Liquid Assets: Tide Turns Against Privatization of City Water Systems

By Steve Kellman
Circle of Blue

There’s nothing like a fiscal deficit to prompt municipal leaders to think hard about how to save money. Everything is on the table and no city service or asset is untouchable. So last November when the mayor of Carbondale, Illinois made several suggestions for bailing out the cash-strapped city, the idea of selling the municipal water and sewer system gained serious traction.

Water plant, Carbondale, Illinois.

According to Mayor Brad Cole, the $42 million sale would supply enough cash to erase the budget deficit, pay off pension fund obligations, repeal a two-year-old sales tax, and build long delayed police and fire stations, the Southern Illinoisan of Carbondale reported.

That may sound good in Carbondale but the newspaper also noted, that officials in other cities around Illinois are regretting decisions to privatize water systems in the face of steep water rate hikes and loss of control over when and where to install water mains.

More than 75 Carbondale residents turned out for a meeting at a local coffeehouse in late November to discuss their opposition to water privatization. Standing-room-only crowds peppered the city council with questions and concerns in two December council meetings, even as council members repeatedly said, and they weren’t joking, that the proposal was dead in the water.

“I understand the community being very concerned about it; it’s not going to move forward anywhere,” Councilwoman Corene McDaniel assured the local newspaper. “The community is passionate about the water and I understand wholeheartedly; you don’t know what you’d be getting if you went to a private organization.”

Brad Cole, Mayor of Carbondale.

What convinces a city to consider giving up control of its water in the first place?

Some officials believe the private sector can do a better job maintaining and upgrading a leaky and inefficient water system. Others see an opportunity to leverage a successful water system and its guaranteed cash flow from its customers — city residents — to win a large up-front payment from a private firm. That money can then be used to plug budget shortfalls in other departments.

Experts who have watched failed experiments in the privatization of municipal water systems say both beliefs are wrong.

John Keesecker, a senior organizer for the non-profit consumer organization Food & Water Watch, works with community groups across the United States to prevent the privatization of public water resources.

“Our number one concern with systems that are privatized is that service goes down and there’s poor water quality,” Keesecker said. “There’s also less accountability and transparency, because at the end of the day these companies are beholden to shareholders and their concern is primarily with making a return and not with providing a good service.”

“When it’s publicly managed, council members or aldermen can be voted out if it’s not being managed well but that’s not the case when it’s been privatized. Voting them out won’t necessarily change the way the water system operates.”

In the United States, the big commercial players in the field of water privatization include:

• Veolia Water North America, a subsidiary of France’s Veolia Environment. According to the organization’s Web site, the North American division serves more than 14 million people in 650 communities “through public-private partnerships with municipalities or governments,” and is involved in the nation’s largest public-private water services partnership in Indianapolis;
• United Water, a subsidiary of France’s Suez Environnement, which serves more than seven million people in 24 states and operates 240 municipal water systems, including three of the nation’s largest contract services operations;
• American Water Works Company, Inc., which was owned by German conglomerate RWE until last November and currently serves 15 million people in 32 states as well as Ontario, Canada; and
• Aqua America, which provides water and wastewater services to approximately three million people in 13 states.

In the U.S., the privatizing trend began in the 1980s, Keesecker said. Initially, most of the deals involved cities paying companies to manage systems for several years.

Over the past several years, however, there’s been a backlash against privatization, Keesecker told Circle of Blue.

“When these giant multinationals first hopped into the market around 2000, they were going for large cities like St. Louis, Atlanta and Stockton,” he said. “And they found in many of these cases either that the deals couldn’t be struck or they failed.”

Atlanta, for example, struck a $400 million, 20-year deal with United Water in 1998. Five years later, the city canceled the agreement because it was dissatisfied with United’s management. The city’s major complaints included a 50 percent cut in staff size that caused a backlog in work orders, and $36,000 in bills to the city for work that was never performed, Keesecker said.

In Fort Wayne, Indiana parts of the city get water from a municipal system while other areas use Aqua Indiana: an Aqua America subsidiary. Complaints from Aqua Indiana customers have spurred the city to begin buying back portions of the Aqua Indiana system and folding them into the city’s service, Keesecker added.

Another setback with privatization are the increased costs.

“The private water companies in the U.S. cost, on average, 80 percent more than public water utilities in providing water,” Keesecker said. “And although private municipal water systems are regulated at the state level, the public service commissions at the state level often rubber-stamp rate increases, and allow companies to make profits, which require dramatic rate increases.”

For example in Indianapolis, which Veolia Water North America cites as a successful partnership, residents are furious over a requested 35-percent rate hike earlier this year. The request comes just three months after the water department won permission to charge a 10.8 percent emergency rate increase.

Veolia officials say they need to make $111 million in improvements over the next two years to maintain the system and meet federal mandates, The Indianapolis Star reported. The company also attributes part of the problem to variable-rate bonds which have seen their rates shoot up during the economic meltdown, and the need for millions in additional debt to get out of it, the paper reported.

With lease deals not as popular as they once were, Keesecker has seen the companies adopt another strategy in recent months.

“The trend that we’ve seen in the Midwest in the last year and a half is more of these water companies are courting cities to buy or lease their water systems, and that’s because the cities are really cash strapped and they could use the influx of money,” he said. ““It’s been spurred largely by the economic crisis…. State budgets are hurting and cities like Milwaukee, for instance, are getting less support from the state, and they have this tremendous asset, which is a wildly successful drinking water system.”

In Milwaukee last spring, the city comptroller floated the idea of leasing the Milwaukee Water Works to a private operator for up to 99 years in exchange for a one-time payment of up to $600 million. The comptroller argued that the payment could be used to create an endowment that would generate $30 million a year, letting the city avoid annual debates over cutting city services or raising taxes.

Milwaukee’s 60- to 99-year lease would have been the first in the country for a system that large. Milwaukee Water Works, which was established in 1871, provides drinking water to the city and 15 other communities in the region.

While city leaders initially authorized the comptroller to explore the possibility, a wave of protest from public employee unions and environmental groups forced the city to back away from the proposal in May.

One of the leaders of that fight was Melissa Scanlan, the founder and senior counsel of Midwest Environmental Advocates. She and others helped organize KPOW (Keep Public Our Water) to fight the proposal.

“People just threw themselves into this issue because water is such a fundamental core of human life, and it really struck a chord in the community,” Scanlan said. “They did back down pretty quickly but there’s always the possibility that this will surface again and be put back on the table.”

Scanlan also argues that water privatization runs counter to the goals of water conservation, since the profit-based motivation of a private company encourages it to sell as much water as it can to create profit for its owners and shareholders rather than preserve the resource. This is a big issue in Great Lakes states like Wisconsin that are subject to the Great Lakes Compact, she said, which requires its member states to adopt water conservation measures.

KPOW is now seeking city passage of a resolution blocking the lease or sale of the Water Works on the grounds that doing so would violate the public trust doctrine, which holds that all waters of the state are held in trust by the government for the use of the public. Milwaukee Alderman Nik Kovak filed a resolution expressing support for the city’s continuing ownership and operation of the Water Works in September; the bill, which has won three co-sponsors since its introduction, is still in committee.

The fight has also reached the Wisconsin statehouse. In October, Rep. Fred Kessler (D-Milwaukee) introduced legislation to ban the sale or lease of Milwaukee Water Works. The bill has been referred to the Assembly Energy and Utilities Committee, which is chaired by Rep. Jim Soletski (D-Green Bay). State Senator Jim Sullivan (D-Wauwatosa) introduced a similar bill in November that would require senate approval of a water lease like the one proposed in Milwaukee.

“In these times of economic crisis, it is important for cities to examine ways to raise revenue, but we must proceed with extreme caution when it comes to natural resources like water,” Sullivan told Food & Water Watch. “Milwaukee should not fall prey to the empty promises of privatization. Water is life, not a commodity to (be) auctioned off to the highest bidder.”

Steve Kellman is a reporter for Circle of Blue. Reach Steve at circleofblue.org/contact

Sources: The Atlanta Business Chronicle, New York Times, Indianapolis Star, Fort Wayne Journal Gazette, Southern Illinoisan