The Fine Print: How Big Companies Use Plain English to Rob You Blind

by David Cay Johnston

  That 1992 law was just one brick in a nationwide wall that monopoly corporations are building with their campaign contributions. What the people of Felton and some other California towns did to fight back provides a template for stopping price-gouging monopolists and their allies in government.

  In addition to their corporate opponents, the people of Felton faced open hostility from the California Public Utilities Commission. In the sixties and seventies, corporate utilities regarded CPUC as the toughest regulator of its kind in the nation, a guardian of public interests that wrought many reforms, including addressing phantom taxes related to water billing. By the dawn of the new millennium, however, the good reputation of the commission had deteriorated.

  After passage of the 1978 property tax limit known as Proposition 13, political power in California concentrated in Sacramento as taxing power and responsibility shifted to the state from elected county and municipal officials. By the time the Felton fight began, two of the five utility commissioners came from utilities, and staff members of a third commissioner openly mocked consumers for challenging what utility companies wanted. Hardly anyone knew this, however, because only one major newspaper, the San Francisco Chronicle, retained a journalist who frequently covered utility issues.

  Yet the prospect of costly water in Felton ignited unexpected interest. Felton is an idyllic hamlet, with a covered wooden bridge and a small-gauge steam railroad attracting tourists and picnickers. The business district parallels the San Lorenzo River, which flows beneath steeply raked mountainsides studded with giant redwood trees that drink from the morning fog. Nestled among the redwoods are a few hundred cottages and some sprawling modern homes that overlook a two-lane road that wends through the coastal mountains until the asphalt, along with the river, flows into the seaside resort of Santa Cruz, six miles away.

  Felton is home to some five thousand people, an amalgam of Silicon Valley commuters, entrepreneurs, artists and small-business owners like Connie Barr. She arrived as a widow escaping crowded Southern California and kept busy for a decade running a children’s clothing shop. I know Felton well. For a year, starting in 1967, as a teenager I earned the minimum wage reporting for the weekly Valley Press. Later six of my children attended school there.

  The place began as a logging town after the Civil War and supplied many of the materials used to rebuild San Francisco after the 1906 earthquake. In the 1880s, the townspeople had created a water company to “hold, in trust, the water works of Felton, for the use and benefit of that village forever.”

  Over the years, Felton’s population dwindled, along with the biggest redwoods, until in 1923 the water company was sold to a developer. He kept water prices low, as did the local owners who followed. In 1961 Citizens Utilities, a Connecticut operator of water systems, paid about $1,785 per customer in 2012 dollars for the Felton water system, but the price was in line with its value and did not require raising rates.

  This long history of good service and low water prices evaporated in 2002 when American Water Works’ CalAm (California American Water) subsidiary bought a number of little California water utilities from Citizens Utilities, including Felton’s. American Water Works soon became one of more than eight hundred subsidiaries of the German company Rheinisch-Westfälisches Elektrizitätswerk Aktiengesellschaft (the name means North Rhine-Westphalia electric power plant joint stock company).

  RWE is one of the largest publicly traded companies in Germany, a global leader in turning water from a public-service commodity into a private-profit center. At the time it acquired Felton’s little water utility, RWE had 2.6 million water customers just in North America, and its executives boasted of their plans to wring huge profits from water systems. In the case of Felton, however, they faced unusual opposition.

  Under California law, when a utility is sold, customers and local government officials must be given notice. That gives them a chance to object to the buyer and raise questions if the price implies future rate hikes. No one in Felton remembers getting notice. Connie Barr learned of the sale as president of the Felton Business Association, when Jeff Almquist told her. He was the Santa Cruz County supervisor whose district included Felton. Almquist told her that the notice of sale to American Water Works had, apparently, been sent to the wrong county office. By the time it reached Almquist, it was too late to challenge the sale or the price.

  Barr and others describe the letter as misdirected accidently on purpose, but what alarmed Almquist was the high price American Water paid. It was 67 percent more than the value of the Felton water system assets. He guessed that a price so much above book value meant the new owners would seek a big rate hike. His hunch was right, as the rates promptly went up a whopping 74 percent. The new German owners also signaled their intent to seek annual rate increases.

  “What we did not know then, but realized later, was that they planned to double our water rates about every three years,” Barr recalled.

  Hundreds of letters were sent to the Public Utilities Commission, and 1,200 people signed a petition asking that the neighboring San Lorenzo Valley Water District take over the Felton water works. Supervisor Almquist and the newly formed Friends of Local Water, or Felton FLOW, wrote to oppose the rate hike.

  The Public Utilities Commission agreed to hold three public hearings in Felton. Several hundred people jammed the community center, its windows opened so those standing outside could hear the hours of complaints lodged with an administrative law judge. Connie Barr, like everyone else, thought the commissioners were giving their views due consideration. They thought wrong.

  “After one of the meetings I was in the hall talking to a couple of the girls who worked for the judge,” Barr recalled. “I said this was pretty dramatic testimony about poor quality water and lack of repairs and the company asking for big rate increases.” Then Barr wondered aloud how long it would be before the results of the meeting would be known.

  “One of the judge’s girls just looked at me,” Barr remembers.

  “They don’t have to do anything,” the woman told Barr. “This is not that kind of process. This is the ability for people to come and speak. It goes nowhere.”

  The administrative law judge did cite the public statements in his report, but nothing in his decision suggests that those statements resulted in a lower rate hike than the one he granted. Meanwhile, American Water Works, which had bought itself back from RWE, was busy trying to sabotage Felton FLOW. It got a bill introduced in Sacramento to make it harder to use government’s power of eminent domain to force a buyout. American Water Works sent out two flyers asserting that people in another California town, Montara, had been unhappy after winning control of their water system. The flyers omitted mention of the community celebration held a year after the takeover and the fact that all of the Montara water board members won reelection. There were other reported shenanigans by the company: Mark Stone, then a Santa Cruz County supervisor, said that an American Water Works official told him that if he did not back off and support their continued ownership of the Felton system, they would make sure he lost his reelection campaign in 2004. The company supported a lawsuit brought against the Felton FLOW organizers. In neighboring Monterey County the company tried to get a law passed exempting it from any local regulation. When a Felton resident whose water supply suddenly stopped took photographs of an American Water Works crew, the company called the sheriff. And the company gave an antitax group money to produce another flyer, one opposing the takeover by showing hundred-dollar bills burning. The flyer made no mention of the fact that water rates had more than doubled in three years and that more increases were pending.

  Then, in 2005, a measure to raise taxes and sell bonds to buy out American Water finally got onto the ballot. It passed with 74.2 percent of the vote. American Water works was subsequently bought out for $13 million, of which about $11 million was cash.

  Was the price fair? Was it, as utility law requires, “just and reasonable”? American Water bought sev
eral small water systems at about the same time, its reports to shareholders show. The company paid on average $1,540 per customer. At $13 million, Felton residents paid almost $10,000 per customer to be free of American Water, more than six times what American Water Works paid others to acquire their systems.

  “Buying out the water company was a huge victory, even though we got robbed blind,” said Jim Mosher, a veteran lawyer who was the volunteer legal coordinator for FLOW. “Even when you add the higher property taxes to pay off the bonds and the water bills we now pay, people still save money every month. Had the company won we would be paying the huge future water rate increases the water company was seeking and be much worse off. When the bonds are paid off after thirty years, this will be a really great deal.”

  For its part, American Water Works says the price it got for the Felton system was only half what it deserved. Comparing what the company got for the Felton system to what it paid for small water systems elsewhere is basically nonsense, Kevin Tilden of American Water Works told me. “Each water system is unique,” he said. A difference such as location or age of the system “makes an apples-to-apples comparison nearly impossible.”

  Tilden has a point. A water system with new pipes and pumps and other gear is worth a lot more than one that has been run down, leaks and needs upgrades.

  So what shape was the Felton water system in? “The system was one step short of awful,” said James Mueller, the general manager of the municipal water system that serves the rest of the San Lorenzo Valley and who is in charge of upgrading and modernizing the system that American Water let fall apart. After the takeover, he says, “the company pretty much stopped maintenance.” That means the $10,000 per customer buyout price was actually higher as the system had to be rebuilt and upgraded after years of corporate neglect. (See table on page 126.)

  A WIN FOR AMERICAN WATER

  While people in Felton won their fight, some New Jersey customers of American Water were not so fortunate. American Water’s New Jersey subsidiary remains the dominant supplier of water in the Garden State with 2.5 million customers in thirty-eight towns. It also sells water wholesale to ten municipal water systems.

  The company reported that the typical New Jersey residential customer paid $38.21 per month in 2007. It got a 12.5 percent increase that year and 15.2 percent the next and in 2010 was seeking a further 14 percent increase. Add it all up, and the average customer wrote a monthly check for $56.44. That’s a nearly 48 percent increase in three years when inflation ran just 5.3 per cent.

  Raising monopoly water prices nine times faster than inflation is a surefire way to make company executives and shareholders wealthier while damaging local economies. The increase in water rates alone means that each New Jersey community of 100,000 people has $8 million less money to spend each year.

  Despite these enormous rate increases, all approved by the New Jersey Board of Public Utilities, American Water in 2010 wanted to cut benefits to its workers. The company said it just could not afford them. It demanded that the workers pay 52 percent more in health insurance premiums for their families. The American Water workers in New Jersey earned an average wage of $24 an hour, according to the Utility Workers Union of America, which represents many of them. That’s about $48,000 per year.

  Customers of American Water Works, who have no choice but to pay its rapidly escalating prices, have helped it produce stellar performance for investors even as it cuts back on investments in its water systems. The company reported that the volume of water it sold in 2010 increased only 2.4 percent over 2009, while operating profits soared to more than four times the 2009 operating profit. Customers can expect even bigger and faster rate hikes because, as the company disclosed in the fine print of its annual Form 10-K statement, management has “continued its focus” on getting rate increases approved faster.

  Taxes are another story. American Water paid just 6 percent of its profits in 2009 taxes, far below the 35 percent tax rate set by Congress. In 2010, when profits quadrupled, it paid nothing. Instead the company got back $30 million from the government, making its real tax rate negative 4 percent.

  The company’s statements to investors show it intends to squeeze customers for more and more money. It told investors in its 2011 annual disclosure statement that “water and wastewater rates in the United States are among the lowest rates in developed countries; and for most U.S. consumers, water and wastewater bills make up a relatively small percentage of household expenditures compared to other utility services.”

  Another pattern is easy to discern. American Water lets its systems run down, then demands huge rate increases to fix them up, not unlike the problem Pacific Gas & Electric customers will face because the company is replacing power poles that last fifty years on a 700-year cycle. Despite rate hikes approved or being sought everywhere, American Water sharply cut spending in 2009 and 2010 to improve its water systems. It also told shareholders that in 2011 investments to maintain and improve the systems would be “at the lower end” of its budget.

  The rates customers paid American Water Works bought them more than $1 billion of capital improvements in 2008; but in 2010, when rates were much higher, this spending fell 24 percent to $766 million.

  As at corporate-owned electric, natural gas, telephone and cable systems, American Water’s captive customers can expect more of the same—higher rates, minimal spending to improve the system, and a decrease in the compensation of its rank-and-file workers.

  All this adds up to a very good deal for the company and its owners, but what about the customers? Fortunately, most water in America is still distributed by nonprofit systems administered by cities, counties, special water districts or cooperatives. These systems do not pay multimillion-dollar salaries to their executives and do not operate corporate jets that the executives can use to fly off to play golf. But Wall Street is busy promoting private takeovers of municipal water systems that give governments a one-time slug of cash. Politicians like Governor Mitch Daniels of Indiana promote these sales as a way to ease taxpayer burdens. But the relief is illusory. The cash infusions the government gets must be paid back through higher rates, while commonwealth property is transferred to private hands.

  Local governments that are smart about their water systems not only maintain them, they charge prices high enough to cover part of the city budget, a surplus that reduces the need to raise money through sales taxes, property taxes and fees.

  FELTON WATER BUYOUT SAVES MONEY

  CORPORATE-SUPPLIED WATER,

  ANNUAL PRICE AFTER

  RATE HIKES $2,017.76

  COMMUNITY-OWNED WATER

  SYSTEM BILL $484.50

  TAX INCREASE TO BUY OUT

  AMERICAN WATER WORKS* $535.00

  TOTAL COST OF COMMUNITY-OWNED

  WATER SYSTEM $1,019.50

  SAVINGS PER YEAR ($998.26)

  * Bonds paid off after 30 years

  People tend to use more water as their incomes grow; this behavior is mildly in accord with the ancient principle that the greater one’s economic gain, the greater his burden to sustain the civilization that made his gains possible. It’s a better model than the monopoly.

  12…

  How We Beat the Garbage Gougers and Their Stinking High Prices

  I was searching for my perfect Donna Reed neighborhood. Sidewalks, streetlights, family life. Pleasantville.

  —Melinda Goldberg, Brighton, New York

  12. Your monthly bill to have your garbage hauled away has been rising faster than inflation. Even during the Great Recession, when we had less money to spend and less trash, prices kept rising. And they’ll continue rising if executives of the big garbage companies have their way.

  The explanation has nothing to do with growing demand or even a shortage of landfills. Indeed, some landfills are actually shrinking—and sinking; that’s what happens when you spray water onto them and let bacteria silently dine on the buried trash. But your trash-hauling bills are on the rise
because of a long-term strategy by the biggest garbage haulers to reduce competition, thereby handcuffing the invisible hand of Adam Smith’s competitive marketplace. In fact, executives of the two largest garbage companies, Waste Management and Republic Services, have touted their shares to Wall Street analysts as lucrative investments because, they boast, they have defeated the power of the market to hold down the prices customers pay.

  Republic Services says it has about 18 percent of trash-hauling revenues. Waste Management has 26 percent. Two companies controlling 44 percent of a $47 billion industry describes not competition, but oligopoly. Competition is good for consumers and the economy overall as it promotes efficiency, tends to hold down prices and encourages innovation. Oligopoly is good for owners because it helps them escape the rigors of market competition so they can jack up prices, earn bigger profits than a competitive market allows and expend less effort managing their assets.

  Later in this chapter, we’ll look in more detail at the stranglehold these two companies have on their industry. First, though, some good news: you can fight the garbage gougers and win. The path to lower prices may surprise you: paying higher taxes lowers the cost of garbage collection. In my neighborhood in upstate New York we agreed in 2006 to raise our property taxes. The next year we started saving money and since then the savings have grown. Every extra dollar of tax I paid in 2011 meant $1.80 more in my pocket.

  The truth behind such tax calculations has come under such vicious attack for the last three decades that many Americans have a blind spot, refusing to consider how expedient this strategy can be in cutting costs and maximizing services.

  TRASH TALKING TAXES

  At one time, a wide cross section of Americans understood that taxes could save money and help grow the economy. The principle has been largely forgotten since the modern antitax movement got going with the 1978 passage of Proposition 13, the ballot initiative that froze basic California property taxes at 1 percent of a property’s value.