Is the municipal water supply a public trust resource, to be distributed equitably as a common good, or can it also be a commodity sold for profit? The question is more than philosophical. Two giant French corporations, Suez and Veolia Environnement, as well as German conglomerate RWE, are purchasing private water companies and signing contracts to run municipal water and wastewater systems, in a coast-to-coast movement to crack what financial analysts regard as “America’s last great monopoly”—the water supply. “The two big monopolies preceding it—electricity and telecommunications—have become among the most dynamic business areas in America,” according to ITT Industries, a New York state-based engineering and manufacturing firm that makes equipment for both industries.

In January 2003, Germany’s RWE snapped up California-American Water Company (Cal-Am), thereby becoming the state’s fourth biggest private water supplier, with 480,000 customers in coastal areas as far-flung as the Monterey Peninsula and Imperial Beach. French-owned USFilter has won nine contracts to run publicly owned wastewater systems in California, including those in Petaluma, Richmond, and Rialto, just east of Los Angeles. Meanwhile, RWE and Connecticut-based Poseidon Resources have been pitching to build desalination plants in Moss Landing, Huntington Beach, and Carlsbad, to convert ocean water to drinking water. (See Coast & Ocean, Autumn 2003.)

The arrival of foreign-based multinationals in coastal communities has caused a stir, and in some cases outright revolt. Many residents, environmentalists, and politicians are livid that the water out of their taps is under the control of some distant conglomerate whose sole reason for being is to generate profit for its stockholders.

“If you commoditize the things you depend on for your life, and the dollar rules, those who can pay, pay, and those who can’t, can’t . . . and you have a Malthusian world,” says David Keller, a former Petaluma City Council member who fought against complete privatization of the wastewater treatment system in his own district.

Thomas Robert Malthus’s “dog eat dog” principle has, of course, always ruled the business world. Food, housing, transport, and other essentials have long been bought and sold for a profit, splitting society between the haves and have-nots—but water?

“Our water is part of the public trust. We all own the water,” says Sarah Christie, legislative coordinator of the California Coastal Commission. “The idea of selling water for a profit is absolutely hideous.”

Not everyone shares this view. Advocates of privatization agree that the public owns the water in rivers and reservoirs, but argue that private enterprises are often better than public agencies at laying pipes and running the system. They contend they have greater expertise and can operate more efficiently to ensure that customers get the best product at the best price. They also see California—with the world’s fifth-largest economy, a diminishing water supply, and rising demand—as an investment opportunity.

Traditionally, water supply systems in major U.S. population centers have been built and managed by public agencies. Privately owned water systems have also been around for more than a century, however. As developers built new residential tracts in rural areas, many set up their own water utilities, said Sharun Carlson, executive secretary of the California Water Association (CWA), a trade body for investor-owned water distributors. Today about 160 private distributors, most of them small, supply 20 percent of the state’s residents. They own or operate the distribution systems and are regulated by the state Public Utilities Commission (PUC). The biggest is the 77-year-old San Jose–based California Water Services Company (Cal-Water), serving two million people.

In recent years, some of the smaller water companies have been absorbed by larger firms, and growing numbers of municipal utility districts have outsourced operations and management to private enterprises. Stan Ferraro, vice president of business development at Cal-Water, said the takeovers were friendly and were often initiated by ailing public-water municipalities.

The advance by the European water companies into California began in 1999 when Paris-based Vivendi (now Veolia Environnement) paid $7.9 billion for USFilter of Palm Desert, which in just a few years had become the biggest water-related company in the country by rapidly buying up small water companies, water service equipment firms, and bottled water firms, as well as signing contracts to build and run wastewater systems. USFilter’s annual sales were almost $4 billion, according to a company spokesperson, when it was bought by Vivendi. The French company now provides water and sewage services to 14 million Americans in 45 states.

In 2000, France’s Suez bought United Water for $1 billion, giving it 11 million customers in 18 states, including California. In January 2003, German industrial giant RWE paid $8.7 billion for American Water Works Company (owner of Cal-Am). The European companies generally own the water plants, pumps, and pipes in their districts and either have legal rights to water from local reservoirs, wells, or rivers, or buy water from a wholesaler, such as the Metropolitan Water District of Southern California.

Together these three multinationals control more than half of all water managed by for-profit firms, according to Steven Shrybman’s study, Thirst for Control, released in 2002 by the nonprofit Canadians’ Blue Planet Project. They have operations on every continent except Antarctica. What drew them to the U.S. over the past four years?

Debra Coy, a water analyst with Schwab Capital Markets in Washington, D.C., points to one overwhelming attraction: the opportunities for growth. In the U.S., only 15 percent of the population buys water from privately owned utilities, according to the American Water Works Journal. In Europe, around 40 percent do so. In addition, the fiscal distress of states and local communities has created substantial opportunities to buy or run public utilities, Coy said, essentially opening doors to private water enterprises.

According to the Environmental Protection Agency, U.S. utilities need to spend $350 billion over the next 20 years to get aging water and sewage systems up to scratch. Local governments can only borrow so much without damaging their credit ratings, Peter Cook, executive director of the National Association of Water Companies, points out. Federal funds are no longer readily available, as they were at other times when the country was investing heavily in infrastructure, as for freeways in the 1950s and sewage treatment systems in the 1970s.

Cook contends that water prices must go up to encourage conservation and cover the cost of supply. Americans have to face the fact that their water is “dirt cheap,” he said. Private firms can act as the shock troops to bring this about, he argues, sparing elected officials who are wary of upsetting voters.

The entry of European multinational firms into California’s water supply management marks a qualitative change, according to Juliette Beck, California director for the Water for All Campaign of Public Citizen, a consumer advocacy organization. These giant firms have an aggressive track record for expansion and, because of their global reach, may have little vested interest in local communities, she said. Beck believes they are intent on privatizing more public utilities and squeezing what they can out of local water systems to pay off billion-dollar debts accumulated through global expansion.

Turning more water systems over to big private firms brings a host of risks, Beck said: profiteering or market manipulation, as happened in the case of Enron and the California power crisis; higher rates as companies pay dividends to shareholders, high executive salaries, and corporate taxes—expenses that public agencies do not have; poor customer services and deteriorating public works as they cut corners to boost profits; potential damage to public health and the environment by companies that find it easier to pay fines than spend money on adequate personnel and expensive upgrades; and new pressures for development, and loss of local control. In addition, there is apprehension that water could fall under international trade agreements that might ride roughshod over local laws.

Private operators respond that these concerns are groundless. They say the PUC and other regulators ensure that they set fair rates and meet strict standards. “The scrutiny of the PUC is rigorous,” says Tom Thoren, spokesman for German-owned American Water Works Company, which serves 18 million people in 28 states. “We deliver boxfuls of information year after year.”

Local Resistance

The takeover of American Water Works (owner of Cal-Am), by Germany’s RWE was vigorously opposed by San Diego, Thousand Oaks (Ventura County), and Montara (San Mateo County) whose representatives argued at PUC hearings that a distant foreign owner, burdened with debt, would push for exorbitant rate increases and let service slip. They also feared RWE would try to squeeze local ratepayers to cover the $1.8 billion premium it paid for American Water Works over its net asset value, although RWE executives pledged that this would not happen. Felton, an unincorporated town in Santa Cruz County, has since joined the chorus.

The PUC cleared the takeover in December 2002, listing 29 conditions, among them that the burden of debt financing not be passed on to ratepayers. Schwab analyst Debra Coy, however, said that ultimately RWE will have to recover that premium, and that the money will come from its ratepayers—though probably over a larger base of customers as the company expands.

Though privatization and ownership consolidation are moving forward, public resistance has led to a small countertrend. In Atlanta, Georgia, a water services contract with French-owned United Water was ripped up by the city last year, after several warnings were sent out to residents urging that they boil their tap water, and a dispute arose over an extra $80 million in costs for repairs on the city’s water and sewage treatment system. The utility’s staff had been cut by half. Petaluma, in Sonoma County, spent $2 million and more than eight years trying to make a deal work by which a division of Waste Management, Inc. would finance, design, build, own, and operate a new sewage treatment facility, according to former City Council member David Keller. “It was an extraordinary series of lessons,” he said. “The ultimate decision was that the company could not reasonably assure ratepayer protection. It was ratepayer interest versus the mandate to turn a profit.” Petaluma went on to design a municipally owned system that includes wetlands as part of the treatment along with trails and wildlife protection. It promises to bring in tourism.

In 2002, the Montara Water and Sanitary District, which serves tiny Montara and Moss Beach on the San Mateo County coast, decided to buy their Cal-Am water services system. The 1,650 households and businesses in the District had been putting up with low-pressure showers and leaking pipes for years under the water network’s previous owner, Citizens Water (purchased by Cal-Am in January 2002), said Scott Boyd, president of the District’s board. “Rates were going up, there was a lack of maintenance, and water quality concerns, while every year the company was pumping out more profit. We decided we had to do something.”

The District passed a $19-million bond measure and filed suit in San Mateo County Superior Court, claiming eminent domain over the water system. The court struggle went on for months, but was ultimately resolved when the PUC instructed Cal-Am to sell as a condition of its merger with RWE/Thames. In May 2003, the District agreed to pay $11 million for the water system. Boyd says it was a “painful” price, but worth it to win control of rates and service. In February, six months after taking over, the District had already made substantial improvements, Scott said. The bonds will be paid off over 25 years.

'Felton and Thousand Oaks are considering similar takeovers. In Felton a proposed buyback went into limbo last October when the main instigator, Santa Cruz County Supervisor Jeff Almquist, was appointed to the Superior Court. The new supervisor, Mark Stone, is researching the matter to see what is best for the community, an aide said. In Thousand Oaks, Deputy City Manager Scott Mitnick said residents served by Cal-Am are paying one-third higher rates than neighbors across the street, who buy water from the city.

“This is the ‘Enronization’ of water,” Mitnick said, referring to the Texas energy company that played a major role in bringing on California’s 2000 energy crisis, then collapsed, and later was found to have manipulated the energy market. “They’re exporting the profits out of California, and the end result will not be lower rates. It will not be more efficiency.”

Some early signs suggest he could be right. Felton, Larkfield (a community near Santa Rosa, Sonoma County), and parts of Sacramento County are facing up to 57 percent rate jumps from Cal-Am this year, worth $9 million in total to the company. Felton and the Office of Ratepayer Advocates are disputing the rises before the PUC, which sets private utility rates. Their analysis suggests price increases only half that size are justified.

In a submission to the PUC, former supervisor Almquist said the rise would be “grossly unjust” to Felton’s “primarily working-class community,” where rates are already high. He said American Water Works had just reported a 26 percent jump in income for the third quarter of 2002 and was paying its two top officers a combined $1.1 million a year. American Water Works spokesman Kevin Tilden responded that rates in these areas have not changed for five years. He said energy prices are up and security costs have rocketed since the terrorist attack in New York. The PUC case is ongoing.

While these disputes have been an annoyance to Cal-Am and its German parent, they have been mere flea bites compared to the situation in the Central Valley city of Stockton where a Hollywood-style feud has been raging between its mayor, Gary Podesto, and a group of angry citizens.

In 1999 the City was fined $100,000 for spilling chlorine into the San Joaquin River. It faced the prospect of paying tens of millions of dollars for a new sewage plant to meet federal standards. Podesto, having picked up some new ideas from a recent U.S. Conference of Mayors, believed he had the solution: a private-public partnership, in which the City owns a plant, but hires a private firm to run it. The Stockton City Council investigated the possibilities and lined up a preferred bidder: OMI/Thames Water, a joint venture between Denver-based engineering firm OMI Inc. and Thames Water, owned by RWE.

On October 22, 2002, dozens of residents skipped the World Series to show up at City Hall and protest the hand-over of their water system to a foreign giant. They had collected thousands of signatures for a March ballot measure that would force the City Council to put the issue to a city-wide vote. The Council heard the citizens out but steamrolled ahead. A month later, Morris Allen, a 61-year-old engineer, stepped down as director of the Stockton Municipal Utility Department, a post he had held for 16 years. He was forced to resign after asking too many hard questions about the bid, he said. “They just wanted me out of the picture.”

Mayor Podesto and Boston consulting engineers ARI said the OMI/Thames bid to build a new plant and run the water and sewage treatment systems would save the City $175 million over the 20 years of the $600 million contract. Allen claims the purported savings were a “total fiction” because the City Council’s price comparison was based on an out-of-date plan that was no longer being recommended by the City’s engineers. The Pacific Institute, an independent research and policy center based in Oakland, analyzed the bids and concluded that the City might save $20 million of capital cost if OMI/Thames were hired to expand the wastewater treatment plant, but that the savings resulted from using a type of treatment process that involved environmental risks. They further concluded that if the private firm were also hired to run the facility, and inflation over the next 20 years were the same as the past 20 years, the City would pay OMI/Thames $1.7 million more than it would spend under continued City operation. Podesto says he does not “put much confidence” in these numbers.

In February 2003, the Stockton City Council rammed through the OMI/Thames contract—less than two weeks before the election in which citizens passed a ballot measure that requires the Council to get voter approval on such contracts. “There was blatant arrogance and disregard for the public desire all through the process,” said Ann Johnston, a former City Council member. Podesto countered that “this was an administrative decision, not to be bogged down by a proposal put on the ballot.” Pointing out that the City Council heard some 100 hours of public testimony on the project, he said that Council members were elected to make just such decisions. OMI/ Thames started operating the system August 1, 2003.

It didn’t end there. The Concerned Citizens Coalition of Stockton and others promptly took the City to court, claiming it should have done an environmental review before signing the contract. On October 21, Superior Court Judge Bob McNatt ruled against Stockton, accusing the City of an “abuse of discretion.” Because a profit-seeking firm might operate differently than a public body, he said, an environmental review was essential. To the delight of the plaintiffs, Judge McNatt followed up this ruling seven weeks later with an order that the contract with OMI/Thames be voided. The company and Stockton City Council were stunned. The City is appealing the ruling.

The Stockton contract was seen by some as California’s biggest test yet of a private-public partnership. Many such contracts already exist in the state. And in the view of some officials, many do work. USFilter, now owned by France’s Veolia, has almost 300 water and sewage contracts across the country, in cities including Burlingame, in San Mateo County. Jim Good, USFilter’s vice-president of business development in the western states, said 90 percent of their municipal customers renewed their contracts last year.

The City of Richmond, on San Francisco Bay, faced a bitter battle with unions and residents when it hired USFilter last year to renovate and run its neglected water pollution control plant. In the end, USFilter did the job for $7 million—less than half of the City’s $18 million cost estimate. Richmond assistant city manager Rich McCoy said the strife over cutting staff and paying environmental fines has been passed on to USFilter. Efficiency is up, he noted, and water rates are likely to rise little, if at all, at the next review. Staff was cut from 25 to 14, according to assistant plant manager John Whitfield.

Geoffrey Segal, of the pro-privatization Reason Public Policy Institute, said private firms bring economies of scale, international expertise, and a profit motive that “focuses them on creating a better mousetrap.” He refers to a 1999 study by the National Association of Water Companies that looked at 29 public-private partnerships serving three million customers. It found all the contracts led to lower rate increases than were previously planned, and that one in six cities reported 10 to 40 percent cost savings.

Public Citizen’s Juliette Beck, however, argues that public bodies can be just as efficient as private firms; they can also keep rates down because they borrow money more cheaply and pay no taxes, dividends, or fat executive salaries. “A lot of things could be more efficient,” she said. “But if your roof is leaking, you fix the roof. You don’t sell the house.” Some cities, including San Diego and Phoenix, had reaped considerable savings by collaborating closely with municipal worker unions in “re-engineering programs” that provided incentives for cost-cutting measures, Beck said.

Another point of dispute relates to private firms’ environmental record. In both 1999 and 2000, England’s Environment Agency named RWE-owned Thames Water the country’s worst polluter, following violations that included allowing raw sewage to flow onto streets and lawns. Tom Thoren, at RWE/Thames–owned American Water Works, explained that under UK laws, Thames takes the blame for incidents outside its control, such as other companies’ spills into rivers. American Water Works was not cited for a single environmental violation in 2002, he said.

How conservation of water may fit with the interests of investor-owned companies is also a matter of dispute. “They make money from selling water,” explained Peter Gleick, president of the Pacific Institute. “It’s not in their interest to tell customers to use less.” Thoren’s response was that private companies do encourage customers to save water because if they didn’t, the PUC could deny rate increases.

On a global scale, critics of multinational commodification of water supplies worry about the implications of international trade agreements such as the General Agreement on Trade in Services (GATS), one of 21 multilateral commercial agreements enforced by the World Trade Organization (WTO). GATS was approved by Congress in 1995 and subsequently reopened for further negotiation for expansion. In March 2003, U.S. trade representatives, responding to a European Union request, agreed that wastewater services will be among the “committed services” that GATS aims to ensure are open to trade. Although drinking water was not included, it could be in the future. These agreements could put public agencies in a difficult spot. Should a municipality bring in a foreign private partner then find the deal doesn’t work out, cancel the contract, and choose to do the job alone, the United States might have to pay millions in compensation to other GATS members for removing a business opportunity.

Even more ominously, talks are now under way to implement GATS rules that would allow any foreign company to challenge the United States if it felt its business (or attempt to set up business) was being impeded by domestic laws or regulations that were “more burdensome than necessary to ensure the quality of the service.”

Joe Brenner, director of the Center for Policy on Trade and Health (CPATH), a nonprofit research group, said this vague and still undefined proposal could mean that a local, state, or federal body seeking to invoke health, environmental, or planning regulations could be challenged in an international tribunal. For example, the California Coastal Commission, which has some of the strictest coastal protection rules in the world, could be challenged if it tried to impose new marine life protection measures upon a foreign-owned wastewater treatment plant. While GATS does allow laws that protect human, animal, or plant life, warns Brenner, the judgment on whether they may be “more burdensome than necessary” is wide open to interpretation. “It’s decided by an international trade tribunal that may have no sense of what the U.S. considers public welfare, or any experience in public health.”

The North American Free Trade Agreement (NAFTA) Chapter Eleven clause on “investors’ rights” is also causing anxiety. It gives companies the right to take a member country to court if they believe their property has been “expropriated,” leaving them with a financial loss. For example, U.S. Metalclad Corporation won a $17-million claim against Mexico when it was stopped from building a hazardous waste facility on land already so contaminated by toxic wastes it threatened the groundwater. According to Thirst for Control, most companies challenging local environmental rules under NAFTA have won.

Tom Thoren, at RWE’s American Water Works, dismisses the trade issue as “just another ruse,” commenting that “there is no truth in any of it. The preponderance of legal experts say there is no way RWE could use these tactics to trump over local and U.S. laws.”

Across the country new contracts are being signed at a slow but steady pace. Bill Reinhardt, editor of Public Works Financing, said revenues to private operators of public water and wastewater plants have been growing at a rate of about 10 percent a year since 1995, reaching $1.1 billion in 2002. About 2,400 public plants are now privately run—but none in a major U.S. city, he said.

Internationally, water privatization has been controversial for years. The Bolivian city of Cochabamba, for example, hired a consortium, led by San Francisco–based Bechtel, to improve and run the city’s water system. Water rates skyrocketed and violent protests erupted, prompting Cochabamba to pull out of the contract. Bechtel has sued Bolivia for $25 million under an international trade agreement.

Although most water services worldwide are provided by public agencies—nearly 95 percent, by some estimates—the number of people served by private companies grew from 51 million to 300 million between 1990 and 2002, report Peter Gleick, Gary Wolff, and Meena Palaniappin in the January–February issue of the Journal of Water Resource Planning and Management.

According to Fortune magazine, sales in the global water supply industry were $400 billion in 2001. That equaled 40 percent of the oil sector’s sales and more than the sales of the entire pharmaceutical sector. Joe Brenner at CPATH says the sums to be made in the U.S. alone are “staggering.”

That is a disquieting observation. Unlike electricity or telecommunications, the other former “monopolies,” water is fundamental to life. Sharing it is not just a matter of economics. The public needs to take note of who’s in control.