in Fryeburg's Wards Brook aquifer, where its trucks fill up at a pumping shed. Currently the tanker trucks carry the water to Poland Spring bottling plants in Poland, Hollis, and Kingfield, but Nestle officials say a 25-year agreement could help the company build a plant in Fryeburg. The company employs about 800 people in Maine, although none work full-time at the Fryeburg sites.

"We want to continue to grow and make investments in Fryeburg and investments in Maine, and we can't do that on two-, three-, four- and five-year contracts," said Nestle's Dubois. "We need stability in our business, and we really feel like the long-term arrangement allows us to chart a course for the future."

That's fine with many in Fryeburg who regard Nestle Waters as a fair partner, a clean industry whose presence has kept water rates low and has given to numerous causes in town, from heating assistance for the poor to a new gymnasium for the local high school, Fryeburg Academy.

"Here in Maine, Poland Spring and Nestle act responsibly," said Dick Krasker, a retired owner of two local summer camps who has been active in local water issues. "They respect the sustainability of the resource and have absolutely no intention of overusing or abusing it. They're very generous to our town, and they have been hugely advantageous to the customers of the water company, whose rates are some of the lowest and who get some of the best water in the world."

Indeed, independent monitoring results suggest Nestle's average annualized pumping of 200,000 to 300,000 gallons a day is not adversely affecting the water table, which has risen in recent years because of unusually high rainfall. (Nestle is allowed up to 600,000 gallons a day.) Krasker, who several years ago helped raise money for the town to contract for ongoing monitoring, an independent hydrological survey and and environmental impact assessment, said there has been "zero" impact.

"None at all," he said. "You could either use this water Poland Spring is pumping or it would flow into the Saco River."

Nestle and Fryeburg Water dismiss concerns that their relationship could ever cause local customers or wells to run out of water. In 2008, Nestle made a written pledge to the town selectmen that existing residential customers "have priority over Poland Spring," a principle enshrined in the proposed contract. "There are short- and long-term suspension clauses, and we're first in line to be shut off before other users in the town," Dubois said.

Nestle Waters is first in line for cutoffs, but it's not alone. The proposed contract stipulates that such action "shall be for no greater duration, and to no greater extent, than (Fryeburg water) suspends or reduces water sales to its commercial and industrial customers."

Some residents question the arrangement and mistrust the motives of Nestle SA, whose global CEO, Peter Brabeck, has repeatedly argued that water is not a human right, apart from the 6.6 gallons per day he says a person needs for hydration and basic hygiene. Water used for other purposes must have "a price," he has said regularly, in order to spur necessary infrastructure investments needed to conserve a precious resource he predicts the planet will run short of long before oil.

"The commodification of water is an enormous problem, especially when you are creating new markets (for bottled water) in places where people already have potable water," said Nickie Sekera, a human rights activist who lives in Fryeburg and opposes the new contract. "If you look at what's happening on a global scale with droughts and population growth, I am hugely concerned about any long-term agreement. Anything over five years I think is grossly irresponsible and misguided."

TOO CHEAP A PRICE?

But the argument that appears to be getting the greatest traction in the PUC deliberations is that the Fryeburg Water Co. might be selling water to Nestle too cheaply. Until 2008, Nestle was willing to pay Pure Mountain Springs a price many times higher than the tariff rate, the argument goes, so it should continue to do so in the future.

"I'm not against profit, but this money here goes back to pay for infrastructure and to reducing rates for mainline ratepayers," said resident Bruce Taylor, who is an intervener in the case and has subpoenaed Nestle to reveal the rates it paid Pure Mountain Springs for water before it bought the entity in 2008. "I think it would be exceedingly helpful to commissioners so that they can make a wise and informed decision."

The deputy public advocate said his office is interested in the idea, and that under state law the water company could establish a higher tariff for large-volume consumer users. "It can be done, and it does not necessarily have to be done here" in the current proceedings, Black said. "You could change the tariff for commercial customers independently of this case, either because the PUC orders it or because Fryeburg Water Co. decided on its own to accept an ascending rate that would change the amount Nestle pays."

Fryeburg Water has not considered this option, Andrews said. "I know things have been suggested by other parties, but our rates are structured based on cost of service, so that is not something we have explored," she said.

Dubois said it was an "interesting concept" but noted that his company had to invest to buy Pure Mountain Springs, and in facilities and aquifer protection land in Fryeburg. "It's a little short-sighted in that the rate itself doesn't account for business principles in the return on investment and the like," he said.

He added that Nestle owns the pumping station and pipes at Fryeburg and uses untreated water, so Fryeburg Water Co.'s cost to deliver it is essentially free. "Our payments are free and clear to the company," Dubois said. "We don't want to be singled out. We want to be treated like any other customer."

FIXING A THORNY PROBLEM

If Tuesday's proceedings do wind up focusing on the Pure Mountain Springs era, Chairman Welch will likely be under additional pressure to recuse himself, as he worked closely with Nestle on related issues. He said he would make a decision whether to remove himself after the hearing. If he does leave, he said the PUC would be unable to approve the proposed contract for lack of a quorum.

"I get that it's a real issue, a tough issue," he said. "I will have to make a hard call."

In October, the chairman decided not to disqualify himself, in part because if he did the PUC would no longer have a quorum to act. "Consequently," he wrote at the time, "my participation is ... compelled by the so-called 'rule of necessity.' " He also wrote that he would not be biased by the personal relationships he had at Pierce Atwood.

Several people familiar with the PUC say they believe Welch has good intentions. "I think Chairman Welch appears to be a very reasoned jurist," said Taylor, whose attorney filed a second recusal motion last month. "But I am concerned about the appearance of conflict of interest and the transparency of process."

Sean Mahoney, executive vice president of the Conservation Law Foundation, which testified in support of Welch and Schneider at their respective confirmation hearings, said the Nestle case is indeed a conundrum for Welch.

"I personally think Tom is somebody of integrity, but a lot of people looking from the outside are going to say something doesn't smell right, and that's a problem," Mahoney said. "When you're in that position you have to be whiter than the driven snow, particularly in issues fraught with a lot of emotional and other baggage. So I think he is in a tough spot."

Colin Woodard can be contacted at 791-6317 or at:

cwoodard@pressherald.com

This story was updated at 1:10 p.m. Sept. 3 to correct the order and number of past Maine public advocates. There have been five, in this order: Gordon Weil, Peter Bradford, Paul Fritzsche (previously with Pine Tree Legal Assistance), Stephen Ward and Richard Davies.

 

 

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Additional Photos

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Poland Spring water trucks fill up at the water pumping station at Fire Lane No. 4 along Route 113 in Fryeburg.

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Wards Pond off Route 113 in Fryeburg is part of an aquifer where Poland Spring water trucks fill up and travel through Fryeburg.

 


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