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California and Kentucky Cities Should Fire Corporate Water Giant; Communities Will Be Better Served by Local Control of Water

Oct. 4, 2005

California and Kentucky Cities Should Fire Corporate Water Giant; Communities Will Be Better Served by Local Control of Water

New Report on RWE/Thames Water Spotlights Many Failures of Privatized Water Systems

WASHINGTON, D.C. – The largest private water company in the United States, which serves 16 million customers in 29 states, is heavily debt-ridden and has a track record of raising rates excessively where it operates, according to a new report by Public Citizen. The national consumer group Public Citizen urges voters in Lexington, Ky., and Monterey, Calif. to fire the corporate water giant when they vote Nov. 8 on initiatives asking whether the communities should buy back their local water utility from Kentucky American and California American, subsidiaries of the multinational RWE AG.

According to Public Citizen’s report, RWE and its subsidiary, Thames Water, have a record of environmental pollution, poor financial decision-making, risky business ventures and dismal customer service. The report is available here.

Water privatization, despite touted promises of efficiency and improved management, has failed to deliver stable and reasonable rates or good customer service in cities with private waterworks. The report provides an overview of RWE’s water operations in 20 countries, serving 70 million people, including 16 million people in 29 states. German RWE’s water division is run by British subsidiary Thames Water. Thames Water also operates U.S. assets through American Water, purchased in 2003. Fortune lists RWE’s revenue as $50.9 billion, with an annual profit of $2.657 billion, and the company is listed as the world’s 78th largest corporation.

“Most Americans still consider water to be a public good that should be managed locally, not by a foreign-owned conglomerate that reports to its shareholders and thinks about profits first, people second,” said Wenonah Hauter, director of Public Citizen’s Water for All Campaign. “Across the country, we’re seeing consumers’ water rates jump, and RWE is often behind those rate increases.”

The company went on a buying frenzy about five years ago, snapping up energy and water companies; among them was American Water, which RWE purchased for $7.6 billion, three times the book value. Financial analysts were wary of the purchase, which heaped heavy debt on the company. In state after state where RWE had to win regulatory approval for its buyout, the company promised that customers would not be stuck with the tab. However, that has often not proved to be the case.

In December 2002, Thames Water Managing Director James McGivern promised California consumers that the high acquisition price of purchasing American Water was based on predicted growth and that the cost would “never, ever be passed down to the customers of California American.” But Californian consumers in communities where water systems are owned by RWE have suffered large rate increases from the corporate takeover and are now fighting back.

In July 2005, 75 percent of voters in Felton, Calif., approved Measure W, an $11 million bond issue to finance the public buyout of California American, a subsidiary of RWE. Residents were disgruntled because Felton’s water rates are 36 percent higher than five of six nearby public water agencies in the county, and California American filed an application to more than double water rates over the next three years.

In Lexington, the city was prompted to pursue a public buyout when RWE purchased American Water and its subsidiary, Kentucky American, in 2002. Citizens were already concerned with local control issues and rates, but after the purchase, citizens organized as Bluegrass FLOW to seek control of the water company through eminent domain. In late December 2004, residents were stuck with an unapproved 15 percent rate increase. Three months later, the Public Service Commission overruled the increase, scaled it back to 8.5 percent and forced the company to issue refunds. In September, a Fayette County judge ruled that a citizen-initiated referendum that will determine the fate of condemnation proceedings against Kentucky American is legal and can be held in November.

And in Monterey, Calif., residents have long complained about poor customer service, unacceptable water leaks and the illegal pumping of water from the Carmel River, which threatens endangered species. On Nov. 8, voters will decide whether to fund an independent study of options for public acquisition of Cal Am’s water system.

Hijacked water rates aren’t consumers’ only concern when it comes to the way it does business. Thames Water also has a history of environmental violations and is known in England as the country’s worst polluter, topping the list in five of the past six years. In June 2005, Britain’s Environment Agency reported that more than 1 million tons of sewage went into the River Thames untreated – an estimated 400,000 tons alone on June 28 after a thunderstorm swamped the system, after which Thames Water opened the gates at three of its pumping stations in the London area, causing raw sewage to flow directly into the river. Londoners who use the river for the popular sport of rowing estimate that there are now 50 such occurrences a year, each accompanied with a warning not to row for two weeks afterwards.

“You don’t have to dig deep to find Thames’ trail of pollution,” said Hauter. “Tell me what community would want to do business with a company that appears to prefer paying fines rather than maintaining their systems to prevent these types of occurrences.”