ON THE COVER North Coast Journal Weekly

CNPA logo2003 CNPA "Blue Ribbon Finalist" for Environmental/Agricultural Resource Reporting
Is the water bag proposal a Trojan horse?

A plan for bulk H2O export might be more than Humboldt bargained for.



After the Simpson pulp mill -- one of its biggest customers -- closed on the Samoa Peninsula in 1998, the district started advertising the sale of up to 20 million gallons per day of excess water capacity. The idea was to use the water to attract new business to the area -- maybe a Southern California company looking to relocate -- bringing jobs, tax revenue, and lower wholesale water costs. After all, Simpson had paid 40 percent of the district's water bill.

In the long-term, district officials worried that if they didn't use the water, it could be transferred "out-of-basin" to another water district -- putting a hard limit on growth in Humboldt County. In other words, use it or lose it.

Some of the customers that came forward were different, though. Instead of relocating their businesses in Humboldt County, they wanted to ship the water down to water-hungry Southern California. In giant bags.

Carol Rische in front of water district mapOne of those buyers, an Alaskan businessman, came back this December with "a very conceptual proposal, short on details," recalled district General Manager Carol Rische [photo at right] as she poured a mug of coffee in her Eureka office. "He wanted the letter of intent ASAP."

Eager to find a replacement for the revenue that came from the Simpson pulp mill, district officials looked over Humboldt County's Prosperity! growth plan for guidance. Given that the water bag proposal promised to create a significant number of local jobs at little environmental cost, they concluded it was consistent with the plan's goal of "maximizing our region's economic competitiveness without sacrificing our quality of life." In other words, it was worth looking into.

"We're in the water business -- we sell water," said district official Vern Cooney. "Water services that is."

It can be tough for even experienced professionals to wrap their minds around the difference between "water services" and "bulk water." But after deciphering California's byzantine water laws, most experts agree that water belongs to the citizens of California -- a public trust.

"You pay for the plumbing, basically, not the water," explained Connie Stewart, Arcata Councilwoman and member of the district's Water Quality Task Force.

Water district officials have asked the task force, an advisory body, to indicate its level of support for Davidge's proposal. The task force, made up in part of elected officials from the seven municipalities served by the district, will meet later this month to discuss the matter.

In a recent interview, it was clear that district officials had the local economic and environmental impacts of the water bag proposal down cold. But they were less well-versed on something else: the possibility that by selling to a bulk water exporter, international trade laws could kick in and impair the district's ability to control its own water. Looked at that way, it's not at all clear the water bag proposal is consistent with the Prosperity! plan, which advises Humboldt County against getting into a situation where "global pressures determine our future for us."

According to Rische, "One thing I hadn't thought about was NAFTA (the North American Free Trade Agreement) and trade issues."

"We had no idea, honestly," said district commissioner Vern Cooney -- understandably, since most public water districts don't have an international trade lawyer on retainer.

That may soon change.

aerial view of Mad River with inset of pump station
Overview of Mad River and Essex water treatment facility.

pipeline on trusses over water in slough
Industrial water pipeline near the Mad River Slough Bridge.

The director of water

[Ric Davidge]Ric Davidge [photo at right] is the man who wants to tap into Northern California's water market. In his mid-50s, shrewd and articulate, Davidge embodies the murky boundary between big business and public office.

His titles may change, but the job description doesn't. Davidge is a power broker, and he thinks big. A combat medic in Vietnam with a master's degree from the University of Alaska, Davidge worked as a Republican strategist for Ronald Reagan, Alaska Sen. Ted Stevens and former Alaska Gov. Walter Hickel, and has connections with the Bush administration. He has had several government appointments -- he was an official under Secretary of the Interior James Watt in the 1980s, and has worked with current Interior Secretary Gale Norton. He has been involved in a number of business enterprises, and has his own Washington, D.C. lobbying firm. When not tending his award-winning garden or running his own Alaskan playhouse, he's been a tireless advocate of property rights and business -- especially timber, oil, ranching and mining. He has also worked for tort reform (limiting the amount in damages that an individual can sue a company).

It was as director of water for the state of Alaska that he oversaw 40 percent of the nation's fresh water, and the idea for exporting bulk water first took root. "I always do my homework," said Davidge. In 1994, he wrote an influential paper that helped Alaska pioneer the commercial export of water. (Initially, Davidge was a proponent of transporting water via single-hulled tankers, which after the Exxon Valdez spill in 1989 were considered too risky to ship oil in. He eventually came around to water bags, in part because toxic residue in old oil tankers is hard to get rid of.)

Davidge's expertise led to positions on international trade commissions; a spot on the World Water Council, a non-governmental think-tank; and eventually president of a global consortium called WorldWater, SA, which according to its website seeks to "provide high quality water to any area in the world." The consortium includes: Japanese Nippon Yesen Kaisha (NYK), the world's largest shipping company; Nordic Water Supply (NWS), a pioneer in bulk water transport; and Mizutech, a privately owned financial arm of the multibillion-dollar Saudi Arabian Abdul Latif Jameel Group [ALJ].

Parched communities

San Diego currently pays more than $400 per acre-foot for water -- over twice as much as in Humboldt -- much of it from the Colorado River. (An acre-foot is the amount of water it takes to cover an acre of land in a foot of water. It is also approximately how much water an average family uses in a year.)

For many years, Southern California took more than its share of water under the Colorado River Compact, an agreement between states of the Colorado River Basin. Other southwestern states didn't protest too loudly, because they didn't need it. But times have changed; Colorado, Utah, Arizona and Nevada have grown rapidly, and they want their water. Interior Secretary Norton, formerly a state official in Colorado, recently ordered enforcement of the compact, effectively cutting the Golden State off from 800,000 acre-feet of water.

Not surprisingly, San Diego County -- facing growing demand and dwindling supply -- is concerned. Desalinization is being seriously considered, despite its high costs. With no more cheap water sources available, bulk water export from the North Coast has begun to look feasible.

"San Diego," said Davidge, "is the classic example of a place that is based on a false economy -- subsidized water."

Agriculture accounts for some 75 percent of Southern California's total water use, and Davidge sees opportunity. "If water was put in a real market," said Davidge, "then agriculture and water allocation would readjust. Twenty thousand acre-feet per year" -- the amount Davidge wants to ship from Humboldt -- "won't solve the problem, but it will help significantly."

For the Monterey Peninsula, another potential customer for Davidge, things look equally bleak. Plans are being developed to add a third dam to the Carmel River, although the river doesn't even flow year-round.

"Right now, there are no economic incentives to conserve," Davidge said. "The more you use, the more you should pay. Water is essential for economic life and freedom."

So is water a human right? "Water has its own value, just like other commodities," Davidge answered. The problem is, if water is a human right, then it doesn't have value, and it gets wasted."

The battle in Mendocino

After surveys of every river from Marin County to Canada, WorldWater settled on the Gualala and Albion Rivers in Mendocino County. Applications No. 31194 for the Gualala by Alaska Water Exports and No. 31195 for the Albion by WorldWater SA were filed with the State Water Resources Control board on Sept. 13.

Davidge and company planned to build cisterns into the mouths of the rivers in Sonoma County, pump the water into giant 800 x 200 x 35-foot "water bags" pulled by a tugboat, then ship the water to San Diego. A pilot project between Turkey and Cyprus by partner Nordic Water Supply has proved the technical feasibility of the water bag concept, according to Davidge, although it has yet to turn a profit.

The plan stirred up a hornet's nest of activists on the North Coast, from Albion Nation back-to-the-landers to wealthy homeowners in the Sea Ranch. Concerns ranged from tugs ruining their unspoiled ocean view to sinister rumors of a global water takeover. Some activists whispered about shooting holes in the water bags.

"Our immediate concern was environmental -- the effects on watershed and habitat," said Jim Jordan, a resident of Sea Ranch near the Gualala's idyllic estuary and member of Friends of the Gualala River. There were other concerns. What about the visual pollution of a tug and bag operation? What's the effect on the economy? Living at Sea Ranch is all about the view, after all, and nearby Gualala is a tourist town.

The California legislature soon passed the Wiggins Bill to require, but not fund, environmental study before any plans were approved. After testimony by local citizens -- including a retired economist from New York University and a hydrologist from Lawrence Livermore National Laboratory, the California Coastal Commission voted 9-0 to mandate further environmental study -- in effect opposing applications No. 31194 and No. 31195.

According to Jordan, who attended the meeting, "Every one of the commissioners who spoke said, `I'm scared about the trade issues, but I don't understand them.'"

Humboldt County Supervisor John Woolley was one of those commissioners. "That came up as a question," he agreed.

In a confrontational Dec. 15 letter to the State Water Resources Control Board, Davidge blamed "external groups with emotional and political agendas that are not in the long-term public interest of the people of California." However, he did note that, "We are also sensitive to the growing evidence that these communities do not want us as neighbors."

Davidge, faced with having to pony up as much as $2 million to conduct the minimal environmental studies for his plans, withdrew the proposal.

Little environmental impact

Davidge's latest plan involves buying water from the Mad River, then shipping it to San Diego or Monterey -- and he's learned his lesson, according to Carol Rische.

"Mendocino was very ugly. He really got a dose of reality -- negative community sentiment. He also got an introduction to California's regulatory requirements."

Davidge's new plan appears to be much more fireproof, not least because he doesn't need to obtain a permit to get the water, as was the case down in Mendocino. Instead, he would merely be buying water that has already been allocated for industrial use. (Rische added a caveat: Existing water rights might have to be amended since the end user would be changed -- from a pulp mill in Humboldt to, say, San Diego or Monterey.)

Environmental impacts to the Mad River? The district is crystal-clear on this point: There will be no reduction in the river's flow below its diversion point for the simple reason that existing infrastructure is already handling this water -- that's why it's called excess capacity.

What about marine mammals that might try to surface under the water bag? Answer: dolphins and whales have sonar to avoid just such an unpleasant fate. What if a bag ripped and the water spilled into the bay? Answer: plenty of freshwater drains into the bay every day.

What about the local economy? According to Davidge, as many as 200 jobs would be created, all on the tugboats that will haul the water. If a bag assembly plant is based in the county, which Davidge has talked about, an unspecified number of additional jobs would be created.

Dave Hull of the Humboldt Bay Harbor Recreation and Conservation District said a water bag operation could boost the district's tax base and enhance harbor revenues. The plan could also reduce wholesale water rates by $1 to $2 per month per household, according to the district.

Davidge's proposal has really got the entrepreneurial spirit going. "Let's talk about selling it to San Diego ourselves, instead of selling it to Mr. Davidge at a price that's appallingly low," suggested Stewart, of the district's task force.

And what about the international trade issues, which figured prominently -- if sometimes incoherently -- in citizens' concerns, first in Mendocino and now here?

"We will be shipping water from one California city to another," stated Davidge. "There are no trade issues. Suggestions that NAFTA and GATT (the General Agreement on Trade and Tariffs) apply are purposeful misrepresentations meant to scare folks."

aerial of loading dock with proposed water bag positioning marked
Positioning of water bag adjacent to proposed existing loading dock.

Privatizing water?

Public Citizen, for one, isn't convinced. The watchdog group founded by Ralph Nader has been keeping an eye on water privatization lately, said Juliette Beck from Public Citizen's Oakland office. "In the context of NAFTA's Chapter 11, Davidge's proposal could put us on a slippery slope to privatize ownership of water."

Lydia Lazar, assistant dean of international law at Chicago Kent College, was more specific. When it comes to international trade agreements, "whether or not water is being transported across international borders is not the only question." International trade agreements, she pointed out, can cover trade within a country if foreign investors are involved.

NAFTA makes a distinction between "containerized" or bottled water and "bulk freshwater," the water in question here. Bottled water is obviously a privatized commodity that can be traded freely -- check out the grocery store. But what about the bulk water exports? Beck pointed to a 1993 declarative statement signed by all three NAFTA countries.

"Unless water, in any form, has entered into commerce and becomes a good or product, it is not covered by the provisions of any trade agreement, including the NAFTA."

In other words, putting water into enormous bags might be tantamount to bottling it, in which case NAFTA could conceivably kick in.

Many scientists, public policy experts and public interest advocates think that water privatization would be a disaster.

Dr. Peter Gleick, president of the Pacific Institute and a member of the prestigious National Academy of Sciences, summarizes the work of many scientists in an Institute report: "Water is both an economic and social good, far too important to the well-being of humans and our environment to be placed entirely in the private sector." If corporations owned water, argues Gleick, they would naturally try to sell as much as possible -- only at higher prices -- shutting out poor people and fragile ecosystems without guaranteeing any conservation.

Fans of this genre point out obvious similarities to California's energy debacle. Enron spearheaded the privatization of a public utility, followed by wholesale deregulation, market manipulations, phantom energy trades and rolling blackouts, while power plants remained idle. A few executives got rich; the public got Enron-ed. With water, warns Gleick, things could get much worse.

"A Pandora's Box"

The Chapter 11 provision of NAFTA -- the decade-old treaty between the United States, Canada and Mexico -- isn't about bankruptcy, at least in a financial sense. It was originally conceived to protect foreign investments against government measures "tantamount to expropriation" -- or equivalent to depriving an investor of possession by a government seizing property.

In practice, though, it's opened a "Pandora's box" of litigation, worldwide corporate lobbying -- and worse, according to Howard Mann in a Chapter 11 legal critique called "Private Matters, Public Problems," jointly published by the Ford Foundation, the World Wildlife Federation and the International Institute for Sustainable Development. A senior trade advisor to the last group, Mann is an international lawyer who has represented government bodies and private firms in international trade negotiations worldwide.

"Investment" has been interpreted to mean anything from capital investments to trade -- including market share, market access, and rosy Enron-esque forecasts of anticipated profits. Government measures have been interpreted to mean just about any government act; as of 2001 there had been at least 20 Chapter 11 suits -- and 11 of those challenged environmental laws as "tantamount to expropriation."

Unfortunately, it's tough to be sure -- Chapter 11 cases are closed to the public and have no appeal to a government's domestic court. The courts consist of a majority-rules tribunal of three arbitrators -- one each selected by the investor, the state being sued, and the NAFTA secretariat, staffed mainly by ex-lobbyists, corporate executives, and government officials with business contacts. Essentially, the state often goes into arbitration with two strikes against it.

With a gift for understatement, Mann finds the trade courts "worrying from a basic democracy perspective," with "a disturbing lack of balance between the protection of private interests and the need to promote and protect the public welfare." Chapter 11 is "being turned into a means to fend off proposed new regulations, lobby for or against specific government actions, and generally to preserve or gain a competitive position," writes Mann. "Threats to use Chapter 11 are now a routine lobbying instrument."

Journalist Bill Moyers, who covered NAFTA for the PBS special "Trading Democracy," put it more bluntly: "Chapter 11 is an end-run around the Constitution."

Here is a sampling of Chapter 11 litigation:

Methanex v. California. In the late 1990s, the fuel additive MTBE started turning up in groundwater around Lake Tahoe. Alarmed, scientists found evidence that the chemical caused cancer in animal studies. Gov. Gray Davis signed a bill ordering its phase-out -- and the manufacturer, the Canadian company Methanex, sued under Chapter 11. Methanex sought compensation for the projected profits that would be lost under the ban -- to the tune of $970 million. The case is under appeal.

In Sun Belt Water, Inc. v. Canada, a Santa Barbara-based company had a contract to export bulk water from British Columbia to Goleta, near Santa Barbara. The contract was later rescinded when the Canadian province outlawed bulk water exports, fearing a NAFTA-inspired water grab. Meanwhile, a Canadian company with domestic plans was allowed to proceed. Sun Belt sued in 1998 under Chapter 11 for more than $200 million. More about that later.

NAFTA's investment protections are increasingly being adopted in other international trade agreements like GATT and the Free Trade Area of the Americas, still under negotiation.

In Bechtel v. Bolivia, the American water conglomerate lost a contract to privatize water in the city of Cochabamba after rate hikes and water outages sparked deadly riots. Bechtel used a Dutch subsidiary to sue under a trade agreement that the Netherlands had with Bolivia.

Clearly, privatization of local water services can fall under international trade agreements.

A Trojan horse?

So if Davidge/Aqueous/WorldWater/Mizutech or another bulk water exporter gets a contract -- or even a tentative agreement called a "letter of intent" -- could a case be filed under Chapter 11 or another international treaty?

"It depends on the nature of the dispute -- or the contract," said Lazar of Chicago Kent College.

If any government agency enacted a new law or regulation that affected the ability of the Humboldt water district to fulfill its contract -- from limiting access due to drought or expanded Endangered Species Act listings to outlawing bulk water export -- the regulating agency could potentially be sued in trade court for compensation.

Even more troubling, another bulk water exporter could potentially file suit in trade court as soon as the ink was dry on the Aqueous deal, demanding equal access to California's water, since NAFTA and other international trade agreements prohibit regulating the amount of a commodity being traded. Put simply, a deal with Aqueous could set a precedent for privatizing Northern California water.

Would the water district be able to write a contract to supersede international trade agreements? Don't bet on it, said Lazar. "The water district is not going to be able to contract around it."

"We're concerned about the potential implications," said Arcata City Manager Dan Hauser, a member of the district's task force. "What if he [Davidge] uses this contract to leverage more deals in the western U.S.? It could be a foot in the door to other rivers."

Woolley echoed Hauser's concern. "Water being gold in this state, I think we need to be very concerned."

An ominous ruling

Now, back to Sun Belt Water v. Canada. That Chapter 11 case regarding bulk water export was adjudicated -- or settled -- when the Office of the U.S. Trade Representative intervened, and will probably not go to trial. The terms -- you guessed it -- have not been disclosed, but Sun Belt CEO Jack Lindsey has said, "Because of NAFTA, we are now stakeholders in the national water policy of Canada."

In his Dec. 15 letter to the State Water Resources Control Board, Davidge sounded a similarly ominous tone. Planning for Northern California watersheds should include "outside interests," Davidge wrote. "To exclude them from the public process would not be wise as they will have growing political and economic power as economies and communities and in fact cultures face the loss of their water understructure."

And, by the way, who are the foreign investors -- the Saudi firm Mizutech and other "unnamed partners?" Davidge would only say that "we will be in compliance with federal disclosure laws and the Jones Act," which requires that any shipping company operating between U.S. ports be at least 51 percent American-owned and American-crewed.

Jim Rossi is a freelance writer who recently relocated to Humboldt County.
Editor Keith Easthouse contributed to this report.

The district is "in the driver's seat"


CAROL RISCHE, MANAGER OF THE HUMBOLDT BAY MUNICIPAL Water District, does not dismiss the concern that selling Mad River water to an Alaska businessman will somehow cause the district to lose control of its water. But at this point in time she's not too worried about it.

"I think we're in the driver's seat," she said, explaining that liability protection and the length of the agreement would be written into any contract.

She said that if the district decides to go ahead and consider Ric Davidge's proposal to buy Mad River water and ship it to points south in giant poly-fiber bags, it would consult with international trade lawyers to see if the issue is a "deal-killer," as she put it.

To understand why the district is even thinking about Davidge's proposal, it is first necessary to learn some history.

The water system that today furnishes drinking water to 80,000 people in and around Humboldt Bay was conceived back in the 1950s by local businessmen for two reasons: to provide Eureka and Arcata with a reliable water supply, and to persuade the timber industry to locate pulp mills on Humboldt Bay.

The first step was to form a water district to administer the new system; after a months-long publicity campaign, voters went to the polls on March 13, 1956 and approved the proposed district by an 89 percent margin. Several months later, a second vote was held in which 69 percent supported a $12 million bond issue to finance the district.

Newspaper front page headlining "Two pulp mills announce they will buy water here"Officials of the newly created district then went to the Simpson Timber Co. and the Georgia-Pacific Corp. and signed contracts to deliver water to two pulp mills that would be located on the Samoa Peninsula. The Humboldt Standard, one of two daily newspapers back then, announced the news in a giant headline that ran in its May 12, 1959 issue.

For more than 30 years, from the early 1960s to the mid-1990s, the two pulp mills consumed enormous amounts of water -- as much as 40 to 50 million gallons a day (pulp mills need water for cooling, among other things). That's compared to the roughly 10 million gallons a day that has been consumed over the years by the seven municipalities that are the district's customers.

Given the volume of water they were using, it shouldn't be surprising that the two pulp mills together paid the lion's share of the district's operating costs. Sales to the mills offset the cost for everyone else.

It also shouldn't come as a surprise that when the Simpson mill closed down a few years ago, it was a major blow to the district. "It was a huge loss," recalled Rische.
[Graph below shows the dramatic plunge in industrial water demand in the mid-90s.]

Graph of Water Customer deliveries showing decline in industrial demandEver since, the district has been looking for a replacement. That's why, beginning in 1998, the district started advertising the fact that it had 20 million gallons of excess industrial water available. That's also why the district believes the proposal by Davidge, who runs Aqueous, Intl., should be seriously considered.

"We're in the water business. We sell water," explained Vern Cooney, a district official. Added Rische: "We have a regional system that is significantly underutilized because of the loss of the Simpson mill. We won't do this if it sells the community short. But there are significant economic benefits" to be gained.

What are those benefits? As much as $1.6 million in additional annual revenue, which would go a long way toward keeping water rates down.

Adding urgency to the situation is the fact that the remaining pulp mill, Samoa Pacific Cellulose, doesn't use as much water as it used to and plans to renegotiate its contract next year. "We feel we're paying more than our fair share," said company official Brent Hawkins.


WorldWater SA:
Ric Davidge's 1994 paper on bulk water export:
World Water Council:
Bill Moyers NAFTA links from Trading Democracy on PBS:
Howard Mann's critique of NAFTA's Chapter 11 for WWF:
NAFTA Secretariat's own Ch. 11 Summary:
Pacific Institute for Studies in Development, Environment, and Security:
Natural Resources Defense Council:
United Nations' General Comment on Water:

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