Great Lakes Article:

As Cities Move to Privatize Water, Atlanta Steps Back
Douglas Jehl
02/18/2003

ATLANTA - Privatization has hit the water sector, which has remained mostly the bastion of public utilities. Over the last five years, hundreds of American communities, including Indianapolis, Milwaukee and Gary, Ind., have hired private companies to manage their waterworks, serving about one in 20 Americans. The main reason is that the cities are facing enormous costs to repair aging sewer pipes, treatment plants and other water infrastructure. Federal officials say the total cost of repairs could outstrip current spending by more than $500 billion in the next 20 years. The utilities' hope has been that partnerships with private companies could generate savings and provide access to capital to help cover such staggering bills.

But a cautionary tale has emerged here in Atlanta, where the largest water privatization deal collapsed in January. Instead of public savings and private profit, a deal reached in 1999 between Atlanta and United Water resulted in bitter disappointments for all sides, not least of all consumers. Atlanta is now retaking control of a system that United Water was to have managed until 2019.

"This city had a motto for years, and it went something like `Atlanta grows where water goes,' " said Jack Ravan, the city's commissioner of watershed management. "I think we've learned enough to know that we'd prefer to see the city in charge of that destiny." The decision, in many ways, takes Atlanta back to square one. It will have a publicly controlled system that, on paper at least, will be more costly to ratepayers than the one it replaces. The arrangement offers no clear way to pay for extensive water-system repairs, estimated to cost $800 million over the next five years. (A separate bill to upgrade the city's sewers could exceed $3 billion.)

But Atlanta officials, along with customers like Gordon Certain, the head of a local neighborhood association, say almost any change seems preferable to existing service they call poor, unresponsive and fraught with breakdowns, including an epidemic of water-main breaks and occasional "boil only" alerts caused by brown water pouring from city taps. "Is it possible to have private water work right?" Mr. Certain asked. "I'm sure it is. But if you have a political problem in your city, you can vote in a new administration. If you have a private company with a long-term contract, and they're the source of your problems, then it gets a lot more difficult."

The breakup comes as the question of privatized water is generating increased attention around the country, with advocacy groups like Public Citizen waging campaigns against the proposed deals. And while water privatization advocates describe the Atlanta failure as an aberration, all sides say that it is likely to weigh heavily in places like Stockton, Calif., which is considering whether to go down a similar path. "This is a huge setback for privatization, and it's going to have to give both cities and companies pause," said Dr. Peter H. Gleick, president of the Pacific Institute, a nonpartisan environmental research organization in Oakland, Calif., that has written extensively about the risks and benefits of water privatization.

United Water, a subsidiary of the giant French company Suez, has acknowledged problems with its management of the Atlanta system. But it has also said it was stuck with trying to run a system in unexpected disrepair, while losing at least $10 million annually under a $22 million-a-year contract that the city refused to renegotiate. "It was important to recognize reality in Atlanta," Michael Chesser, United Water's chairman and chief executive, said of his company's consenting to the breakup. Still, United Water, one of the country's two biggest private water companies, has contracts to operate more than 100 other municipal systems, and Mr. Chesser said he expected that number to grow. "This is a market with a huge potential," he said.

It was Atlanta's new mayor, Shirley Franklin, who forced an end to the partnership, demanding that United Water quit or be fired. But in announcing an end to the partnership in Atlanta on Jan. 24, Mr. Chesser and Ms. Franklin said each side had recognized that continuing the deal was in neither party's interest.

Across the country, 94 percent of water systems are publicly controlled, said William G. Reinhardt, editor of Public Works Financing, the leading trade journal covering the industry. Most are owned and operated by municipalities, in what remains the most fragmented of any American utility, divided into roughly 5,000 different pieces. The number of publicly owned systems that, like Atlanta's, are operated under long-term contracts by private companies has increased to about 1,100, from about 400 in 1997. "It all comes down to economics," said Debra Coy, a research analyst with Schwab Capital Markets. "In an environment where cities are paying much more attention to their problems with wastewater and water, you have an industry that's coming in and telling them, hey, we can help you do this."

A 1997 executive order helped to smooth the way for such public-private partnerships. But in cities already strapped for cash, the bigger factor has been the dark shadow cast by the need for new investment, to meet the needs of growing population or to keep aging systems in compliance with strict environmental laws. Some federal estimates of the need for new spending for municipal water systems have reached as high as $1 trillion over the next 20 years.

In Atlanta, some water pipes date from the 19th century, and its water system has been in failing shape since the mid-1990's, when the federal government began to assess fines against the city for failing to meet water-safety standards. In striking the deal with United Water in 1999, city officials said they hoped to save as much as $20 million a year from the $42 million budgeted for the existing, bloated public utility, and to apply those savings to capital improvements. But at most, Atlanta officials say, the city has managed to achieve only $10 million in annual savings, and only at what has been a significant political cost, with ratepayers blaming the city for United Water's shortcomings.

At the same time, United Water said its expected profit had turned into heavy losses as operating costs soared. Atlanta's pipes, fire hydrants and water treatment plants turned out to be in much worse shape than the city had let on, the company said. The return to public control that Atlanta has now embraced will send the city's water costs soaring back to about $40 million a year, compared with the $22 million in direct costs it was paying United Water, Mr. Ravan said. But he said there would be other, less tangible savings. "What is the cost of a `must boil' alert?" he asked.

But critics, including Hugh Jackson, a Nevada-based researcher with Public Citizen, are using the example of Atlanta to offer a broader indictment of a privatization process they regard as misguided from the start. "Obviously, water is a basic necessity, to a degree that electricity isn't, when you get right down to it," Mr. Jackson said. "We do not feel that it should be managed for quarter-to-quarter returns for a corporation that is trying to satisfy a profit demand."

Some experts, including Adrian Moore, a privatization advocate who is a vice president at the Los Angeles-based Reason Foundation, say the main lesson of the Atlanta collapse is that cities and private companies needed to be realistic about what a partnership can achieve. "It's like a marriage," Mr. Moore said. "You've got to work to make it work."