Small Towns Tell a Cautionary Tale About the Private Control of Water

By Tim Reiterman

May 30, 2006 12 AM PT

Times Staff Writer

In San Jerardo, a tidy but poor farmworker cooperative encircled by the black earth of Salinas Valley fields, residents have been drinking bottled water for almost five years because the tap water they buy from a private company is unsafe.

Nearby, families in the modest town of Chualar are still smarting over monthly water charges that in some instances ballooned by 1,000% or more.

And about 40 miles to the northwest, the Santa Cruz Mountains hamlet of Felton voted last year to tax each household up to $700 a year to take control of the local for-profit water system after the new owner proposed a series of rate increases.

These communities are fronts in a statewide battle over the price, quality and reliability of water that investor-owned utilities are supplying to nearly one in five Californians.

In the late 19th century, private companies delivered water to most of the state’s homes and businesses. Today about 80% of the state’s people live in large cities and towns served by publicly owned utilities. About 140 for-profit companies provide water to more than 6 million people, mostly in suburbs and smaller communities.

Supporters of government-run water systems point out that they, unlike investor-owned utilities, do not need to pay taxes or produce a profit. But big companies contend that they can operate with less overhead per customer.

At the core of the dispute are philosophical differences over whether an indispensable resource should be controlled by private firms.

In San Jerardo, a farming co-op of converted military housing several miles from Salinas, residents still are paying for their tap water, although it was declared unsafe in 2001 when Alisal Water Corp. found high levels of nitrates in a company-owned well serving the community of 250.

Since then, the company has been providing households with three five-gallon bottles of purified water each week for drinking and cooking. Residents complained that it was not enough.

Monterey County recently began providing 10 additional gallons weekly to families that needed more, said co-op manager Horacio Amezquita.

“It is better because people ran out of the 15 gallons,” he said. “Right now, it is working, but when summer comes, people will use more water.”

Down the street, fieldworker Manuel Alcala said he doesn’t like paying $35 to $45 a month for tap water his family of five cannot drink -- and that cannot be used to wash his baby’s bottles. “The water is no good,” he said.

In 2004, U.S. District Judge Jeremy Fogel fined Alisal and its owners $500,000 for violations of the Safe Drinking Water Act that Fogel said jeopardized the health of thousands of customers in several communities around the county. Federal officials said it was the largest penalty ever imposed on a water utility.

The judge ordered the sale of the company’s eight small water systems. Investor-owned utilities with nearby service areas are buying the largest ones.

Residents of San Jerardo are still waiting for a clean, adequate water supply, though recently a public water district moved to acquire the co-op’s system and devise a plan to remedy its water supply problem with government funding.

Marc Fairman, lawyer for Alisal, said that, despite the violations cited by the federal government, the Salinas-based company “never had any kind of serious health problems with their systems.”

In nearby Chualar, residents who had been paying $21 per month for water got a rude introduction to privatization two years ago, when Monterey County sold the town’s water system to California-American Water Co.

A monthly charge of more than $200 prompted Rebecca Trujillo, a farmworker whose husband owns a concrete business, to call Cal-Am’s customer service line in Illinois. She said she was told there must be a serious leak.

But that was not the problem -- and Trujillo was not alone. Some monthly bills exceeded $500.

With approval from the California Public Utilities Commission, which regulates investor-owned water companies, Cal-Am had started assessing Chualar customers the same rates as its customers in a Carmel Valley neighborhood of million-dollar homes.

The rates were designed to encourage conservation by steeply increasing charges for households that used more water than a typical family of four. But Chualar’s households often are much larger than that.

When residents protested at a PUC meeting in San Francisco, Cal-Am agreed to restore the old rates until more reasonable ones could be developed.

The residents want rates tailored to their ability to pay. “Water is very special because three-quarters of our bodies are water,” said Trujillo, surrounded by relatives in her bungalow. “It is more important to bring the water than food.”

State and company officials concede they were at fault.

“The whole idea of setting rates based on.... an adjacent area is pretty shaky,” said Fred Curry, water branch manager at the PUC. “It was a shortcut that the commission allowed Cal-Am to get away with, but it blew up in their face.”

“We were running on autopilot,” said Kevin Tilden, Cal-Am vice president of external relations. “Obviously the adjacent community was not the right template.”

The backlash against water companies echoes events of the early 20th century, when many communities, rebelling against perceived profiteering by private companies, formed public agencies so they could control their own water.

“If the private firms do not deliver water of the quality people are looking for and they start charging a lot, it creates anger, resentment and a desire to do something about it,” said retired UCLA history professor Norris Hundley, an expert on California’s water history.

Many of the recent protests followed a burst of consolidation in the water industry, with larger companies acquiring smaller ones to expand their service areas and revenues.

The companies maintain that although mergers save customers money over time, rate hikes can be necessary to pay for fixing old, neglected pipes and plants and to meet stringent new water quality rules.

Private water companies say they do a more efficient job than publicly owned utilities by employing fewer people, sometimes spreading costs across multiple service areas and often moving faster to upgrade aging facilities.

The state PUC lets them charge rates sufficient to cover operating costs and reap a potential profit of about 10% on new facilities and other capital improvements. The PUC also has permitted some companies to pass on merger costs to customers.

Residents of several communities around the state have launched takeover campaigns after privately owned water companies proposed raising rates.

That is what happened in Felton -- a town in the Santa Cruz County redwoods with an eclectic population of professionals, blue collar workers and retirees -- after its new water purveyor, Cal-Am, sought a rate increase of about 74% over three years.

The town’s old water company had been absorbed by Cal-Am’s parent, American Water Works, which in turn was acquired by German conglomerate RWE AG.

Felton residents said their rates were higher than those in neighboring areas and that water should be controlled by public agencies.

“We have to draw the line on privatization,” said Jim Mosher, a Felton lawyer. “Water is not an appropriate commodity to be in private hands....

“We are on the front line of a global issue,” he added.

Residents launched a ballot initiative to finance a takeover with $11 million in bonds. In July, voters approved a bond measure that could obligate each household to pay $600 to $700 a year in extra taxes for three decades, up to $21,000.

Although Felton, with about 1,300 customers, represents fewer than 1% of Cal-Am’s 180,000 customers, the company fears a takeover could have a domino effect and has refused to sell.

Water companies have defeated takeover efforts on the Monterey Peninsula and in the Fresno County town of Selma.

But residents of the San Mateo County beach town of Montara, tired of chronic water shortages, bought their privately owned water system for about $11 million in 2003.

Now, Claremont in the San Gabriel Valley and Fontana in San Bernardino County are exploring ways to put water systems under public control.

For decades, communities have debated whether privately or publicly owned water companies can provide better and cheaper service.

“I think you can have well run and poorly run public or private water companies,” said Peter Gleick, president of the Pacific Institute, an Oakland-based think tank that has studied the issue.

State regulators say some private companies may do a better job of upgrading infrastructure than cash-strapped public agencies do, but such expenditures spur higher rates, partly because utilities are allowed to collect a return on their capital improvements.

“The only way they make a profit is on investment,” said Curry of the PUC. “What I am seeing is costs for private companies increasing faster than the cost of public ones.”

Consolidations of water utilities became more attractive after 1997, when the industry won a change in state law allowing them to shift more of their purchase costs to ratepayers.

The stated goal was to encourage the absorption of struggling, small water companies.

“In my opinion, this was a misdirection,” Curry said, noting that numerous small companies had been swallowed up without such incentives.

PUC records show that, although water companies have made dozens of mergers and acquisitions since 1997, there were many more in the previous decade.

Sometimes costly problems go along with mergers.

In a single year, Long Beach-based Dominguez Water Corp. bought several other utilities before it was purchased in 2000 for $62 million by San Jose-based California Water Service Group, also called Cal Water, the state’s largest water company.

The company told the PUC the merger would not result in a rate increase, because the $32-million premium it paid would be offset by efficiencies.

A few years later, however, the company proposed rate hikes to cover infrastructure improvements.

The PUC’s consumer advocacy division chided Cal Water for failing to properly inspect the Dominguez systems before purchase and then charging customers for repairs on an overpriced acquisition.

People in Lucerne, a Lake County community of about 3,000 previously served by Dominguez, were shocked when Cal Water proposed a 246% rate increase for this year to help pay for a new treatment plant and storage tank and replacement of pipelines dating to the 1920s.

Hundreds packed the local senior center and decided to look into a takeover. In a survey, many residents said the rate increase would cause them to dig wells, move or cut back on food and medicine.

Cal Water Vice President Stan Ferraro said the system would have needed major improvements whether the company had bought it or not.

“Here comes a larger company and does the responsible thing, and the question is: How do they get paid in rates?” Ferraro said. “It is a tough issue, and one the state should look at throughout the state. Affordability is important.”

The company is seeking a state loan to build the treatment plant and help avert a major rate increase.

Former PUC commissioner Henry Duque, who consults for Cal-Am and Cal Water, said companies may be partly to blame for the spate of consumer takeover campaigns.

Utilities sometimes alarm ratepayers by proposing excessively high rates as a strategy for gaining PUC approval, Duque said.

“If you’re a utility, you have to know regulators are going to cut you back, so you come in high,” he said.

He also said utilities fail to educate the public adequately about reasons for increases. “I keep telling water companies, ‘You need to get across to customers that you are not jacking up rates 18% to make 18% more’ ” profit, Duque said.

As fights over rates continue, privatization is expanding. Some companies are contracting to run municipal systems, including two in Stockton that have a controversial 20-year, $600-million deal. In other cases, they contract to provide such services as billing, testing or maintenance to government-owned systems.

The debate over privatization has focused attention on the affordability of an essential commodity.

“We are beginning to see water bills approach the same levels as energy bills, and the needs of low-income households for water are at least as much as they are for energy,” said Curry of the PUC.

“So we are trying to develop [a statewide] low-income program to see their needs are satisfied.”

(BEGIN TEXT OF INFOBOX)

Water company campaign spending

California’s 10 largest investor-owned water utilities spent more than $1 million from 2000 through 2005 on state and local political races and ballot initiatives.

*--* Company Contributions

California-American Water Co. $491,064

Golden State Water* 157,353

San Jose Water 102,050

San Gabriel Valley Water 99,530

Suburban Water 73,816

California Water Service 72,486

Valencia Water 26,978

Great Oaks Water 23,116

Park Water 12,224

Apple Valley Ranchos 0

Total $1,058,617