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As cities
move to privatize water, Atlanta steps back
NY Times - 2/10
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."
Some
experts, including Adrian Moore, a privatization advocate who
is a vice president at the Los Angeles-based Reason Foundation,
say the main lesson of the Atlanta collapse is that cities and
private companies needed to be realistic about what a partnership
can achieve.
"It's
like a marriage," Mr. Moore said. "You've got to work
to make it work."
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