The Corporate Control of Water Takes an Unexpected Twist

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:

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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.