On January 5, 1998, less than 10 months after issuing a request for qualification, the Milwaukee Metropolitan Sewerage District (MMSD) signed a 10-year, $350 million operation and management (O&M) contract with New Jersey-based United -Water Services. This is the largest wastewater 0&M agreement ever signed in the United States and the first major privatization in Wisconsin. It guarantees savings to ratepayers of $145.8 million over the term of the contract.

None of the privatization savings will fall directly on labor, which had accepted large staff reductions during the past three years under public management. In a separate deal cut with the district's unions, United Water agreed to equal or batter pay and benefits, plus no layoffs without cause for the full 10-year term of the -service agreement. In exchanger the unions agreed to a strict pre-employment drug-tasting program and to drop all litigation and grievances, allowing MMSD to sign the contract in time to meet the exacting schedule set by the district's executive director, Anne Spray Kinney.

Union contract talks are set to start to mid-March with the district's four bargaining units, so the full extent of United Water's business -risk has yet to be determined. By all accounts, it is considerable, especially given MMSD's zero tolerance for strikes. Unlike district employees, United Water employees are allowed to strike. If they do, however, the service agreement will be immediately terminated for cause. That contract provision, intended to ensure environmental compliance, gives the unions far greater negotiating power with the private operator than they aver had with the independent public authority.

With the backing of its unions and Milwaukee's city council, MMSD is seeking a private-letrer ruling from the IRS and permission from the U.S. Department of Labor to allow employees who sign on wit the private operator to continue to participate in the city's defined-benefit pension plan. (The multiplier for Milwaukee's employee retirement system is 0.62, about 50 percent higher than the average for private pension systems.)

United Water has been given the job of securing those approvals in Washington, D.C. If it is successful in extending the public-private model to city pension systems, it will create considerable good will with the trade and public-employee unions to Milwaukee and elsewhere. A win could also increase MMSD's budget savings in the service agreement.

Under the agreement, set to take effect on March 1, MMSD will retain industrial-waste pretreatment, engineering, central-lab monitoring and research, Milorganite sales, marketing and distribution, and field sampling and monitoring, in addition to monitoring contract compliance. United Water Services will provide operation and maintenance of MMSD's Jones Island and South Shore wastewater treatment plants (with peak hydraulic capacity of 390 mgd and 300 mgd, respectively), the collection system, Milorganite production (52,000 tons per year, yielding over $5 million in gross revenue), and a 30 MW cogeneration plant now used to heat sludge.

According to MMSD, the $29,8 million annual fee negotiated with United Water produces 30 percent cost savings, compared to the district's budgeted 1998 spending on comparable services, including all utilities. The savings come mainly from staff attrition, better energy management, operational efficiencies, and reductions to chemical use. The 30 percent savings from outsourcing compares with 5 to 6 percent savings achieved by Milwaukee in the past from the most aggressive internal cost-cutting programs implemented by city agencies, says MMSD's Kinney. MMSD's transaction costs will total a little more than $1 million, or about 0.75 percent of its projected savings. That is the combined fee paid to its consultants. United Water's service fee will be increased annually by the lower of 2.5 percent or the Consumer Price index (CPI) for Milwaukee, plus, if applicable, the percentage of the CPI over 5 percent.

According to the city's competition consultant, Infrastructure Management Group, economies a scale were created by MMSV's decision to include in one contract the two wastewater treatment plants, the collection system, and biosolids manufacturing. Offering one of those might have piqued interest but offering all at the same time gained the immediate attention of the major players and created ar opportunity for substantial economies of scale.