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Misconduct Taints the Water in Some Privatized Systems

When cities hire firms to run utilities, they seek quality at lower cost. They may get ethics scandals, violations and irate consumers.

May 29, 2006|Mike Hudson | Special to The Times

INDIANAPOLIS -- In recent years, cities across the U.S. have turned over a vital public service -- providing safe drinking water -- to private enterprise.

Driving the trend was the idea that for-profit companies, mainly European conglomerates, could operate water and sewer systems efficiently, keeping water quality high and costs low.

In some places, private-sector management helped trim bureaucracies and replace decaying infrastructure, local officials say. But in Indianapolis, New Orleans, Atlanta and other cities, privatization has been accompanied by corruption scandals, environmental violations and a torrent of customer complaints.

In Atlanta, residents began complaining of brown, brackish drinking water soon after the French company Suez and a subsidiary began running the water system under a $428-million, 20-year contract. It later emerged that Suez had treated then-Mayor Bill Campbell, who championed the contract, to a $12,000 Parisian holiday.

In New Orleans, officials blamed a subsidiary of Veolia Environnement, another French company, for illegally discharging sewage into the Mississippi River on dozens of occasions. The president of a related Veolia subsidiary was convicted in 2002 of bribing a New Orleans sewer board member to support renewal of its contract.

In Milwaukee, a Suez subsidiary caused 107 million gallons of untreated sewage to be discharged into streams and Lake Michigan, a 2002 state audit found. The company triggered a series of overflows by shutting off sewer tunnel pumps during hours of peak electricity demand, saving itself $515,000, the audit said.

A lawsuit by Wisconsin's attorney general blames inadequate maintenance for an even bigger discharge in May 2004, when more than a billion gallons of sewage gushed into local waters.

Indianapolis reached a $1.5-billion, 20-year agreement with Veolia to run the city's waterworks in 2002. The contract is the largest of its kind in North America.

Within the first year, customer complaints nearly tripled and the company admitted mailing more than 15,000 incorrect bills. Inadequate maintenance caused hundreds of fire hydrants to freeze, hampering efforts to put out fires that consumed a church and other buildings.

Then, on Jan. 6, 2005, heavy rains swelled the White River and triggered a chain of system failures at the White River Treatment Plant. Officials issued a boil-water advisory, 40,000 schoolchildren took an unscheduled holiday and residents of the nation's 12th largest city learned they could no longer take their tap water for granted.

A federal grand jury, meanwhile, is investigating allegations that Veolia's Indianapolis unit falsified water-quality data.

Peter Gleick, president of the Pacific Institute, an Oakland think tank that studies water issues, said the rhetoric of privatization "has run into the brick wall of reality."

"I'm not opposed to privatization. I'm opposed to bad privatization," Gleick said. "If privatization is going to work, there really needs to be clear protection of the public good and clear standards for performance."

The water companies say the vast majority of cities are satisfied with their performance. In recent years, they say, more than 90% of municipalities with private water or sewer operators extended their contracts when they came up for renewal.

"We've had some jobs where we haven't done a fantastic job," said Scott Edwards, a vice president of Veolia Water North America. "But we have largely done a fabulous job.... We believe in what we do. We believe our story and we believe in the day-to-day results."

Veolia and Suez, the world's two largest water companies, moved aggressively into the American market in 1999.

Veolia spent $6 billion to acquire the nation's largest water company, USFilter. Suez, which already owned a third of United Water, a private firm based in Harrington Park, N.J., spent $1 billion to buy the entire company.

In 2003, Germany's RWE AG purchased American Water Works Co., based in Vorhees, N.J.

The European companies touted their size, financial wherewithal and expertise and they cultivated friends in city halls, state legislatures and Congress. They promised to provide solutions for cities struggling with aging pipes, tight budgets and tough environmental regulations. Over the last decade, major water firms have made more than $4 million in federal campaign contributions, according to the nonpartisan Center for Responsive Politics. The industry also has given generously to the U.S. Conference of Mayors.

The mayors' conference helped spark the industry's growth by lobbying the Clinton administration to strike an Internal Revenue Service rule that limited municipal utility management contracts to five years. The 1997 rule change cleared the way for 20-year deals.

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