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Foreign Faucet

Cities that tap private companies to run water systems often are hiring overseas firms. Some find that hard to swallow.

Mahomet, Illinois, is blessed with high-quality drinking water that it pumps straight from beneath the prairie. But like thousands of other communities, the village faces a hefty tab to upgrade its infrastructure to meet new federal rules and ensure an adequate supply of clean water to a growing number of local homes and businesses. Mahomet expanded its water-treatment plant just a decade ago, but the population increased by almost 60 percent during the 1990s. Since tripling the system's capacity could cost $2.5 million, officials were tempted last year when the Illinois-American Water Co. offered to sell Mahomet water from its privately owned system in nearby Champaign.

After all, the U.S. Environmental Protection Agency has been encouraging municipalities to consider partnering with private-sector companies because of the economies of scale and technical expertise they can offer when it comes to replacing crumbling pipes and bringing drinking-water quality into compliance with tightening federal standards. Illinois-American has been in business for a century, and it supplies water to 900,000 people in 124 Illinois cities and towns. But notwithstanding its "mother and apple pie" name, Illinois-American is no longer a hometown water company.

After a series of mergers, New Jersey-based American Water Works now controls Illinois-American. And in January, American Water Works itself was bought by RWE, a German utility conglomerate that turned American Water into a division of its London-based Thames Water Co. subsidiary. The world's third-largest private water and sewage service company, Thames serves 51 million customers in 46 countries. As Mahomet officials are well aware, supplying water to 5,000 residents in the American heartland would hardly be a priority for a multinational operation.

Although Illinois-American's proposed rates may have been the deal- breaker, the German takeover was always there in the background. In conversations with voters, Mahomet village president Jeff Courson says, "you just have the question, 'Do you really want somebody in a foreign country controlling your water rates?'" Ultimately, the board decided by a 3-to-2 vote to expand the village-owned system instead and increase its rates to cover the cost. "It was a decision from the heart more than anything," adds Jason Heid, Mahomet's water supervisor.

Other American municipalities, both large and small, are having similar misgivings. Entrusting a profit-driven company with an indispensable public service has always been a controversial concept. Once organized along community or regional lines, the water services industry in the United States has been consolidating into bigger firms that operate in many states. In the past several years, European-based utility giants have been buying up those companies and bidding agressively for new contracts to run American water systems.

As a result, privatization debates have a new undercurrent: Outsourcing operations may mean handing over the reins not simply to a commercial enterprise but to a business whose executives answer to superiors on the other side of the Atlantic Ocean. "A service as important as water is to urban life should be in public hands. It shouldn't be owned by a foreign company," contends Terry Kohlbuss, director of the Tri-County Regional Planning Commission director in Peoria, Illinois.

Peoria and nearby Pekin have been grumbling about Illinois-American's service for years, and the RWE acquisition has reinforced community leaders' case that city governments should buy the company out and take control of water delivery to their residents. Simultaneously, other cities are signing onto public-private partnerships with multinational firms to operate municipally owned treatment plants and delivery pipes. Some previously unspoken concerns about the global reach of foreign corporations have begun seeping into those privatization debates.


Nevertheless, local officials may have few alternatives to dealing with European-controlled water conglomerates. Reluctant to raise rates, many municipally run systems have deferred replacing rusting pipes and extending water lines to outlying neighborhoods. They've also struggled to come up with money to upgrade treatment plants and monitor for a growing list of regulated contaminants. Cities and counties now face another expensive mandate, to secure water supplies against terrorist attacks. As communities seek partners to share the burdens, the number of water systems that are operated under long-term contracts by private companies has grown from roughly 400 in 1997 to about 1,100 today.

That trend is what's enticed foreign multinationals to establish beachheads in the expanding U.S. market by acquiring American water service companies. The upshot is that Paris-based Suez Lyonnaise des Eaux, the world's largest water services company, treats sewage for Indianapolis, Milwaukee, and Springfield, Massachusetts, and supplies drinking water for Pittsburgh, Hoboken, New Jersey, and Plainfield, Indiana, through its United Water subsidiary. US Filter, owned by the second-largest company, French-based Vivendi Environnement, treats sewage for Oklahoma City and New Orleans, supplies drinking water to Tampa and Indianapolis, and recycles Honolulu's wastewater.

Corporate managers contend--and EPA agrees--that the expert staffs and financial clout of such consolidated water service firms can deliver cleaner water at lower rates than conventional municipal utilities. In a global economy, they add, shifting company headquarters overseas doesn't mean the service they provide will deteriorate. Even after RWE absorbed Illinois-American's parent, "the same folks are out here doing their jobs," says David Baker, the company's Northern Illinois district manager.

Nonetheless, some communities are now concluding that privately run water works don't look like such a good deal. Earlier this year, Atlanta Mayor Shirley Jackson canceled United Water's 20-year contract to run the city's frayed drinking-water system. The company was losing $10 million a year, while residents continued complaining about deteriorating service and contaminated pipes that forced some neighborhoods to boil water for consumption.

Peoria last year won court approval to exercise an option the city wrote into Illinois-American's 1889 franchise that gives municipal government the right to buy the system that delivers Illinois River water to its residents. Ten miles down the road, the town of Pekin is moving to condemn the company's system in that community. A local family owned the firm supplying Pekin's water for years, but complaints grew after they sold it to Illinois-American in 1981. What's more, water rates have climbed to nearly $24 a month for an average Pekin residential customer, nearly $10 more than what public systems charge in nearby communities. Disenchantment peaked when the city fire fighters got put on hold when they called the company's centralized service number for help accessing water to put out a blaze.

Those disputes have been building for years, but the German takeover hasn't enhanced Illinois-American's reputation. In 2000, Pekin voters turned down a ballot measure that would have endorsed taking over the community's water system. But residents gave their consent to a similar initiative last year--after RWE announced it was acquiring American Water Works. As Mayor Dave Tebben declared, "foreign ownership of our natural resource has dramatically shifted the dynamics of the situation."

Elsewhere in the state, communities are up in arms about whopping rate hikes the company is seeking. Illinois-American wants Illinois Commerce Commission consent to charge 22 percent more in Peoria and in the Illinois suburbs around St. Louis. It is seeking even steeper hikes in the northern part of the state--including 39 percent for the 14,000 residents of Streator and 51 percent for Sterling's 6,400 homes--largely to cover expenses the company has incurred to comply with federal drinking-water standards.

Municipal officials agree that water must be kept safe. But Streator City Manager Paul Nicholson suggests the company mismanaged infrastructure improvements, and the backlog has now resulted in a drastic request for higher rates. Meanwhile Illinois-American has been extending water mains to new homes that crop up in surrounding townships, giving rural residents no reason to support annexation by the city. "A community may be at a disadvantage when it doesn't own one of the key utilities that are necessary to serve new homes in unpopulated areas," Nicholson says. As community leaders begin figuring out how to make the local economy more competitive, he adds, "the question has been raised" about whether Streator should take over the Illinois-American system.

Similar doubts are growing among bigger cities. The mayors of Charleston, West Virginia, and the Lexington-Fayette County government in Kentucky are negotiating to buy systems that now are owned and operated by American Water affiliates. The privately owned Indianapolis Water Co. had been supplying Indianapolis with water since 1881. But when the federal government directed the firm's parent corporation to divest its water operations, the city government purchased the system itself for $522 million rather than risk competitive bidding that might drive the price so high that rates would escalate as much as 50 percent.

Rather than run the system, however, Indianapolis last year awarded US Filter a 20-year contract worth more than $1.5 billion to maintain and operate 12 treatment plants, 3,800 miles of mains, and 32,000 fire hydrants. As part of the transaction, the company agreed to freeze rates for five years and promised not to lay employees off for two years. Even Peoria and Pekin, if they succeed in booting Illinois- American out, expect to hire private contractors to run their systems.


Nonetheless, the Ralph Nader-led group Public Citizen, which has close ties to public employee unions, links the Peoria and Pekin battles along with Atlanta's failed privatization partnership as fodder for a campaign against trusting what it depicts as renegade multinational corporations to supply safe and reasonably priced water for communities. Juliette Beck, an organizer in the group's Oakland office, says big water companies are seducing municipal leaders with slick presentations that paint rosy privatization pictures at their national conventions.

Beck has been orchestrating petition drives in Stockton, California, to overturn Mayor Gary Podesto's plan to put the city's water and wastewater systems under private management. In February, the Stockton City Council endorsed the mayor's proposal to grant RWE's Thames Water and an American partner, Operations Management International, a $600 million contract to manage the city's water, sewage and stormwater system. Podesto pushed the deal through two weeks before Stockton residents approved a March 4 ballot initiative that now requires voters to approve any privatization deals the city strikes in the future.

Podesto says the arrangement will save Stockton $175 million for operations and maintenance over the 20-year contract and substantially reduce the cost the city faced to upgrade sewage treatment. "Rates will go up because infrastructure needs to be built, but they would go up more if the city was operating it," the mayor maintains. Podesto scoffs at concerns about dealing with a German-owned partner, noting that "we drink foreign water in bottles all the time."

But in light of California's travails after energy markets were deregulated, most Stockton residents "trust local officials to be more responsive than they do outside private corporations," says former Stockton City Councilor Ann Johnston. Unwilling to support the privatization drive, Morris Allen, the Stockton water director, retired early in December. "Other people have tried this and now they're trying to get out," he says. "The mayor is at the wrong end of the wave."

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