September 30, 2002

Water as Business Taps Into Fears

Environment: Concern over possession of a natural resource as a commodity and the possibility of firms' taking treatment shortcuts hamper deals.

by Michael A. Hiltzik
Los Angeles Times

The apparent breakdown of a deal between private Cadiz Inc. and the public Metropolitan Water District to build a $150-million water storage facility in the Mojave Desert raises an issue that may become more relevant to the state's water future: What role is there for private enterprise in supplying water to the California public?

The question evokes fears of the kind of corporate profiteering and market manipulation alleged in the wake of energy deregulation in the state. If anything, privatizing water may be an even more sensitive issue, given its stature as a natural resource essential for physical, as well as economic, health.

In part because of the dangers of cutting corners on water treatment and system maintenance, public-interest advocates have long been wary of efforts to turn over public water supplies or systems to private enterprise.

"One of the things we learned in the energy deregulation debacle is not to give private companies a free hand in the management of a natural resource," said Peter H. Gleick, president of Oakland-based Pacific Institute for Studies in Development, Environment, and Security and coauthor of a study critical of global water privatization. "Water is too important to be left solely in private hands."

Still, many private entities are active in the water trade throughout the state--and some are planning to become more deeply involved.

Among them are owners of water rights in the river-rich north who deliver supplies to the parched south. Others are small-scale farmers who agree to fallow acreage during droughts in order to divert irrigation water to cities and suburbs. And some view the state's geographic imbalance of supply and demand as a long-term commercial opportunity.

In the Sacramento-San Joaquin Delta, for example, a real estate venture between two life insurance companies--Zurich Financial Services and Kemper Insurance Cos.--is proposing to build reservoirs on two marshy islands to hold surplus floodwater for release during dry periods. Layne Christensen Co., a Mission Woods, Kan.-based mineral, energy and water company, is expanding water storage facilities in Kern County that already are under contract to provide dry-year supply to the MWD.

But many other private entities have been lured by visions of riches to be made in the business of moving around water supplies within the state--only to be crushed in a bureaucratic and political wringer.

"A lot of companies trying to move water across the delta have not been successful because it's complicated," said Jerry Johns, water transfer chief for the California Resources Agency. "It requires a lot of overhead. The physical issues are hard. Water rights are complicated. If your business plan is moving water from north to south, you should be prepared to spend a lot of time working out how that's done."

As a commodity, water is protected by a shield of regulation, tradition and emotion that can turn even the determination of who owns the right to use water under what conditions into a forbiddingly complex task. These complexities have blindsided some of the country's most sophisticated private investors, leading to some spectacular missteps in recent California history.

In the mid-1990s, the wealthy Bass brothers of Texas bought up 30,000 acres of farmland in the Imperial Valley, hoping to profit from the spread between the $12.50-per-acre-foot price they paid for Colorado River water as farmers and the $250 that San Diego would pay them to divert it as urban supply. Too late, the Bass family discovered that the water rights did not belong to them as landowners but in trust to the Imperial Irrigation District, which opposed the Bass sale. (The Bass family still made a profit in the Imperial Valley. Meanwhile, the district moved to strike its own deal--still under negotiation--with San Diego.)

Three years ago Azurix, a water-trading subsidiary of Enron Corp., paid $31 million for a 13,000-acre ranch in Madera County, in the heart of the San Joaquin Valley farming region. The idea was to allow customers to store as much as 400,000 acre-feet of water in an aquifer under the ranch, extracting it in dry periods as needed. Local farmers viewed the proposal as a pretext for stealing their natural water supply. (An acre-foot is about 325,000 gallons--enough water to meet the needs of two average households for a year.)

"The Azurix project was perceived as a threat, as a means of taking our water and sending it away to the highest bidder," recalled Kole Upton, a pistachio and almond farmer who headed a local water users' group opposed to the project. The Madera County Board of Supervisors eventually passed an ordinance requiring their consent to any water transfers out of the district. Azurix later disintegrated in the Enron bankruptcy. A unit of Layne Christensen has since taken over the property.