3
Forces of Change in the Water Service Industry

Water and wastewater utilities in the United States provide safe, reliable, and economical service as measured by any comparative standard of performance. The nation’s water infrastructure has benefited greatly from long-term investments in water systems and the adoption of new wastewater standards with accompanying financial assistance. U.S. water service systems are based on historically conservative approaches to design and construction that, when combined with the current political aversion to long-term investments in infrastructure, have created some resistance to change. Nevertheless, major changes are under way.

Water service providers face new challenges on a range of fronts that include rising consumer expectations, increasingly stringent government standards, technical complexities, decaying infrastructure, and a political imperative to control costs and to limit rate increases. These pressures have created a market opportunity for private firms seeking to expand their role in the water services sector. These include investor-owned water utilities, which have seen limited expansion through acquisitions, and private domestic and foreign firms that offer services on a contractual basis to publicly owned water and wastewater systems. These companies can bring additional technical and managerial competency to the water sector, while also accepting a degree of competitive risk.

Water consumers and public and special interest groups are becoming more vocal and better educated about water quality and utility management issues. This is because of a variety of factors, including growing



The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement



Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience 3 Forces of Change in the Water Service Industry Water and wastewater utilities in the United States provide safe, reliable, and economical service as measured by any comparative standard of performance. The nation’s water infrastructure has benefited greatly from long-term investments in water systems and the adoption of new wastewater standards with accompanying financial assistance. U.S. water service systems are based on historically conservative approaches to design and construction that, when combined with the current political aversion to long-term investments in infrastructure, have created some resistance to change. Nevertheless, major changes are under way. Water service providers face new challenges on a range of fronts that include rising consumer expectations, increasingly stringent government standards, technical complexities, decaying infrastructure, and a political imperative to control costs and to limit rate increases. These pressures have created a market opportunity for private firms seeking to expand their role in the water services sector. These include investor-owned water utilities, which have seen limited expansion through acquisitions, and private domestic and foreign firms that offer services on a contractual basis to publicly owned water and wastewater systems. These companies can bring additional technical and managerial competency to the water sector, while also accepting a degree of competitive risk. Water consumers and public and special interest groups are becoming more vocal and better educated about water quality and utility management issues. This is because of a variety of factors, including growing

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience media coverage of contamination and pollution events, stressed water supplies in some regions, new statutory hurdles for project construction, and competition between environmental and human uses of water. Legislators at the local, state, and federal levels are creating laws that tighten standards (and increase the costs) for water and wastewater services. During the first half of the twentieth century, wastewater services consisted primarily of collection and disposal, while water supply services consisted of treatment processes and larger investments in reservoirs and pipelines. After World War II, the water sector experienced significant changes driven by accelerating environmental pressures in the 1960s and 1970s. New federal efforts at improving wastewater systems resulted in significant assistance to local communities for constructing wastewater treatment works; however, local utilities were left with obligations for operation, maintenance, and replacement. More recently, public health threats, long-deferred infrastructure maintenance, increases in capacity needs driven by population growth, and reallocation of supplies for environmental purposes have created significant new costs to drinking water utilities (Westerhoff et al., 1998). Increases in wastewater charges necessary to pay for the operation of new plants built throughout the United States in the 1980s generally made it harder to raise rates for water service improvements in the 1990s. Higher operating costs in the 1980s reflected higher standards for compliance and included new requirements for the disposal or recycling of sludge, control of combined sewer overflows, and upgrades. Furthermore, a new effort by the U.S. EPA to better manage nonpoint source pollution is likely to result in additional costs for source control and drainage services. The cost of water has been low in comparison to charges for energy, telephone, television, and waste recycling costs. But customers who envision a future of cheap, plentiful water may be in for some surprises when all water-related services are factored into their monthly bills. Investment deferrals and historic underpricing by many cities exacerbate this situation. Many publicly owned systems continue to be reluctant to charge customers for the true cost of water and wastewater services, although this is not the case for special purpose public agencies or investor-owned utilities. Underpricing of water services may satisfy political goals, but it also undermines economic efficiency and results in higher long-term costs to users. WHAT DO CUSTOMERS EXPECT? Water utility customers want adequate environmental protection and public health protection at the lowest reasonable cost. An indication of this was revealed in an American Water Works Association Research Foundation (AWWARF) study (1998), which was initiated in 1993 and

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience BOX 3-1 Water Utility Customer Attitudes: A Study by the American Water Works Association Research Foundation 1993 Customer Attitudes Most customers are willing to pay the cost to meet federal standards, and most customers were willing to pay up to $10 per month more for water that exceeded federal standards. Customers rank clean, safe and healthy, and good-quality water three to five times more important than reasonably priced water, and only 6 percent of the customers list reasonable price as their top priority. 1998 Customer Attitudes Getting water that is safe, aesthetically pleasing, and reliable was 10 times more important than reasonably priced water. Overall perceptions remained about the same as the 1993 results. About 60 percent of respondents believed that they were getting good to excellent value, and 75 percent ranked utility performance as good or excellent. The customers’ first priority was in having an uninterrupted supply; significantly lower in priority was affordability. The lowest priority was in “public input in making utility decisions.” SOURCE: AWWARF (1998). updated in 1997 and again in 1998 (Box 3-1) (AWWARF, 1998). The AWWARF survey was followed by a Customer Attitude and Community Utility Communications Survey in 2001. These studies also included the opinions of utility managers who felt that public willingness to pay more was limited or nonexistent. It is clear that the industry initially responded slowly (with some notable exceptions) to customer desires to improve water quality and to their willingness to pay for it. Because of EPA’s requirement for consumer confidence reports, the number of utilities providing detailed water-quality reports with prescribed content has increased. In addition, there is an increased interest in how utility operations affect the environment and water quality, and the public today is generally better informed on scientific and technical issues. A heightened awareness of national security issues since the terrorist attacks on September 11, 2001, is sure to sharpen the public’s interest in the security of the nation’s water utility systems. Numerous proposals for state and federal legislation to make significant investments in enhancing security, including structural improvements to water and wastewater systems, are currently under consideration.

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience PUBLIC OFFICIALS AND PRIVATIZATION Both elected and appointed local officials have been significant forces for change in the water industry. In the late 1990s, mayors and executives from Atlanta; Indianapolis; Lynn, Massachusetts; Milwaukee; and Seattle contracted for water service operations to save money and improve performance. Largely because of the need to repay grants when assets are privatized and the lower cost of borrowing available to municipalities, none of these efforts involved asset transfer or buyout similar to the water privatization effort in the United Kingdom during the 1980s. The lower borrowing costs are due to the state and federal tax exemption for municipal debt. Recent Internal Revenue Service (IRS) rule changes have allowed cities to enter long-term operations contracts, thus reducing the incentive for asset acquisition. In the 1990s, the cities of Charlotte, North Carolina, and San Diego, California, conducted managed competition between public utility staff and private companies that had invested large sums in the preparation of proposals. However, these were unsuccessful because of union opposition or legal actions. The city of Indianapolis, on the other hand, allowed wastewater utility staff to compete with outside offers to operate and maintain the plant. That contract went to the private firm United Water. The result has been a tightening of utility operations by existing employees and organizations. A major new national program sponsored by American Water Works Association and the Water Environment Federation (WEF)—a program called “Qualserve”—provides a formal employee-based and peer-review procedure to determine appropriate changes in the functions of water utilities. Factors driving local officials toward these changes include long-term cost reduction, obtaining a risk-sharing partner for regulatory compliance, difficulty of attracting new employees with adequate technical capability, and the need to focus civic energies and resources on more immediate social problems. New laws in Arizona, California, Georgia, New Jersey, and Washington allow utilities to enter into contracts that combine either design and construction, or design, construction, and operations, within a single contract. These contracts can be negotiated rather than awarded to the lowest-cost bidder. States allow cost to be a major factor, but it is only one of the criteria used to obtain the facility and/or the service. The state role tends to be limited to statutory procurement requirements for localities. Only the state of New Jersey has authorized economic regulators (the Board of Public Utilities) to review privatization contracts in order to ensure that cities and ratepayers are adequately protected. Changes in federal policy also have stimulated privatization activity in the water sector. At the federal level, IRS Revenue Procedure No. 97-13

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience (passed in 1997) allows, with some exceptions, operating contracts of up to 20 years without sacrificing the tax-free status of these facilities (which were largely financed through federal construction grants). Prior to the change in IRS regulations, federal grant projects risked losing the federal grant if the commitment to private sector operations was greater than five years. This new procedure has had fewer effects on drinking water systems because few drinking water facilities were built with federal construction grants. A potential downside of the movement toward long-term contracting is the possibility of monopoly power. In the absence of competition or regulation, the long-term monopolist may not maintain efficiency or produce anticipated savings. Changes in tax law have opened the way for the use of design, build, and operate (DBO) contracting. The design and build (DB) approach was originally proposed in the 1970s for wastewater facilities being funded under the Clean Water Act of 1972. However, opposition developed within the consulting engineering community, which felt there would be a conflict of interest if design and construction were not separate responsibilities. Today, many engineering firms recognize that synergies may be created by combining the design, build, and operation components into a single business responsibility and that costs can be saved and a better product produced. In the past, the primary driving forces affecting water utilities were the need to keep costs low, to use the utilities to generate funds for municipal services (primarily in big cities), to relegate utilities to last priority in budgeting, and to delegate utility operations under the “out of sight, out of mind” principle. But contemporary health and environmental priorities have elevated water supply and wastewater management in the public consciousness and have added significant future cost concerns. CHANGING LEADERSHIP: MANAGERS, ENGINEERS, AND WATER UTILITY PROFESSIONALS Significant changes in the internal operations and dynamics of water utility organizations are also taking place. The traditional utility manager typically had several years of technical education (and possibly a degree in civil or environmental engineering), was experienced in operations, maintenance, design, or customer relations, or had participated in the construction of major water infrastructure systems. Succession was achieved, usually without formal planning, by progressively promoting new leaders whose tenure in executive jobs frequently exceeded ten years. This leadership was characterized by top-down, clearly recognized lines of authority. These traditional features, however, are changing in a new era of cooperative decision making, public participation, customer rela-

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience tions, and greater media coverage of utility activities. There has also been a change in educational priorities, with civil engineering candidates studying subjects that emphasize more general concepts or that advance the science of a particular process, as opposed to studying basic public works technologies. At the same time, aspiring young professionals have more interest in sciences, computer technologies, and policy studies. These factors have resulted in water utility staffs with less traditional technical training. More water utility managers today have backgrounds in economics, public administration, and law. These new leaders tend to be more open to change and to be more proactive in urging their peers and support staffs to consider how changes can improve the utility’s performance. CHANGE AND GROWTH IN THE PRIVATE SECTOR Until recently, the private water sector could be characterized by four separate areas of activity: (1) privately owned and operated regulated utilities that grew gradually through acquisitions, (2) engineering companies that planned and designed new facilities, (3) construction companies that specialized in building water-related facilities, and (4) manufacturers and suppliers of materials and services. There were a limited number of operations contracts, but they were mainly for small wastewater plants. Investor-owned utilities are facing big changes. For example, water industry consolidations in 1999 occurred at a rapid rate (PWF, 2000a). Foreign firms such as Ondeo (Suez Lyonnaise des Eaux, France), Vivendi (France), some United Kingdom companies, and U.S.-based American Water Works Company, Inc. have made major national and international acquisitions. With regard to standards compliance and reliability, these firms and public agencies face similar challenges. Their growing capabilities are illustrated by the California Water Service Company (San Jose), which operates central services for a group of widely dispersed local systems. By providing laboratory, engineering, and major business assistance, California Water Service Company’s services are of interest to small and medium-sized U.S. public utilities faced with increasing demands. Larger private water companies in the United States usually are regional in nature, extending beyond local geopolitical boundaries and often operating multiple water systems. Private companies could bring professional management, technological expertise, and economies of scale to small and medium-sized water systems. As water rates have often been regulated to meet only the costs of short-term needs, private companies have looked to governments to make the needed long-term investments. There appears to be new regulatory flexibility in some states. For example, Pennsylvania has adopted more flexible processes for approving

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience regular rate increases, and California routinely approves all increases needed to meet requirements of health authorities. Although many U.S. engineering companies conduct their business in the traditional mode (i.e., the traditional bidding process), others are forming partnerships for design-build-operate and design-build projects. Some decline to participate in these projects, preferring to play the traditional role as independent adviser to a municipality that is considering some form of privatization. Others incorporate an increasingly wide range of services in their corporate or core responsibilities. In a world of changing alliances, real and potential conflicts of interest abound (Busch, 1998), and engineering companies must adopt multiple project strategies to succeed in the municipal sector. Construction companies find it relatively easy to move from competitive bidding on a single design to a cooperative bid on a design that they influence. Builders share in the performance risk of the facility that they will construct and are partners—not potential adversaries. The level of risk they are willing to tolerate depends upon their business arrangement. Because this new project approach has only a small share of the market, the bulk of construction company work is still in the traditional bidding mode. REGULATIONS AND STANDARDS THAT AFFECT SERVICE Significant and continuous change is a fact of life for water service providers. New laws, regulations, standards, and policies are being developed that will determine performance requirements for protecting public health and the environment. In addition, the range of regulatory requirements faced by today’s operators is extraordinary. The following discussion summarizes some of the significant factors that may cause reconsideration of the appropriate balance between public and private roles. Public health requirements led to the establishment of maximum contaminant levels (MCLs) by EPA, and some states have standards that are more stringent. These requirements are reflected in recent proposals by EPA to lower the arsenic standard from 50 to 10 micrograms per liter and to prevent Cryptosporidium organisms from entering water systems. Control of arsenic depends on improvements to several thousand small (serving a population of less than 10,000) systems and to larger utilities (requiring relatively smaller investments). Constructing the necessary facilities is both costly and administratively difficult for small systems. The Safe Drinking Water Act provides for state revolving funds that can be of some assistance, and although overall funding remains at low levels, it is available to both public and private utilities (Appendix B provides an overview of the Safe Drinking Water Act). Most small systems could

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience benefit by contracting or cooperating with neighbors to implement improvements such as arsenic control. The comparative benefits of using public or private operations to achieve reliable compliance with regulatory standards are being evaluated in Canada. New regulations are likely to continue to create conditions favorable to consolidation and/or regional service contracting. Environmental requirements of the Clean Water Act are under regular review and have been strengthened as far as nonpoint sources are concerned. Total maximum daily loads are being established for stream systems. Performance requirements for wastewater plants are becoming more stringent. Little financial assistance for compliance is available, and to a large extent, systems funded by previous EPA grants now require rehabilitation. The Clean Water Act and the Endangered Species Act complicate the provision of water services. Compliance with both acts has made more explicit the full costs (including social and environmental costs) of new construction, making new facilities less economically and politically attractive. The effect is to require more effective operations of existing facilities, which in turn requires investment in efficient controls and in highly qualified individuals, who may be more readily available in the private sector. TECHNOLOGY The second half of the twentieth century saw substantial improvements in the delivery of water supplies and in wastewater treatment. Improvements in treatment technology, pumps, valves, chemical feeders, and instrumentation and control greatly enhanced performance. The reuse of treatment residuals (sludges) and energy recovery are being more widely practiced. Wastewater reclamation and reuse for nonpotable water supply purposes in urban areas have been adopted widely, particularly where water resources are limited. This integrated approach offers the prospect of more efficient and economical water supply and wastewater management. However, increasing operating costs for wastewater facilities that were constructed largely with federal and state grants is resulting in dramatic increases in operating budgets. Where water and wastewater are billed together, high costs for one have caused resistance to investment in the other service. Treatment processes, including ozonation, membrane filtration, and use of ultraviolet light disinfection, are rapidly improving. In areas of limited water supply and high demand, demineralization is being seriously considered. Although new technologies have yet to produce economical results, newer, more efficient membranes may become a rela-

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience tively low-cost option, particularly where brackish waters are available. Investments in these processes and in computerized technology offer great opportunities for better and lower-cost service. Consolidation and centralization of services can make these benefits more widely available. New technologies can be used and the benefits of regionalization achieved by either public or private entities. However, there may be political resistance to cooperation and regionalization (Chapter 5 further examines U.S. water utility regionalization). Private sector incentives may be used to overcome political barriers to the application of efficient technological solutions. Computerized automation is increasingly used by sewerage and water utilities, primarily to ensure reliability. A common cause of treatment failure is human error, as recent Cryptosporidiosis outbreaks in the United States and Canada demonstrate. The opportunity to reduce costs and improve reliability will be increasingly available to technically sophisticated utilities. For instance, unattended operation of treatment plants during periods of low flow, with suitable redundant alarm systems, can improve reliability and reduce costs. RISK SHARING Several factors increase the risks associated with operating water and wastewater systems. These risks include the challenges associated with meeting increasingly stringent water quality standards, potential litigation actions by the public, increasing amounts of damage awards, and a low public tolerance for service outages, even during natural disasters. There may be social benefits in reallocating some of these risks, such as a small community water utility partnering with a larger utility (public or private) to share some of the risks associated with water services delivery—provided the risks and responsibilities are clearly defined. The city of Seattle has developed an approach to risk allocation that has been successfully used on several projects (see Appendix C). Seattle and other cities have also demonstrated the value of detailed treatment performance requirements that include transferring risk of regulatory compliance, providing monetary incentives and penalties. However, this requirement may have limited the number of potential contractors willing to accept the risk. Although it is probably unreasonable to attempt to fully transfer such risks as major natural disasters, the risk of regulatory compliance offers a new opportunity. One way to identify useful approaches is for a public agency to enter into a bidding/negotiation dialogue with private companies regarding the service in question. Public entities have used private

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience sector contractors for a range of services, but the amount of risk transfer has traditionally been limited. This trend is changing, and public utilities are exhibiting an increasing willingness to consider risk transfers. REGIONALIZATION AND THE SMALL UTILITY In general, smaller water utilities have more difficulties in responding to the challenges listed in this chapter. State and federal regulatory agencies have long recognized these difficulties, while some point to the ability of smaller utilities to keep pace with investment needs and increasingly stringent water quality requirements as perhaps the nation’s most pressing water and wastewater problem area (EPA, 1999c, 2000). The significance of this problem increases each year and occurs in three main areas: (1) to make efficient capital investment for treatment or rehabilitation, small systems have severe financial limitations; (2) to use modern technology, experts are increasingly needed for design and operation; and (3) sources of supply, treatment, and effluent limitations frequently require regional or basin approaches that are beyond the jurisdiction or political will of local public or, for that matter, private agencies. In the future, changed practices in the water and wastewater industry, initiated by competition and technology, may offer significant advantages to owners of small municipal systems. Rather than relinquishing ownership, they may be more willing to contract some (or perhaps all) of the responsibility for operating their utilities. Industry changes may provide opportunities for small systems through rate regulation assistance by state agencies, new industry performance standards, and benchmarking information and other services offered by regional private (and perhaps public) service providers. Regionalization is not just a private/public issue. It frequently involves concerns of loss of control over growth and development, or reluctance to give up a local function that has a proud history of accomplishment. Water industry changes now taking place may offer opportunities to preserve these values through carefully managed service contracts. With few exceptions, publicly owned water and wastewater facilities in the United States have been maintained as independent units even when economic analysis has demonstrated the benefits of consolidation. In 1972, the wastewater grant incentives of Public Law 92-500 and the increasingly stringent discharge standards have occasionally caused consolidations. However, independence was frequently advocated to assure local control even at higher cost. On the national level, larger private owners continue to acquire small private utilities (PWF, 2001). This trend accelerated near the end of the twentieth century, but it has been coun-

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience tered by municipal systems in which independence has sometimes been valued more than efficiency and steadily increasing regulatory risk. CAPITAL INVESTMENT Public agencies are at times reluctant to incur debt. Political arguments at the national and local levels pit advocates of pay-as-you-go financing against supporters of long-term borrowing. Local situations reflect varying factors that affect debt justification such as connection charges, developer contributions in areas of high population growth, economies of scale for treatment plants and pipelines, and the ratepayers’ ability to pay today and in the future. The national subsidy in the form of tax exemptions for municipal bonds makes public financing the lowest-cost form of borrowing. If citizens individually or collectively incur debt for long-lived assets, public financing will prove to be least expensive. The history of public finance shows that few agencies are unable to market bonds. Some may pay a higher interest rate but rarely, if ever, is the rate as high as private market rates because of the tax-exempt status of municipal debt, which creates roughly a 20 to 40 percent interest cost gap. This gap is demonstrated in the hypothetical analysis shown in Table 3-1. This comparison is solely for the purpose of showing the advantage of the municipal tax exemption and is not intended to represent a utility’s typical budget. Table 3-1 compares revenues and expenses for the two utilities. The first line contains the end result: the revenue requirement for the government-owned utility ($757,500) is only 75 percent of the revenue collected by the investor-owned utility. Depending on how the tariff is designed, this could translate into water prices a full 25 percent below those charged by the private sector utility. But in order to understand this result, it is necessary to examine the causes for such a large discrepancy and to assess the factors that may mitigate the differences. Despite this disadvantage, private water companies and some politicians continue to advocate various methods for accessing private capital markets to finance municipal water and wastewater system projects. In addition, the sale of water utility systems to provide a one-time windfall of cash to local communities, at the expense of future water ratepayers, may also be advocated. Except for short-term cash flow purposes, or the rare circumstances of low public credit, municipal debt will remain the most practical and least expensive form of financing. The availability of financial assistance to small utilities is growing. Federal appropriations since 1997 in the Safe Drinking Water Act State Revolving Funds have been about $800 million per year. Total expendi-

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience TABLE 3-1 Revenue and Cost Comparisons for Alternative Types of Ownership Item Actual Investor-Owned Utility ($) Hypothetical Government-Owned Utility ($) Operation Revenue (from user charges) 1,004,000 757,500 Expenses Variable operating expense 74,300 74,300 Fixed operating expense 288,900 288,900 Maintenance expense 144,700 144,700 Depreciation expense 88,600 88,600 Total expenses 596,500 596,500 Other Expenses Rate case expense (amortized) 7,700 0 Income taxes 89,100 0 Taxes other than income 59,400 0 Total other expenses 156,200 0 Net Utility Operating Incomea 251,300 161,000 Cost of Capital Interest expense 115,200 161,000 Net cash flow to owner 136,100 0 Total cost of capital 251,300 161,000 Balance 0 0 NOTE: The difference in calculated revenue requirements is $246,500. The largest part of this is due to exemption from taxes. Income and other taxes not paid by the government operator total $148,500. This does not represent an efficiency gain for government ownership; it is simply a transfer not made. In more pragmatic terms, if the local government were to acquire the privately owned utility described here, all levels of government would lose $148,500 in tax income. This would be ultimately recovered by either increasing tax rates or other taxes, or reducing government services, or both. On balance, the customers of this utility may be better off under public ownership, but society as a whole may not be. aNet Utility Operating Income = revenue − expenses – other. SOURCE: Boland (2000). tures since the program’s inception have been about $3 billion, about a third of which has been received by small systems (AWWA, 2001a). States have the discretion to make loans available to investor-owned utilities. However, the state of California has required that the benefits of any such loans accrue to customers of the utility. As a practical matter, the private sector has not participated in these programs. Allowing the use of tax-free bonds for privately operated water projects serving the public is mandated by Executive Order 12803 (Infra-

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience structure Privatization, April 30, 1992). The 1997 IRS modifications to Private Activity Bond Regulations provided local governments with some additional flexibility. However, there are still limitations on the use of tax-exempt financing for public-private partnerships. The following actions would allow greater access to tax-exempt financing: Eliminate the state volume cap restrictions for water and/or wastewater systems serving the public. Assure that revolving funds are available to privately owned/privately operated water and wastewater systems serving the public. Accelerate depreciation for private investment in municipal water and wastewater infrastructure. Provide flexibility to allow some private equity capital investments in facilities that are also partially funded through tax-exempt financing for water and wastewater infrastructure. Modify state law limitations to allow competition through incentive and/or performance-based fee structures for private operation and management of water and wastewater systems. The Water Infrastructure Network (WIN), a group representing most associations concerned with investment in water infrastructure, issued a 2001 report advocating new federal funding to capitalize state-administered grant and loan programs in the amount of $57 billion through a new generation of state funding organizations called “Water and Wastewater Infrastructure Financing Authorities.” The report recommended changes in financial assistance to meet needs that have exceeded recommended grants and loans to municipalities. The suggestions listed above also indicate a growing consensus for further lowering the barriers between public and private financing of water and wastewater facilities. Consideration is also being given to providing incentives and assistance to states to help smaller utilities deal with system upgrades and to facilitate regionalization (see Box 3-2). SUMMARY A broad range of forces within the U.S water services sector are providing opportunities for private water firms to extend their services offered to a wider range of customers. The U.S. water infrastructure system faces a large backlog of deferred maintenance. A large portion of the nation’s water storage, treatment, and delivery infrastructure was constructed in the late nineteenth century, and much of it is in need of maintenance or replacement. These needs, combined with municipalities that may be unable or reluctant to make substantial investments in water

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience BOX 3-2 Water Infrastructure Network Water Infrastructure Network (WIN), which was formed in 1999, is a coalition of local elected officials, drinking water and wastewater service providers, state environmental and health administrators, engineers, and environmentalists involved in drinking water and wastewater infrastructure operations. The Network was formed after the Association of Metropolitan Sewerage Agencies released the report The Cost of Clean Water (1999), which recognized the investment shortfall for water and wastewater treatment. WIN recognizes that other financial assistance mechanisms, including public-private partnerships, may address a portion of the issue helping smaller utilities deal with system upgrades and facilitate regionalization. The WIN also recommends that Congress authorize Water and Wastewater Infrastructure Financing Authorities (WWIFAs) to use federal capitalization grants to: purchase or refinance outstanding debt obligations of water or wastewater service providers, guarantee or purchase insurance for an obligation of a water or wastewater system, secure the payment or directly repay principal or interest on general obligation bonds issued by the state if proceeds of the bonds will be deposited into the State Revolving Loan Fund, and deposit into a capital reserve for a debt instrument of a water or wastewater system. As part of the federal funding package design to lower the cost of capital for WWIFAs that choose to leverage their federal capitalization grants for individual issuers seeking to borrow in the public capital markets, Congress should exempt from state private activity bond volume caps state and local private activity bonds for water and wastewater infrastructure, where such bonds (1) are used to finance core water or wastewater infrastructure, and (2) produce public health or environmental protection benefits that are generally available to the public. This will reduce the cost of financing water and wastewater infrastructure. As important, it will allow communities increased flexibility to more efficiently structure public-private partnerships that bring together the strengths of both the public sector and the private sector. SOURCE: EPA (1991). infrastructure, have provided an opportunity for private sector water firms. Customer expectations of high-quality water, along with minimal risks to public health and high levels of environmental protection, provide a water delivery challenge to both the public and private sectors. Some surveys have shown, however, a high willingness to pay for these amenities. In some U.S. cities, such as Atlanta, Indianapolis, and Seattle,

OCR for page 41
Privatization of Water Services in the United States: An Assessment of Issues and Experience municipal officials have delegated substantial responsibility to private firms for the operation and drinking water or wastewater treatment facilities. Private companies in the United States and abroad are growing in size and competence, creating new capabilities and a greater willingness to share risks of performance of water treatment facilities. At the same time, water utility officials bring a broader set of educational backgrounds to utility management, and some water utility staff—especially in larger cities with more resources—are receiving training in many aspects of water utility operations. Joint efforts of public and private sector experts have resulted in new and better models for contractual arrangements. At the same time, worldwide tightening of standards for protection of the aquatic environment and public health has fostered new technologies that, with automation, can provide better and more economical treatment and delivery systems. The pace of change in the water utility industry is accelerating. New standards for performance, continuing concerns about cost and efficiency, and new management cultures and attitudes are creating a pace of change not previously experienced in the industry. Increased use of the private water utility sector will require careful consideration of unique characteristics of each local utility service area.