Privatization of Water Services in the United States An Assessment of Issues and Experience (2002) / Chapter Skim
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5. Structural, Pricing, and Regulatory Issues
5. Structural, Pricing, and Regulatory Issues
Pages 81-99
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From page 81... ...
"Fixed costs" are infrastructure costs associated with water supply, treatment, and distribution. It is thus difficult to reduce capital costs, and even substantial savings in operating costs can help offset capital costs only to a limited extent.
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From page 82... ...
. Public ownership can also be a constraint if systems cannot expand beyond geopolitical boundaries to capture potential regional-scale economies.
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From page 83... ...
The capital intensity of the industry and its substantial economies of scale have a direct bearing on capital facility planning since it is more cost-effective to add larger increments of capacity. In all utilities, the line between "surplus capacity" for foreseeable needs and "excess capacity" (which could not be justified as part of the rate base under state regulation)
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From page 84... ...
Regionalization, or the merging of multiple water utilities into a single administrative unit, can be achieved under public or private ownership and with or without actual physical interconnection. Economies of scale in the drinking water industry are associated primarily with water source withdrawals and treatment, but these economies can be offset by the costs of transporting treated water long distances.
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From page 85... ...
RISING COSTS AND THEIR EFFECTS ON U.S. WATER SERVICES Costs are rising for the water industry.
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From page 86... ...
It is becoming increasingly hard for water utilities to avoid or postpone the cost of maintaining a reliable and compliant drinking water system. Limited public funding and the achievement of economic efficiency mean that the cost of infrastructure improvements must be supported through rates.
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From page 87... ...
Economic efficiency is promoted if water rates more accurately reflect the true cost of providing water services. Rate structures can improve economic efficiency by reflecting marginal costs, including the opportunity costs of the water associated with alternative supply options.
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From page 88... ...
Regionalization in government operations usually means that one or more communities turn over their assets (and, in their view, local control) to another public agency or regional authority.
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From page 89... ...
because public goals may be achieved more cost effectively. A more recent rationale for regionalization and consolidation comes from the 1996 Safe Drinking Water Act (SDWA)
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From page 90... ...
From the perspective of local communities, the chief concern about regionalization and consolidation is surrendering control, either to a regional authority or to state public utility regulators. The desire of communities to retain local control and use political processes to govern water utility decisions has tended to thwart regionalization efforts.
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From page 91... ...
All community water systems are subject to regulation by state drinking water primacy agencies pursuant to the federal Safe Drinking Water Act (SDWA)
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From page 92... ...
Economic regulation applies to virtually all private water utilities (although not private contract companies) , and some publicly owned systems in some states opt to provide this level of oversight.
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From page 94... ...
Some analysts view economic regulation of utility revenues and rates as a deterrent to privatization because regulation constrains profitability and does not provide the performance incentives of competitive markets (Haarmeyer, 1993; Raftelis, 1989~. Some analysts also believe that regulation provides disincentives (or inadequate incentives)
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From page 95... ...
State commissions demonstrate economies of scale and scope in regulation when compared to decentralized oversight by local governments. Although their traditional policies are based upon rate-based/rate-of-return methods, the commissions also have responded to the economic and technological changes affecting the utility industries, including emerging competition.
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From page 96... ...
Regulation and Privatization It can be argued that privatization and economic regulation share the common goal of establishing managerially sound and financially viable water and wastewater systems. Strategic use of acquisition and other regulatory incentives already has had a considerable influence on the restructuring of the water industry.
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From page 97... ...
The transfer of assets and financial arrangements probably requires approval as well. Acquisition adjustments require a determination of ratemaking treatment.
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From page 98... ...
The statute is comprehensive, except for the obvious fact that it does not address privatization agreements for water service. · In California, wastewater privatizers must "apply to the commission for a determination that the proposed privatization project is not a public utility .
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From page 99... ...
To many privatization advocates, economic regulation is not necessary because local governments can "regulate" through the contract vehicle and associated review processes. Others have suggested, however, that a regulatory role might be justified under some circumstances to prevent abuses of monopoly power by profit-seeking contractors, to ensure that cost reductions are reflected in the rates charged for service, and to protect communities and water customers in the context of constrained local regulatory capacity.
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