Many U.S. investor owned electric utilities companies have been pursuing investment diversification programs. These ventures have been in both traditional and non-traditional areas of operation.
The main catalysts for these diversification programs have been capital accumulation from plant rate base depreciation coupled with a decrease in investment opportunities for traditional electric utility plant. Electric utility core market share has been eroded due to the proliferation of independent power producers (IPPs) and cogeneration plants, the implementation of demand side management programs, technological changes, shifts in regional economic changes, triggered by global competition and the recent economic slump. These factors have contributed to a "crowding out" effect of the historical investment areas for investor owned electric utilities.
Out of economic necessity, local governments will most likely turn increasingly to private sector financing of water and wastewater facilities. Private sector involvement will vary from outright purchase of publicly owned water and wastewater facilities to degrees of public-private shared partnerships. Whatever the ownership format, diversification opportunities in water and wastewater industries for investor owned utilities should be available.
There are numerous foreign and domestic models of water and wastewater privatization, which suggests how the U.S. water industry might re-structure. In the U.S., the example of Minnesota Power and its Florida subsidiary, Southern States Utilities (SSU) stands as a successful example of how a company, with diminished traditional core customer base, mainly due to foreign steel imports and a weakened local economy, was motivated to seek alternative utility investment opportunities in private water companies. Initially a combination of six small Central Florida companies were rolled up into Southern States Utilities (SSU). SSU has grown to a water/wastewater company with nearly 150 systems serving 160,000 customers and employing over 500 people.
In recent years, particularly in the U.K. and France, privatization of water and wastewater facilities has been the solution of choice in providing quality services without placing additional hardships on the public purse. A number of other countries, most notably Australia in 1992, have turned to the private sector for financing in providing safe and environmentally sound water/wastewater services.
In-house staff and operating experience will prove beneficial to electric utilities involved in the water industry. Investor owned water and wastewater facilities in the U.S. are subject to similar regulatory controls as those which govern the electric utility industry. The experience base of investor owned electric utilities of operating in a regulated environment will be an enhanced managerial attribute for the acquisition and operation of water and/or wastewater facilities. The ready transfer of management and operating skills and relatively low learning costs related to acquiring and operating a water or wastewater facility versus a completely new competitive investment, could provide electric utilities with a potentially attractive investment opportunity.
In addition to the operating synergism, water and wastewater facilities are low risk, high capital requirement enterprises, which may be well suited to electric utility investment strategies. The regulatory control of the water and wastewater industries ensures, in degree, a guarantee of market share and full cost recovery, through commission supervised rate designs. Electric utility water/wastewater facilities will provide, within their own service areas, additional economies in the form of a highly correlated customer base, in-depth knowledge of the local regulatory environment, and an understanding of the many nuances of the local economy.
There is already a very viable investor owned water utility industry in the United States. This industry has, on aggregate, provided investors with rates of return on investment and stock appreciation that have equalled or outperformed many other market sectors, including other utilities.
Electric utility investment in the water and wastewater industry should also have a complementary impact on local economic growth. Expansion on an electric utility's customer base can be enhanced or constrained by the availability or lack thereof of water and wastewater facilities. Thus an investor owned electric utility, by investing in the water and wastewater infrastructure of the service area community; 1.) be making a prudent, stand alone investment and 2.) encouraging community economic growth and hence, in the longer-term, an expansion of its traditional electric customer base. These ripple or secondary effects will increasingly be an incentive for electric utilities to consider investment in water and wastewater facilities, especially in their own service areas.
Other findings of this brief study were:
Chapter 1 Water and Wastewater Systems
A. Summary
B. Water Systems
C. Wastewater Facilities
Chapter 2 - Trends Toward Privatization - USA and Abroad
A. Summary
B. Privatization
C. Public-Private Partners
D. USA Case Studies of Privatization
E. Increased Pace of Foreign Privatization
F. Differences Between US and European Community Approaches
Chapter 3 - Financial Overview
A. Summary
B. Major Features of US Water Service Operators
C. Comparisons
Major Water and Wastewater Companies
Chapter 4 - Rates and Prices
A. Summary
B. Ratemaking in the US Regulated Utility Industries
C. Price Sensitivity - Rate Elasticities
Chapter 4 Appendix
Chapter 5 - Infrastructure Financing Problems and Solutions
A. Summary
B. Infrastructure Expenditures - Private and Public Sectors
Appendix A - Slides
Appendix B - Communities in Distress: Coping with the Clean Water Funding Crisis of the 1990s
Appendix C - Financing the Future - Report on the Commission to Promote Investment in America's Infrastructure
Appendix D - Meeting Water Utility Revenues Requirements: Financing and Ratemaking Alternatives
Additional Notes - April 14, 1996