PRIVATE LIVES FOR PUBLIC BODIES

The Wall Street Journal, in its August 12, 2010 print edition, discussed cities which are considering proposals to privatize their municipal-owned water and/or wastewater systems. The article suggests that a motivation for such privatization measures is the need to produce money for cash-strapped municipalities.

There is no inherent reason why water and wastewater utilities should be government owned. In the case of water, general caselaw is that municipalities which own water utilities do so in their proprietary capacity, not in their governmental capacity. There are no apparent natural efficiencies with governmental ownership. Further, there is caselaw that municipal systems can earn a profit.

Provision of water and/or wastewater service by investor-owned utilities is not a new idea. Many cities in the United States receive such service from such investor-owned utilities as American Water Works Co., Aqua America Inc., American States Water Co., California Water Service, Connecticut Water Service Co., and Middlesex Water Co. In Illinois, for example, cities such as Champaign, Urbana, Streator, Sterling, Pontiac, Peoria, and Kankakee have been served by investor-owned water companies for well over one hundred years. In addition, there are many small communities across the country there are served by small, local water and/or wasterwater public utility companies.

In a way, privatization is a misnomer. Most regional water and wastewater utility companies are owned by investors in the general public. All of the companies named above are listed on stock exchanges. Further, they are "public" utilities, affected with the public interest and regulated accordingly.

What is driving privatization today? It appears that the drivers include the following:

1. Evolving more stringent USEPA environmental standards are imposing capital requirements to enhance treatment facilities.

2. Infrastructure is becoming old, obsolete and worn out, imposing replacement costs.

3. There are increased risks of standards violations and civil liability for water-borne disease or polluted discharge.

4. For some, there is a need to find new water sources if supply.

5. For some, managing the systems is a headache and stressful to administrative resources.

6. Privatization can produce capital or free up capital for other municipal purposes.

7 Rate increases caused by increased costs to upgrade and operate systems are politically unattractive.

8. Regional public utilities can achieve economies of scale, which can mitigate rate increases.

9. Regional public utilities generally have expertise regarding management, compliance, and operations issues.

In most states, government-owned water and wastewater utilities are not subject to regulatory commission jurisdiction. Therefore, customers who have issues as to quality of service or reasonableness of rates are limited to litigation in the courts.
However, public utility companies generally are subject to regulatory commission jurisdiction in the states in which they operate. Customers, in such cases, can participate in rate and other proceedings before such agencies.

It should be kept in mind that privatization is not a singular concept. It can take several different forms: for example, out right sale of system assets, lease of assets, management contract, public-private partnership, etc.