Chapter 2 1997 Survey of Privatization and/or Condemnations in PUC/PSC Jurisdictions

Summary

The U.S. does not have a uniform approach to regulating its water and wastewater systems. As noted in Chapter 1, many investor owned water utilities (IOUs) are regulated by their state’s public service or public utility commissions. Other states use different approaches. Some states encourage degrees of private sector involvement, others are neutral, and some discourage it. Additionally, some states could possibly benefit from degrees of privatization and others have systems that require no current change to their status.

Since 1993, Consulting Economist Brian Browne has conducted an annual survey of U.S. states and territories in order to ascertain whether there has been a significant movement toward either privatization or condemnation within any jurisdictional boundary. Herein are presented in summary form, the completed instruments of the 1997 survey. The delta, or change in responses since 1993, has not been overwhelming, except that year-by-year interest in answering the survey has increased.

The following format displays these answers. Table 2-1 summarizes all responses on a state-by-state basis. Lengthy textual responses are quoted in later in this chapter.

Methodology

The commissions/regulatory authorities were requested to answer eight questions:

1. Does your commission have a position pro or con regarding water and wastewater privatization?

2. Have there been any trends toward privatization / condemnations within your jurisdiction?

3. If so, how much?

4. Do you have defined steps that must be followed before a public district is permitted to privatize?

5. If so, do these steps vary as a function of the privatization format, e.g. contract operations vs. asset acquisition?

6. What steps are taken to ensure a competitive bid process for privatization?

7. What steps—in reverse (privatization) or condemnation hearings are taken to ensure capital equity is guaranteed to investors?

8. Please provide any suggestions you may have of additional areas in privatization/condemnation that should be considered.

Table 2-1. Summary of Responses to State-by-State Water Privatization Survey

ⁱ Questions 1 through 8 from the survey. They appear in the form of a key word for each question on this table.

ⁱⁱ Numbers in parentheses indicate a lengthy response. The text of those responses appears by state and by corresponding parenthetical numbers in the following section of this chapter.

ⁱⁱⁱ “N/a” means “not applicable,” and is used where this was the response to the survey questionnaire. Blanks in the table indicate that there was no response.

Results Summarized

The overall results are summarized in Table 2-1. In addition, the numbers in parentheses below correspond to the numbers in parentheses in the table and are followed by the full text of the lengthier responses to the questionnaire. To avoid repeating the questions, the answers are coded. For example A2 is the answer to question 2.

Alabama Public Service Commission

(1) A2. “Not to our knowledge.”

Arizona Corporation Commission

(2) A2. “The trend has been in the opposite direction. City systems (such as the City of Phoenix) acquiring small water systems as they grow.”

(3) A3. “In the last 12 1/2 years there have been a couple of privatizations. However, the ratio has been about 20:1 private-to-public to every public-to-private.”

(4) A8. “Those considering privatization should study the results of privatization in the UK.”

California Public Utilities Commission

(5) A3. “Many cities are considering privatization or contract operations.”

(6) A4. “Yes, the municipal code, we do not regulate that.”

(7) A5. “Yes, contract operations do not require a vote. Asset acquisition does.”

(8) A6. “We don’t really know. California has laws requiring competitive bidding in some areas, but we don’t enforce them. The state Attorney General does.”

(9) A7. “Appraisals are required and considered.”

(10) A8. “Regionalization is an issue.”

One additional question was put to the California PUC:

Q. What will the impact of Proposition 218 be on privatization of water and wastewater in California?

A. “It will make municipal corporations less attractive. It is changing the rate design already to be usage based.”

Connecticut Department of Public Utility Control

(11) A1. “Connecticut does not have a position on wastewater privatization. There have been no trends toward privatization. There were reports this year that the city of New London was thinking of privatizing their wastewater plant, however I don’t know the status of the rumor. Connecticut DPUC does not regulate municipalities. Most of Connecticut’s larger cities, Waterbury being the exception, have private investor owned water companies.” (Michael J. Kenney, Project manager, DPUC.)

Florida Public Service Commission

(12) A1. “Presently the Commission has no formal policy regarding privatization. To date we have not been faced with this situation. However, our present guidelines provide no obstacles to privatization and such a situation could be considered within the framework of our present rules regarding new utilities or utility ownership transfers.”

(13) A2, A3. “In the past three years this Commission has approved 21 transfers of regulated utilities to governmental entities. A majority of these transfers involved small utilities whose customers could be better served by a larger utility. Pursuant to present legislation, the Commission approves these transfers as a matter of right. We are not aware of any recent privatization within the counties we regulate, however, such activity may occur in non-jurisdictional counties. You may want to contact the Florida League of Cities and the Association of Counties for further information on privatization initiatives.”

Florida League of Cities
201 West Park Avenue
P. O. box 1757
Tallahassee, Florida 32302-1757
(904) 222-9684

Association of Counties
100 South Monroe Street
Tallahassee, Florida 32301
(904) 224-3148

(14) A4. “Since we do not have jurisdiction over publicly owned utilities, we are not involved in their decisions to privatize. However, should the assets of a publicly owned utility be transferred to private ownership, such action would create a jurisdictional utility. The owners would then seek approval of either a transfer or original certificate application from this Commission. These would be processed in the same manner as a transfer of one private utility to another.”

(15) A5. “Pursuant to present legislation, any governmentally owned utility, regardless of any contractual operations, would be considered a public owned utility outside the jurisdiction of this Commission. Regarding asset transfers, please see the answer to the above question.”

(16) A6. “This Commission would not be involved in this area.”

(17) A7. “This Commission would not be involved in this area.”

Hawaii Public Utilities Commission

(18) A1. “We have not had or see any future possibility of an existing public water or wastewater system being privatized. The normal process for new water and wastewater systems is to begin as private systems, built by a developer, and then turned over to a municipal government to own and operate. We do not see a trend of the municipal government not accepting any new water or wastewater system thereby, forcing the developer to operate the system as a private utility after obtaining a Certificate of Public Convenience and Necessity (CPCN) from the Commission.”

Illinois Commerce Commission

(19) A1. “The Commission has not entered a formal position on privatization but has approved several recent petitions by utilities to purchase municipal operations and does support regionalization of water systems.”

(20) A2, A3. “Recently several water utilities purchased municipal systems and several more have indicated that they are in serious discussions with municipal systems. In the past there were very few such purchases.”

(21) A4. “We have no jurisdiction over municipal operations and have not defined steps. The purchasing utility must obtain a Certificate of Convenience and Necessity to serve a new area.”

(22) A6. “We have no jurisdiction over municipal operations and therefore have no procedures regarding the sale of municipally-owned systems.”

(23) A7. “The Commission does not set the price paid to a utility if its system is condemned by a municipality. The price in all condemnations is set by the Circuit Court.”

(24) A8. “Method for determining the rate base upon which the regulated utility will earn a rate of return when purchasing a municipal system.”

Iowa Utilities Board

(25) “We don’t regulate water.”

Louisiana Public Service Commission

(26) A4. “This Commission does not have jurisdiction over municipally operated utilities. The authority to privatize could come only after a majority vote of users in the area in question.”

(27) A5. “Utilities that become jurisdictional to this Commission must seek approval of rates and rate base.”

(28) A6. “Not jurisdictional to this Commission.”

(29) A7. “Not jurisdictional to this Commission. If a municipality seeks to parallel or confiscate private utility property, any dispute must be resolved by a civil court.”

Maryland Public Service Commission

(30) A2, A3. “Two. Both are currently ongoing. One involves the potential sale of physical assets by a government to the private sector and the other involves a possible condemnation of a private system by a municipality.”

(31) A5. “Contract operations would not require prior Commission approval, however, an asset acquisition by a privately owned public service company that operates for a gain would require prior Commission approval.”

(32) A6. “Public districts are not subject to the Commission’s jurisdiction.”

(33) A7. “Such hearings are outside of the Commission’s jurisdiction. Maryland’s investor owned systems would have to rely upon constitutional protections.”

New Hampshire Public Utilities Commission

(34) A1. “The Commission does not have a specific pro or con position regarding privatization or condemnation but reviews proposals on a case by case basis to the extent they fall under our jurisdiction.”

(35) A2. “There has been a fairly recent trend for experienced water companies to offer contract O & M services to municipalities, but this is primarily limited to the one or two largest utilities in the state. Wholesale privatization of public districts is rare. A recent case involved a community district that transferred its facilities in their entirety to a larger private utility that offered good service, low rates, elimination of supply concerns and the prospect of regional expansion.

“Condemnation proceedings are also rare, although a significant one is currently underway in which a town is attempting to take over the entirely portion of a privately owned water system lying within its boundaries. This involves roughly 60 percent of the system’s customers, all of its storage and a significant portion of its other infrastructure. Final hearings are scheduled for the fall.”

(36) A3. “See above.”

(37) A4. “See below.”

(38) A5. “Yes. Public districts have not been regulated by this Commission since the 1980’s except when they serve outside their municipal boundaries and charge a different rate outside than in. As a result, only one municipal utility remains regulated, and efforts by the others to move toward contract operations would not fall under our jurisdiction.

“Contract operations offered by regulated (privately owned) utilities are normally conducted separately from utility operations, with the Commission’s sole concern being that costs and records are indeed segregated.

“An asset acquisition by a privately owned utility would require the Commission to grant franchise approval to the acquiring utility. This typically involves a review of that utility’s managerial, technical and financial capability to operate and maintain the acquired system.”

(39) A6. “As explained above, competitive bids for contract operation of public districts do not fall under our jurisdiction. Asset sales from public districts to private are so rare that they are reviewed on a case by case basis and no set standards exist regarding competitive bids.”

(40) A7. “Existing statutes spell out the specific steps involved but basically require the Commission to set the sale price and amount of damages through a hearing process if the two parties cannot reach agreement. Recovery of investment in existing plant is a factor the Commission would consider.”

New Jersey Board of Public Utilities

(41) A1. “Yes. But first you need to be more specific regarding what you mean by privatization. We have and continue to support and, where appropriate, facilitate the acquisition of any system (public or private) that finds itself unable to meet the challenges facing these industries today.

“However, when we talk about water privatization in New Jersey, we generally refer to long term contracts for the operation and maintenance of public systems. In New Jersey, Governor Whitman signed into law in 1995 legislation that supplement existing statutes that allowed private entities to enter into long term contracts for the operation and maintenance of municipal water systems. We were the first state to have such legislation.”

(42) A2. “No. As indicated above, the trend is toward the municipality retaining ownership of its assets and only privatizing the day to day operations. Also, there have been no cases where the public entity condemned the private operation and very few where they have acquired an investor owned system.”

(43) A4. “Municipal law requires a number of actions on the part of the municipality if they sell assets. There needs to be a referendum as to the sale, after which a formal bidding process takes over, all subject to N. J. law. The Board of Public Utilities only needs to approve the municipal consent, issued by the municipality, to the private, regulated system that is acquiring the assets, in order for the company to serve in the municipality. The rate issues are reserved to the next filed rate case of the regulated company.

“Where operation and maintenance agreements are the course of action, the municipality must comply with steps outlines in the 1995 legislation referred to above. The BPU has 60 days to approve the contract, and its has no continuing oversight over the contract.”

(44) A6. “The procedures are set out in the legislation enacted in 1995, and in the statutes governing the conduct of municipalities.”

(45) A8. “None. Condemnation is only used when the public entity is forced to take over a private system, after negotiations fail. We have not encountered such a situation in the water and wastewater industry. There have been agreements or contracts of sale voluntarily entered into.”

New York Public Service Commission

(46) A1. “The New York Public Service Commission has not set forth a policy with regard to privatization of municipal water systems. (We do not regulate public or private wastewater systems.) Condemnations do not require our approval: municipal acquisitions of private systems do and, while we have no formal policy with regard to such acquisitions, we routinely approve them finding that, overall, the economies of scale, improved quality of management and operations and the financing available to the municipality justify approval.”

(47) A2. “We have not seen a trend toward privatization in New York state. It is rare that a system is condemned because in New York a utility’s value in condemnation is set by the courts at ‘reproduction cost new less depreciation,’ [sic] which can make the cost of condemnation prohibitive. Negotiated acquisition is more the rule. Commission approval is required in such instances.”

(48) A4. “Since we don’t have jurisdiction over public water or wastewater systems, this question is not applicable.”

(49) A7. “We take this question to read: “How do you ensure that an investor in a private utility is fairly compensated in a condemnation hearing?” As indicated earlier on, the value of the condemned system is set in the courts and it is up to the private utility to present through testimony its estimate of the value of the system.”

Ohio Public Utilities Commission

(50) A1. “No. PUCO does discourage the development of non-viable systems and therefore encourages consolidation.”

(51) A2. “Privatization—no. Investor owned utilities being purchased by public entities—yes.”

(52) A3. “One investor owned utility has had 2 districts purchased from it (to avoid condemnation) by the local government and one is pending negotiation.”

(53) A4. “PUCO has a certification process (Administrative Rules) that must be followed to become a PUCO regulated company. It doesn’t matter whether the applicant is a public district or privately held company.”

(54) A5. “The certification process is a function of asset acquisition.”

(55) A6. “None. PUCO does not permit acquisition adjustments. Plant is recorded at original cost (date dedicated to public service).”

(56) A7. “None. If the private company is being purchased by a public entity, any profit or loss goes to the shareholders. PUCO has not jurisdiction over public entities, so PUCO tries to guarantee continuity of service.”

Oklahoma Corporation Commission

(57) A1. “No. The Oklahoma Corporation Commission has jurisdiction to grant or deny certificates of public convenience and necessity to water transportation companies which serves the public. 17 O.S. 1991 §§ 159.11 et seq. However, issues concerning privatization and condemnations are rarely presented to the Commission, and to date, there has been no need to adopt a formal policy regarding water and wastewater privatization. The Commission only has jurisdiction over public water districts for limited purposes, and does not have jurisdiction over private entities carrying water for their use and not for sale to the public. See 17 O.S. 1991 § 159.22; 82 O.S. § 1324.23. Thus, the Commission would not have jurisdiction over an entity until it was already privatized and seeking to serve as a common carrier of water.

“Under the Oklahoma Rural Water, Sewer, Gas and Solid Waste Management Districts Act, authority over the creation and dissolution of a rural water district is given to the board of county commissioners of the county which has the greatest portion of the territory in which the water district is located. 82 O.S. § 1324.1, et seq. The Act contains the numerous provisions relating to the organization, dissolution, sale of facilities, consolidation, etc. of rural water districts. However, the Commission is not involved in any of these activities.”

(58) A2. “There does not appear to be any such trend in causes coming before the Commission at this time. Matters have been brought to the Commission’s attention involving rural water districts taking over small, private systems, but nothing would indicate a trend.”

(59) A4. “The Oklahoma Statutes address provision of utility service and condemnations by cities and towns. 11 O.S. 1991 § 22-104 and § 37-208. Under the Oklahoma Rural Water, Sewer, Gas and Solid Waste Management Districts Act, 82 O.S. § 1324.1, et seq., there are numerous requirements relating to the organization, dissolution, sale of facilities, consolidation, etc. of rural water districts. However, the Commission is not involved in any of these activities.”

Pennsylvania Public Utilities Commission

(60) A1. “The PA PUC encourages large privately owned water utilities to buy small troubled water and wastewater utilities. Similarly, it has been the PUC’s position to urge municipalities to buy or absorb troubled or potentially troubled privately owned water and wastewater companies. The primary concern of the PUC is to alleviate problems before they occur if at all possible.”

(61) A2. “The PUC encourages small water and wastewater utilities to apply their own initiative in selling a troubled or potentially troubled company. The PUC has vigorously encouraged takeover of troubled companies. This trend has increased over the last several years.”

(62) A3. “It is not possible to quantify the trend toward privatization. The takeover trend has been larger private companies buying small troubled private companies and/or municipalities absorbing small private companies.”

(63) A4. “Yes, the Application process must be rigidly adhered to whenever any utility under this jurisdiction acquires another service providing entity.”

(64) A5. “Contract operations must have an Affiliated Interest Agreement approval to conduct this type of operation. This type of Agreement sets forth, among other things, the charges for specific services and the nature of the services to be provided. Stock and asset transfer [sic] are handled via the Application process. This process examines the reasonableness of these types of transactions.”

(65) A6. “The competitive bidding process regarding privatization is examined during the Affiliated Interest analysis. This documentation must be provided to the Commission upon request. Construction costs, service fees, and other charges must also be subject to competitive bidding or reasons why such are not practicable or applicable.”

(66) A7. “A forced takeover process of a severely troubled company would provide for a hearing and fair level of compensation. This is not a common occurrence within this jurisdiction.”

(67) A8. “The purchase price is not a major concern since the allowable return for ratemaking is based on depreciated original cost. However, acquisition adjustments are considered in various instances.”

South Dakota Public Service Commission

(68) “The South Dakota Public Service Commission… does not regulate public water or wastewater systems.”

Texas Natural Resource Conservation Commission

(69) A1. Water. “TNRCC does not have a stated position regarding privatization. The Commission focuses on outcomes (high quality, reasonably priced services) rather than ownership type.”

Wastewater. “Wastewater privatization is not a matter where I am familiar with any position. However, the Commission and the state have a legislative policy of preferring regional systems for the collection, treatment, and disposal of wastewater.”

(70) A2. Water. “Yes, a large number of districts already use contract operators and a number of municipalities are seriously considering contract operators. But there has been very limited interest in selling or leasing government owned assets.”

Wastewater. “It seems to be matter of much discussion in the state. A few utilities, such as the Lower Colorado River Authority (Austin and Central Texas area) are active and expanding into the operational and ownership control of POTWs.”

(71) A3. Water. “Our data management systems do not currently track this type of information in such a way that we can easily identify trends.”

Wastewater. “There is no good mechanism for gauging any trend.”

(72) A4. Water. “State law and agency regulations specify procedures for notification to TNRCC and administrative steps for transferring ownership to a new entity. These mechanisms are necessary whether the transfer is between private or public entities. However, conversion to contract operators does not require TNRCC authorization.”

Wastewater. “ State law and agency regulations specify procedures for notification to TNRCC and administrative steps for transferring ownership to a new entity. These mechanisms are necessary whether the transfer is between private or public entities.”

(73) A5. Water. “Yes. See Answer to Question 4.”

Wastewater. “Yes.”

(74) A6. Water. “TNRCC is not directly involved in the bidding processes of governmental entities. There are, however, state laws which require competitive bidding for sales of governmental assets and contracts for services which exceed specified dollar amounts.”

Wastewater. “TNRCC is not involved in any bidding processes. The agency only receives notice of the entities requesting the wastewater permit transfer.”

(75) A7. Water. “Condemnation proceedings are conducted in District Court so TNRCC is not directly involved. There are provision in Chapter 13 of the Water Code which address the compensation for certain types of forced asset transfers (copy of 13.254 and 13.255 attached.”

Wastewater. “N/A—No TNRCC involvement.

(76) A8. Water and Wastewater. “No suggestions.”

Virginia State Corporation Commission

(77) A1. “No, please note that the VA Commission has no regulatory authority with respect to public systems.”

Washington Utilities and Transportation Commission

(78) A4. “Not sure—would be in statute for public utilities which is not our jurisdiction.”

Wisconsin—Public Service Commission of Wisconsin

(79) A1. “The Public Service Commission Wisconsin (PSC) does not have a formal position on privatization. The PSC is interested in the consolidation of water and sewer utilities, where feasible, to prevent the proliferation of new utilities. Currently the PSC regulates some 580 municipal water utilities and 9 private water utilities. Approximately 46 of the municipal water utilities have joint sewer utility operations regulated by the PSC.”

(80) A2. “No, there has been no trend toward privatization in Wisconsin. In the past there has [sic] been a few isolated instances where a municipality took over a private system. In general, Wisconsin municipal utilities are well managed, have reasonably priced water and have good access to a water supply. A major reason in some states for the privatization of a municipal water supply is that the municipality would have a new source of revenues, that being taxes paid by a private utility. However, in Wisconsin, municipal water utilities already pay a property tax equivalent to the municipality, so the municipality would not gain anything in the way of taxes that it does not already receive.”

(81) A3. “See answer to number 2 above.”

(82) A4. “Yes, there are statutory requirements that mandate that the current utility would have to obtain PSC approval to abandon its obligation to provide service and the new entity to receive approval to provide service.”

(83) A5. “Yes, asset acquisition would be governed by statute as noted above in the answer to number 4. There are no statute requirements regarding utility management decisions contracting out some of its operations, e.g. billing or meter reading services.”

(84) A6. “Not applicable.”

(85) A7. “As noted in the answer to number 1 there are only 9 private water utilities in Wisconsin. Of these 9, only 3 have 1,000 or more customers. In a disputed condemnation hearing, the PSC would establish a reasonable price for the value of the utility being taken over. There would be no guarantee to any investor that they would recover their investment in a takeover.”

(86) A8. “Given the current situation, it is doubtful if there would be much interest in privatization (asset acquisition) of the municipal water utilities in Wisconsin. However, there are currently about 20 municipal water utilities that are contracting out a portion of their utility operations, such as meter reading, billing and management of treatment plants. In the future, the area of contract operations for a part of the municipal water utility operations would seem to be more viable then asset acquisition.”