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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.
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
Privatization of Water Services in the United States: An Assessment of Issues and Experience is available from the
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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
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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
Water Industry Council, Brooklyn Heights, New York
JEROME B. GILBERT, J.
Gilbert, Inc., Orinda, California
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
JEFFREY W. JACOBS, Study Director
ELLEN A. DE GUZMAN, Research Associate
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
CH2M Hill, Boston, Massachusetts
University of Minnesota, Minneapolis
Pacific Institute, Oakland, California
JOHN LETEY, JR.,
University of California, Riverside
DIANE M. McKNIGHT,
University of Colorado, Boulder
Emory University, Atlanta, Georgia
National Audubon Society, Washington, D.C.
RUTHERFORD H. PLATT,
University of Massachusetts, Amherst
JERALD L. SCHNOOR,
University of Iowa, Iowa City
Virginia Polytechnic Institute and State University
R. RHODES TRUSSELL,
Montgomery Watson, Pasadena, California
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
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.
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-
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