Privatization of Water Services in the United States

An Assessment of Issues and Experience

Committee on Privatization of Water Services in the United States

Water Science and Technology Board

Division on Life and Earth Studies

National Research Council

NATIONAL ACADEMY PRESS
Washington, D.C.



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Privatization of Water Services in the United States: An Assessment of Issues and Experience Privatization of Water Services in the United States An Assessment of Issues and Experience Committee on Privatization of Water Services in the United States Water Science and Technology Board Division on Life and Earth Studies National Research Council NATIONAL ACADEMY PRESS Washington, D.C.

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Privatization of Water Services in the United States: An Assessment of Issues and Experience NATIONAL ACADEMY PRESS 2101 Constitution Avenue, N.W. Washington, D.C. 20418 NOTICE: The project that is the subject of this report was approved by the governing board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. Support for this project was provided by the American Water Works Company, Inc., California Water Service Company, Severn Trent Environmental Services, the U.S. Environmental Protection Agency under Contract No. X-82829401, and the University of California under Award No. SA6138. Library of Congress Cataloging-in-Publication Data Privatization of water services in the United States : an assessment of issues and experience / Committee on Privatization of Water Services in the United States Water Science and Technology Board Division on Life and Earth Studies. p. cm. ISBN 0-309-07444-4 1. Water utilities—United States. 2. Water-supply—Economic aspects—United States. 3. Sewage disposal—Economic aspects—United States. 4. Privatization—United States. I. National Research Council (U.S.). Committee on Privatization of Water Services in the United States. HD4461 .P75 2002 363.6′1—dc21 2002008161 Privatization of Water Services in the United States: An Assessment of Issues and Experience is available from the National Academy Press, 2101 Constitution Avenue, NW, Box 285, Washington, DC 20055 (1-800-624-6242 or 202-334-3313 in the Washington metropolitan area; Internet: http//www.nap.edu). Copyright 2002 by the National Academy of Sciences. All rights reserved. Printed in the United States of America.

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Privatization of Water Services in the United States: An Assessment of Issues and Experience THE NATIONAL ACADEMIES Advisers to the Nation on Science, Engineering, and Medicine National Academy of Sciences National Academy of Engineering Institute of Medicine National Research Council The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce M. Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievement of engineers. Dr. Wm. A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Kenneth I. Shine is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce M. Alberts and Dr. Wm. A. Wulf are chair and vice-chair, respectively, of the National Research Council.

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Privatization of Water Services in the United States: An Assessment of Issues and Experience This page in the original is blank.

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Privatization of Water Services in the United States: An Assessment of Issues and Experience COMMITTEE ON PRIVATIZATION OF WATER SERVICES IN THE UNITED STATES CHARLES W. HOWE, Chair, University of Colorado, Boulder JEAN E. AUER, American States Water Company, Hillsborough, California JANICE A. BEECHER, Beecher Policy Research, Inc., Indianapolis, Indiana CHARLES A. BUESCHER, JR., Washington University, St. Louis, Missouri LARRY CHERTOFF, Water Industry Council, Brooklyn Heights, New York JEROME B. GILBERT, J. Gilbert, Inc., Orinda, California RICHARD HOWITT, University of California, Davis DANIEL A. OKUN, The University of North Carolina (Emeritus), Chapel Hill DAVID E. RAGER, Cincinnati Water Works, Cincinnati, Ohio WILLIAM G. REINHARDT, Public Works Financing, Westfield, New Jersey WILLIAM N. STASIUK, New York City Department of Environmental Protection, Kingston, New York Staff JEFFREY W. JACOBS, Study Director ELLEN A. DE GUZMAN, Research Associate

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Privatization of Water Services in the United States: An Assessment of Issues and Experience WATER SCIENCE AND TECHNOLOGY BOARD RICHARD G. LUTHY, Chair, Stanford University, Stanford, California JOAN B. ROSE, Vice-Chair, University of South Florida, St. Petersburg RICHELLE M. ALLEN-KING, Washington State University, Pullman GREGORY B. BAECHER, University of Maryland, College Park KENNETH R. BRADBURY, Wisconsin Geological and Natural History Survey, Madison JAMES CROOK, CH2M Hill, Boston, Massachusetts EFI FOUFOULA-GEORGIOU, University of Minnesota, Minneapolis PETER GLEICK, Pacific Institute, Oakland, California JOHN LETEY, JR., University of California, Riverside DIANE M. McKNIGHT, University of Colorado, Boulder CHRISTINE MOE, Emory University, Atlanta, Georgia ROBERT PERCIASEPE, National Audubon Society, Washington, D.C. RUTHERFORD H. PLATT, University of Massachusetts, Amherst JERALD L. SCHNOOR, University of Iowa, Iowa City LEONARD SHABMAN, Virginia Polytechnic Institute and State University R. RHODES TRUSSELL, Montgomery Watson, Pasadena, California Staff STEPHEN D. PARKER, Director LAURA J. EHLERS, Senior Staff Officer JEFFREY W. JACOBS, Senior Staff Officer WILLIAM S. LOGAN, Senior Staff Officer MARK C. GIBSON, Staff Officer M. JEANNE AQUILINO, Administrative Associate PATRICIA A. JONES, Study/Research Associate ELLEN A. DE GUZMAN, Research Associate ANITA A. HALL, Administrative Assistant ANIKE L. JOHNSON, Project Assistant JON SANDERS, Project Assistant

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Privatization of Water Services in the United States: An Assessment of Issues and Experience Preface There has been widespread interest in “privatizing” various functions and activities in both the public and private sectors in the United States at least since the early 1980s. In the water services sector, privatization has taken many forms, from meter reading and accounting and billing, to operation and maintenance of core water supply and wastewater facilities, and in some instances the sale of system assets. Early water utilities in the United States were private companies, but urban growth eventually prompted many cities to develop publicly owned water systems. Since World War I, public ownership has been stimulated by various financial arrangements that reduce the cost of capital for public water systems. Water utilities in the United States today often face a combination of financial, regulatory, and operational challenges. Much of the nation’s water supply, treatment, and distribution infrastructure was built one hundred or more years ago. Much of this infrastructure is today in need of repair or replacement, and population growth in many areas requires water infrastructure expansion. Decisions about allocating resources for water infrastructure replacement and expansion are made in a context of limited or shrinking city budgets, competing demands, and increasingly stringent water quality regulations. Expenditures to adequately maintain our essential, but unglamorous, water infrastructure system are thus often inadequate. As a result, there is a large backlog of deferred maintenance on the nation’s water infrastructure. Local officials are interested in options that promise to relieve these pressures.

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Privatization of Water Services in the United States: An Assessment of Issues and Experience Since the middle and late 1980s, new actors have entered the U.S. water utility scene in the form of large international firms that specialize in water utility management and ownership. These firms have been able to offer technical help to smaller systems, and lower costs and new capital supplies to larger systems. Proposals from these firms have often been politically attractive by virtue of promises to minimize price increases, expedite long-delayed maintenance, and provide capital for system expansion and meeting increasing water quality standards. An important consequence of this availability of private alternatives has been improved performance of many public water utilities. This study springs from strategic planning sessions of the National Research Council’s Water Science and Technology Board (WSTB). During the late 1990s, the WSTB noted a growing interest in the prospects for water services privatization in the United States. The WSTB noted that some studies of water services privatization had been conducted, but that a comprehensive review that characterizes many NRC studies would be timely and useful. In an effort to provide an overview of the key issues in privatization—including fiscal, policy, management, regulatory, water quality, and environmental issues—the WSTB drafted a study proposal and shared it with several prospective sponsors. Given the various public-private relations that characterize U.S. water utility operations, it was fitting that a mix of public and private organizations stepped forth to provide funding for the study. The committee and the WSTB thank the following sponsors for their foresight and courage in granting the committee license to provide an independent review of the key issues: American Water Works Company, Inc., California Water Service Company, Severn Trent Environmental Services, the U.S. Environmental Protection Agency, and the University of California. The committee itself was comprised of a range of water service industry experts, public and private managers, water industry consultants, officials of water industry associations, government officials, journalists, and academics. This committee’s report was nearing its conclusion when the tragedy of September 11, 2001 occurred. Those events may have changed the environment for decisions about privatization and appropriate public-private balance. Those events certainly raised security concerns about our water utilities, a topic not covered by the committee. Nonetheless, the report provides useful background information for both public and private officials in the water utility sector. The report was reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise in accordance with the procedures approved by the NRC’s Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as pos-

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Privatization of Water Services in the United States: An Assessment of Issues and Experience sible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We wish to thank the following individuals for their review of this report: John Briscoe, The World Bank; Peter Gleick, Pacific Institute; Rebecca Parkin, George Washington University; Paul Seidenstat, Temple University; and Rhodes Trussell, Montgomery Watson, Inc. Although the reviewers listed above have provided many constructive comments and suggestions, they were not asked to endorse the conclusions or recommendations, nor did they see the final draft of the report before its release. The review of this report was overseen by Patrick Adkins of the Alcoa Corporation. Appointed by the National Research Council, he was responsible for making certain that an independent examination of the report was carefully carried out in accordance with the institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring committee and the institution. The committee wishes to thank the many experts who spoke to the committee during its early meetings and who provided logistic support, information, data, and insightful case studies. Finally but certainly not least, the committee thanks Dr. Jeffrey Jacobs of the Water Science and Technology Board staff for his tireless editing and unwavering insistence on clarity and balance throughout our extensive discussions and the writing process—all with good humor whatever the pressure from reviewers or the committee chair. Ms. Ellen De Guzman provided excellent arrangements for all our meetings and endless, highly competent assistance in formatting and editing the chapters and tables, figures and all. Ms. Rhonda Bitterli also provided excellent editorial advice. Charles W. (Chuck) Howe Chair

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Privatization of Water Services in the United States: An Assessment of Issues and Experience Contents     EXECUTIVE SUMMARY   1 1   KEY ISSUES IN WATER SERVICES PRIVATIZATION   10     Forms of Water Service Privatization,   11     Trends in and Types of Privatization,   15     Concerns About Privatization,   23     Concluding Observations,   28 2   HISTORY OF U.S. WATER AND WASTEWATER SYSTEMS   29     Public Water Systems in the United States,   30     Publicly Owned Wastewater Treatment Works,   35     Private Water Systems,   37     Water Utility Privatization Around the World,   38 3   FORCES OF CHANGE IN THE WATER SERVICE INDUSTRY   41     What Do Customers Expect?,   42     Public Officials and Privatization,   44     Changing Leadership: Managers, Engineers, and Water Utility Professionals,   45     Change and Growth in the Private Sector,   46     Regulations and Standards That Affect Service,   47     Technology,   48     Risk Sharing,   49     Regionalization and the Small Utility,   50

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Privatization of Water Services in the United States: An Assessment of Issues and Experience     Capital Investment,   51     Summary,   53 4   MODELS OF WATER SERVICE PROVISION   56     Four Strategies,   58     Assuring Successful Contracts,   77     Risk Management,   78     Contract Oversight and Evaluation,   78     Summary,   79 5   STRUCTURAL, PRICING, AND REGULATORY ISSUES   81     Infrastructure and Capital Intensity,   81     Rising Costs and Their Effects on U.S. Water Services,   85     Regionalization and Consolidation,   88     Regulation,   91 6   BROADER IMPLICATIONS OF WATER SERVICES PRIVATIZATION   100     Privatization and Community Values,   101     Implications for Environmental and Water Supply Protection,   104     Privatization and Regional Economic Growth,   106     Summary,   109 7   CONCLUSIONS   110     REFERENCES   114     APPENDIXES         A Privatization of Water Services in England and Wales   121     B Overview of Safe Drinking Water Act (SDWA)   128     C Seattle Public Utilities Treatment Plant, Design-Build-Operate Project, Risk-Sharing Matrix   131     D Biographical Information   135     INDEX   139