WATER UTILITY PRIVATIZATION UPDATE

An article in the current issue of Water Environment & Technology magazine asserts that public-private partnerships between municipal-owned water utilities and investor-owned water utilities continue to increase.*

According to the report,the trend is being driven by the municipal utilities' need to upgrade infrastructure and a corresponding lack of sufficient financing resources to get the job done. Cities seem to be recognizing that they cannot afford the necessary capital investments in their water systems, particularly with competing other needs within the cities.

In addition, according to the article, municipal utilities are turning to privatization to achieve more cost-effective management of capital improvements as well as of daily system operations.

The article also points out that privatization can provide access to expertise, new technologies and operational best practices in addition to financial resources.

The key issue in any privatization arrangement, in my experience, is the CONTRACT -- the agreement that structures the deal, including the relationships and the responsibilities. This is true whether the privatization may be as simple as an outright sale of the entire system, or a more complex design/build arrangement, or a concession, or an operation management concept.

When privatization is distilled to its essence, it boils down to a shift of risk from municipal ownership to investor ownership of the local utility. That shifting of risk, when effected through a fair and adequately structured contractual arrangement, benefits both the local government as well as its customers. However, as the article states, the parties to privatization should focus on the long term and on performance standards more than design standards. Of course, performance standards must come with consequences if they are not met.

A recent Illinois SupremeCourt decision adds an interesting twist to the privatization discussion.** A a town entered into what in essence was a public-private partnership with a contractor, whose responsibility was to maintain and repair portions of the municipality's water and wastewater infrastructure and to operate its treatment facility. The Court held that the contractor was subject to the Illinois Prevailing Wage Act because the contractor was not a regulated public utility company considered as such by the state utilities commission or other state agency. Even though the contractor performed utility functions, the court said, it did not fall within the public utility exemption from the Prevailing Wage Act.

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* "When Public Goes Private", LaShell Stratton-Childers,
Water Environment & Technology, January, 2014, p.13

** People v. E.R.H. Enterprises, 2013 IL 115106