2
History of U.S. Water and Wastewater Systems

This chapter provides a historical framework for consideration of today’s debates over privatization. Changes in policies and practices are never free of the inertia of history. Some of the key pressures for change today have resulted from past action (or inaction), and today’s practices have evolved from specific problem-solving histories.

Efforts to provide safe drinking water and wastewater disposal facilities date back to the origins of civilization (Rosen, 1993; Winslow, 1952). Ancient societies in Egypt, Mesopotamia, India, Pakistan, Crete, and Greece all sought to provide safe drinking water and safe means of human waste disposal. Water supply and wastewater collection reached a high point in the Roman Empire. The Dark Ages, however, witnessed a decline in the development and application of these practices.

As world population neared one billion during the Industrial Revolution in the late nineteenth century, cities and villages became more crowded. Public health concerns dictated that new ways had to be found to provide safe water supplies as well as provide means for safe disposal of sanitary wastes. Growth in the numbers and in the size of cities and increasing use of water in residential, commercial, and industrial enterprises led to increasing provision of public systems for water supply and wastewater systems. Although some research suggests that private water companies emerged during the Renaissance (Walker, 1968), private entrepreneurs initiated the provision of water supply services on a large scale during the nineteenth century in both Europe and the United States. By contrast, provision of sewers, along with streets and drainage facilities,



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Privatization of Water Services in the United States: An Assessment of Issues and Experience 2 History of U.S. Water and Wastewater Systems This chapter provides a historical framework for consideration of today’s debates over privatization. Changes in policies and practices are never free of the inertia of history. Some of the key pressures for change today have resulted from past action (or inaction), and today’s practices have evolved from specific problem-solving histories. Efforts to provide safe drinking water and wastewater disposal facilities date back to the origins of civilization (Rosen, 1993; Winslow, 1952). Ancient societies in Egypt, Mesopotamia, India, Pakistan, Crete, and Greece all sought to provide safe drinking water and safe means of human waste disposal. Water supply and wastewater collection reached a high point in the Roman Empire. The Dark Ages, however, witnessed a decline in the development and application of these practices. As world population neared one billion during the Industrial Revolution in the late nineteenth century, cities and villages became more crowded. Public health concerns dictated that new ways had to be found to provide safe water supplies as well as provide means for safe disposal of sanitary wastes. Growth in the numbers and in the size of cities and increasing use of water in residential, commercial, and industrial enterprises led to increasing provision of public systems for water supply and wastewater systems. Although some research suggests that private water companies emerged during the Renaissance (Walker, 1968), private entrepreneurs initiated the provision of water supply services on a large scale during the nineteenth century in both Europe and the United States. By contrast, provision of sewers, along with streets and drainage facilities,

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Privatization of Water Services in the United States: An Assessment of Issues and Experience generally fell to local government. To this day, private provision of water supplies is common in many parts of the world, whereas wastewater treatment is seldom a responsibility of private enterprise. An exception is when private developers provide the service in connection with the construction of buildings and streets. PUBLIC WATER SYSTEMS IN THE UNITED STATES In 1755, Hans Christopher Christiansen instituted services for the first public water works in America at Bethlehem, Pennsylvania. In 1772, the state of Rhode Island chartered two private water delivery companies in Providence (Hudson Institute, 1999). New York City initially used private wells as its main water source. As the city grew, however, these wells became fouled. In 1799, New York State Assemblyman Aaron Burr (later U.S. vice-president) proposed legislation creating the Manhattan Company. Although this legislation was intended to provide a new source of water supply for the city, it also allowed for any unspent money to be used to create a bank. Burr’s main purpose was the creation of the Manhattan Bank, the forerunner of the Chase Manhattan Bank. The company pursued its banking interests, but it neglected its water-related responsibilities. It was only in 1842 that New York City officials, after considerable study, brought an ample supply of water to the city from the Croton River. This was one of the early large municipal water supply projects in the United States (Blake, 1956). Boxes 2-1 and 2-2 describe the development of water supply and treatment facilities for the cities of Baltimore and Boston, respectively. During the mid-1880s, there was a growing recognition in Britain, Europe, and the United States that water was a vehicle for the spread of disease, particularly typhoid, as well as cholera. There was also a need to provide water for fighting fires, which ravaged many cities during the period. Local government investments in public water supply service therefore grew in size and number. By 1850, the number of public water supplies in the United States had increased to 83, of which 50 were privately owned (Carlisle, 1982). After the Civil War, U.S. population continued to increase, and the need to reduce diseases and to provide fire protection escalated. By 1866, there were 136 public water supplies in the United States (Hail and Dietrich, 2000). At the beginning of the twentieth century, the number of water systems in the United States had increased to over 3,000, with approximately equal numbers of public and private owners (Figure 2-1). In the late 1800s, new water treatment methods, such as slow sand filtration and rapid filtration with chemical coagulation, had been developed and were being used in public water supplies (AWWA, 1951, 1981a,

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Privatization of Water Services in the United States: An Assessment of Issues and Experience BOX 2-1 The Baltimore Water Company The Baltimore Water Company was formed in 1805 at the invitation of the municipal authorities after the city of 30,000 had failed in attempts to build its own water works. By 1830 Baltimore’s population had grown substantially, but only a small fraction of the population was being served by the water company. With the city’s help, the company obtained springs in the city. But as was the case in many other cities, the wells and springs had become contaminated and the extension of the piping system had been restricted to the center of the city. A city council committee had not blamed the water company; it had been interested in profits. The water company responded that it was prepared to sell its assets to the city. To forestall such action, the company acquired additional, higher-quality sources above the city and, because of a cholera outbreak, water from fire hydrants for flushing street gutters was made available at no cost to the city. But after another cholera outbreak, it was apparent that Baltimore would be obliged to be responsible for its water supply. The issue then became whether the assets of the Baltimore Water Company would be purchased or whether an entirely new, larger system would be built because the performance of the company system, particularly in making water available for fire fighting, had been unsatisfactory. In 1836, a consultant recommended the construction of two dams on streams at some distance from the city, along with an aqueduct and a reservoir near the city. Thus began another conflict, with such a costly project being opposed by the conservative elements in the city leadership. An economic panic in 1837 drove out any thoughts of the proposed project. This gave the company another lease on life and it began a 15-year program of system additions. From 15 miles of pipe in 1835, by 1852 some 47 miles of pipe were in operation. Despite these improvements and company prosperity, dissatisfaction with the company surfaced, primarily because of its decision to only serve districts of the city that promised to be profitable. Only about 30 percent of the people were being served. Also, while water for fire fighting was free to the city, the public was perturbed by large charges for all other public uses. The principal problem was the inability of the company to keep up with the city’s rapid population growth. An 1853 report of the Baltimore Water Commissioners made the following assessment: The Baltimore Water Company has done what a private citizen would have done for himself under similar circumstances, managed its business with an eye single to the interest of the stockholders. It had doubtless dealt as fairly as any corporation in existence, yet public sentiment is not satisfied, nor should it be with its operations. If Baltimore was a “finished city,” and was only to survive until its present tenements and warehouses shall have decayed and fallen, the present system of supplying it with water might be tolerated. But her destiny is one of greatness and strength, and those charged with her legislative authority should, before it is too late, confer upon her that benefit which is of inestimable value (Blake, 1956). Finally, in 1854 the city purchased the holdings of the Baltimore Water Company and initiated plans for the creation of a management infrastructure and pursuit of a water supply adequate for the future. The inability of a private company with limited financial resources to keep up with growing demand for water again obliged a city government—even one happy to be served by a private company—to take responsibility for an important public service.     NOTE: This box draws from Blake (1956).

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Privatization of Water Services in the United States: An Assessment of Issues and Experience BOX 2-2 Water Supplies for the City of Boston On April 7, 1825, a fire that destroyed homes and stores in central Boston led to a debate that lasted for more than 20 years before a decision to finally bring a supply of water to the city adequate in quantity and quality was reached. The issue was not whether the provision of water for the rapidly growing city was desirable; every candidate for mayor over the two decades promised to bring water to the city. The issue that delayed the decision was whether the water should be supplied by the city government or by one or more private companies. Although water for fire protection triggered the debate, Boston’s leaders recognized the necessity of an adequate supply of good-quality water. The water from the wells serving individual homes, as well as from those made available by private entrepreneurs who provided keys to the locks on the pumps for a price, was contaminated by infiltration of wastes from nearby privies. Even uncontaminated wells were providing “salt” water for poor taste and appearance. On the other hand, so-called “soft” water of good quality, available in ponds above the city, could be obtained by gravity. Sewers became accessible for the receipt of household wastes during the middle and late nineteenth century. The storm sewers discharged to local drainage ditches, which extended contamination of the groundwater. The situation was further aggravated when small companies set themselves up to distribute water from private wells to some homes and businesses. The convenience of piped water in homes and businesses, and most particularly the availability of flush toilets, resulted in an explosive expansion of small piped systems serving the city’s more prosperous enclaves. The city’s business leaders recognized the promise of profits that a large water company might bring, and several companies were created. The Aqueduct Corporation brought water from a small pond within the city. The Boston Hydraulic Company, through the Massachusetts legislature, took water from ponds north of the Charles River and within 12 miles of the city. However, the Boston City Council rejected the requirement that it be obliged to subscribe to stock in the Boston Hydraulic Company. In 1836, it brought the issue to a public referendum, and the public, despite opposition of the two companies, overwhelmingly endorsed the proposition that the city should build and operate the waterworks. Although this decision took more than 10 years of discussion and debate, it was only the beginning. b). In 1893, Congress passed legislation to develop regulations to prevent the introduction, transmission, or spread of communicable disease from foreign countries or from state to state. However, it was not until 1912 that the first water regulations were promulgated under this legislation (AWWA, 1999). These early federal regulations prohibited the use of common water cups on interstate common carriers. The U.S. Public Health

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Privatization of Water Services in the United States: An Assessment of Issues and Experience The issue became a choice between water sources and private water companies and public ownership. The private companies, by then also including Boston Aqueduct Corporation and the Spot Pond Aqueduct Company, owned the small nearby ponds. The proponents of public ownership preferred Long Pond (later known as Lake Cochituate), which was larger and further from the city. The water companies preferred investing in water supply at a lower immediate cost, rather than committing to a larger source they did not own that was more costly and for which the companies did not have the financial resources. A second referendum again supported public ownership, but this time by a smaller margin. Meanwhile, the city was growing. The Boston Aqueduct Company had so extended its distribution system that the customers complained of low pressures and being without water much of the time. The city had done nothing, and the controversy continued. In 1844, the city finally decided to enter into the provision of water from Long Pond. But the water companies were not done—they had the ear of the state legislature. The legislature agreed that the city should go ahead with its scheme but only if supported by another referendum. This time, the Long Pond option with public ownership was narrowly defeated. Machinations of the Spot Pond Aqueduct Company, however, delayed the commitment to the private option, and the decision to privatize was aborted. Finally, consultants employed by the city reported that Spot Pond would provide only 1.5 million gallons per day, while the city needed 7.5 million gallons per day, and soon would need 10 million gallons per day. In April 1846 it was put to a vote, and the citizens again overwhelmingly supported the Long Pond project and public ownership. In the final analysis, financial resources available to the private companies could not compete with those of the municipality, which had the financial support of its state legislature. At the time, long-term investments were more readily made by public bodies than by private companies. Since then, water and sewerage and wastewater treatment systems in the Boston metropolitan area have largely been regionalized and are now the responsibility of the Massachusetts Regional Water Authority (MWRA). Some cities in the region, such as Cambridge and Worcester, have their own water systems, and most of the cities own and operate their own sewerage and water distribution systems. The state controls the MWRA watersheds. The MWRA makes liberal use of private consultants, private laboratories, and other private establishments for capital and operational purposes.     NOTE: This box draws from Blake (1956). Service Drinking Water Standards were first adopted in 1914, with bacterial limits to protect the traveling public. Water supplies in cities that provided water for interstate carriers needed to be approved by the U.S. Public Health Service. Many states adopted these or similar standards for their communities. The use of chlorine as a disinfectant in water treatment became common in the United States around 1915. By the 1940s,

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Privatization of Water Services in the United States: An Assessment of Issues and Experience FIGURE 2-1 Historical pattern of ownership in the U.S. water industry (1800 to 1896). In the nineteenth century, the number of water supplies grew exponentially from a total of about 600 in 1880 to about 3,000 in 1895. Ownership was evenly divided between public and private ownership. Beginning about 1900, the number of publicly owned systems began to exceed the number of private systems. SOURCE: Baker (1948). water-borne diseases in the largest U.S. cities were reduced nearly 100-fold from 1910 levels (AWWA, 1951). The years following World War II saw the development of new approaches to ensure safe water supplies. Organic chemicals that were used heavily during the war found a place in a range of civilian applications. Many of these chemicals eventually made their way into surface and groundwater systems. In her 1962 book, Silent Spring, Rachel Carson expressed concerns regarding environmental quality, including the quality of drinking water, caused by synthetic chemicals (Carson, 1962). These new chemicals were dissolved in minute quantities in water and could not be detected by the analytical techniques of the day (Dougherty et al., 1966). New analytical tools were developed, and they fostered even greater concerns over water pollution. There was public clamor for federal standards to be applied to all water supplies. As early

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Privatization of Water Services in the United States: An Assessment of Issues and Experience as 1942, the American Water Works Association (AWWA) had been calling for standards (Public Health Reports, 1946), but it was not until environmental groups forced Congress to act that the Safe Drinking Water Act (SDWA) was passed in 1974. This act requires that all public water supplies abide by national “maximum contaminant levels.” The U.S. Environmental Protection Agency is responsible for establishing drinking water standards under the Safe Drinking Water Act. PUBLICLY OWNED WASTEWATER TREATMENT WORKS The original approach to disposing of wastewater from urban homes in the United States was via cesspools or septic tanks with underground tile drains for wastewater disposal through percolation into the ground. But this often polluted the groundwater that was being used for water supply. Sewerage systems were thus introduced to remove wastewater from homes and other buildings for discharge to the nearest waterbodies. Local governments constructed sewerage lines, as well as streets, drainage systems, and infrastructure for other utilities. These sewerage systems, while sanitizing homes, also often created nuisances and health hazards in the receiving waters, as these were also being used for water supply. Comprehensive sewerage systems were being built throughout Europe and the United States in the mid-1880s. Because receiving waters often played multiple roles as sources of food, places of recreation, and sources of drinking water, treatment of wastewater before discharge was initiated in the latter years of the century. Initial treatment consisted of diverting wastewater to farms for application to the land, where wastewater helped restore nutrients to the soil. In fact, these facilities were called “sewage farms” well into the twentieth century. With urban growth and the attendant larger volumes of water that needed to be processed, sedimentation alone was no longer sufficient, and various improvements in treatment were introduced. Chemical precipitation was introduced to enhance sedimentation, but that created problems with sludges. A major step was the introduction of biological treatment with trickling filters following sedimentation (Box 2-3 describes development of St. Louis’ water supply and use of chemical treatment). Many other types of secondary biological treatment processes are now available, with the aim of increasing their efficiency and reducing their space and cost requirements. Activated sludge and other modern biological processes can provide up to 95 to 98 percent removal of organic matter and suspended solids and bacteria. Passage of the Clean Water Act in 1972 made secondary treatment a requirement for all wastewater treatment plants in the United States. A federal construction grant program, which provided additional funds as

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Privatization of Water Services in the United States: An Assessment of Issues and Experience BOX 2-3 Developing St. Louis’ Water Supply At the beginning of the nineteenth century, St. Louis was under French control. But French leader Napoleon Bonaparte was having problems in Europe and needed money. In 1803 Secretary of State James Monroe and President Thomas Jefferson negotiated the Louisiana Purchase. President Jefferson subsequently authorized Meriwether Lewis and William Clark to lead an expedition to the Pacific Coast (1804-1806). Following Lewis and Clark’s expedition, St. Louis served as a launching point into the western United States for settlers, trappers, and miners and became known as the “Gateway to the West.” By 1830, the population of St. Louis had reached about 6,000, and its water supply was primarily from springs and cisterns (Schworm, 1968). The city of St. Louis signed a contract with a Mr. Wilson and a Mr. Fox to “build and conduct water works supplying clarified water” to private citizens at $20 per year for a residence and at $100 per year for hotels and factories. In addition, after 25 years the “works” were to belong to the city of St. Louis. Unfortunately, Wilson and Fox were unable to borrow the necessary capital to perform the contract, and in 1831 the city took over the project and built its own water system, which became operational in 1835. In 1832, a cholera epidemic broke out and killed 4 percent of St. Louis’ population. In 1849 and 1866, St. Louis again had cholera epidemics that killed a greater number of victims than the epidemic in 1832 (Primm, 1981). It was not until 1904 that clean water was available to St Louis, which by then was the fourth-largest city in the United States with a population of 575,000. That the availability of clean water coincided with the St. Louis World’s Fair was not coincidental, as the mayor had promised there would be clean water for the fair (AWWA, 1981a). John Wixford, a chemist with the city water division, had found that by using ferrous sulfate and then adding lime to the river water, he could achieve consistent coagulation. Wixford’s process allowed St. Louis to have clean water for the fair and is still used for treating water from the Mississippi and Missouri rivers. an incentive for innovative practices, and state grants up to a total of up to 90 percent, were major stimuli for the construction of wastewater treatment plants. In many instances, even secondary treatment was found to be inadequate for maintaining receiving waters as “swimmable and fishable” (as required by the Clean Water Act) and greater removal of specific components such as nutrients (nitrogen or phosphorus) was thus necessary. This is characterized as “advanced treatment.” Although the federal government has no regulations for nonpotable reuse, many states do, and one of the requirements generally applicable is provision of “tertiary treatment,” which adds a sand filtration process (similar to that used in drinking water plants) following secondary treatment. In its Guidelines for Water Reuse (EPA, 1992), the U.S. Environmental Protection Agency

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Privatization of Water Services in the United States: An Assessment of Issues and Experience recommends tertiary treatment followed by chlorine disinfection for unrestricted nonpotable reuse. Requirements under the Safe Drinking Water Act and the Clean Water Act are sure to become more restrictive over time, given the continual emergence of contaminants that pose yet unknown public health risks and given that there will be new contaminants that have not yet been invented. Prevention and detection of pollution and the treatment of water at all stages of the hydrologic cycle will become more complex and more costly. PRIVATE WATER SYSTEMS Regulation of U.S. water utilities can be traced back to the nineteenth century and the westward expansion of United States. As the privately owned U.S. railroad system developed and expanded westward during the nineteenth century, rail operations needed to be regulated in order to ensure reasonably priced services. A new type of state regulatory organization was created to control these natural monopolies. With the invention of electricity and the telephone, similar types of regulation were also required. Gas and water services were eventually added to the list of regulated natural monopolies. Regulatory commissions began in the 1870s and, by the early twentieth century, had established rules and regulations to help control the various service industries. Regulatory commissions were initially interested in ensuring the provision of better services. However, given the monopoly status of the water supply systems, the commissions imposed financial constraints on the private water companies, as was customary for other privately owned monopolies such as electricity, telephone, gas, and transportation. Experience with these utilities has generally shown them to be reliable, with fair rates. All U.S. states have enacted legislation for the creation of regulatory commissions. A private water system is one for which assets are held by an individual, by a private corporation, or by a holding company (although there are only a few of these in the United States) and for which there is a general expectation that the owner(s) will be compensated by receiving some return on their investment. The terms “private” and “investor-owned” are used interchangeably. The majority of private systems are owned by individuals or families, by real estate development firms, or by mobile home park operators. Only a handful of private water utilities are “public” companies (those that issue stock that is publicly traded by investors). Of course, private ownership does not negate the public responsibilities of private water systems, including compliance with all applicable standards that apply to publicly owned systems. Indeed, most private water companies are held to additional responsibility in the form

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Privatization of Water Services in the United States: An Assessment of Issues and Experience of economic regulation. Unlike water utilities, companies that provide contractual services are generally private companies that also may or may not be publicly traded. Most water systems in the United States are publicly owned by municipalities, as well as by counties, authorities, and governmental districts. In addition to the public-private distinction, many water utilities operate on a nonprofit or not-for-profit basis. These include cooperatives and many homeowners associations. State policies vary with regard to water system types and associated regulatory jurisdiction. As of 1995, state regulatory commissions regulated approximately 8,750 water supplies in 46 states (Beecher, 1995), of which approximately 4,100 were investor-owned. The remainder are under some form of public ownership, generally municipal, but often in local regional authorities. Regulatory commissions are directly concerned not with water-quality issues, but with water rates, rates of return, and quality of service (water quality is regulated by state agencies according to federal government standards). State regulatory commissions also regulated approximately 2,150 wastewater utilities as of 1995, approximately 1,230 of which were investor-owned, with the remainder being under government ownership (Beecher, 1995). Many private systems are relatively small, built by developers and owned by private entities, often homeowners associations. As a result of federal and state construction grant programs available only to municipalities and sewerage authorities, private companies were seldom able to compete, and many of them were sold to municipal or other governmental operations. Public water supplies presently have limited state and federal grant programs. However, there have been recent pressures to request federal assistance to help replace needed infrastructure. Because of the magnitude of these costs and the tendency for reductions in federal assistance, it does not seem likely that massive federal grants will be available for the drinking water industry. WATER UTILITY PRIVATIZATION AROUND THE WORLD This report on U.S. water privatization touches occasionally (see Appendix A) on international water privatization efforts. The more prominent privatization efforts have been in France, where water services privatization started in the mid-nineteenth century, and the United Kingdom, where national water utilities were privatized during the 1980s. The end of the Cold War saw the extension of private contract services in central and eastern European countries. Some European cities, including Berlin, Barcelona, and Budapest, have recently contracted for water and wastewater service. Private water services have also been provided in

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Privatization of Water Services in the United States: An Assessment of Issues and Experience BOX 2-4 Water Privatization in Cochabamba, Bolivia One of the better-known Third World privatization attempts occurred in Cochabamba, Bolivia, during 1999-2000. The Cochabamba experience made international news after riots erupted following privatization of the water utility and resultant rate increases. One person was killed and several people were reported injured in the riots. Although details of the events that precipitated these riots are not universally accepted and have not been independently reviewed, the key issues revolved around an attempt to improve Cochabamba’s aged and decrepit water infrastructure through contracts with an international consortium of private companies (see Global Water Report, 2000; Minneapolis Star Tribune, 2000; PSI, 2000). The city’s water services had been operated by Semapa, a municipal water company. The Semapa system clearly needed improvement. It leaked badly and served only roughly half of the city’s residents. The poor were not being served well, and the company had a declining rate structure (the more water used, the lower the per-unit price). Water delivered to businesses was thus cheaper than water to homes, and those homes that were served tended to be those of the wealthy. The poor often purchased their water from unregulated truckers who charged more for water than Semapa did. A consortium led by International Water Ltd., a London-based company that is half owned by San Francisco-based Bechtel Corporation, was awarded the contract to operate and expand the city’s water supply system. Two main options had been considered for addressing Cochabamba’s water problems: the Misicuni Project and the Corani project. The former project was costlier and technically more difficult. Against advice from the World Bank, the Bolivian government apparently required that the more expensive Misicuni project be implemented. International Water sought to have construction of an expensive dam in the Misicuni scheme delayed, which would have reduced the need for immediate rate increases. International Water had no authority to impose a rate structure that was established by contract. The Misicuni project also required some 20 kilometers of tunnels, four kilometers of which had been drilled, and it is alleged that the Bolivian government insisted that the cost of the incomplete tunnels be included, along with the costs of all the assets of the subsidized Semapa agency. More than 50 percent of the rate increases were said to have resulted from including these costs. Critics of the privatization scheme allege that the rate increases were between 35 percent to 200 percent or even 300 percent, representing the exploitation of the poor at the benefit of multinational corporations. Typical rates for water and sewerage services rose 35 percent. Low-income residents were to pay 10 percent more, and the largest hikes (106 percent) were reserved for the highest-volume users, the most affluent. Critics also complained about the lack of public participation in decision making, the lack of justification for and discussion about rate changes, and the lack of appropriate government oversight. Following extended rioting and negotiations, the state government rescinded the contract. This case study illustrates the emotional environment within which water matters are often addressed and the high risks faced by private companies when dealing with local politics. It also illustrates the difficulties in changing rate structures after a history of subsidized water services has been established.

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Privatization of Water Services in the United States: An Assessment of Issues and Experience countries such as Australia, Macao, and the Philippines, but there have been no comprehensive evaluations of the net benefits of these decisions. Independent evaluations of the successes, failures, benefits, and problems of these global efforts would be useful. Because companies with global investments are increasing their market share in North America, it would be of interest to U.S. utilities to have a continuing understanding of the performance of these companies in international markets. Failures or controversies occasionally develop (Box 2-4), some of which receive great international attention. Unfortunately, there are few credible, independent evaluations of water utility performance in many recent privatizations.