Water as Business
Taps Into Fears
Concern over possession of a natural resource as a commodity
and the possibility of firms' taking treatment shortcuts
The apparent breakdown of a deal between
private Cadiz Inc. and the public Metropolitan Water District
to build a $150-million water storage facility in the
Mojave Desert raises an issue that may become more relevant
to the state's water future: What role is there for private
enterprise in supplying water to the California public?
The question evokes fears of the kind of corporate profiteering
and market manipulation alleged in the wake of energy
deregulation in the state. If anything, privatizing water
may be an even more sensitive issue, given its stature
as a natural resource essential for physical, as well
as economic, health.
In part because of the dangers of cutting corners on water
treatment and system maintenance, public-interest advocates
have long been wary of efforts to turn over public water
supplies or systems to private enterprise.
"One of the things we learned in the energy deregulation
debacle is not to give private companies a free hand in
the management of a natural resource," said Peter H. Gleick,
president of Oakland-based Pacific Institute for Studies
in Development, Environment, and Security and coauthor
of a study critical of global water privatization. "Water
is too important to be left solely in private hands."
Still, many private entities are active in the water trade
throughout the state--and some are planning to become
more deeply involved.
Among them are owners of water rights in the river-rich
north who deliver supplies to the parched south. Others
are small-scale farmers who agree to fallow acreage during
droughts in order to divert irrigation water to cities
and suburbs. And some view the state's geographic imbalance
of supply and demand as a long-term commercial opportunity.
In the Sacramento-San Joaquin Delta, for example, a real
estate venture between two life insurance companies--Zurich
Financial Services and Kemper Insurance Cos.--is proposing
to build reservoirs on two marshy islands to hold surplus
floodwater for release during dry periods. Layne Christensen
Co., a Mission Woods, Kan.-based mineral, energy and water
company, is expanding water storage facilities in Kern
County that already are under contract to provide dry-year
supply to the MWD.
But many other private entities have been lured by visions
of riches to be made in the business of moving around
water supplies within the state--only to be crushed in
a bureaucratic and political wringer.
"A lot of companies trying to move water across the delta
have not been successful because it's complicated," said
Jerry Johns, water transfer chief for the California Resources
Agency. "It requires a lot of overhead. The physical issues
are hard. Water rights are complicated. If your business
plan is moving water from north to south, you should be
prepared to spend a lot of time working out how that's
As a commodity, water is protected by a shield of regulation,
tradition and emotion that can turn even the determination
of who owns the right to use water under what conditions
into a forbiddingly complex task. These complexities have
blindsided some of the country's most sophisticated private
investors, leading to some spectacular missteps in recent
In the mid-1990s, the wealthy Bass brothers of Texas bought
up 30,000 acres of farmland in the Imperial Valley, hoping
to profit from the spread between the $12.50-per-acre-foot
price they paid for Colorado River water as farmers and
the $250 that San Diego would pay them to divert it as
urban supply. Too late, the Bass family discovered that
the water rights did not belong to them as landowners
but in trust to the Imperial Irrigation District, which
opposed the Bass sale. (The Bass family still made a profit
in the Imperial Valley. Meanwhile, the district moved
to strike its own deal--still under negotiation--with
Three years ago Azurix, a water-trading subsidiary of
Enron Corp., paid $31 million for a 13,000-acre ranch
in Madera County, in the heart of the San Joaquin Valley
farming region. The idea was to allow customers to store
as much as 400,000 acre-feet of water in an aquifer under
the ranch, extracting it in dry periods as needed. Local
farmers viewed the proposal as a pretext for stealing
their natural water supply. (An acre-foot is about 325,000
gallons--enough water to meet the needs of two average
households for a year.)
"The Azurix project was perceived as a threat, as a means
of taking our water and sending it away to the highest
bidder," recalled Kole Upton, a pistachio and almond farmer
who headed a local water users' group opposed to the project.
The Madera County Board of Supervisors eventually passed
an ordinance requiring their consent to any water transfers
out of the district. Azurix later disintegrated in the
Enron bankruptcy. A unit of Layne Christensen has since
taken over the property.
"The movement to treat water as a commodity is always
resented in agricultural communities," Upton said, "because
we farmers can't afford to pay what the MWD can."
Cadiz also ran afoul of bureaucratic obstacles and changing
hydrological conditions in its campaign to build a $150-million
facility to store surplus Colorado River water under company-owned
land in the Mojave Desert in partnership with the MWD.
The company's plan to extract as much as 1.5 million acre-feet
of water from a natural aquifer provoked environmentalists,
who contended that extraction on that scale would threaten
the desert ecosystem. At the same time, drought on the
Colorado made the availability of water to fill the storage
site doubtful. And the high profile of Cadiz Chairman
and Chief Executive Keith Brackpool, a confidant of Gov.
Gray Davis, placed the entire project under the political
spotlight. Last week, MWD officials said they would advise
the district board to defer the project indefinitely.
Promoters of large-scale water deals know that public
passions and political scrutiny come with the territory.
"Opposition to water transfers is extraordinarily emotional,
and it evolves into a theological issue," said Ric Davidge,
head of World Water, an Alaska company proposing to tap
two Northern California rivers and ship the water to Southern
California in enormous floating plastic bags. "Interest
groups that take exception to 'privatizing' water as a
commodity are misinformed. Water has been a commodity
since water and money existed. What's new is the emergence
of public entities in control of it as a resource and
Some would-be marketers of water say those public agencies
exploit local resentments to maintain their political
stranglehold on the state's most valuable resource.
"Those who wish to maintain control of water prey on fears
of transfers," said Michael P. George, chairman and chief
executive of Point Richmond, Calif.-based Western Water
Co., which has been trying for years to find a way to
profitably sell to the south some 200,000 acre-feet of
Northern California water to which it holds historical
rights. George says he has faced relentless resistance
from public water agencies reluctant to give up what he
characterizes as subsidized monopolies.
"Our efforts to organize efficient, cost-effective transfers
have been stymied by the fact that there is no process
by which you can gain approval for a transfer," he said.
"There are myriad processes by which you can be told no,
asked for more information or asked to provide money for
studies, but no way you can get to a yes."
George has been battling the MWD over differing interpretations
of the "fair compensation" that state law says he must
pay the district for sending water south via its pipelines
and aqueducts. He argues that because the transmission
capacity he would use would be otherwise idle, the MWD
should charge him only a nominal rate. The MWD, for its
part, argues that Western Water should pay the same transmission
rate of $154 per acre-foot charged to all its other customers,
which include member water agencies. With that fee added
to its own costs, Western Water would be hard-pressed
to turn a profit.
MWD officials say that's as it should be, in part because
the district has an obligation to provide guaranteed supply
to the 17 million residents within its jurisdiction.
The MWD's traditional sources of water, such as the Colorado
River system, are relatively cheap, largely because the
MWD and its member districts helped finance the construction
of Hoover Dam more than 70 years ago. They would be reluctant
to cede the financial benefits of their claim to the cheap
water by selling their capacity to Western Water at a
preferred rate, says MWD Chief Executive Ronald R. Gastelum.
Eventually, Gastelum acknowledges, the water scene will
change. As demand in Southern California grows, the MWD
will be forced to turn to more costly supplies--desalinated
water, for example, or supplies purchased on the spot
market. Such conditions, which are imminent, will give
independent suppliers such as Western Water a window to
undercut the huge district's embedded costs.
"I don't think they can compete with us by trying to meet
our existing demand," Gastelum said. "But as we develop
new supplies, they will be able to compete."
Until then, however, the market's outside suppliers will
continue to face daunting obstacles.
"Michael George's business plan is premised on an economic
theory that doesn't account for the political reality
that no one wants to let him have a cheap ride for his
private interest," Gastelum said.