Fact Pack

The Meaning of Privatization

The term “privatization” covers a wide spectrum of water utility operations, management, and ownership arrangements.(1) There have been at least three models of water privatization:(1)

• “Outsourcing” means both private contracting for water utility plant operation and maintenance (O&M) and private provision of various services and supplies, such as laboratory work, meter reading, and supplying chemicals.
• “Design, build, and operate (DBO)” means negotiating a contract with a private firm for coupling design and construction services with comprehensive operating agreements for new, expanded, or upgraded facilities.
• “Asset sale” means the sale of government-owned water/wastewater assets to private water companies.

In the United States, the contracting of O&M to a private provider has been more common than the sale of utility assets to private companies. No major U.S. city has sold its utility assets in recent decades, although some smaller water utilities have done so.(1)

Implications of Privatization of Water Utilities

Here are examples where privatized water utilities have posed risks of rate hikes, negative economic impacts, inadequate customer service, and harm to natural resources.

Rate Hikes

Hingham and Hull, Massachusetts

Massachusetts-American, an American Water Works subsidiary, more than doubled water rates over a five-year period, claiming the increase was needed to build a new water treatment facility. There is evidence, however, that the company inflated the costs of the new facility to increase its profits.(2)

Huber Heights, Ohio

In 1993, American Water Works purchased Ohio Suburban Water, a small outfit that provided water for 40,000 customers in Huber Heights and parts of the Mad River Township. The city opposed the sale, concerned that the company would raise rates and extend service to areas beyond the city limits without annexation, thus impairing the city’s ability to grow. The city’s fears soon materialized – the company increased its rates by 30 percent. At the same time the company moved to contract with Industrial Water to deliver up to 2 million gallons of Huber Heights’ water a day to the Wiley Industrial Park, located outside the city.(2)

Pekin, Illinois

In 1982, Illinois-American, another subsidiary of American Water Works, acquired Pekin’s water system from a local private owner. In the 18 years that followed, rates increased by 204 percent. At the same time, the company failed to keep infrastructure up-to-date. The company’s behavior negatively impacted the city’s economic growth and added to its expenses.(2)

Negative Economic Impacts

One of the main arguments for privatization of water systems is that it will save municipalities millions of dollars. For example, the Mayor of Stockton, California, a proponent of privatization, claims that the city’s 20-year, $600-million deal with OMI-Thames Water, which went into effect on August 1, 2003, will save the city as much as $97 million compared to continued public utility operation. Several studies suggest that this may not be true. A study by the Pacific Institute finds that Stockton stands to lose $1.7 million over the life of the deal.(3) According to Public Citizen, it is also possible that Stockton, like other cites where Thames and OMI have operated, will face higher utility rates due to additional charges, change orders, automatic cost-of-living increases and independent audits.(4) However, none of this takes into account the substantial cost of preparing for privatization. Public Citizen estimates that the minimum cost of feasibility studies, evaluating bids, negotiating contracts, and severance pay to municipal workers was $4.9 million between 2000 and the start of the contract in 2003. This does not include the thousands of hours that city staff spent on the issue, nor does it include the costs of negotiations with disgruntled public employee unions facing privatization of their jobs.(5)

Inadequate Customer Service

In January 1999, the city of Atlanta, Georgia, entered into a 20-year contract with United Water Resources Inc. to run its drinking water system. On January 24, 2003, because hundreds of residents had complained of brown water and poor service since the city agreed to the privatization contract, Atlanta terminated its contract with United Water.(6)(7) According to a letter from the state Department of Transportation, United Water failed to repair a recurring leak that had been a problem for at least two years. They did not make the repairs until the state threatened to hire a contractor to fix the problem and to charge United Water for the work.(8)

Harm to Natural Resources

In Connecticut, since the English water company, Kelda Group of Leeds, announced its intent to purchase Aquarion, parent company of local water utility BHC, there has been great concern for the fate of BHC’s nearly 19,000 acres of watershed land.(9) As part of its development plans, Kelda Group sought to sell off certain undeveloped watershed areas deemed excess to its needs. The affected communities fought the proposed sales, forced the company to declare a three-year moratorium on the proposed sales, and then obtained state assistance to purchase the land directly for conservation.(10)

Overview of Privatization of Water Utilities in the U.S.

• Historically, about half of U.S. water systems were privately owned. That number decreased after World War I due to the availability of government financing. According to the National Association of Water Companies, the proportion of water services in the United States provided by private water companies, whether measured by customers served or volume of water handled, has remained close to 15 percent since World War II.(1)
• In 1995, private- or investor-owned water supply utilities accounted for about 14 percent of total water revenues and for about 11 percent of total water system assets in the United States.(1)
• While municipal water in the United States has been traditionally viewed as a public resource, private management and ownership are on the upswing, particularly by international companies. The market is now estimated at $2.5 billion per year.(11) The French and German conglomerates have been expanding the market of water management services in the United States.(7)

* Ancillary systems deliver drinking water as an adjunct to their primary business (e.g., mobile home parks, retirement homes).

Corporate Players

• The European companies that specialize in the privatization of water services have bought America’s largest private water utilities.(12) United Water Resources was purchased in 2000 by Paris-based Suez, the world’s largest water company. Vivendi, the second-largest French water giant, bought U.S. Filter in 1999 and became a member of the powerful U.S. Coalition of Service Industries through its subsidiary, U.S. Filter. On January 10, 2003, RWE, a German utility conglomerate, purchased American Water Works, which serves 15 million people in 27 states and three Canadian provinces and is the largest publicly-traded water company in the United States.(7)
• European-based utility giants have been bidding aggressively for new contracts to run American water systems. American Water Works, bought by RWE, now controls Illinois-American Water Co. U.S. Filter, owned by Vivendi, treats sewage for Oklahoma City and New Orleans, supplies drinking water to Tampa and Indianapolis, and recycles Honolulu’s wastewater. Suez 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.(6)
• Private water companies are pushing for legislation to require cash-poor municipal governments to consider privatizing their waterworks in exchange for federal money.(12) From 1995 through 1998, the water utility industry, its employees, and their political action committees, spent less than $500,000 on campaign contributions. But in the last two election cycles from 1999 to 2002, campaign spending more than tripled to roughly $1.5 million. More than half of the sector’s campaign spending came from two large New Jersey-based companies, United Water and American Water Works, both of which are owned by foreign private water companies.(7)

Federal Trend Toward Privatization

• Both the Clinton and Bush administrations have asked for less federal regulation in deference to more state independence, and states have become more comfortable in outsourcing to the private sector certain activities that were once wholly the province of municipal government.(10)
• In 1996, the U.S. Environmental Protection Agency (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.(7)
• In 1997, the Internal Revenue Service (IRS) extended the privatization contract limits to 20 years, which encouraged private water companies to begin expanding their operations in the United States.(7) Liberalization of federal tax laws has helped encourage private participation in the operation of publicly-owned plants that were funded by public bonds or grants.(1) Industry representatives are now pushing for even more incentives to use the tax code to increase privatization activity, especially in the water area.(10)

State Trend Toward Privatization

• From 1988 to 1997, the rate of privatization in the U.S. increased by more than half. In the name of smaller government, states will likely consider numerous privatization schemes in the next few years.(14)
• Reluctant to raise rates, local officials seek private partners to share the financial burdens of upgrading treatment plants and monitoring for a growing list of regulated contaminants.(6)
• Cities have viewed privatization as an option for many years. 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 (IRS) 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.(7)

Long-Term Water Contracts and State Actions

The number of water systems that are operated under long-term contracts by private companies has grown from approximately 400 in 1997 to about 1,100 today.(6) Urban utilities can now enter into contracts of up to 20 years for the operation of such systems under liberalized federal tax laws.(1) Vivendi and Suez secured 20-year, billion-dollar contracts in some of America’s largest cities, including Atlanta and Indianapolis. Cities from Camden, New Jersey, to Stockton, California, also have contracted or are looking to contract with these companies.(7)

* The contract was terminated on January 24, 2003.

Phoenix, Arizona

In July 2003, the city of Phoenix voted to award American Water Services, a subsidiary of the German water company RWE, a $336-million contract to design, build, and operate a water treatment facility on the shore of Lake Pleasant. The move came after Earth Tech Inc. pulled out of the bidding because it could not produce a $20-million performance and payment bond.(17) Earth Tech is a subsidiary of Bermuda-based Tyco International, whose former top officials face charges of tax evasion, securities fraud, and other financial improprieties.(18)

Stockton, California

In February 2003, the Stockton City Council approved a 20-year, $600-million contract with OMI-Thames Water for the operation and maintenance of the city’s water, wastewater, and stormwater utilities. However, voters in Stockton passed Measure F in the March 4, 2003, special election with 60 percent of the vote, which requires voter approval for any contract over $5 million related to their municipal water utility. To overturn the city council’s decision, Stockton voters collected 11,700 petition signatures for the ballot initiative on the privatization issue.(19) Despite their efforts, OMI-Thames began operating Stockton’s water utilities in August 2003.

Atlanta, Georgia

In 1999, Atlanta signed a 20-year, $20.8 million deal with United Water. At the time, this was the nation’s largest public-private partnership contract. But Mayor Shirley Franklin, who took office after the deal was signed, canceled the contract on January 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 had failed to collect millions of dollars in unpaid bills.(7)

Pekin, Illinois

In 2001, voters in Pekin, Illinois, consented to a ballot measure that would have endorsed taking over the community’s water system from Illinois-American. Pekin citizens began the buyout campaign when RWE announced it was acquiring American Water Works, the parent company of Illinois-American. In spite of steadily increasing rates, American Water Works had failed to provide quality service; fire hydrants had not even been kept in working order.(6)(7)

Peoria, Illinois

In 2002, Peoria 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. Officials in Peoria contend the water company overcharges for its service. Peoria as well as Pekin has some of the highest water rates in the state.(6)(7)

Indianapolis, Indiana

In 2001, the Indianapolis government purchased the Indianapolis Water Company, a private corporation that had served the city for 131 years. The $522 million deal was struck when the federal government directed the firm’s parent company to divest its water operations. In April 2002, however, Indianapolis awarded Vivendi’s U.S. Filter a 20-year, $1.5 billion contract to maintain and operate its treatment plants, which, at the time, was the nation’s largest management contract. As part of the transaction, the company agreed to freeze rates for five years and promised not to lay off employees for two years.(6)

Lexington-Fayette County, Kentucky

In July 2003, the Lexington-Fayette Urban County Council voted to begin condemnation proceedings to acquire the local water utility, Kentucky-American Water Company. In 2002, a company that falls under the umbrella of RWE had bought Kentucky-American for $8.6 billion. Condemnation is a legal process that would compel Kentucky-American to sell itself to the city. The price would be determined by a jury. Lexington, with a population of about 260,000, is thought to be the largest city in recent years to consider condemnation proceedings against a local water utility.(20)

New Orleans, Louisiana

In October 2002, 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. U.S. Filter 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, which is a major source of pollution.(7)