Earlier this week, American Water, the country’s largest private water utility providing services to 15 million people nationwide, announced that it is selling its water outsourcing business to French multinational Veolia. This appears to be among its final actions in a years-long shift away from operating city-owned utilities to focus on its core business of directly owning water and sewer systems. American Water undertakes the most extreme form of water privatization: outright purchases of public systems.
Owning a water system can be more lucrative because the company can set its own water prices and determine its own projects – with regulatory oversight (but as discussed below, that oversight is often tarnished by revolving-door issues and conflicts of interest). When a company manages and operates a water system under an outsourcing contract, the local government usually retains some control over setting the prices and should be able to have some oversight of the system.
Although American Water is keeping a few contracts, including in Camden, N.J., these deals are near systems that the company owns. The company aggressively pursues acquisitions of municipal water systems near its existing network and of sewer systems where it already owns the water system. These deals allow the company to purchase smaller systems, tie them into its larger network, use its own workforce without hiring public workers, and then hike rates on its customers across the region. These situations also provide the company with a competitive advantage given its name recognition and familiarity with the local officials who decide whether to sell public assets. By retaining Camden’s contract, American Water is sending a strong signal that the company will eventually seek to outright purchase the city’s water system.
Where is American Water Growing?
The company’s growth is concentrated in states with corporate-friendly regulators and legislators who allow it to hike rates and rake in profits. Most notably, American Water has been aggressive in Pennsylvania, following a slew of pro-privatization laws that were passed in the state. Since 2017, more than a third of the company’s new customers from acquired systems are in Pennsylvania.
American Water’s Top States for Acquisitions
|State||No or limited referendum requirement||Fair value legislation||Water/sewer rate consolidation||Infrastructure surcharges||Total acquired customers 2017-2018 (including pending)||% of acquired customer growth|
Source: Food & Water Watch calculations based on American Water. “Investor Presentation.” June 2018 at 12, 14 and 28; American Water. “Investor presentation.” June 2018 at 28; American Water. “2017 Fourth Quarter and Year-End Earnings Conference Call.” February 20, 2018 at 39.
What are Pro-Water Privatization Laws and Regulations?
Some of the following are legislative measures and regulations that could help smooth the way for American Water to own more systems:
- Removing Public Input on Water Privatization — Some states like Pennsylvania have never required voters to approve the sale of their water systems to companies. Other states, like New Jersey, have century-old laws giving the public the right to decide the future of their water and sewer systems. Recent legislative efforts have curtailed these public protections and cut the public out from the decision making. In New Jersey, former-Governor Chris Christie signed a law that fast-tracks privatization by removing the automatic right to referendum on water system sales in 2015. That same year, in Indiana, then-Governor Mike Pence signed a law that bans referenda on the privatization of small and distressed water systems, and because of that law, a community group in Charlestown, Indiana, never got the vote they petitioned for and their water system is being sold to American Water.
- Fair Value Legislation — These state laws facilitate rate hikes and the privatization of public water and sewer systems. When a private company buys a municipal water system, traditionally state regulators need to review the purchase to determine if the price is reasonable and to limit rate increases by allowing a company to recover only the system’s book value. Under fair value legislation, outside consultants can set the value of that acquired water system and the company can then recover that potentially inflated amount through rate hikes on its customers. This has a dual effect of making it more profitable for companies to buy systems and making it easier to entice cities to sell because the company can offer higher purchase prices.
- Water and Sewer Rate Consolidation — Pennsylvania was the first state in the country to allow private water companies to charge their drinking water customers for the cost of buying up wastewater systems. Governor Bruce Rauner vetoed similar legislation in Illinois in 2015. Usually, drinking water customers pay the cost of drinking water systems, and wastewater customers pay the cost of wastewater systems. This legislation allows water companies to spread the costs of privatizing wastewater systems to their drinking water customers. It was a great impetus for American Water’s wastewater growth in Pennsylvania, facilitating for example the company’s purchase of Scranton’s sewer system. “Rather than recovering that money only from Scranton customers, our investment could be spread out to our entire system,” said Walter Lynch, president and chief operating officer of regulated operations for American Water, to the Scranton Times-Tribune while making its pitch in 2015. “This makes acquisition of a system more palatable to the parties involved and the ratepayers.”
- Infrastructure Surcharges — Pennsylvania was also the first state to allow companies to charge surcharges for infrastructure projects. Investor owned water utilities can automatically increase customer bills up to a certain percentage — from 3 percent to 10 percent, depending on the state — after repairing or replacing water pipelines. (Check out our fact sheet about these surcharges).
The Water Lobby
Given the passage of these state laws, it should be no surprise that the private water industry has spent a considerable amount of money communicating with state legislatures about their interests.
For example, from 2007 through the first quarter of this year, Pennsylvania American Water (a subsidiary of American Water) has spent $1.3 million lobbying in Pennsylvania.
New Jersey American Water paid nearly $150,000 last year alone to Optimus Partners, the lobbying firm of Philip Norcross. NJ Spotlight described Norcross as “the brother of a congressman and the man considered South Jersey's Democratic party boss.”
Who Regulates Whom?
Corporate friendly regulators add fuel to the pro-privatization legislation. There is a pernicious revolving door between state utility regulators and the companies they are supposed to regulate.
For a stark example, look no further than the new head of the National Association of Water Companies (NAWC), the trade association for water corporations: Robert Powelson. Powelson previously served as head of the National Association of Regulatory Utility Commissioners.
Powelson was also chair of the Public Utility Commission in, you guessed it, Pennsylvania, where he approved water rate increases for investor-owned water utilities like American Water that he now represents as the head of NAWC.
Powelson isn’t alone. Water companies have hired former state regulators, and governors have appointed corporate lobbyists to be regulators. For example, in 2013, Aqua America hired a New Jersey regulator to be the president of its New Jersey arm. The next year, then-Governor Chris Christie appointed a former New Jersey American Water lobbyist, Richard Mroz, to lead the state Board of Public Utilities. (NJ American Water paid him $36,000 in 2013, according to lobbying disclosure reports.) Mroz left the board earlier this year to return to the private utility sector.
State officials are failing to protect the public from the exploitation of corporate water monopolies. Large corporations are advancing their own interests through laws and regulations that fast track privatization of public water and hike prices on their captured customer base.
This is unacceptable. Three simple actions can help prevent further erosion of the integrity of the regulatory process:
- Governors should appoint utility commissioners who are protective of the interests of public — not the corporations they regulate.
- States should pass strong laws outlawing the revolving door between regulators and the corporations they regulate.
- State legislatures should promote democratic decision-making about the future of water and sewer systems by requiring voter approval of water privatization deals.