Minnesota cities allege prices of water-quality chemical were inflated

Cities across the state are suing a group of chemical producers for allegedly bilking taxpayers out of millions by inflating the price of a compound needed for water treatment.

Minneapolis, St. Paul, Duluth and Rochester are among the cities seeking to recoup their money after a former chemical company executive in New Jersey admitted this fall to his role in a price-fixing scheme spanning more than a decade. More than 30 related lawsuits have been filed nationally, seven of them in Minnesota.

The cases center on the price of liquid aluminum sulfate, known as alum, which is used by local governments to purify drinking water — as well as clean wastewater and lakes. It is also used by pulp and paper companies. Some cities have seen upward of threefold increases in alum prices since the late 1990s, when the alleged price fixing began.

"If you really do the economics, the price should be flat or slowly declining," said Duluth City Attorney Gunnar Johnson. "And that's not what we were seeing."

Minneapolis, which produces 57 million gallons of clean drinking water per day, uses alum more than all but one other chemical in its treatment process. The city pays about $900,000 a year for it, up from $200,000 to $300,000 in the late 1990s, according to attorneys with Lockridge Grindal Nauen, the firm that has been filing the local lawsuits.

Precisely how much cities were overcharged remains unclear, pending a more thorough economic analysis as the cases move forward, attorneys said. But based on experiences in other similar cases, Joe Bruckner of Lockridge Grindal Nauen noted that "people and companies don't enter into illegal price fixing conspiracies unless they think there's something pretty substantial to be gained by doing so."

The lawsuits are seeking class action status. They target six primary producers of alum, saying they colluded to take advantage of the municipal bidding process, which favors low bidders. The companies allegedly eliminated competition by agreeing not to pursue each other's historical customers. The lawsuit said they accomplished it by discussing the price of bids intended to win contracts, then ensuring they were selected by having other companies submit bids at much higher prices.

"Each one of these instances was in furtherance of an overall agreement to keep that price up and to increase that price to all customers across the board across the country," Bruckner said.

The arrangement came to light in federal charges brought in October against Frank Reichl, a former executive with General Chemical Corp. Reichl, whose attorney declined to comment, has pleaded guilty. Several other companies named in the lawsuit did not return calls for comment.

"By agreeing to violate both the spirit and the letter of the competitive process, Reichl and others defrauded municipalities as well as pulp and paper companies out of millions of dollars," Richard Frankel, special agent in charge of the FBI's Newark Division, said in a statement this fall.

One of the defendants named in three of the earlier lawsuits is Roseville-based Hawkins Inc., a chemical distributor. Hawkins General Counsel Richard Erstad said the company had no role in the scheme, however, particularly since as a distributor it must pay the prices set by manufacturers. More recent lawsuits do not name Hawkins as a defendant.

"That's not how we do business," Erstad said. "We were as surprised as anybody to see ourselves named in that."

Citing an industry publication, the lawsuits say that from 1998 to 2004 alum prices rose up to 38 percent, and the companies in question often simultaneously announced identical price-per-ton increases. Yet the lawsuits also outline evidence that demand for the product was relatively stable.

"Absent something external happening in the markets, what you usually expect to see is a lot steadier prices," Bruckner said. "Even if they may increase, even if they may decrease, you don't see the sorts of peaks and valleys or spikes … that we've seen in this market."

Alum works by enlarging particles in water that often contain pollutants, allowing them to be more easily removed, said Professor Tim LaPara, a water treatment expert at the University of Minnesota. "Alum is probably one of the most cost-effective and simplest ways to achieve particle removal," LaPara said.

Other major cities pursuing lawsuits include Cincinnati, Charlotte, N.C., Newark, N.J., and Detroit. Minnesota cases have also been filed by the Metropolitan Council, which uses alum to treat wastewater at its smaller plants, the city of East Grand Forks and TeeMark Corp. in Aitkin.

"If the city of Duluth has been harmed and if we can prove that … we want to recover those moneys for the people buying the water and put it back into the system," Johnson said.

Eric Roper • 612-673-1732

Twitter: @StribRoper