State Wants Firms to Get Share of Water Funds

Critics say 2-year-old Prop. 50 allows only nonprofits and public agencies to benefit.

By Nancy Vogel, Staff Writer
Los Angeles Times

SACRAMENTO - California health officials are preparing to reverse a long-standing state policy by letting private companies tap voter-approved water bond money that has historically been restricted to public water districts.

Several public agencies and consumer groups are fighting the move, arguing that voters had no indication that for-profit firms might benefit when they passed Proposition 50, a $3.4-billion water bond measure, two years ago.

State health officials are just now drafting rules for dividing up the Proposition 50 money and are being heavily lobbied to make sure procedures allow private firms to compete for shares. The firms gained the support last year of a key lawmaker who presides over state water issues.

"We have a multifaceted water system in California that runs the gamut from public to private," said state Sen. Mike Machado (D-Linden), who heads the Senate Agriculture and Water Resources Committee. "So we have to try to deal with all aspects of it."

Officials at the state Department of Health Services say they are inclined to agree. Next week the department is expected to complete guidelines that will allow private companies to compete for $485 million in Proposition 50 money.

Machado said he would try to make sure the rest of the bond money was similarly available to investor-owned companies.

In 2002, proponents heralded Proposition 50 as a way to protect, expand and clean California's water supplies and to preserve river parkways and wetlands. The official state voter guide included the statement that bond money "would be available for expenditure by various state agencies and for loans and grants to local agencies and nonprofit associations."

Previous water bond measures in California, including those passed in 2000 and 1996, limited grants of the bond money to public agencies and nonprofit groups, although private companies have been able to get loans through a fund for safe drinking water.

"Water in California is enshrined in our state Constitution as a public trust," said Juliette Beck, coordinator of the "Water for All" campaign of Public Citizen, a national nonprofit consumer advocacy group. "We think it's imperative that public funds go to support public water systems and never end up in the coffers of multinationals or private companies, period."

Officials with the private water companies, however, argue that their customers are taxpayers too, and therefore should be entitled to the benefits of a statewide bond issue that all taxpayers will be paying back over the next 25 years.

"Twenty percent of the state's population is served by these utilities; everybody pays for the bonds, so everybody should be able to compete fairly," said Christine Frahm, a lobbyist for Southern California Water Co. in San Dimas. The company would like to use Proposition 50 money to help pay for the replacement of main water pipes in Norwalk and Artesia, she said.

Stan Ferraro, a vice president with California Water Service Co., which serves 460,000 people from Los Angeles to Chico from its headquarters in San Jose, is also interested in getting Proposition 50 grants for his company. He said state aid would help keep customer rates from rising.

"It purely is saving our ratepayers from us having to go out and borrow the money," Ferraro said.

But public agencies and consumer advocates argue that taxpayer-financed water bonds should not be used to aid investor-owned companies, some of which are subsidiaries of large, European-based corporations. There is not enough money available to pay for all the worthy projects sought by public agencies, they argue.

The state health department's original draft guidelines on distributing Proposition 50 money banned private water company applications.

But the agency reversed itself after private water firms — which have spent more than $800,000 on lobbying in 2003 and so far in 2004 — stated that the Proposition 50 language passed by voters did not unequivocally restrict the money to public agencies.

"Unless there's some specific section that prohibits the funding to go to private entities, since the private enterprises provide water to consumers and it improves water quality, our read of it is, it's acceptable," said Rufus Howell, assistant chief of the department's Division of Drinking Water and Environmental Management.

That position is supported by a legal opinion issued Feb. 27 by the state legislative counsel's office at Machado's request.

Unlike previous water bond measures, Proposition 50 was not written by the Legislature, but largely by Joe Caves, a Sacramento attorney who has worked for various environmental groups. Many lawmakers, as well as public and private water purveyors, supported the bond issue, and private water companies donated $52,500 to the "Yes on 50" campaign.

"We didn't put in a prohibition," Caves said. "We just didn't speak to the issue."

Last year, Machado introduced a bill that would make private water companies eligible to tap Proposition 50 funds.

His bill would also open the bond money to mutual water companies, which are not-for-profit water districts owned by customers.

Machado said the bill had nothing to do with the $25,000 in campaign contributions he accepted last year from private water companies, including $20,000 from Southern California Water.

"It's a question of health and safety," he said. Many private water companies serve poor communities, he said, especially in eastern Los Angeles County and the southern Central Valley. "I realized we weren't addressing the needs of all the constituents who were supporting the bonds."

Machado's bill is stalled in the Assembly, but he said it was no longer necessary, given the pending health department guidelines for distributing bond money. He said he would try to ensure that the Department of Water Resources, State Water Resources Control Board and other bond-disbursing agencies that have yet to write guidelines would also allow private water companies to compete for the money.

The health department's proposed guidelines are less restrictive than Machado's bill. His legislation includes provisions to ensure that the California Public Utilities Commission prevent private companies from earning a profit from any bond-funded improvements, such as a water treatment plant. The PUC regulates 144 investor-owned water companies and sets the rates they can charge.

Public water agency officials expressed concern that mere administrative rules would be more lax than what Machado proposed.

The senator expressed certainty that the PUC would oversee the use of any bond money a private company might be awarded and guarantee that shareholders and corporations would not profit from it.

But PUC officials have yet to determine how they will deal with the novel situation, said PUC spokeswoman Terrie Prosper.

The issue never arose in the 2002 campaign for Proposition 50, which encountered only minor opposition, from the California Farm Bureau and taxpayer groups resistant to more state borrowing.

Those who represent public water agencies say they have become aware only in the last few weeks that they could be competing with private firms for Proposition 50 money. The Assn. of California Water Agencies has yet to weigh in on the issue.

Jerry Jordan, executive director of the California Municipal Utilities Assn., sent a letter last week to Gov. Arnold Schwarzenegger's Health and Human Services Agency secretary warning that the proposed set of guidelines "undermines and contradicts long-standing state policy."