By Mary Bottari on October 21, 2013

While high profile privatizations have dominated the news in recent years, a new trend is quietly emerging -- communities taking public assets back under public control. The trend is most pronounced in the area of water resources. In communities across the country, people are deciding that water is just too precious to subject to the profit motive.

Dollar sign dripping from faucetNo state has seen more of these "reverse" privatizations than California. Today, multiple towns are fighting for-profit firms for control of the public's water. One of those firms is the New Jersey-based for-profit American Water (known as California American Water Co. or Cal Am in California).

On the scenic Monterey Peninsula, a citizen's group called "Public Water Now" makes a compelling case for public control of the peninsula's scarce water resources. Public Water Now alleges that Cal Am's long-term mismanagement of the water resources and failed efforts to secure new water resources have cost ratepayers some $100 million since 2004.

In 1995, a court ordered pumping of the area's primary water source, the Carmel River, to be cut back by 70 percent by 2017. With the deadline looming, Cal Am has failed to secure another source of water. "Cal Am has shown either poor planning, poor management, poor judgment, poor decision-making, or all of the above," says Public Water Now's website. Even though it has failed in its major responsibility to the Monterey Peninsula, the firm has raked in a steady rate of profit from peninsula residents -- 30 cents on the dollar in pretax profits for 2012.

After abandoning two prior plans for establishing desalination facilities, Cal Am has a new proposal for another "desal" plant. The project would depend on a ratepayer surcharge and a public bond offering. This would pass nearly all risks on to ratepayers say critics, but at the end of the day ratepayers would have no ownership stake in the asset.

Some peninsula residents are saying enough. They want public control of the public's scarce water resources.

When it Comes to Precious Water, Is it Better to Be a Renter or an Owner?

In the United States, 86 percent of Americans receive their water services from a publicly owned and operated utility. But for-profit firms have made inroads in recent decades and see public water as a new profit center. In 2011, Citigroup economist Willem Buiter predicted that "water as an asset class will, in my view, become eventually the single most important physical-commodity based asset class, dwarfing oil, copper, agricultural commodities and precious metals."

"Any solution to the Monterey Peninsula's serious water problem demands long term planning, long term investment and a consistent public planning process unfettered by short term demands for shareholder profitability. Public ownership and public control would make the whole process easier and remove conflicts of interest," Wenonah Hauter, Executive Director of the non-profit watchdog group Food & Water Watch, told CMD.

Cal Am is "so strongly driven by pure profit that they will simply ignore more economical options," says Ron Cohen. Cohen, a successful software executive, founded the nonprofit advocacy organization Public Water Now. The group studied the situation and drafted an initiative for voters that would require the Monterey Peninsula Water Management District to pursue a public purchase of Cal Am's local assets.

"You just have to ask yourself," Cohen said, "do you want to be a renter for the rest of your life, and for generations to come, or do you want to be an owner?"

The initiative reads: "The voters of the District assert that the District should, as soon as practicable and to the extent permitted by law, pursue the acquisition of Cal Am's water system assets and infrastructure in order to deliver maximum value to ratepayers in perpetuity. Such public ownership of the water system not only will remove Cal Am's current for-profit, investor-driven bias, but will also eliminate the excessive fees, costly procedures, and burdensome jurisdictional control of the CPUC over water service on the Monterey Peninsula."

The issue will be put to the voters on the June 2014 ballot.

Cal Am Prepping for Battle

But it won't be smooth sailing for proponents of public water. Cal Am has made a lot of money on the peninsula and is not likely to go down without a fight. It successfully beat back a previous referendum on public water.

In November 2005, groups mobilized behind "Measure W," a question on the ballot that would have simply authorized a study to assess the process for a community buy-out of the water utility. To defeat the measure, Cal Am hired BNA Communication, which used direct mail, field communications, and television, radio, and newspaper advertisements to fight back. Measure W was defeated with 62 percent voting no. A judge later allowed Cal Am to pass the costs of its "public outreach" -- $1,353,831 -- onto its customers through new surcharges.

This time around, it will be different, says Cohen. First, while the previous initiative authorized only an expensive study, "the new initiative maps a direct line from passage to acquisition," says Cohen. Second, Public Water Now conducted a poll showing that two-thirds of residents were inclined to support the initiative. The group has teams geared up to go door-to-door to make the case for public control, and they are already past the halfway point on signature collection. But the biggest difference between 2005 and today is that "we have had eight more years of Cal Am and they have failed on two more occasions to solve the peninsula's water problems," says Cohen.

Scare tactics will be the company's preferred rebuttal. Cal Am representative Catherine Bowie told the local news that any public takeover will result in an eminent domain proceeding because Cal Am's assets are "not for sale." She warned that any eminent domain proceeding would be lengthy, contentious, and costly.

Eminent domain is a legal tool used by governments to purchase private property for a public purpose, such as for the construction of power lines. If homeowners don't want to sell, the government can still legally secure the property as long as it pays "fair market value."

But the threat does not bother Cohen. He points to Felton, California. In 2001, Cal Am purchased Felton's water system and a year later proposed a 74 percent rate hike. In response, residents formed an action group and petitioned Santa Cruz County to establish a public agency to exercise control over the water system. In July 2005, Felton residents voted 3-to-1 in favor of issuing $11 million in bonds and raising taxes in order to buy their water system back. The water district offered Cal Am $7.6 million, its appraised value, but the company refused, demanding $25 million. A week before the eminent domain proceeding was set to begin, however, the company settled the case for $10.5 million.

Since then, the community has steadily invested in the water system, and homeowners have saved about 30 percent on their water bills, says Food & Water Watch.

Trend Towards Public Ownership or "Municipalization"

In case you think the Monterey struggle is quixotic, you should know there is a bit of a trend in successful public takeovers or "municipalizations."

Ron Cohen explains that most of these municipalizations have to do with three issues: local control, better customer service, and better prices:

  • In 2007, the city of O'Fallon, Missouri was considering selling its public water system to American Water, but delayed after public protest. In 2009, after more than two decades of contracting with private companies to run the system, the city opted for complete public provision of water. It saved 15 percent by operating the systems with public workers instead of private contractors.
  • In 2008, citizens in the town of Cave Creek, Arizona took control of their water system, which had always been privately owned and operated.
  • In 2001, Montara, California residents voted four-to-one in favor of a public takeover of the water system. At first, Cal Am refused to sell, but the California Public Utilities Commission and Montara Water & Sanitary jointly purchased the system in August 2003.

But there is a fourth reason as well. When Public Water Now polled peninsula residents on how they felt about a public takeover, "their number one reason was to keep the money in the local community. In the next 10 years, $300 million will be sucked off the peninsula and sent to New Jersey never to be recovered," contends Cohen.

With a public water system, any revenues raised are not forked over to distant shareholders, but are reinvested into the public system for the long term. And any desalination facility that is built will be owned and controlled by the members of the community themselves.

For the first time on the Monterey Peninsula, citizens will be owners and not renters.


This is the latest in a series of corporate profiles on the privatizers and profiteers selling out our democracy. To see the full corporate rap sheet on American Water, visit OutsourcingAmericaExposed.org and follow the conversation on Twitter at #outsourcingamerica. To learn more about "taking back the tap," check out Food & Water Watch's Municipalization Guide.

Mary Bottari

Mary Bottari, CMD's Deputy Director, is an experienced policy wonk and consumer advocate who has served as a senior analyst on trade.

Comments

As a water utility professional who represents 2,800 investor-owned water utility employees in California, I was troubled by the inaccuracies in this blog post, especially since the segment of the water utility industry it was denigrating – investor-owned water companies (IOWCs) – is leading the industry in making the necessary infrastructure investments to ensure that water moves safely from its source to your tap.

The old expression, “You may be entitled to your own opinion, but not to your own facts,” is still true, and here are a few facts to consider:

*Private-public partnerships continue to thrive in the United States. More than 2,000 facilities from New York to California are operated in mutually beneficial public-private partnership contract arrangements. These partnerships allow municipalities to maintain a critical role in their water services, yet they take advantage of the extensive benefits that come with a private operator. And these contracts are renewed at an impressive rate — more than 93 percent — precisely because of this mutually beneficial arrangement.

*In communities everywhere, people are realizing that the essential infrastructure of pipes, wells, reservoirs and treatment facilities must be protected. Professional water companies, whose sole business is to provide safe, reliable drinking water, have an outstanding track record for doing this.

*In California, Public Water Now has made no compelling case for “public control of the [Monterey] Peninsula’s scarce water sources”. The local water utility, California American Water (CAW), is an integral part of the community and has owned and managed the region’s water system responsibly for nearly 50 years. The “failed efforts to secure new water resources” alluded to in the blog are the result of individuals trying to derail CAW’s efforts to secure a long-term water supply. The time and money wasted in the original desalination project stemmed from these delays and the inability of the public partners to effectively manage the development of this large-scale infrastructure project, not CAW.

*Moreover, the assertion that CAW makes 30 cents profit on every dollar collected from ratepayers is inaccurate. All IOWCs are subject to close regulation and constant scrutiny by a state regulator (and usually an independent consumer advocate) that carefully balances customer and utility interests. CAW’s rate of return (profit) for the period in question was 7.93 percent, a far cry from 30 percent. Utility profit is the opportunity to earn a regulated rate of return on only the capital invested in the water infrastructure. The way to look at utility “profit” is to compare it with paying back the interest on a loan, except in this case the creditors are shareholders who own stock in the company and receive dividends instead of interest.

It's also important to understand the true story in Felton, Calif. Consider this:

*Even though the original amount proclaimed by takeover proponents for the Felton system was $2 million, the final purchase amount was $13.4 million, more than six times what takeover supporters promised the community. That amount was spread over Felton’s 1,300 customers, who obligated themselves to 30 years of higher property taxes.

*Just before the eminent domain case went to trial, the water system was sold to a neighboring public water district and the guarantee of lower rates evaporated almost immediately. Shortly after the takeover, the new water provider announced plans for substantial rate increases. Customers got a 12 percent increase in 2009, an 8 percent increase in 2010 and a 15 percent increase in 2011. Each year’s rate increase was based on the previous year’s rates, with the compounding effect making the hit even more significant.

*The increases haven’t stopped. This past summer, five more years of compounded rate increases were proposed: 16 percent in 2014, 13 percent in 2015, 8 percent in 2016 and 9 percent in 2017 and 2018. A $50 monthly water bill in 2008 will become a $117 bill, plus 20 years of paying an additional $41 per month in property taxes. In short, government takeovers don’t do customers any favors.

Finally, it’s important to put the notion of “local control” into perspective. The Monterey water system is managed locally by a group of 85 expert water professionals who have lived on the Monterey Peninsula for generations. CAW’s District Manager there has years of experience in water utility operations, and he is credited with helping turn around a troubled desalination plant in another part of the country. This level of expertise and experience is extremely valuable to Monterey water customers.

The quote in the blog about the new desalination plant that $300 million “will be sucked off the peninsula and sent to New Jersey never to be recovered” is false. In fact, the $300 million for the new water supply project will stay on the Peninsula, as does most of the money CAW receives in revenues from customers.

A more accurate assessment of CAW’s “local control” comes from the mayor of Carmel, Calif., Jason Burnett, who was described October 24th on Central Coast Public Radio KUSP* as “one of the key players in crafting a water solution” on the Monterey Peninsula. Although not a big fan of desalination, Burnett said, “Desal should really be your last option because it has a larger environmental imprint and it’s more expensive. So I am not an advocate of desal per se. But when you’ve exhausted all your options, it is what is left.”

And Burnett says CAW’s new desalination project meets the four criteria [he] and his fellow mayors insisted on in exchange for their support. “First of all, we said project economics must be competitive,” he said to KUSP. “Second, we said a project must have suitable public governance, public accountability, and public transparency. Third, we said a project must have a clear path towards being permitted and built as near as possible to the cease-and-desist order [a 2016 deadline imposed by the State Water Resources Control Board]. [A]nd fourth, we said a project must have contingency plans because failure is not an option.”

Clearly, a partnership between CAW, Monterey Peninsula residents and community leaders that works to achieve these four goals is the best solution for the region. An expensive, hostile government takeover is more likely the worst solution.