It happened first in downtown Baltimore. On Nov. 8,
a 20-inch pipe burst, sending hundreds of thousands
of gallons of water into the streets, closing businesses,
snarling traffic, and flooding the underground, where
cars floated in garages.
Then in Chicago, a broken water main created a 43-foot
sinkhole that swallowed several cars as millions of
gallons of water gushed onto streets near busy Lake
Shore Drive on the city’s North side.
Finally on Nov. 10, near San Francisco, a pipe that
carries water to 2.4 million people burst, shooting
a 100-foot geyser into the air. A shut-off valve was
jammed for three days, and the area lost more than 70
million gallons of water.
By and large, Americans have a safe, plentiful, and
cheap water supply, but those three days in 2002 were
a case study in the nation’s water woes. The country’s
geriatric water pipes need to be fixed or replaced,
and government and industry studies have estimated that
it will take between $150 billion and $1 trillion over
the next three decades to do the job.
Both public and private water purveyors are battling
for a piece of that new market. But private water companies,
led by French and German multinationals, appear poised
to take the lead in providing drinking water to American
consumers. With money and free-market ideology on their
side, they appear to be winning battles in Congress,
although the going is still rough in the court of public
opinion.
Private water interests have become a major political
force in the debate about the country’s water
infrastructure, according to a year-long investigation
by the International Consortium of Investigative Journalists,
a project of the Center for Public Integrity. Since
1996, when the Environmental Protection Agency first
warned of a looming water infrastructure crisis, private
water companies and their associations have ratcheted
up spending in the political arena, allocating millions
to influence and support lawmakers.
The ICIJ investigation analyzed campaign finance records
from the 1996 through the 2002 election cycles —
a time when Congress was considering two pieces of legislation
that affected the privatization of drinking water systems.
One, a tax law favorable to privatization, was passed;
the second, a funding bill that encourages privatization,
is expected to be taken up again in the 2003 Congress.
From 1995 through 1998, the water utility industry,
its employees, and their political action committees
spent less than $500,000 on campaign contributions —
a blip on the national campaign finance radar. But in
the last two election cycles — from 1999 to 2002
— campaign spending more than tripled to roughly
$1.5 million. Most of that came from a core group of
seven of the nation’s largest private water companies
and the industry association that represents them.
Of the private water companies, utilities, and water
associations that reported having lobbied on legislation
related to privatization from 1996 to 2002, proponents
outspent opponents 12 to 1, according to federal lobby
disclosure forms.
The National Association of Water Companies, the private
utility industry group, and the seven private companies
– nearly all foreign-owned – emerged as
donating giants among the water sector. Over the last
seven years, those firms and their employees together
contributed 84 percent of the roughly $2 million the
water utility sector donated to federal election campaigns.
More than half of the sector’s campaign spending
came from two large New Jersey-based companies: United
Water Resources Inc., a French subsidiary, and American
Water Works Co. Inc., which was acquired by a German
conglomerate on Jan. 10, 2003.
Of the seven U.S. private water companies that were
major political donors, only one is still American-owned:
Philadelphia Suburban Corp. Inc. of Bryn Mawr, Pa.
Under U.S. campaign finance laws, U.S.-based subsidiaries
of foreign corporations could contribute unregulated
“soft money” contributions to political
parties. The Bipartisan Campaign Reform Act of 2002,
better known as McCain-Feingold, banned soft money contributions
to the political parties.
United Water was purchased in 2000 by Paris-based Suez
Lyonnaise des Eaux, the world’s largest water
company. Since 1994, Suez maintained a “strategic
alliance” with the Harrington, N.J.-based company.
Suez also owns U.S. Water LLC, also based in New Jersey.
Vivendi, the second French water giant, bought United
States Filter Corp. of Palm Desert, Calif., in 1999.
RWE AG, a German multinational company, purchased American
Water Works of Voorhees, N.J., which serves 15 million
people in 27 states and three Canadian provinces and
is the largest publicly traded water company in the
United States. Thames Water LLC, a British subsidiary
of RWE, operates E’town Corp. of Westfield, N.J.
Aquarion Services Co. of Bridgeport, Conn., is owned
by Kelda Group PLC of England.
On the lobbying front, another key battleground of
political influence, just three groups — the National
Association of Water Companies, United Water, and American
Water Works — accounted for more than 90 percent
of the $2.4 million spent by those in the water utility
sector that traditionally have supported privatization
measures.
By contrast, groups that generally have opposed privatization,
such as the Association of Metropolitan Water Agencies,
an industry organization for public water utilities,
spent just more than $200,600 between 1996 and the first
half of 2002 to make their case with lawmakers.
Publicly owned water companies spent more than $2.3
million lobbying on an array of issues. But it was not
clear from the disclosure forms that they are required
to file how much of their lobbying dollars were aimed
at influencing the privatization debate.
Due to corporate diversification and the vagueness
of lobby disclosure forms, it was also impossible to
determine the specific spending patterns of two major
private water players. But French media giant Vivendi
Universal — parent company of its water unit Vivendi
Environnement and of the U.S. water company USFilter
— and the California-based Bechtel Group, former
parent of U.S. Water, are both big spenders on political
campaigns and lobbying.
Jim Creedon, a spokesman for United Water, said political
spending by the water companies is “never given
with the intention of influencing opinion.” It
is, however, a way to get noticed, a kind of calling
card left at lawmakers’ doors.
Marilyn Ware, chairwoman of American Water Works, and
Marian S. Ware, her mother, gave $350,000 in soft
money to a branch of the Republican National Committee.
In September 2002, Marilyn Ware was appointed by President
George W. Bush to serve on his National Infrastructure
Advisory Committee.
Water privatization, which has gained momentum in the
rest of the world over the last decade, is poised to
become a strongly contested issue in the United States.
Private owners and managers of water utilities by the
start of 2003 made up roughly 15 percent of the industry,
leaving plenty of room for expansion.
Decaying Infrastructure
The hodgepodge of federal grants and loans that states
typically rely on to help upgrade their water systems
is dwindling. The Environmental Protection Agency estimated
in September 2002 that the budget shortfall to make
these repairs may reach $263 billion by 2019 for drinking
water alone.
The Republican-led Congress does not appear inclined
to dole out extra money for large public projects when
the funding stream is renewed in 2003. In general, the
government’s position “is to let markets
work,” said Bennett Raley, assistant secretary
for Water and Science at the Interior Department. Typifying
its attitude toward public companies, the Bush administration
is seeking to privatize part of the postal service.
Based on past experience in other countries, though,
privatizing water carries risks. The water giants not
only will raise rates to cover costs, critics say, but
will use monopolies over water systems and rights to
manipulate the system, much the way electricity companies
were accused of doing in California in the summer of
2001. Critics fear that these companies will not be
held accountable, so jobs will be lost, quality will
wane, and the poor will lose service.
“Why does somebody need to make money on your
water?” said Dick Hierstein, city manager of Pekin,
Ill., which decided to buy back its water system from
American Water Works. “Does somebody need to make
money off the air you breathe? It is as simple as that.”
Defenders of the publicly owned water systems say they
have worked well despite a shortage of cash. They argue
that water is a homeland security issue, an area where
government spending can be defended as legitimate and
perhaps even patriotic.
"Water infrastructure is not failing right and left,
like a road with potholes or a river erupting into flames,
because public water systems are doing a great job,"
said Michael Arceneaux, a spokesman for the Association
of Metropolitan Water Agencies, which represents municipal
utilities serving more than 100,000 customers.
“Clean and safe water is no less a national priority
than are national defense, an adequate system of interstate
highways, and a safe and efficient aviation system,”
added Norida Torriente, a spokeswoman for the American
Society of Civil Engineers.
But the major private utilities have plenty of experience
around the world dealing with opposition and have had
some success in America doing what they do everywhere:
buying up local companies, donating to politicians,
and tapping into lobbies to change legislation to smooth
the way for privatization.
“With [American Water], we will inherit their
existing political and lobbying skills,” said
Peter Spillett, head of Environment, Quality, and Sustainability
for Thames Water, in an interview at his office outside
London. “In Washington, we will employ useful
lobbyists and so on.”
Gérard Payen, senior executive vice president
of Suez, said that its U.S. subsidiary is still developing
alliances with politicians and industry groups. The
United States and China are the company’s main
expansion targets, Payen said.
From the business perspective, there is no reason Suez
should not succeed.
“Running water systems is a business,”
said Debra Coy, vice president of Schwab Capital Market’s
Washington Research Group. Everything else, she added,
is “emotional rhetoric.”
The Open U.S. Market
Private water companies are not a new concept in the
United States. They were set up in Rhode Island in 1772.
By 1799, the Manhattan Company, which was associated
with Manhattan Bank and then the Chase Manhattan Bank,
was created to clean up New York’s water. But
it neglected the public needs, and eventually the city
government, in 1842, embarked on the nation’s
largest public water project by bringing in water from
the Croton River.
Baltimore’s water system bounced between public
and private owners over more than a 50-year span in
the 1800s that included cholera outbreaks and contaminated
wells. In 1830, city officials accused the private water
company of supplying water only to the rich. Yet it
took 20 years for the city to buy back the assets.
By 1850, 50 of the country’s 83 systems were
privately owned. That changed to a system largely run
by public utilities during the early 20th
century as population boomed and advocates crusaded
for public hygiene, disease prevention, and fire protection.
Today, public utilities serve 81 percent of the American
population. Yet private companies own about 70 percent
of American drinking water systems, EPA figures show.
But these are generally small, rural operations.
Analysts expect the $60 billion drinking water market
to grow to between $180 billion and $200 billion by
2019 due to the anticipated infrastructure needs.
Much of the current private involvement in water is
in management, rather than outright ownership of waterworks.
It is within this market of management services that
the French and German companies are hoping to expand.
In these public-private partnerships, which Congress
is expected to endorse, contracts typically last for
20 years.
Vivendi Environnement and Suez secured billion-dollar
contracts in some of America’s largest cities,
including Atlanta and Indianapolis. Cities from Camden,
N.J., to Stockton, Calif., also have contracted or are
looking to contract with these companies.
Atlanta had been touted as a “trophy contract”
for private companies after it signed a 20-year, $20.8
million deal with United Water in 1999 – at the
time, the nation’s largest public-private partnership
contract. But Mayor Shirley Franklin, who took office
after the deal was signed, canceled the contract on
Jan. 24, 2003.
Citing a city audit of United Water operations, Franklin
complained that the company had not kept up with maintenance
and repair work and failed to collect millions of dollars
in unpaid bills. The company saved the city only about
$10 million a year, or half its projections, a January
2003 audit showed, according to Greg Giornelli, chief
policy officer for Atlanta.
United Water chairman and CEO Michael Chesser said
the company had improved its performance over the last
several months. However, both the city and company agreed
that the contract did not provide “an economically
viable framework” for either party’s future,
he said in a press statement.
In 2001, Indianapolis bought the assets of the local
private water company that served the city for 131 years.
Nine months later, city officials awarded the nation’s
largest management contract to date — a 20-year,
$1.5 billion-deal to Vivendi’s USFilter.
After three years and almost $4 million in planning,
the New Orleans Sewerage and Water Board rejected plans
for a water and wastewater private management contract
worth just under $1 billion. USFilter had been seen
as the top contender in the New Orleans deal. City officials
led by Mayor Ray Nagin said they needed a private manager
to keep water rates from skyrocketing and to meet federal
mandates to overhaul the city’s sewer system,
a major source of pollution.
The water deal had been expected to sail through a
vote of the water board, but it died in October 2002
after several council members abruptly withdrew support.
Two of the 13 board members whose terms expired in October
— and who voted against the measure — were
not reappointed by Nagin, who has said publicly that
he is considering reopening the bidding process in February.
Cities have viewed privatization as an option for many
years. They have lobbied the government intermittently
since the 1980s — when Chicago Mayor Richard M.
Daley picked up the torch during a budget battle —
to change the tax code in a way that would enable cities
to contract with private companies, including water
companies.
The U.S. Conference of Mayors, a nonpartisan organization
of cities with populations of 30,000 or more, joined
with the Washington-based industry group, the National
Association of Water Companies, to lobby the Internal
Revenue Service to change language in the tax code that
penalized cities with loss of tax-exempt status if they
contracted private companies for more than five years.
The tax status is crucial to the finances of cities
because it allows them to borrow money at significantly
lower rates and with tax-free interest payments on the
government bond market. Private companies claimed they
found it difficult to recover costs with contracts limited
to five years.
Success came in 1997, when the IRS extended the contract
limits to 20 years. That step encouraged private water
companies to begin expanding their operations in the
United States.
The big companies view the U.S. market hungrily because
Americans are among the largest per capita water-users
in the world — and pay among the lowest rates.
In 2001, the Congressional Budget Office estimated
that Americans paid an average of 0.5 percent of their
annual household budgets on water and wastewater bills
during the 1990s. That could rise slightly, from 0.6
percent to 0.9 percent by 2019, the report estimated.
A 2002 rate survey by Raftelis Financial Consulting
of North Carolina showed that drinking water fees grew
by 8.8 percent from 1996 to 2001. Last year, American
customers paid an average of $16.46 a month for typical
usage of 7,480 gallons of water.
For private companies, this simply means there is plenty
of room to increase rates. That could lead to angry
backlash, critics said. But on the other hand, the companies
may find plenty of justification.
Overall, government reports show that conservation
efforts have reduced water consumption and lowered the
revenue utilities desperately need for capital improvements.
Drought and a population that is expected to double
in the next 50 years have led to worries of future shortages.
Several aquifers, including the Ogallala in Texas and
the Potomac-Raritan-Magothy in New Jersey, already are
under duress. Last summer, more than 40 percent of the
nation experienced a drought, forcing some towns, such
as Westminster, Md., to consider purchasing water from
outside sources. Getting water to these regions could
cost more money.
In 1996, the EPA released a report that identified
the need for improvements in the U.S. water infrastructure.
By 2001, bipartisan legislation to fund these projects
had been introduced in Congress. It required utilities
for the first time to consider alternate management
options — including private partnerships —
before they receive federal money. Congress is expected
to reconsider that legislation in early 2003.
Diane VanDe Hei, executive director of the Association
of Metropolitan Water Agencies, the public utilities
industry group, said there should be no federal mandate
for privatization. “I don’t think there
is enough information or data for the federal government
to endorse public-private partnerships,” she said.
The companies believe the proposed legislation simply
“encourages creative asset management,”
said Louis Jenny, director of federal relations at the
National Association of Water Companies, the trade group
for private companies.
Against the Tide
Labor unions and the watchdog group Public Citizen
waged an 18-month-long campaign to halt the trend toward
privatization around the United States.
The groups heavily lobbied Congress in 2001 and 2002
to excise language from the bill advocating private
partnerships, which Public Citizen said “jeopardizes
public access to safe and affordable drinking water
and adequate wastewater treatment by making federal
assistance conditional on the recipient’s consideration
of privatization.”
The Senate version made a moderate concession, changing
the phrase that explained funding conditions from considering
“public-private partnerships” to “forming
cooperative partnerships.” The House version remained
the same.
A coalition of municipal water companies and public
interest groups formed an antiprivatization lobby that
called on Congress to increase grants and loans to $57
billion over five years to improve public utilities’
infrastructure. Private companies objected to the expanded
grants because they would remove the incentive to privatize.
Eventually, labor unions, which also opposed privatization,
were able to kill the bill. They wanted contractors
to be paid the federal prevailing wage, a collectively
bargained figure that typically exceeds market rates.
Without that provision, privatization threatens labor
unions’ bargaining clout.
During the campaign over the bill, Public Citizen cited
several bribery and corruption convictions — overseas
and in the United States — as evidence that global
water companies could not be trusted with the nation’s
water supply.
In 2001, Aqua Alliance Inc., parent company of Professional
Services Group, a wastewater treatment company, pled
guilty to bribing a New Orleans Sewerage and Water Board
official in exchange for favorable treatment. Board
member Katharine Maraldo and three PSG employees were
indicted in U.S. District Court in Houston, Texas, for
conspiracy, mail fraud, and interstate travel in aid
of bribery. Maraldo was convicted in June 2002 of accepting
legal services and more than $70,000 in cash from the
company. Michael Stump, a former PSG executive, also
was convicted on charges related to bribery. Two others
were acquitted on all charges, and one man killed himself
in May 2002.
In Atlanta, according to Public Citizen, state campaign
finance records showed that donations from four executives
of United Water Services Inc., a division of United
Water Resources Inc. and a minority subcontractor to
Atlanta Mayor Bill Campbell’s 1999 reelection
campaign, totaled $4,750. Such donations are not illegal,
unless clear evidence exists that a donation was given
in exchange for a government contract.
Bill Campbell’s brother, Ralph, who ran for the
state auditor office in North Carolina, received more
than $10,000 in contributions from United Water executives
in Georgia, Indiana, California, and New Jersey. The
company does no business in North Carolina.
The ‘Champions’
The usual practice of the private water companies is
hard-nosed.
Howard Woods, former director of business development
for American-Anglian, a now-defunct branch of American
Water Works, described the 1990s as a cut-throat period
in the water business in the United States. Companies
bid so low that they risked tiny profit margins, he
said. The thinking was that they could always renegotiate
later to recoup their costs — a common practice
in the water business in other parts of the world.
“You could think of it as gutsy,” he said.
“But I tell you that was the way to open the door.”
Today, the fervor has subsided a bit, said Woods, now
a consultant. “We make sure that we are viewed
as the ‘good guy’ to hire at the end of
the day, we make sure the decision was based on who
had the lower number on the piece of paper. It’s
not necessary to do anything else to win the job.”
But according to insiders, the process is not always
that simple. One common practice of the water companies,
they say, is to develop “champions,” or
local powerbrokers, such as mayors, council members,
or legislators, to carry their message to both city
councils and the people. They try to persuade local
governments facing the headaches of budget crunches,
labor strife and decaying systems that the answer to
their woes lay in privatization.
Around the world, companies such as Suez, Vivendi,
Thames, and Saur have proven to be masters at this skill.
In Europe, they ally themselves with city mayors or
top managers. In South America and Asia, they join hands
with powerful local businessmen who have close ties
to senior politicians.
In the United States, the result often is a symbiotic
relationship between the companies and local politicians.
A former New Jersey lawmaker, a consultant who has worked
with private water companies, said the companies carefully
scout their potential “champions,”
looking for the lone party member on councils, political
neophytes, or mayors.
Typically beleaguered, rarely thriving, the municipalities
these politicians represent often can’t make payroll,
struggle with labor problems, or sometimes, just want
cleaner water for their citizens.
Enter the private companies and their champion with
promises of a grand solution. The consultant said company
representatives carefully train their “champion”
on how to sell the product. Dinners, trips, theater
tickets, and sometimes cash follow, he said. On a recent
visit, the New Jersey consultant gave a former champion
several hundred dollars to “help him out,”
he said.
In the meantime, the companies wage a quiet public
relations campaign. They meet with local reporters and
editors to persuade them to publish stories or editorials
about the water debate. They find residents to write
letters to the editor endorsing privatization. Often,
they recruit people to pad official planning meetings
that otherwise go unattended to speak up on behalf of
privatization. This technique can often get them past
the EPA’s requirement that municipalities hold
open meetings for public comment, the consultant said.
Scott Edwards, spokesman for USFilter, acknowledged
use of the word “champion” to describe allies
in cities where his company has plans. However, he noted
that his company requires all its contractors to sign
documents prohibiting them from engaging in illegal
activity, and specifically bribes.
Kerry Lauricella, a former councilman in Harahan, La.,
said he often felt “wooed” by prospective
contractors, although he said neither he nor anyone
he knew took bribes or were otherwise influenced.
Harahan, a suburb of New Orleans, eventually chose
to privatize its wastewater system because it felt it
had no choice. Harahan operated with a $4 million budget
with about two-thirds earmarked for safety protection.
It was difficult to handle capital projects, he said.
“We did what a lot of cities do: keep taping
it and taping it and sooner or later tape doesn’t
work anymore,” he said about municipalities’
struggles to make major infrastructure repairs.
In 1996, the town contracted its wastewater services
to a company that was later bought by USFilter. Lauricella
said he does not feel entirely good about it. “I
have mixed emotions on having a non-American company
with its hand on the tap of America’s water valve,”
he said. “You don’t know what will happen.”
Some Towns Are Voting ‘No’
In Kentucky, a grassroots movement is opposing RWE’s
purchase of American Water, whose subsidiary, Kentucky-American
Water Co., serves more than 290,000 customers in the
Lexington-Fayette Urban County area. The county is considering
purchasing the company itself.
Officials in the Illinois towns of Pekin and Peoria
— which have some of the highest water rates in
the state — have reported problems with their
water companies, both subsidiaries of American Water
Works, and have taken steps to buy back the assets.
Pekin officials have complained about burst pipes and
malfunctioning hydrants. Officials in Peoria contend
the water company overcharges for its service.
"Our studies show that the cost of water in Peoria
is twice that of other similar-sized cities in the country,"
said Terry Kolbuss, executive director of the Tri-County
Regional Planning Commission in East Peoria, Ill., who
began advocating public ownership of the utility several
years ago while he worked as a business development
consultant.
Susan Atherton, a spokeswoman for Illinois-American
Water Co., said that rates in Pekin and Peoria are not
the highest in the state and that many other suburbs
pay far more for their water. She said the customers
served by Illinois-American pay a "fair rate" and get
"excellent service" in return. Atherton added that state
regulators, not the company, established the rates charged
by privately owned companies.
In blue-collar Pekin, one of America’s fading
mainstreet towns, few can afford the higher rates. The
steamboat and railroad industry that fed the little
town along the Illinois River has left little more than
rusted factories on its willowed banks. One of America’s
fading mainstreet towns, Pekin has little more to offer
its residents than a candy store, a few diners, trinket
shops, and a tavern with a crumbling facade.
Hierstein, Pekin’s city manager, said the company’s
service — in private hands since 1886, in Illinois-American
Water’s control since the early 1980s —
had declined in recent years. Company officials counter
with an Illinois Commerce Commission report that Pekin’s
number of customer complaint calls ranked among the
lowest in the state from 1999 to 2001.
