TROUBLE ON TAP: The inside story of Missouri American's proposed water increase
Ask most Parkville water residents where their water comes from and most will point to the Missouri American water plant at the foot of 1st Street.
There, the water is received from wells that tap into the alluvial beds deep below the Missouri River. The water is treated and pumped throughout the system which serves Parkville and its surrounding areas. Turn on your faucet, and it’s there.
That’s the downstream path your water takes. The upstream path from your checkbook to the company is a little more complicated however.
Your check is mailed to Missouri American Water, which is a wholly-owned subsidiary of American Water. Based in New Jersey, American Water is the largest water services provider, serving 18 million people in 29 states and Canada.
American Water is owned by Rheinisch-Westfälisches Elektrizitätswerk AG (RWE), a German owned utility company that moved to purchase American Water in 2001 for 7.6 billion – six days after the 9/11 attack.
The sale was finalized in 2003 and when finished, gave the RWE complete ownership of the water supplies for more than 1,800 communities across the United States including Parkville.
“Blue Gold”
All around the world, water is more and more being viewed as a commodity instead of a resource.
Aided, in part, by the World Bank and the International Monetary Fund (IMF), public-private partnerships are being promoted to sell water. The World Bank believes that privatization is the answer for supplying the developing world’s water needs, citing cases of government corruption, wastefulness, inefficiency or the combination of all three. Waste, in particular, is cited because most of the world’s water pipes are aging and leaks siphon off profitability – something a well managed corporation would be under a great deal of pressure to fix.
With the World Bank and IMF there to help streamline bureaucracies in developing nations, several “big water” companies have emerged. The largest of the private firms are based in Europe, the top three being France’s Suez and Veolia and Germany’s RWE. Those companies generally manage water systems and wastewater services and together the three provide water to 300 million customers in more than 100 countries.
There are other players, as well. Coca-Cola, Pepsi-Cola and Nestle have emerged as the worlds larges suppliers of bottles water. Coke and Pepsi proved Dasani and Aquafina respectively, while Nestle, the market leader in bottled water, owns brands like Perrier and Aqua Panna. In areas of the world where local water supplies are either ruined or unavailable, the importance of water contracts – similar to soft drink fountain exclusivity contracts — play a major role in day to day life.
Currently, the big water companies own only 10 percent of the world’s water supply, but industry analysts project that at current rates, the number could grow to 70 percent in just a few decades.
This year, however, RWE threw in the towel.
“People are just kind of weird with water”
The deal to purchase much of America’s water supply turned out to be more complex than RWE executives ever realized.
American Water’s stockholders approved the sale with an 80 percent majority, and why wouldn’t they? Industry analysts reported that RWE paid a 36.5 percent premium over the company’s average stock price in the month before the deal, purchasing the American Water Works for $4.6 billion in cash and assuming $3 billion of their debt.
The deal, announced just days after 9/11, quickly ended up in the quicksand of American bureaucracy. The deal had to be approved in more than 12 states and the process took more than 16 months to complete – an eternity in the utilities business. Having paid such a premium for the company, and shouldering that debt load created lots of pressure on RWE from their shareholders.
The length of time also had the effect of wakening several communities to the foreign buyout and many were upset with the idea of losing local control of their water sources.
In meeting after meeting with public service commissions across the country, representatives from the company insisted that they would not pass the premium they paid onto their customers. The American Water utilities they purchased were located in 29 states which accounted for nearly 80 percent of the country’s population. They would make their profits by expanding, not raising rates, company officials insisted.
But RWE was still in too much debt to really begin acquiring and little by little, rates started to rise around the country, in one city, by as much as 100 percent.
Alarmed, many communities began asking how water – which many Americans thought of as a truly public utility – could be privatized in the first place. They soon learned that privatization of American “roads, tunnels, bridges, electricity supply facilities, mass transit, rail transportation, airports, ports, waterways, [and] water supply facilities” was legalized by President George H. W. Bush when he signed Executive Order 12803 in April 1992.
Some municipalities tried to reacquire their local water companies.
“I do not want decisions made on an essential as important as water [based on] what benefits international shareholders and not local taxpayers,” exclaimed Gary, Indiana Mayor Scott King during his state of the city address last February. ““We have to look at the cost and benefit of buying the water company.”
The fight to own their own waters systems has not been an easy one and RWE, through American Water and its subsidiaries fought most of the attempts off, usually by attacking politicians who supported doing so. In Felton, California, California American Water responded to petition drives by issuing business reply questionnaire cards to their customers.
“I oppose a taxpayer-funded eminent domain takeover because of possible homeowner cost increases of $9,200 ($58 per month,” one of the choices ominously stated. The alternative provided by the water company didn’t read much different, either.
“I support a taxpayer-funded eminent domain takeover despite the taxpayer costs and inexperience of those who would manage the water system.”
In the meantime, rates continued to go up. In one small farming town, customers calculated that it would be cheaper to bathe themselves in milk instead of water. The opposition, particularly in Felton, California where opponents of RWE formed a group called Friends of Locally Owned Water (FLOW) that has been copied in several other states, grew more vociferous.
At the end of one public meeting, Catherine Bowie, a community-relations manager for RWE’s subsidiary in California exclaimed that “people are just kind of weird with water.”
By 2006, RWE had seen enough.
Despite generating income of about $1.75 billion last year nearly a quarter of the company’s revenue its return on capital was 7.4 percent and that wasn’t enough to justify the investment needed in pursuing domination of America’s water market.
After looking for a single buyer, RWE decided to sell off American Water in an initial public offering an unusual move for a company that has been in business since 1886. IPOs are risky for new businesses, where investors really aren’t sure how much a company is worth and speculation is wild. American Water is a rather well known company and industry analysts should have an easier time pegging the worth of the stock – a stock that RWE admittedly paid too much for.
And the word on the street has been less than kind.
Officially, RWE stated that they were exiting the market so they could concentrate on the more lucrative power markets in Europe. Privately, it appeared the board just wanted to get out of attending local Alderman meetings.
In April, a consumer advocacy organization called Food & Water Watch obtained the sealed minutes from RWE’s board. In the document, executives admit that “con-siderable political resistance to privatization of the water sector” and “performance problems and weak growth at American Water” were reasons for the German utility’s exit from the market.
“These minutes demonstrate that RWE doesn’t believe that private water companies in the United States are a good investment,” Food & Water Watch’s Executive Director Wenonah Hauter said in a statement after releasing the minutes. “The company is dumping their bad investment on Wall Street investors and American ratepayers.”
An educated customer is their best customer
In Parkville, rates are set to rise almost 25 percent if Missouri American has their way and many people are starting to wake up to the realities of such an increase. With gas prices expecting to rise much further, property tax reassessments, parks and road taxes, a garish new ambulance tax and consumer prices on the rise, the water bill is just the latest hit on the local pocketbook.
“We’re very concerned,” Jim Allen, owner of The National Golf Club told the Luminary. Although the golf club utilizes a state of the art irrigation system that feeds from lakes on their property to water their two golf courses, the club frequently relies on the local water supply, too. One year, the club spent about $100,000 on their water bill. With the increase, the bill would be $25,000.
“That’s no small amount,” Allen remarked.
Missouri American’s tactic in the early going has been one of “education”, a philosophy championed by the company’s new CEO Don Correll. Correll was the former CEO of CEO of Pennichuck Water Service Corporation, a New Hampshire based water services company that successfully fended off local takeovers in the past. Once the company is spun off, Correll has indicated he plans on growing the company through the raising of rates and admitted as much at an industry conference in New York.
“We need to educate the public to appreciate the value of water, so they are willing to spend more,” he said. “Once you educate the customer, there is a willingness to pay.”
Borrowing a page from power and light companies, who often urge protestors of new plants to switch to candle power, Correll once commented that dissenters to rate increases should be given a choice of “bottled water or going to the river with a bucket.”
Missouri American is in lockstep with Correll’s message.
“We continue to deliver an excellent service that our customers depend upon at an exceptional value,” Greg Weeks, Missouri American’s General Manager, declared in a statement the day his company decided to begin the process of raising rates in Platte County. “One gallon of tap water still costs less than one penny.”
According to Weeks, the company will have invested almost $200 million in water system improvements throughout the state from November 2003 to April 2007. The company has been replacing and installing new water lines, meters and hydrants and making improvements at water treatment, pumping and storage facilities to enhance customer service in local communities. Weeks added that Missouri American Water has also experienced significant increased costs for chemicals, fuel, labor and insurance over the past three years, which it is seeking to recover in its rate filing.
Any change in water rates will become effective only after a thorough analysis and review by the Missouri Public Service Commission; a process that will take approximately one year and includes opportunities for formal public and customer input. The last meeting was held at Park University’s McCoy Meetin’ House in June. Read the Luminary for future meeting dates.
Once paid off, there are no publicly announced plans to lower rates.