PRIVATE LIVES FOR PUBLIC BODIES--PART 2

Some in the media have implied that the purpose for privatization of municipal-owned water and wastewater systems is to raise needed money for other municipal activities. Some critics have asserted that privatization of these systems could result in higher rates for service.

However, in reality, there can be many different reasons for privatization beyond the raising of capital. I will cite two examples from my experience. A small town sold its water system to an investor-owned water utility company because the town leaders could no longer endure the prospect of disconnecting service to their neighbors who were not paying their water bills.

In another example, a larger town sold its water system to the same water company because its wells were going dry and the distribution system needed a costly upgrade. The water company was able to extend a long pipeline from its source of supply and treatment facilities to provide the town with a reliable supply and had the resources needed to upgrade the distribution system.

Therefore, while some privatization transactions may have the objective of providing funds to a municipality, privatizations may be pursued for other reasons such as:

1. Management issues (the headache factor). Operation of water and wastewater systems in compliance with all the multiplying and complex regulations under the Safe Drinking water Act, Clean Water Act and other rules requires a technical expertise that may be beyond a town's capability or endurance.

2. Cost factors. Utilities are experiencing increasing costs for staff and other operating expenses such as power and chemicals; increasing costs for security measures; and increasing capital costs for upgrades and replacements of infrastructure.

3. Source of supply factors. Wells may be reducing in productivity, necessitating searches for alternative and likely more expensive supplies.

Speculation that privatization necessarily will result in higher rates may be misplaced. In the first place, the rates of a municipal system may be unreasonably low due to subsidies from municipal funds other than rate revenue or due to deferrals of maintenance or upgrades that would have caused rate increases. Beyond that, acquisition or operation of a municipal-owned system by an investor-owned utility under some form of privatization can result in mitigation of any rate increase that would result from operational improvements or facility upgrades.

For example, a regional investor-owned water utility can offer economies of scale and efficiencies not available to a stand-alone town. Such a utility will have staff and expertise to handle regulatory compliance and monitoring requirements, security enhancements and management matters. If revenue requirements increase due to upgrades in operation or facilities, proposed rate increases most likely will require approval from a state utility commission. In addition, there may be regulation by contract. The privatization agreement may contain conditions and undertakings related to performance and rates. Indeed, customers may find that they have more rate protection after privatization than under prior municipal ownership.