Gulp!

At first, Doris Fodge didn’t think much about the insert in her water bill that read, “Welcome to Our Family.” Her new family was California-American Water Co. (Cal-Am), which had just bought out Citizens Water Resources, her water company for 15 years.

She wasn’t especially concerned that she had a new water company. “Just so long as I turned the knob and the water came out,” she said.

So, Fodge didn’t think much about it again until March 2002, when she received a notice from Cal-Am that her water was going to be turned off in 10 days if she didn’t pay her bill.

Fodge knew there had been a mistake. She had always paid her bill promptly when she received it. But when she called to get the matter straightened out, she had difficulty negotiating the new company’s unfamiliar phone system, she said.

“It took me a good half hour to get to talk to a real person,” Fodge explained. When she finally did talk to someone, she was simply told to ignore the notice. She said the agent treated her impersonally, even rudely.

“Before [with Citizens], I could just tell that I was talking to somebody in a small office in Sacramento,” she said. Now, she didn’t know whom she was talking to, or where they were. Later, she would find out her calls were being routed to a corporate office in Illinois.

“At one point, something just clicked, and I thought, ‘Wow, this is a really big company now.’”

What Fodge didn’t realize was just how big. She was, in fact, now a customer of the largest private water-services company in the nation, just one of 16 million customers.

If she already felt a little nonplussed and alienated from her new water company, she soon would be angry with it. The new company was growing and was asking for a dramatic rate increase. And Fodge was beginning to learn a lot about the complex world of big water.

Three years ago, Fortune magazine dubbed water and water services the “new oil” and the investment opportunity of the next century. Like oil, water is an increasingly precious commodity, and it’s increasingly profitable to those who control it.

In the United States, water supply and service historically have been the public domain—owned and operated by citizens, just like parks, libraries and police departments. The vast majority of water utilities (85 percent in the United States) are still run by local governments. But that’s starting to change, as the lucrative water industry shifts from public works to private profits.

Outright purchases of existing public utilities by private companies are still rare. More often, for-profit companies contract with governments to fix up and run publicly owned water utilities for them, promising the leaner, more efficient operations the companies say only the private sector can provide.

In the mid-1990s, it was becoming clear that the nation’s water infrastructure was straining with age and was in need of billions of dollars of new investment. A few major national and international corporations were ready to make those investments, for a price.

In 1997, under heavy lobbying by private water companies, the U.S. Congress loosened privatization rules and allowed private companies to sign 20-year contracts to provide water services that used to be provided by public utilities.

But critics say this sort of privatization undermines local control and siphons profits—money that should be invested back into the community—out of the area, even to other countries.

And in some cases, as in the Sacramento region, these private companies are expanding into areas where there was no water infrastructure before—following the wave of suburban sprawl to find new, lucrative markets.

As the water business has grown more profitable, there has been a feeding frenzy of larger corporations swallowing up smaller ones, concentrating billions of dollars of assets into the hands of a few global players. The water giants—Vivendi Water (which recently changed its name to Veolia Water), Suez and RWE Thames Water—are similar to other big multinational companies in their size and power. But unlike corporations hawking movies, telephone service or soft drinks, the water companies control one of very few things no one can do without.

There are nearly 30 water districts in Sacramento County; most are publicly owned and controlled by an elected board or other governing body like the Sacramento City Council or Sacramento County Board of Supervisors.

Of the handful of private, investor-owned utilities in the Sacramento area, there are only two that serve more than a few hundred customers. Both—the Arden-Cordova Water Service and Citizens Water Resources—recently were purchased in a wave of corporate roll-ups that have swept the state, and the nation, in the past three years.

The Arden-Cordova Water Service became part of Southern California Water Co., which in turn was a subsidiary of American States Water Co., which serves about 300,000 customers in California and Arizona.

Citizens Water, whose water assets were modest within the new generation of water giants, was snapped up in 2001 by Cal-Am, a subsidiary of American Water Works Company Inc. (AWW). With the takeover by Cal-Am, those properties became part of the AWW empire, with 16 million customers in 27 states and three Canadian provinces.

Cal-Am/AWW laid off most of the small customer-service staff in Sacramento that had worked in the office on Beloit Drive. The technical staff, the people who read meters and fixed broken pipes, remained. But they now took their instructions from an office in Illinois, which handled all of the service calls coming in from its water systems across North America.

This sort of centralization is one of the primary arguments for consolidating the industry. Bigger is better, if it means saving on overhead and shedding redundant personnel. But it also annoys local customers who suddenly feel lost in the corporate bureaucracy.

This statewide concentration of water utilities mirrored the international consolidation that was happening in the water industry.

In 1999, the French entertainment conglomerate Vivendi purchased USFilter, making it the largest provider of water services on the planet and putting American utilities under foreign control for the first time. In 2000, another French company, Suez (the folks who built the Suez Canal), bought up the assets of United Water, gaining 11 million customers in America.

In February 2002, one month after Fodge became part of the Cal-Am family, Germany-based RWE announced its intention to merge with Cal-Am’s parent company, AWW. The deal would be the first foothold for a foreign utility company in California. Fodge would become one of RWE’s 70 million water customers.

It would be an expensive transaction. RWE would pay $4 billion to buy AWW, nearly twice as much as the debt-saddled American company was worth on paper. RWE also would assume the significant debt of AWW, another $4 billion.

Commissioners at the Public Utilities Commission (PUC) were worried that the “premium” or inflated purchase price that RWE was paying to buy the American company would wind up being passed on in the form of increases to ratepayers. But AWW and RWE assured the PUC and state utility commissions around the country that they would not ask customers to shoulder any of the costs of the merger.

And in documents filed with the PUC, the two companies promised that the merger actually would result in immediate savings to ratepayers, mostly thanks to an economy of scale that allows the larger company to make infrastructure improvements more cheaply.

Notices to customers about the proposed merger likewise promised “no adverse impact on customer rates.”

But six months later, in September 2002, while PUC commissioners were still pondering the proposed merger, Cal-Am asked the commission for a whopping 62-percent rate increase. Cal-Am said the rate hike was necessary to cover increasing electricity prices, the increasing costs of water treatment and efforts to safeguard the water supply from terrorist attacks. The magnitude of the request shocked ratepayer advocates, who believed the company was trying to find a “back door” to make customers pay for the merger.

In January 2003, the PUC and regulators from other states did sign off on the merger between RWE and AWW. In fact, Cal-Am/RWE spokesman Kevin Tilden boasted that the acquisition was approved “in record time.”

But the rate increase is still being hotly debated and has turned out to be more controversial and difficult than the big merger was.

Cal-Am was hoping to have the new rates, which would generate about $10 million in additional revenue in the state (mostly from its Sacramento customers), approved back in June of this year.

Cal-Am contends that it needs the rate increase because energy prices and the costs of chemicals are driving up water rates everywhere. And it is true that other water districts in the area, public and private, have hiked rates recently. The city of Davis recently increased its rates by 15 percent. Sacramento County Water Agency increased rates by 10 percent in October.

But Cal-Am is asking for far more, in percentage terms. Tilden said part of the reason the requested jump is so high is that Citizens Water hadn’t increased rates in about five years.

Some of the cost is also attributed to the loss of groundwater wells that have been shut down because of contamination from Air Force operations at Mather Field. But the company is already in negotiations with the government to recoup that money. Tilden said the ratepayers will shoulder those costs for now, but the company will pass along any savings it can negotiate.

But ratepayers in some Cal-Am territories have revolted. And they are joined by groups like Public Citizen, the consumer-advocacy group founded by Ralph Nader, which have accused Cal-Am and its parent company of lying to the public and state regulators.

Opponents of the rate hike believe it is a veiled attempt to squeeze ratepayers and to help shareholders recoup the staggering premium paid in the big merger.

“It’s nothing but a big shell game,” said Ed O’Neil, a Bay Area attorney hired by the city of Montara and Santa Cruz County to help them try to stop the rate hike.

The city of Montara, in San Mateo County, and Santa Cruz County appealed to the PUC to stop the rate case from proceeding until Cal-Am showed how it planned to pass the promised savings from the merger on to ratepayers. They were joined by the Office of Ratepayer Advocates (ORA), an independent department within the PUC.

“They were telling the PUC commissioners two different stories,” said the ORA’s Ray Charvez. “They made all these promises that they don’t seem to intend on keeping,” he added.

Cal-Am admits that none of the promised cost savings from the merger are accounted for in the current application for a rate increase. Cal-Am’s spokesman, Tilden, said that because the merger is so recent, it’s simply too early for ratepayers to see most of those benefits. He said the merger and the current rate case have absolutely nothing to do with each other. Indeed, if the company were to try to pass the merger costs on to customers, after having promised not to, “my boss would probably be in jail right now,” Tilden said.

That probably would be OK with Juliette Beck, director of Public Citizen in Oakland. “I think it’s very disconcerting that these rate hikes are being pushed on people less than a year after they were promised, over and over again, all of these benefits [from the merger].”

Beck added that as the “global water barons,” as she calls them, continue to buy up smaller companies, higher water bills are inevitable. “The consolidation trend is often followed by increased rates and diminished services. That’s how they make their money.”

Though RWE and its subsidiaries promised not to pass the costs of the merger on to ratepayers, the company also said it would earn profits for its shareholders through new growth. And for new growth, Sacramento is ideal.

“This is a great time to be in the water-resource business,” said Mitch Dion, manager of Cal-Am’s North Division, which includes Sacramento and the surrounding areas.

When Cal-Am bought out Citizens Water, Dion explained, it gained a foothold in one of the fastest growing regions in the state. So, rather than simply running the water utility it already owns here, Cal-Am is hoping to grow as the region grows. Virtually anywhere farm fields and grasslands are being slated for new subdivisions, Cal-Am and its parent companies see the potential for profits.

Six hundred thousand people are moving into California every year, “and it feels like they are all moving into Sacramento,” Dion said. And with that growth, local governments have the responsibility of providing water in an increasingly complicated regulatory environment and with ever-tighter water supplies. But local governments, especially fast-growing ones, may not be equipped to manage water well.

“It’s just not the focal point of what they do. They are into things like police and parks and libraries,” Dion explained.

So, Cal-Am is banking on some local governments to leave water service to pros like Cal-Am, which has tremendous financial resources and thousands of employees with expertise in every facet of water management.

Last year, Cal-Am’s parent, RWE, landed a $600-million-a-year contract with the city of Stockton to run its water utility. The company is hoping to get more contracts in the fast-growing Sacramento area.

Cal-Am recently landed a franchise in southern Placer County, a potential gold mine for the company in an area that will see thousands of new homes in the coming years. And Cal-Am representatives are already talking to officials in Sutter and Yuba counties to help serve the new growth in those areas.

Back in Sacramento County, Cal-Am already is poised on the border of a huge business opportunity: the Sunrise-Douglas development area, which soon will sprout 20,000 new homes.

Unlike most local governments, Sacramento County actually has a law limiting the growth of investor-owned utilities. In theory, Sunrise-Douglas is off-limits to private utilities.

But Dion noted that much of the area, though approved for development by county supervisors, now lies inside the borders of the new city of Rancho Cordova, and that city decides who its water purveyor will be and whether to grant a new franchise to an investor-owned utility. And there are no rules limiting the city’s ability to contract out water services.

Likewise, Sacramento County still has a huge swath of mostly undeveloped land that will need new water service as the county fills in its existing urban-growth boundary. As the county plans service for those new developments, “we think they may want to outsource some of those services,” Dion explained.

Herb Niederberger, chief of the Sacramento County Water Agency, said the contracts in Stockton and a similar contract being considered between American States Water Co. and a rural water district in the unincorporated and soon-to-be-developed Natomas area are early experiments in the privatization of local water utilities.

“I don’t think you’ll see companies going out whole-hog and buying public systems. But if these contracts are successful, I think you’ll see more of them,” Niederberger said.

Dion couldn’t or wouldn’t say how much the company would grow in this area in the next five or 10 years. But he noted that Cal-Am is already the largest private utility in the region and is currently second only to the city of Sacramento in the number of customers served in the Sacramento metropolitan area. (The city has about 100,000 connections, and Cal-Am has 58,000.) If Cal-Am can tap into Sacramento’s growth successfully, Cal-Am, along with its parent companies, soon could be the biggest water purveyor in the region and a powerful player in regional water politics.

Any new suburb is dotted with Wal-Mart, Starbucks and McDonald’s stores; wherever growth goes, large corporations are there to make a profit. Now, it seems corporate giants are honing in on an even more fundamental market that new growth creates. The folks in the booming suburbs may want Big Macs and lattes, but they need water. Call it the McDonald-ization of water. RWE: over 70 million served.

But here and there, local governments and citizens’ groups are forming pockets of resistance to the corporate water giants.

The RWE contract in Stockton, for example, has been bitterly controversial. The city council there approved the contract over vociferous objections from groups like Public Citizen, the Sierra Club and the local League of Women Voters, who condemned privatization, evoking Enron, California’s electricity-deregulation debacle and the specter of foreign control over local water supplies.

The groups went out and gathered thousands of signatures opposing the deal and even passed a ballot measure last March requiring a public vote on any privatization plans. The measure passed, but Stockton’s city council already had rushed the deal through, two weeks before the election. Now, the contract is in legal limbo, following a Superior Court decision that found the council ignored certain provisions of the California Environmental Quality Act when it approved the deal.

Meanwhile, the city of Montara, which had bedeviled Cal-Am by so actively opposing the rate increase to the PUC, decided to take a more direct approach. In August, the town bought its water system back from Cal-Am, paying more than $11 million. For months, Cal-Am resisted the public takeover, but the PUC finally ordered Cal-Am to sell. Then, the company held out for a price that even advocates of the purchase think was far too high.

“I’m convinced that they fought us hard because they didn’t want to let us set a precedent,” said Scott Boyd of the Montara Water and Sanitary District.

The city of Thousand Oaks was one of the few local governments to fight the acquisition of AWW by RWE, and it’s also considering buying out the Cal-Am water system there. Deputy City Manager Scott Mitnick said his city opposed the merger as just plain bad public policy.

“In California, water is our pride and joy,” Mitnick explained. “It’s what we do, like fire or police.” Though he generally opposes privately owned utilities, he said, the increasing concentration of those utilities into the hands of a few foreign corporations only makes matters worse.

“Never before have those water companies been owned by companies outside of the U.S. It’s just unprecedented,” Mitnick said. “You are allowing profits to flow out of the state and out of the country.”

Santa Cruz County, troubled by the merger and increasing water rates, is considering using eminent domain to seize a small Cal-Am water district in the tiny community of Felton. And ratepayers are revolting not just in California but also across the country. The citizens of Peoria, Ill., and Lexington, Ky., also are thinking of buying out systems owned by Cal-Am’s parent, American Water (the post-merger name of AWW).

In Atlanta, Suez lost its contract to run that city’s water utility earlier this year, after city officials became frustrated when the company failed to deliver on promised improvements to the system. And overseas, the London Assembly (similar to a city council) decried RWE’s handling of that city’s leaky water system, suggesting that RWE was more concerned with paying its shareholders than with making needed repairs.

Mitnick calls what’s happening in the water industry here the “Enron-ization of water,” arguing that RWE and the other water giants’ strategy of growth through acquisition is unsustainable. Given the skepticism about the privatization that is already out there, it may be difficult for RWE to grow at the rate it thinks it can. Mitnick said that when the tremendous growth the company has planned doesn’t pan out—and he feels certain it won’t—then the company will be back asking for more rate increases.

“Mark my words. We won’t see any of the economic benefits they promised. It will get worse in Stockton, worse in Felton, worse in Sacramento,” he said.

The funny thing is that the crown jewel of Cal-Am’s new properties, Sacramento, never really noticed the quick succession of corporate mergers, or the proposed rate hikes. Perhaps it’s not surprising. Sacramentans still enjoy relatively low water rates compared with those of communities like Montara or Thousand Oaks. After all, said Fodge, “this rate increase isn’t going to kill me.” Even with a 62-percent increase, Cal-Am’s rates will be somewhere around the overall Sacramento average. “But if they do it this time, what’s to prevent them from doing it again and again?”

More importantly, Fodge said, the rate increase has made her think for the first time about what it means for water, of all things, to be controlled by private corporations.

“I guess I have a problem with big businesses owning the water. It’s like owning air,” Fodge said, adding, “and for another country to own a piece of our water, that baffles me.”

Tilden, the Cal-Am spokesman, said he understands that some people are ideologically opposed to private water utilities. But he thinks groups like Public Citizen that are raising the specter of foreign multinationals to try to stop the rate case are wasting their time.

“If they get a bunch of people upset and agitated, I think that will just be frustrating. The appropriate time for comment was a year ago,” Tilden explained.

But Charvez, at the ORA, said there is still time for ratepayers to let the commissioners, who may decide on the rate hike as early as December, know what they think.

“I think people should be concerned,” said Charvez. “Water is a necessity of life; now it will be a commodity like oil. You may wake up one morning and find that a glass of water costs as much as a quart of oil.” And Charvez is further troubled by the limitations of a state agency like the PUC trying to regulate a multinational corporation. “We can’t go back to Germany and audit them, you know.”

Like Fodge, Charvez was surprised that more people from Sacramento didn’t show up to the meetings the PUC held in Sacramento concerning the rate increase. The PUC made Cal-Am send notices of the meetings out with the water bills.

“I guess people don’t really read their bills,” said Charvez. “They should.”