Posted on 11-2-2003

Dis-United Water
By Douglas Jehl, NYT, 10 Jan03

Ed. New Zealand cities have been copying the US, the below is timely
warning of impending reversals of privatisation in water supply.


Privatization has hit the water sector, which has remained mostly the
bastion of public utilities. Over the last five years, hundreds of American
communities, including Indianapolis, Milwaukee and Gary, Ind., have hired
private companies to manage their waterworks, serving about one in 20
Americans.

The main reason is that the cities are facing enormous costs to repair
aging sewer pipes, treatment plants and other water infrastructure. Federal
officials say the total cost of repairs could outstrip current spending by
more than $500 billion in the next 20 years. The utilities' hope has been
that partnerships with private companies could generate savings and provide
access to capital to help cover such staggering bills.

But a cautionary tale has emerged here in Atlanta, where the largest water
privatization deal collapsed in January. Instead of public savings and
private profit, a deal reached in 1999 between Atlanta and United Water
resulted in bitter disappointments for all sides, not least of all
consumers. Atlanta is now retaking control of a system that United Water
was to have managed until 2019.

"This city had a motto for years, and it went something like `Atlanta grows
where water goes,' " said Jack Ravan, the city's commissioner of watershed
management. "I think we've learned enough to know that we'd prefer to see
the city in charge of that destiny."

The decision, in many ways, takes Atlanta back to square one. It will have
a publicly controlled system that, on paper at least, will be more costly
to ratepayers than the one it replaces. The arrangement offers no clear way
to pay for extensive water-system repairs, estimated to cost $800 million
over the next five years. (A separate bill to upgrade the city's sewers
could exceed $3 billion.)

But Atlanta officials, along with customers like Gordon Certain, the head
of a local neighborhood association, say almost any change seems preferable
to existing service they call poor, unresponsive and fraught with
breakdowns, including an epidemic of water-main breaks and occasional "boil
only" alerts caused by brown water pouring from city taps.

"Is it possible to have private water work right?" Mr. Certain asked. "I'm
sure it is. But if you have a political problem in your city, you can vote
in a new administration. If you have a private company with a long-term
contract, and they're the source of your problems, then it gets a lot more
difficult."

The breakup comes as the question of privatized water is generating
increased attention around the country, with advocacy groups like Public
Citizen waging campaigns against the proposed deals. And while water
privatization advocates describe the Atlanta failure as an aberration, all
sides say that it is likely to weigh heavily in places like Stockton,
Calif., which is considering whether to go down a similar path.

"This is a huge setback for privatization, and it's going to have to give
both cities and companies pause," said Dr. Peter H. Gleick, president of
the Pacific Institute, a nonpartisan environmental research organization in
Oakland, Calif., that has written extensively about the risks and benefits
of water privatization.

United Water, a subsidiary of the giant French company Suez, has
acknowledged problems with its management of the Atlanta system. But it has
also said it was stuck with trying to run a system in unexpected disrepair,
while losing at least $10 million annually under a $22 million-a-year
contract that the city refused to renegotiate. "It was important to
recognize reality in Atlanta," Michael Chesser, United Water's chairman and
chief executive, said of his company's consenting to the breakup. Still,
United Water, one of the country's two biggest private water companies, has
contracts to operate more than 100 other municipal systems, and Mr. Chesser
said he expected that number to grow. "This is a market with a huge
potential," he said.

It was Atlanta's new mayor, Shirley Franklin, who forced an end to the
partnership, demanding that United Water quit or be fired. But in
announcing an end to the partnership in Atlanta on Jan. 24, Mr. Chesser and
Ms. Franklin said each side had recognized that continuing the deal was in
neither party's interest.

Across the country, 94 percent of water systems are publicly controlled,
said William G. Reinhardt, editor of Public Works Financing, the leading
trade journal covering the industry. Most are owned and operated by
municipalities, in what remains the most fragmented of any American
utility, divided into roughly 5,000 different pieces.

The number of publicly owned systems that, like Atlanta's, are operated
under long-term contracts by private companies has increased to about
1,100, from about 400 in 1997. "It all comes down to economics," said Debra
Coy, a research analyst with Schwab Capital Markets. "In an environment
where cities are paying much more attention to their problems with
wastewater and water, you have an industry that's coming in and telling
them, hey, we can help you do this."

A 1997 executive order helped to smooth the way for such public-private
partnerships. But in cities already strapped for cash, the bigger factor
has been the dark shadow cast by the need for new investment, to meet the
needs of growing population or to keep aging systems in compliance with
strict environmental laws.

Some federal estimates of the need for new spending for municipal water
systems have reached as high as $1 trillion over the next 20 years. In
Atlanta, some water pipes date from the 19th century, and its water system
has been in failing shape since the mid-1990's, when the federal government
began to assess fines against the city for failing to meet water-safety
standards. In striking the deal with United Water in 1999, city officials
said they hoped to save as much as $20 million a year from the $42 million
budgeted for the existing, bloated public utility, and to apply those
savings to capital improvements.

But at most, Atlanta officials say, the city has managed to achieve only
$10 million in annual savings, and only at what has been a significant
political cost, with ratepayers blaming the city for United Water's
shortcomings. At the same time, United Water said its expected profit had
turned into heavy losses as operating costs soared. Atlanta's pipes, fire
hydrants and water treatment plants turned out to be in much worse shape
than the city had let on, the company said.

The return to public control that Atlanta has now embraced will send the
city's water costs soaring back to about $40 million a year, compared with
the $22 million in direct costs it was paying United Water, Mr. Ravan said.
But he said there would be other, less tangible savings. "What is the cost
of a `must boil' alert?" he asked.

But critics, including Hugh Jackson, a Nevada-based researcher with Public
Citizen, are using the example of Atlanta to offer a broader indictment of
a privatization process they regard as misguided from the start.
"Obviously, water is a basic necessity, to a degree that electricity isn't,
when you get right down to it," Mr. Jackson said. "We do not feel that it
should be managed for quarter-to-quarter returns for a corporation that is
trying to satisfy a profit demand.