This report is a follow-up to my 1994 “Water Privatization and Investment Study.” In 1994, I suggested that U.S. electric utilities might investigate investing and contracting in the public U.S. water and wastewater systems.
At the time of writing that report, the main catalysts for investor-owned electric utilities to diversify were capital accumulation from plant rate base depreciation and shrinking investment opportunities in traditional electricity markets. Since the 1994 report was written, many states have developed plans to restructure their electric system and unbundle rates or are in the process of doing so. A strong movement is developing for a nationwide electric market, not as constrained by state boundaries and state regulators as in the past. One could even go further and envision a North American electric market in the not-too-distant future. Inevitably, this approach to what was formerly considered a classic “natural monopoly” raises the question of whether it portends a correlative change for the water sector.
The current changes in the electric industry may or may not create viable additional investment opportunities for investor-owned electric utilities. However, recent changes to the tax codes, a weakening of legislative commitment to the basic tenets of the “natural monopoly” concept, dwindling government budgets and, in California, the implementation of Proposition 218 are a few of the forces that could further open up public sector water and wastewater companies for varying types of private sector involvement, especially by investor-owned electric utilities. Institutional changes, in the form of federal, state and local laws and IRS rules, have the potential to catalyze or inhibit the process and structure of privatization.
Electric utility investment in the water and wastewater industry could also have a complementary impact on local economic growth. Expansion of an electric utility’s customer base can be enhanced or constrained by the availability or lack of water and wastewater facilities. Thus, an investor-owned electric utility, by investing in the water and wastewater infrastructure of the service community area, may be making a prudent stand-alone investment, as well as encouraging community economic growth and hence, in the longer term, an expansion of its traditional customer base. These ripple or secondary effects will increasing be an incentive for electric utilities to consider investment in water and wastewater facilities in their own service areas.
The U.S. water system is largely publicly owned. Ninety-five percent of wastewater customers and 85% percent of water customers are supplied by public entities. However, there are many small privately owned community and non-community water systems, in addition to the viable larger investor-owned water companies. Only 95 of all investor-owned individual utilities have annual revenues in excess of one million dollars. Unlike most public sector water systems, private utilities are generally rate-regulated by a state agency.
In my 1997 survey of regulators, as compared with previous annual surveys, a small but perceptible increase in privatization surfaced. However, changes were mainly in the contract and operations fields, rather than in asset transfers. In the U.S., as in most countries studied, there is a reluctance to transfer assets from the public to the private sector. Contracting or outsourcing are preferred as methods of achieving some privatization. Such public-private partnerships appear to establish a working balance between capital requirements, efficiency and social goals.
Currently, there are over 1,000 operation and maintenance contracts in the U.S. for water and wastewater systems. The number is increasing rapidly. Many of these contractors are foreign and many of them have established business relationships with U.S. firms. Often, the lead operators have a general strategy of exporting domestic technologies to first- and third-world markets. U.S. companies are gradually becoming players in the overseas privatization arena.
Australia has embraced a National Competition Policy (the “NCP”). The driving force behind this policy is to make the Australian economy competitive with its many trading partners. Government business enterprises have been corporatized, and the states, territories and federal government have embarked on a policy of competitive neutrality by removing the “the shield of the crown” as a protective barrier against competition. In addition, the NCP has decreed “open access” to major infrastructure resources. Australia is a possible source of lessons for the U.S., particularly given the already existing high level of American participation in the Australian electric privatization process (Victoria).
Economic change, such as infrastructure privatization, can produce winners and losers. Investors may achieve higher returns on capital, while certain employees (human capital) may find themselves without a means to their customary income sources. Moreover, the costs of economic change do not appear to be spread evenly by age classification.
This work, both in the U.S. and abroad, is ongoing. The world needs viable water systems. Economic growth is related to their availability. Every economy requires an efficient infrastructure, either to enable or sustain economic growth. Water and wastewater systems are at the heart of the infrastructure package. They are highly valued on a global basis. There can be no doubt that there will be a continuing strong demand for improved water and wastewater systems.