Saturday, September 17, 2005 | In January 2002, the City Council voted in closed session to “note and file” a study that recommended on its front page a new sewer rate structure that was “fair and equitable” and would bring the city in compliance with the terms of more than $300 million in state and federal loans and grants.

By noting and filing the thick report, the council essentially voted to keep it from the public’s eyes.

A report issued Thursday by City Attorney Mike Aguirre alleges that the city’s failure to disclose the potential loss of state and federal monies and the cost of future litigation to investors amounts to likely securities fraud by unnamed former City Council members and city officials.

Although the 2002 study certainly wasn’t the first warning offered to city staff and previous and current council members, the actions of elected officials that year drew the spotlight a day after the release of Aguirre’s report.

And accusations flew Friday – at least among the few officials who offered public statements.

Councilwoman Donna Frye, who originally drew attention to the wastewater issues publicly and provided Aguirre’s office with assistance in the investigation, held her own press conference. She described her struggle to make information public and accused former Mayor Dick Murphy of working to cover up the January 2002 report from consultants Black & Veatch.

As evidence, Frye pointed to a public hearing held on May 14, 2002, months after the council voted 6-2 to shelve the report. Murphy and current and former City Council members Byron Wear, Toni Atkins, Brian Maienschein, Jim Madaffer and Ralph Inzunza voted to keep the report private. Frye and former Councilman George Stevens voted to release it and Councilman Scott Peters was absent.

During the 2002 hearing, Frye asked Murphy when a cost study on the wastewater system would be done and released to the public.

After appearing baffled and asking a deputy city manager for his recollection, Murphy answers Frye with the following statement: “I don’t think that we ever had before the council discussion of the sewer cost-of-service study, you know, at a public meeting. You know, we talked about it informally, you know, but not in front of the council.”

Both Aguirre, who played a video tape of the hearing at his morning press conference, and Frye accused Murphy of misleading the public on the existence of the study by dodging questions.

“Sometimes elected officials are not completely candid with the people of San Diego,” Aguirre said.

Frye said she couldn’t say more in 2002 because she had been told she was restrained by law from disclosing matters discussed in closed session.

Murphy said in closed session in January 2002 that he would only release the study if forced to, Frye recalled.

Murphy couldn’t be reached for comment Friday. He resigned in July under the weight of the growing fiscal crisis at City Hall, ongoing federal investigations and a legal challenge to his November election victory over Frye.

Eventually, the council, prodded by Frye, changed its sewer rate structure in 2004 to bring it in line with federal standards, narrowly avoiding the forfeiture of more than $300 million it had received to update and upgrade its wastewater treatment facilities.

The city’s old system charged industrial and residential users similarly, not accounting for the amount of organic material – food residue, human waste and plant matter – discharged by the user.

The new rate system charged based on the organic material produced by the user, a move that switched the economic burden from residents to companies.

The switch, which consumer advocates say saved city residents as much as $20 million a year in unfair fees, has been the death knell for International Specialty Products, Inc., in San Diego, company officials say.

The company, which has harvested kelp from the Pacific Ocean and used its byproducts for food and pharmaceutical products, is the largest user of the city’s wastewater system. It saw its monthly sewer bills jump from $74,000 a month to $146,000 a month, according to the city attorney’s report.

Now, officials plan to close the Barrio Logan plant that’s been around since the 1920s by the end of the year. About 135 local jobs will be lost, officials say.

ISP officials lobbied aggressively to keep the council from converting to the rate system mandated by the state and federal governments. In a 2003 memo cited in the Aguirre report, company manager David McKinley outlines the company’s political strategy to kill the proposal and highlights their success in striking down the attempted 2002 change.

“Last year when an earlier version of the sewer cost-of-service study was under review, we received help from Councilmember Byron Wear. He championed the issue, and persuaded all Council Members except Donna Frye to vote in closed session to table the study indefinitely … So we have a history of council support,” he wrote to a labor representative.

In the memo, McKinley estimated the change would cost his company about $1 million annually.

McKinley said company officials chose Wear because they decided of all the council members, his political philosophy would make him most sympathetic to their plight. Wear, a Republican who earned a reputation as being friendly with developers while on the City Council, didn’t return multiple phone calls for this story.

ISP also held a fundraising event for Murphy during his 2004 campaign for mayor, McKinley said. He said he also contributed to Wear’s previous campaign.

At the time he wrote the 2003 memo, McKinley said he was unaware that the city wasn’t in compliance with the requirements of the state and federal loans and grants.

He said he doesn’t believe that city residents were being overcharged, and said two stakeholder groups that he served on were divided on whether or not the city’s previous rate structure was fair.

“I’ll just say that we watched as city bureaucrats jimmied the numbers to make it look like the city residents were getting cheated because they were afraid that this problem with the state wouldn’t get resolved unless the City Council saw that the residents were getting cheated,” McKinley said in an interview.

Seeking to recoup as much as $200 million for city residents, consumer advocate Michael Shames has sued the city on the grounds that the overcharges were illegal. The case is set for mediation this month.

Aguirre said Friday that he plans on bringing suits against industrial users to recoup the costs incurred by residents and will work with Shames to return money to city ratepayers.

However, Deputy Mayor Toni Atkins in a statement Friday accused Aguirre of jeopardizing the city’s position in the suit, and therefore, potentially harming city taxpayers.

“It is irresponsible for the City Attorney, who has been elected to protect the interests of the city, to continue acting in a manner that could result in such disastrous financial consequences for San Diego’s taxpayers,” she said in a written statement.

Aguirre was quick to respond to Atkins’ afternoon statement: “What has caused the damage is Ms. Atkins’ misconduct, not the uncovering of Ms. Atkins’ misconduct.”

The city attorney said his reports are necessary as part of cooperating with investigating bodies.

In addition to Aguirre’s probes of the pension and wastewater systems, the Securities and Exchange Commission, the U.S. Attorney’s Office and FBI are investigating City Hall finances and politics.

The investigations began focused on the pension system, which is estimated to have a deficit of at least $1.37 billion. However, recent subpoenas show that the focus has widened to include the wastewater system.

McKinley, the ISP official, said that it was unnecessary and unfair to charge companies such as his for the organic material because the city’s Point Loma Wastewater Treatment Plant only performs what’s known as “primary treatment” of wastewater. It doesn’t treat the organic material, therefore, there’s no cost incurred by the city, he said.

However, Sudhir Pardiwala, the consultant who authored the 2002 study that the council kept private, disagreed.

“That’s not a fair statement. A primary treatment requires both the removal of suspended solids and organics,” Pardiwala said.

Please contact Andrew Donohue directly at

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