Low rates, needed repairs lure 'big water' to Uncle Sam's plumbing

It was as if someone tugged at a thread that long weekend in November, split the nation's seam and exposed a nasty wound in its guts.

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 US 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 US 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 ofPekin, 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 fromCamden, 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, Maryland, 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 anti-privatization 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 and 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, he said, to handle capital projects.

"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, Illinois, 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, 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.

ICIJ researcher Daniel Politi contributed to this report.

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