The Corporate Control of Water Takes an Unexpected Twist

By Jon Keesecker, AlterNet. Posted September 9, 2008.

In one U.S. city, a mayor is putting the city's water systems up for
sale in exchange for money for eduction.

During an otherwise unexceptional State of the City address in
February 2008, Mayor Donald Plusquellic put before the residents of
Akron, Ohio, a proposal to sell the city's sewer system. The
still-nascent plan, news even to some in the mayor's administration,
involved handing over the city's system to a private company in return
to for a roughly $200 million fee.

In the United States, about 85 percent of people on community water
systems get their water from a publicly owned utility. But in recent
years, as federal funding for water infrastructure has fallen,
corporations have tried to buy up or privately manage more and more
municipal water systems. And the result for communities has been
higher rates and lower services.

However, in the case of Akron, things are shaping up a little
differently. The purpose of the transfer, the mayor explained, is not
so much to improve system operations -- the finances of the utility
are in relatively good standing -- but rather to finance a scholarship
program for Akron youth, modeled after a program in Kalamazoo, Mich.
The Kalamazoo program, unveiled in 2005, was funded not by the sale of
a city asset but by anonymous, private donors.

In the weeks following the speech, Plusquellic defended his proposal
in radio, television and newspaper interviews. Despite blanket
enthusiasm around the goal of funding higher education, the response
of Akron residents to privatizing the water system ranged from
apprehension to outright skepticism.

On radio show phone calls and in comments on the Web site of the Akron
Beacon Journal, doubts about the plan multiplied. While few doubted
the value of subsidizing higher education, many wondered: Would the
jobs of more than 100 sewer utility employees be secure under a
private operator? Could privatization lead to enormous rate increases
like those sought by privately owned Water & Sewer LLC in nearby
Richfield? Most importantly, what oversight would the public retain,
and might the plan open the door to privatization of other public
services? Some even worried that the scholarship funds might be
siphoned off for other purposes.

By early March, community activists and the Northeast Ohio American
Friends Service Committee were drawing 80 to 200 participants to
public forums to discuss the mayor's plan. Their concerns focused on
the prospect of rate increases, staff cuts, neglected capitol
improvements and poorer service, all of which had been suffered in
other privately operated water systems, as well as the ability of
Plusquellic -- a skilled politician and 20-year incumbent -- to push
through projects without bona fide public input. Many also worried
that the mayor's will could become law before being subjected to a
thorough public vetting process.

Why Akron Residents Have Reason for Concern

It is uncertain whether the citizens of Akron, even Plusquellic, knew
the debate the city would soon enter when privatizing the city's water
system was first proposed in early February.

A historically minor -- though not entirely absent -- participant in
U.S. water service, private water companies have attempted major
inroads into the U.S. water market in the past 10 years.

Decades of cuts in federal assistance to public water utilities,
coupled with a 1997 tax code change encouraging privatization, laid
the groundwork for the entry of multinationals into the U.S. market in
the late 1990s. Major water companies like Paris-based Veolia
Environment and Suez Environment quickly seized the opportunity to
purchase domestic water companies and expand into new markets.

The result: a slew of large privatization proposals in major U.S.
cities like Milwaukee (1998), Atlanta (1999) and New Orleans (2000).
The same companies initiated a concurrent public relations campaign
involving fiscal sponsorship of bodies like the U.S. Conference of
Mayors (to which Plusquellic was elected president in 2004). Credit it
to a certain discomfort about handing a private company the keys to
life's most precious resource; it is no wonder that the privatization
push quickly inspired a backlash among U.S. consumers.

In 2003, just four years into a 20-year contract, Suez was booted from
Atlanta for poor maintenance and failure to achieve expected cost
savings. Two years later, efforts to privatize New Orleans' water
system collapsed and nearly a dozen communities were engaged in fierce
public buybacks of water utilities acquired by Germany-based RWE after
its purchase of American Water in 2001.

Growing awareness of the risks of water privatization continues to
blacken the eye of major water multinationals in the United States and
abroad. In April, RWE ended its brief stint in the U.S. water market
with a less-than-spectacular American Water IPO geared toward
divesting the company. In June, the world's two largest water
companies -- Veolia Environment and Suez Environment -- were ousted
from their own backyards (both are Paris-based) when the city decided
not to renew those contracts. The decision was a stinging rebuke to
the private water giants.

But the most informative story for Akronites is that of Stockton,
Calif., a city of roughly the same size. In 2003, Stockton Mayor Gary
Podesto successfully pushed a $600 million contract with OMI-Thames to
operate the city's water utilities for 20 years. Community opposition
to the contract, led by a local citizens coalition, had spawned a
vigorous campaign for a voter initiative that would subject all water
privatization contracts over $5 million to a public vote. But in
February of 2003, two short weeks before the initiative was set to hit
the ballot, the Stockton City Council chose to expedite the contract
process and take up the mayor's proposal. In a City Hall packed to the
doors, the council voted 4-3 to accept the contract, delivering a
defeat to the citizens coalition. Two weeks later, the initiative
would pass with a 60 percent margin, but it was too late.

In Stockton, the rush to beat the initiative would eventually doom the
water contract. In March of this year, the City of Stockton regained
control of its water utility after a court determined it had failed to
adequately complete an environmental impact statement.

Today, a similar risk faces Akron. But there is evidence that
Akronites have learned from other communities, especially Stockton,
whose drama was the subject of the 2004 film (and later book)
"Thirst".

In the film, 65-year-old orthodontist and Stockton resident Dale
Stocking offers the following advice:

What I'm telling people is when you hear the first indication toward
privatization, start a community. Start a grassroots activity. And if
it appears you're being railroaded into something, or a small group is
in control of an issue, then the citizens immediately have to move to
an initiative to require public participation and a public vote.

The residents of Akron took the advice very seriously. On May 3, local
labor, faith and community groups -- notably AFSCME Ohio Council 8,
which represents many of the sewer workers whose jobs would be
impacted -- formed a coalition under the name Citizens to Save Our
Sewers and Water (Citizens SOS) to launch a voter initiative to amend
the city's charter. Stated simply, the amendment would require that
any action by the mayor or City Council to sell or lease a city
utility be approved by a majority of voters in Akron. Within six
weeks, Citizens SOS collected more than twice the needed signatures,
and on Aug. 18 the initiative was ordered to the November ballot.

A New, Riskier Model of Water Privatization

While Akron and Stockton exhibit some distinct parallels, and Akron
stands to learn much from that Northern California privatization
failure, Akronites face much more than a simple replay of that earlier
drama. With even more moving parts, their story is in some ways even
more epic and could offer a new framework for viewing the
privatization of local water systems.

For starters, the contract proposed by Plusquellic appears to be the
first of its kind in the United States. Most cities of Akron's size
that have privatized their water systems have pursued operation and
maintenance contracts wherein the city pays the private company to run
the water system. However, in hopes of drawing funds for a scholarship
program, the mayor has proposed signing a lease contract whereby a
private company would pay money to the city in return for operation
responsibilities and any profits made. With advocates of the plan
pointing to the privatization of the Chicago Skyway and Indiana Toll
Road and as precursors, Akron stands to be the first large U.S. city
to attempt a contract of this type for water service. However, such
arguments fail to recognize the notably different businesses of
highway and wastewater management and upkeep.

The Chicago Skyway and Indiana Toll Road leases are themselves hardly
without detractors. Public disapproval of the toll road deal was
2-to-1 at the time the deal was penned. Still relatively experimental,
the skyway and the toll road leases -- of 99 and 75 years respectively
-- have raised concerns about the impact of lengthy leases on rates
and usage. To ensure the Indiana Toll Road lease would stick, shortly
before that deal was struck the state nearly doubled tolls for cars,
the first increase in 20 years. A Business Week article last month
estimated that car tolls on the Chicago Skyway could rise from $2 to
$5 between 2005 and 2017.

A second noteworthy element of the Akron episode is the developing
role of investment banks in promoting the privatization of U.S. water
systems. As the unavoidable improvement of water infrastructure proves
an undeniable opportunity for investors burned by the current credit
crisis, major financial players like Morgan Stanley and Goldman Sachs
have lent the weight of their massive financial resources to the
privatization of water systems. In a measure certain to introduce new
elements of risk into the business of water delivery, these banks have
in recent years established and begun managing funds for investors
interested in throwing billions of dollars at the privatization of
water infrastructure.

Equally as important, in Akron and elsewhere, investment banks are at
the same time brokering privatization deals, lubricating the
privatization process as it passes through the corridors of City Hall.
According to a June article in the trade publication The Bond Buyer,
Akron recently retained Morgan Stanley as a financial adviser for the
deal. Goldman Sachs performed a similar function in the privatization
of the Indiana Toll Road and the Chicago Skyway -- in the latter
instance nabbing $9 million in advisory fees, according to a January
article in Mother Jones.

Together, these unique elements throw the Akron proposal into a new
category of privatization deals rife with new risks, both for water
utilities and the consumers they serve. And as Citizens SOS has
pointed out, these elements provide even more reason for a measured
and rigorous public vetting process.

Upsetting the Political Establishment

As the citizens coalition in Akron prepares to campaign for its
initiative in November, the challenge it faces is formidable. In
addition to the muscle provided by Morgan Stanley, Plusquellic enters
his third decade in office with a keen ability to marginalize his
political opponents -- he has already attempted to brand them "the
born-against" -- and few on the City Council are willing to oppose
him.

As in Stockton, there are indications that the privatization plan may
be on a fast track. In late July, after only two short months, an
"advisory group" assembled by the mayor to study his proposal returned
a favorable opinion of the deal. Some in the citizens coalition worry
that the group's blanket endorsement, issued without an actual
contact, may signal a go-ahead for the mayor to cut a deal in advance
of the November ballot initiative.

Meanwhile, the mayor has also lobbied the City Council to send his own
proposal to ballot this fall. The mayor's proposal -- outlining only
abstractly his privatization plan -- asks voters to pre-approve the
privatization of Akron's sewer system. The proposal will appear on the
same ballot as the Citizens SOS initiative and, if approved, could
arguably pre-empt its effects.

But if the odds seem stacked against Citizens SOS and those who would
slow the political and economic machinery bent on privatization, the
end to this story is far from written. In 1998, a coalition of much
the same composition passed Akron's first and only successful ballot
initiative. Against the will of the mayor, and with the support of
only two of 13 council members, voters decided to reform campaign
finance in Akron. With one ballot victory under its belt, and a model
in the efforts of Stockton residents to retain public control of their
water utility, Citizens SOS could once again upset the entrenched
political establishment in Akron.

And while no issue boils down to a single ballot initiative, a victory
for the citizens' coalition in Akron could prove to be yet another
stake in the heart of water profiteers. On the heals of the
re-municipalization of Paris' utilities, the poor American Water IPO,
and the decision in Stockton, a victory in Akron could quickly become
the next benchmark in a public backlash against the corporate control
of water.