Small Town Overthrows Corporate Giant for Control of Water

The people of Felton, California learned that they had successfully wrested control of their water from the clutches of a giant corporation on Friday, May 30, 2008.

Many of the 3,000 adult residents of the Felton Water District had been organizing for nearly six years to buy the community's water system from California American Water. Cal-Am is a subsidiary of American Water, which, despite an ongoing sell-off, remains under the ownership of German multinational energy and water titan RWE.

Surprisingly, less than a week before an eminent domain trial to decide the value of the water system, the announcement came that the San Lorenzo Valley Water District would pay Cal-Am $10.5 million in cash for the system. Of course, Cal-Am went for the deal to settle the eminent domain suit against it and avoid a jury trial, said Jim Mosher, who heads up the legal committee for Felton FLOW -- Friends of Locally Owned Water.

This is a great victory for the citizens of Felton and should inspire other communities to challenge private water utilities that are extorting huge, unjustified rate increases and failing to protect sensitive watershed properties. The SLV Water District has done an excellent job representing us and we look forward to having them manage the Felton water system."

In addition, the agreement states that Cal-Am will donate the 250 acres of forested watershed land in hopes of getting a tax break. Mosher questions whether the land transfer is a donation, however, since it appears to be an integral part of the deal and the price.

How it all happened

In 2001, American Water purchased Felton's water system, which has been privately owned since the late 1800s, as part of its larger acquisition of Citizen's Utilities. Shortly after that, Essen-based RWE gobbled up American Water.

The trouble started in November 2002 when California American Water ignited furor in the Felton community, nestled amongst coastal redwood trees, with a 74 percent rate hike. In response, the Friends of Locally Owned Water was born and flew into action. FLOW fought to reduce the amount of the rate hike, urged Santa Cruz County to create a public agency to control the water system and opposed the company's plan to merge the Felton and Monterey water districts.

The push for public water in Felton found its first success in July 2005 when FLOW spearheaded passage of Measure W, despite Cal-Am's deep-pocketed opposition. With their lopsided 3-to-1 approval of the $11 million bond issue, residents agreed to higher taxes and authorized the SLV Water District to use the bond proceeds to buy the water system.

The district offered California American $7.6 million, but Cal-Am refused. Its leadership stated, flatly, that the system was not for sale at any price and expressed its determination to oppose all public acquisition efforts so that Felton did not start a domino effect of citizens taking control of their water resources. Felton's petition to the California Public Utilities Commission to approve the proposed public buyout failed after the commission succumbed to heavy CalAm lobbying pressure.

Four months later, RWE announced it would sell its stake in American Water, including the Cal-Am division. The reason was supposedly to focus on European energy investments.

But that likely was just an excuse. Leaked minutes from an RWE board meeting reveal that "the German company was taken aback at the difficulties of turning a profit in the American water market, and that its initial estimates of efficiencies and rate increases were overly optimistic." It also cited "considerable political resistance to privatization of the water sector" as a reason to exit the U.S. water market.

Indeed, after more than two years of delays because of investors running scared, the company finally managed to offer up American Water in an April 2008 initial public stock offering. The results were disappointing: "RWE planned to offer shares for $24-$26, but at the last minute dropped the offering price to $22-$23. That still wasn't enough of a cut and on opening day shares sold at $21.50 and the company only sold 36 percent of its shares...As stock analyst Bill Simpson summed it up: '...this IPO is nothing more than an exit strategy for parent company RWE.'"

Meanwhile, back in Felton, there was no backing down. Its purchase offer brushed off, the community turned to eminent domain to force a buyout. Cal-Am responded by doing all it could to make the system seem more expensive. Its appraisal valued the system at $25 million, far more than Felton's $7. 6 million offer. This was based in large part on Cal-Am's assertion that the 250 acres of watershed land should be valued based on the revenue that would be generated from selling the timber and the land for commercial development, a position the community hotly disputed.

Eminent domain proceedings in California have two parts -- the "right to take" hearing before a judge to determine whether the purchase serves the public interest, and a "valuation" trial in which a jury decides how much the property is worth. In both cases, Cal-Am's legal tactics caused delays and increased expenses for the SLV Water District. Finally, the company conceded the public's right to take the water system and settled the acquisition price without a trial.

"We fought off every one of Cal-Am's tactics to derail the process," Mosher said. "But in the end, our position was completely vindicated."

In their successful six-year crusade for their water, the good people of Felton have helped lead the way for numerous other U.S. communities fighting the forces of corporate control of water.