Enron unit tried for water privatization in Florida

Enron unit tried for water privatization in Florida
Michael Pollock & Chris Davis, Herald-Tribune (SW Florida)
March 2002

While Jeb Bush was running for Florida's governor in the summer of 1998, Enron Corp., a fast-growing Houston energy broker, was diversifying into a potentially lucrative new field - privatization of water supplies.

Even as Bush's secretary for the Department of Environmental Protection was settling into his office in February 1999, top executives of Enron's new water venture, Azurix Corp., were seeking audiences with the new governor and his DEP chief David Struhs.

Although Bush generally kept his distance from Azurix, his man Struhs stood on the sidelines like a cheerleader throughout Enron-Azurix's unsuccessful two-year attempt to privatize Florida's water market.

Struhs promoted two ideas near and dear to Azurix: auctioning off blocks of water to the highest bidder, and boosting underground water and storing it there for later withdrawal, a process called aquifer storage and recovery, or ASR.

By May 2001, as Enron was getting ready to junk Azurix and sell it for its parts, Struhs cooled on ASR, citing concerns by environmentalists and legislators.

Enron's attempt to duplicate its success in energy brokerage with a free-market approach to water resulted in $900 million in Azurix debt - a factor in Enron's decision to seek protection from creditors in bankruptcy court.

Azurix's Florida proposals died with the dismantling of the company during 2001 - for which Jeb Bush and the people of Florida might want to thank their lucky stars.

Had Enron and its billion-dollar water baby Azurix succeeded in landing major Florida contracts, taxpayers might now be deeper in the cross-currents of the unfolding Enron bankruptcy and potential fraud case.

Coming-out party
Florida was a primary target for Azurix.

"The simple math is that there are a handful of states large enough population-wise and needy enough water-wise so that we could focus our energy there," said former Azurix managing director Chris Wasden.

The other two targets were Enron's home state of Texas and California.

As Azurix assembled its corporate team, it was clear it had Florida in mind.

As its managing director for North American operations, the company recruited John "Woody" Wodraska, former executive director of the South Florida Water Management District, which includes Miami and the Everglades.

As lead lobbyist in Florida, Azurix employed James Garner, a former chairman of the same district, known as Softmud.

Azurix titled its coming-out party in Florida "Liquid Assets."

The company provided the "instructors" for a seminar sponsored by the Florida Chamber of Commerce at Marco Island Resort in July 1999, roughly a month after Enron sold $654 million in Azurix stock to the public. The topic was whether Florida was ready for a market-based approach to water.

Struhs shared the stage with Azurix officials Wodraska and Chris Wasden and he was listed as an "instructor."

In his section of the morning program, Struhs made a series of suggestions that Florida might be ready for a market-based approach to doling out its water supplies.

"Start with the idea water is a public resource," said Struhs. "Given that, can we still harness the power of the marketplace? I believe the answer is yes."

It was a touchy subject to broach with water bureaucrats present who had a vested interest in a state that has always held that the people own water. That's why water utilities charge customers for disposing of waste water instead of for the water itself.

Azurix wanted the right to sell water in Florida and Struhs seemed to share this philosophy on stage.

He suggested the state "could auction water leases for a 20-year period. You might have water brokers and distribution companies."

"Water doesn't lubricate Florida's economy," Struhs noted. "It actually fuels it."

Later in the Liquid Assets seminar, he suggested auctioning off available water to the highest bidder.

"Divide water resources into blocks that will be auctioned off (such as) the ability to pump 1 billion gallons a day for 20 years," Struhs proposed.

He granted that a portion of the water supply should be set aside for the environment, "in a way that's cautious and conservative. What if environmental communities feel more should be set aside? They can raise money, go to the auction and buy it. Everybody gets to play."

In an interview Friday, Struhs said he was not espousing privatization of water ownership, only more realistic pricing.

"What I have suggested is the present system does not send the right price signals. It does not let people see what the true value is."

Struhs said that the Azurix conference was just one more conference among many at which he was asked to be a panelist.

As for the similarities between his advocacy of water pricing and aquifer storage and recovery and Azurix's, Struhs said, "I don't know what their philosophy is. You'd have to ask them."

In the loop
The Bush family has been rubbing shoulders with Enron and its former chief executive Kenneth Lay for a decade. Struhs' role as a conduit for Enron and other corporations, and his involvement with the Bush family, go back years.

Enron and Azurix were models of the public-private partnership approach he had espoused since his first big job - running the President's Commission on Environmental Quality for the former President Bush.

In 1991 Bush named 23 industrialists and environmentalists to the commission.

As chief of staff, Struhs noted on his resume, he "managed a highly effective interdisciplinary staff of experts to provide a broad range of environmental policy advice within the Executive office of the President." One of the 23 was Lay.

When Bush lost the 1992 election, Struhs became vice president of a Los Angeles-based consultancy called Canyon Group. Canyon, headed by David "Lefty" Lefkowith, had built up an impressive clientele of mostly electric and gas utilities.

Struhs worked to develop an environmental practice. He wanted to create mitigation projects that utilities could invest in, in the way that a builder would turn out a speculative house, then find a buyer, Lefkowith said.

Four years later, on stage at the Liquid Assets seminar, Struhs shared his instructor time with his former boss Lefkowith.

Like Struhs, Lefkowith advocated a position dear to Azurix - that water supplies now public should be privatized.

"I don't think water is so damn special," said Lefkowith.

"If you let markets take over, you'd find water was cheaper, there would be more of it, and customers would be better served."

Lefkowith pointed out that "Telephones were viewed as too special to open to markets. Ditto for gas and electricity. In every single case, customers benefitted when monopolies were opened to market forces."

Why was this California consultant on the stage with Struhs and the Azurix team?

"He will address issues that are kind of high-octane issues, but he can do it in such a way that is disarming," explained Wasden, the former managing director from Azurix. "He also comes off as being without bias."

Wasden said he believed Azurix had hired Lefkowith a couple of times. Lefkowith said he never worked for Enron or Azurix and that his trips to Florida were strictly voluntary, done out of friendship to Struhs.

"I'm sort of semi-retired," Lefkowith told the Herald-Tribune. "I volunteer for the state of Florida because I have a relationship with Struhs."

Struhs said Lefkowith had come to Florida to celebrate Struhs' birthday.

"I have no idea who made him a panelist," he said.

The 'Glades proposal
Azurix's most remarkable Florida proposal was to take over a large portion of the job of restoring the water-starved Florida Everglades in return for receiving a 30-year monopoly license to sell water to the 6 million-plus residents of South Florida.

In February 1999, Azurix lobbyist Garner sought a meeting between Azurix and the new governor.

He had a good rationale for getting Bush to return his call. Bush had asked for his recommendations to fill slots within the water management districts. But in an interoffice e-mail obtained under Florida's Sunshine law, it is clear that Garner has another goal for the meeting.

Garner wanted to discuss "public/private partnership with Enron in which he has an interest - specific to water supply development."

The meeting was postponed until September 1999. When it was close to happening, Azurix made a pitch to a Bush aide to bring in Struhs.

Struhs says that the Everglades came up in the discussion, but that Azurix did not put forth any particular proposal.

Soon after, in October 1999, Azurix did take a specific Everglades water privatization plan to the South Florida Water Management District.

The pitch was similar to one Enron had made in the energy field: Take over a daunting organizational challenge requiring up-front capital. In return, get a long-term license to sell a commodity.

Azurix proposed to Softmud that the company would pay to build several massive plants to manage water. Those plants could help provide water to South Florida while improving flow into the 'Glades, which has been tapped as a supply to the point of crisis to feed the region's burgeoning households and businesses.

The water plants would feature injection sites that would pump water into the aquifer in order to replenish the underground supply on its way into the Everglades.

It would cost billions, but they might be partially reimbursed by federal funding.

"To be honest about it, some former employees of the district went to work for the company. They made a lot of noise about a proposal to privatize the Everglades restoration," said Randy Smith, spokesman for the South Florida Water Management District.

He said Softmud's staff never took the proposal seriously.

On a statewide scale, Azurix sought to convince local governments to employ the company to build and operate ASR systems.

Aquifer storage and recovery sometimes means pumping treated water underground, sometimes raw run-off water, and sometimes treated waste water.

Waste water injection, used in California, pumps partially treated waste water into the ground, lets the aquifer purify it for six months, then pumps it back up to be processed as tap water.

The company's promotion of the idea of injecting waste water into the aquifer stirred up anti-Azurix sentiment and may have doomed the company's Florida efforts.

"No one wants to be characterized as giving people potty water to drink, right?" said former Azurix executive Wasden, who now runs a hearing aid company in Houston. "So what they do in California, they have the water treated, pump it into an aquifer and then after six months you can start to pump it out."

Anti-climax
In late April 2001, Struhs was still promoting ASR, based on radio promotions outlined on his agency's Web site.

One reads: "State agencies are promoting the Aquifer Storage and Recovery (or ASR) - a technology that would capture the rainwater runoff, store it underground, then pump it back up when needed. Leading the charge for ASR is David Struhs, Secretary of Florida's Department of Environmental Protection."

By early May, Struhs backed away from ASR in an agency press release that cited concern by "environmentalists and some state legislators." He said that limited ASR pilot projects, part of the Everglades restoration plan, will instead be used to add to scientific understanding.

"Moreover, these three pilot projects involve restoration, not drinking water, so there is not even the slightest threat to public health," he said.

He did not mention that Enron was in the midst of giving up on the ASR concept as well. In December 2000, Enron had bought back Azurix's stock for $9 per share from investors, many of whom had paid $19 or more.

Enron later sold parts of Azurix but took a $500 million bath in the process. The Florida aquifer injection proposals, handled by Azurix top executives out of Houston, were dropped. Azurix sold its North America operational unit to American Water Works in August 2001.

"My understanding was they began to shop the business shortly after they bought the stock back," said Wasden, who had already left Azurix by that time. "It normally would take about three to four months."

Reprinted from the Herald-Tribune (Sarasota), February 9, 2002. The article was originally titled "Dead in the Water" and Herald-Tribune writer Victor Hull also contributed to the report.