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Enron?s Failure in Water Ventures Highlights Dangers of Privatization to Consumers, Taxpayers

April 2, 2002

Enron?s Failure in Water Ventures Highlights Dangers of Privatization to Consumers, Taxpayers

WASHINGTON, D.C. ? Enron Corp.?s failed venture into the water business, which was marked by financial problems, complaints of poor service and allegations of political corruption, should serve as a warning to consumers and policymakers about the dangers of privatizing public water systems and resources, according to a Public Citizen report released today.

The report ? Liquid Assets: Enron?s Dip Into Water Business Highlights Pitfalls of Privatization ? draws lessons from the troubled history of Azurix Inc., a subsidiary created by Enron in 1998 to own and manage water and wastewater systems, provide water-related servicesand manage water assets. Click here to view a copy of?the report on the Web.

“Companies like Enron sing a siren?s song about privatization of water resources and systems, but there is no evidence that private companies can provide better, less-expensive service to consumers and plenty of evidence that suggests otherwise,” said Wenonah Hauter, director of Public Citizen?s Critical Mass Energy and Environment Program. “Local and state governments should be extremely wary of entrusting such an essential human need as water to corporations that simply want to turn a profit.”

Enron created an elaborate financial structure that involved two trusts and more than 50 subsidiaries and limited partnerships in the Cayman Islands to keep Azurix-related debt off its balance sheets. Its failed water investment cost investors hundreds of millions of dollars and contributed to the company?s eventual collapse. The company?s brief tenure in the water business highlighted many of the risks of water privatization: poor contract performance, political corruption and influence-peddling, environmental violations and uncertain financial stability.

In Buenos Aires Province, Argentina, for example, Azurix?s concession was plagued by lengthy service interruptions, inferior water quality and failure to adequately treat wastewater, resulting in fines totaling $1 million and eventual default on a 30-year contract. In Ontario, Azurix pleaded guilty to 19 environmental charges. In Ghana, the World Bank withdrew a pledge to contribute $100 million toward a water pipeline project after allegations of corruption tainted the government?s water operations contract with Azurix.

Azurix also sought to develop water resources that could be traded and unveiled a Web-based service to facilitate trading, storing and transporting water. Among its schemes was an offer to the state of Florida to help fund the restoration of the Everglades in exchange for the rights to some of its water. The company hired influential former water officials to lobby Gov. Jeb Bush and the Legislature, but the plan failed. The company also sought to develop a large ranch in California as a water “bank,” to store water in wet periods and sell it during dry times. That effort also failed.

“Like the company did with electricity, Enron wanted to create a commodities market for water,” said Alex Tsybine, author of the report. “Consumers in California saw what happened when electricity was traded in an unregulated market: prices tripled overnight and rolling blackouts became frequent. Fortunately, Enron did not succeed in this strategy with water, but the idea has not gone away.”

Water has been called the “oil of the 21st century,” and the World Bank has predicted that by 2025, two-thirds of the world?s population would run short of potable water. With 85 percent of the U.S. population being served currently by public providers, corporate proponents of privatization are salivating over the prospect of huge profits in the years ahead. Enron was only one of many multinational corporations seeking to profit from the scarcity of water.

A proposal in Congress to abolish the Public Utility Holding Company Act of 1935 (PUHCA), would allow traditional electric and natural gas utilities to expand their investments into water businesses. PUHCA, the Depression-era law passed in the wake of energy company excesses that contributed to the stock market crash of 1929, protects consumers by limiting the ability of utilities to make risky investments in non-utility assets.

“Rather than learn an important lesson from the implosion of Enron?s house of cards, some lawmakers are bent on repeating the mistakes of the past,” Hauter said. “Big energy companies want to consolidate assets across various utility sectors like telecommunications, electricity and water. But this is risky for consumers, because they?re the ones who will pay for bad investments, like Enron?s, through higher rates and shoddy service.”