WHO SHOULD OWN WATER SERVICE PUBLIC UTILITIES?

Recently, a newspaper reported that several small towns in the United States are seeking to take over "privately owned water systems" providing water service in the towns because residents allegedly are upset with rate increases. (Wall Street Journal, August 20, 2013, p.A3)

Any discussion as to who should own a water public utility should consider some often overlooked facts:

First, references to "public control" or "public ownership" of a municipal water system compared with "privately owned water system" are a misnomer. Water systems can be government owned and/or controlled or investor owned and/or controlled. Several investor owned water utilities are national or regional in scope of operations and can be more "public" than local government owned systems because they have thousands of shareholder-owners.

Second, water utility service is not an inherently governmental function. Historically, water service in many U.S. towns and cities began with investor owned companies. For example, in the mid-1800s, a company began water service in Chicago by constructing an intake into Lake Michigan and distributing water with wooden mains. Today, investor owned public utilities provide water service in many towns and cities in the United States or manage government owned utilities through so-called "privatization" or "public/private partnership" arrangements. Moreover, in many European countries, such as England, France, Germany and the Czech Republic, investor owned utilities either own or manage water service systems in major cities and towns.

Third, several courts have held that a municipality providing water service does so in its proprietary capacity, not in its governmental capacity. Along the same lines, a municipal owned utility is required to employ an enterprise accounting system for its water utility.

In comparing government ownership of water systems with investor ownership, consideration also should be given to the following:

Rates. Investor owned water utilities are regulated by state utility regulatory agencies, including their rates. Local government utilities in most states are not regulated. Their rates are set by the local city council. For customers of water service, regulation of investor owned utility rates provides a distinct advantage. Not only are the rates approved by a state agency, but customers can appear and participate in rate hearings and appeal to courts from rate orders. Customers of government owned utilities generally do not have such advantages. Further, investor owned utilities are more likely to seek rates that cover full costs of service. Government owned utilities frequently defer rate increases, or fix rates below full cost of service, for political reasons, which can result in deferred maintenance or use of reserves to fund operating expenses instead of infrastructure replacement. When rates are increased, their magnitude can result in rate shock to the customers. It should be noted that in many states, government owned utilities are entitled to rates that recover a return on rate base ( assets) just as investor owned utilities. If their rates recover full costs of service they could be comparable to rates of investor owned utilities.

Service. Larger investor owned water utilities can have advantages due to their regional or consolidated mature. Generally, they may have technical staff and expertise, which local government owned utilities generally would not have due to their size. Size also results in economies of scale for certain operating expenses and purchases. Further, because such investor owned utilities are regulated, management must be responsive to the state agencies, which also regulate quality of service and, of course, to shareholders and customers. These factors provide incentives to maintain and upgrade service and facilities, the costs of which necessarily are reflected in rates.

Financing. Local government owned water utilities have access to municipal bond funding, which generally carries lower interest rates than are available to investor owned utilities. In addition, they also frequently are able to receive federal or state grants and often can collect substantial connection charges from new customers. However, investor owned utilities often are able to use internally generated funds for infrastructure projects or utilize private activity bond programs.

Comparison of the two types of utility ownership probably is more complicated that a typical customer or the media think. One thing is certain, however: every one wants good water service at a reasonable price, and to satisfy that goal, every utility should have rates that recover all reasonable costs of service.