[DEBATE] : (Fwd) Voetsek water privatisers (US case)

[Patrick Bond]

Expectations For Private Water Fail to Pan Out --- Under Fire, Germany's 
RWE Plans to Exit U.S. Market; Global Ambitions Thwarted --- An Uprising 
in California Town
By Mike Esterl
26 June 2006
The Wall Street Journal
A1

FELTON, Calif. -- To RWE AG, Germany's biggest electric company, the  
water business a few years ago seemed to promise a gusher of profits.  
Governments in the U.S. and around the globe were eager to privatize  
their water systems. RWE was already experienced in delivering  
electricity and gas to millions of homes.

But dreams of heady profits evaporated amid heated opposition in  
places like this town of 6,500 people, in California's coastal  
redwood forests. Today, RWE is in the midst of dismantling an  
international water empire that cost more than $10 billion to  
assemble and spanned more than 40 countries at its height.

Water turns out to be less like electricity than RWE hoped. It's  
heavy and hard to transport, making it difficult for a big company to  
build economies of scale. Regulation is never predictable. In the  
U.S., RWE found itself fighting in town referendums and state  
legislatures across the country, winning many battles but losing the  
war.

"It's a very local business," says Harry Roels, RWE's chief  
executive, adding that a global water company "just doesn't have  
outstanding advantages."

RWE is planning to divest its American Water subsidiary, the largest  
water company in the U.S., in an initial public offering. It is also  
preparing an IPO or sale of Thames Water, the largest water company  
in Britain, which it bought in 2000.

Other Europe-based global water companies are treading more  
carefully. France's Suez SA has scaled back its exposure to  
developing countries, and its 20-year contract to run Atlanta's water  
supply ended after just four years amid mutual unhappiness. Veolia  
Environnement SA of France, formerly part of Vivendi SA, continues to  
expand abroad but sold many of its U.S. businesses in recent years  
and still generates the lion's share of its revenue in Europe. Only  
about 5% of water services world-wide are estimated to be in the  
hands of the private sector today, unchanged from when RWE made its  
big moves.

The retrenchment illustrates how foreign investment can often founder  
on inadequate understanding of local conditions. In the U.S., for  
example, although some communities have long had private suppliers of  
water, public entities dominate. Many people see clean water as a  
basic right and balk when their bills go up, especially because  
municipally run systems often keep prices low through tax benefits  
and subsidies.

"People are just kind of weird with water," says Catherine Bowie, a  
community-relations manager for RWE's subsidiary in California.

RWE began a little more than 100 years ago as an electricity provider  
in Germany's Rhineland region. It grew quickly in the early 20th  
century by snapping up power plants and connecting them to its grid.  
More recently it has built up its gas business to become Germany's  
second-largest distributor. Based in Essen, the company has annual  
revenue of around $50 billion and 86,000 employees.

By the late 1990s, water was becoming a hot business around the  
world. Enron Corp. was among the companies that jumped in. Many cash-
strapped U.S. municipalities and other governments were looking to  
sell assets or farm out services, and some hoped that private  
enterprise could do a better job upgrading old facilities and  
managing operations.

RWE became the world's third-largest water player -- behind the two  
French companies -- when it bought Thames and American Water. In its  
2001 annual report, RWE hailed water as "blue gold" and called the  
U.S. "the world's most attractive water market." RWE paid $4.6  
billion for Voorhees, N.J.-based American Water -- a 36.5% premium  
over the company's average stock price in the 30 trading days prior  
to the deal -- and assumed about $3 billion in debt.

Trouble quickly emerged. The acquisition of American Water required  
approvals from more than a dozen states. It took 16 months -- until  
January 2003 -- for RWE to gain control. Regulators then moved slowly  
to approve water price increases. And rebellious territories  
furnished endless headaches for management.

In Felton, south of San Francisco, RWE became embroiled in a battle  
with a group called FLOW, or Friends of Locally Owned Water. American  
Water secured ownership of Felton's water system in January 2002 when  
it bought the water holdings of a Connecticut company that had long  
controlled the asset. Eight months later, American Water, in the  
process of being acquired by RWE, asked the California Public  
Utilities Commission for approval to raise rates in Felton by 74%  
over three years. It noted that rates hadn't been raised since 1998  
and cited the cost of infrastructure repairs.

Soon after, FLOW was formed. Members handed out literature at shops,  
knocked on neighbors' doors and lobbied county politicians to stir  
opposition to RWE. "I've had no vacation in three years. It's all  
I've done," says 85-year-old Frank Adamson, a retiree and FLOW member.

People in Felton complained that response times to broken water mains  
and the like slowed as RWE centralized operations. Accident reports  
from Felton were routed to a call center in Alton, Ill. Daniel  
Kelleher, senior vice president at American Water, says the national  
call center is aimed at boosting service. "It became a much more  
difficult project than we anticipated, and it's still a work in  
progress," he says. While state regulators didn't grant the entire  
rate increase, they decided after more than a year that American  
Water could raise rates 44% in Felton. Momentum grew in the community  
to try to take over the Felton water system and return it to public  
control.

Seeing its operations under attack, RWE became embroiled in Santa  
Cruz County politics. Mark Stone, a county supervisor, says officials  
from American Water's local subsidiary told him they would torpedo  
his election bid in 2004 if he supported a public takeover. A  
spokesman for the local unit says no threat was issued but  
acknowledges the company sent mailings to people urging them to avoid  
candidates who would raise taxes to fund a takeover by the government.

Mr. Stone won the election. By then, the Board of Supervisors had set  
in motion a referendum calling for Felton's water system to be  
purchased by the community after FLOW delivered a petition with 1,300  
signatures.

RWE enlisted a public-relations firm to send letters and make  
telephone calls against the ballot initiative. Its Californian  
subsidiary acknowledges giving tens of thousands of dollars to a  
local property owners' association that filed a legal challenge  
against the referendum. The association distributed a flier that  
depicted a burning $100 bill, arguing that a public-sector takeover  
would cost some Felton taxpayers more than $1,000 a year for the next  
30 years. FLOW disputed that, saying water bills were cheaper in  
neighboring towns with public control.

At Felton's 2005 Memorial Day parade, Mr. Adamson was wheeled through  
town in a bathtub, throwing candy to people and accompanied by a  
sign: "Local Water, Local Control."

Some opponents made hay out of the fact that RWE is German. A year  
before the referendum, a local newspaper published a cartoon  
imagining what Felton would be like if RWE also owned rights to the  
air. "Yoo Hoo! Gootentag! Felton! Ve cut off'n your air because you  
didn't pay der bill!" a local worker in lederhosen announces to a  
room full of slumped-over and gasping inhabitants.

Mr. Adamson, a World War II veteran, says it's not about Germany. "I  
don't hold any grudges, but I don't want some foreign corporation  
controlling our water. I don't even want a large U.S. corporation  
controlling our water," he says.

Last July, 75% of voters in Felton favored Measure W, which proposed  
that the town raise $11 million in bonds to buy its water system.  
RWE's chief executive, Mr. Roels, says the system isn't for sale. RWE  
is preparing to list its entire U.S. unit, which generates more than  
$2 billion in annual revenue, on a U.S. stock exchange. "If people  
are interested in buying into their water supply, they can buy shares  
in American Water after the IPO," says Mr. Roels.

RWE has conducted surveys indicating that more than 90% of its U.S.  
customers are satisfied with the quality of service, according to Mr.  
Roels, who calls Felton "an exception."

Still, the company has faced similar skirmishes across the U.S. In  
Monterey, about an hour's drive south of Felton, RWE spent more than  
$300,000 to defeat a measure proposing a study of whether to buy back  
the water system. In Chattanooga, Tenn., where water has been in  
private hands since the Civil War, Mayor Ron Littlefield has  
approached RWE's local unit about a municipal buyout. He thinks the  
city can save money by combining water with municipally owned power  
and sewer utilities. Chattanooga's water, he says, is a "private  
island in the middle of a sea of public utilities."

Laurel Prussing, the mayor of Urbana, Ill., became interested in a  
municipal buyout after a growing number of "boil orders," when people  
are told they must boil their water to make it safe to drink. When  
she tried to investigate a boil order in February, she says she was  
put on hold for 25 minutes before being connected to a call center in  
another city. An American Water spokesman disputed that boil orders  
have risen in Urbana and said the company distributes special  
telephone numbers that municipal officials can call in an emergency.

Voters in Lexington, Ky., will weigh this fall whether to try to  
seize RWE's unit there by eminent domain -- an idea that some in  
Felton are discussing too.

Private-sector ownership of water in the U.S. remains stuck at 15% to  
20%. Some industry participants believe momentum will pick up as  
municipalities face pressure to upgrade long-neglected  
infrastructure. Still, "the market has grown more slowly than any of  
us thought possible," says Peter Cook, executive director of the  
National Association of Water Companies in Washington.