Privatization of Water Services in the United States An Assessment of Issues and Experience Committee on Privatization of Water Services in the United States Water Science and Technology Board Division on Life and Earth Studies National Research Council NATIONAL ACADEMY PRESS Washington, D.C. NATIONAL ACADEMY PRESS 2101 Constitution Avenue, N.W. Washington, D.C. 20418 NOTICE: The project that is the subject of this report was approved by the governing board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. Support for this project was provided by the American Water Works Company, Inc., Cali- fornia Water Service Company, Severn Trent Environmental Services, the U.S. Environmen- tal Protection Agency under Contract No. X-82829401, and the University of California under Award No. SA6138. Library of Congress Cataloging-in-Publication Data Privatization of water services in the United States : an assessment of issues and experience / Committee on Privatization of Water Services in the United States Water Science and Technology Board Division on Life and Earth Studies. p. cm. ISBN 0-309-07444-4 1. Water utilities—United States. 2. Water-supply—Economic aspects—United States. 3. Sewage disposal—Economic aspects—United States. 4. Privatization—United States. I. National Research Council (U.S.). Committee on Privatization of Water Services in the United States. HD4461 .P75 2002 363.6’1—dc21 2002008161 Privatization of Water Services in the United States: An Assessment of Issues and Experience is available from the National Academy Press, 2101 Constitution Avenue, NW, Box 285, Wash- ington, DC 20055 (1-800-624-6242 or 202-334-3313 in the Washington metropolitan area; Internet: http//www.nap.edu). Copyright 2002 by the National Academy of Sciences. All rights reserved. Printed in the United States of America. The National Academy of Sciences is a private, nonprofit, self-perpetuating soci- ety of distinguished scholars engaged in scientific and engineering research, dedi- cated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce M. Alberts is president of the National Academy of Sciences. 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Wulf are chair and vice-chair, respectively, of the National Research Council. COMMITTEE ON PRIVATIZATION OF WATER SERVICES IN THE UNITED STATES CHARLES W. HOWE, Chair, University of Colorado, Boulder JEAN E. AUER, American States Water Company, Hillsborough, California JANICE A. BEECHER, Beecher Policy Research, Inc., Indianapolis, Indiana CHARLES A. BUESCHER, JR., Washington University, St. Louis, Missouri LARRY CHERTOFF, Water Industry Council, Brooklyn Heights, New York JEROME B. GILBERT, J. Gilbert, Inc., Orinda, California RICHARD HOWITT, University of California, Davis DANIEL A. OKUN, The University of North Carolina (Emeritus), Chapel Hill DAVID E. RAGER, Cincinnati Water Works, Cincinnati, Ohio WILLIAM G. REINHARDT, Public Works Financing, Westfield, New Jersey WILLIAM N. STASIUK, New York City Department of Environmental Protection, Kingston, New York Staff JEFFREY W. JACOBS, Study Director ELLEN A. DE GUZMAN, Research Associate v WATER SCIENCE AND TECHNOLOGY BOARD RICHARD G. LUTHY, Chair, Stanford University, Stanford, California JOAN B. ROSE, Vice-Chair, University of South Florida, St. Petersburg RICHELLE M. ALLEN-KING, Washington State University, Pullman GREGORY B. BAECHER, University of Maryland, College Park KENNETH R. BRADBURY, Wisconsin Geological and Natural History Survey, Madison JAMES CROOK, CH M Hill, Boston, Massachusetts 2 EFI FOUFOULA-GEORGIOU, University of Minnesota, Minneapolis PETER GLEICK, Pacific Institute, Oakland, California JOHN LETEY, JR., University of California, Riverside DIANE M. McKNIGHT, University of Colorado, Boulder CHRISTINE MOE, Emory University, Atlanta, Georgia ROBERT PERCIASEPE, National Audubon Society, Washington, D.C. RUTHERFORD H. PLATT, University of Massachusetts, Amherst JERALD L. SCHNOOR, University of Iowa, Iowa City LEONARD SHABMAN, Virginia Polytechnic Institute and State University R. RHODES TRUSSELL, Montgomery Watson, Pasadena, California Staff STEPHEN D. PARKER, Director LAURA J. EHLERS, Senior Staff Officer JEFFREY W. JACOBS, Senior Staff Officer WILLIAM S. LOGAN, Senior Staff Officer MARK C. GIBSON, Staff Officer M. JEANNE AQUILINO, Administrative Associate PATRICIA A. JONES, Study/Research Associate ELLEN A. DE GUZMAN, Research Associate ANITA A. HALL, Administrative Assistant ANIKE L. JOHNSON, Project Assistant JON SANDERS, Project Assistant vi Preface here has been widespread interest in “privatizing” various func- tions and activities in both the public and private sectors in the TUnited States at least since the early 1980s. In the water services sector, privatization has taken many forms, from meter reading and ac- counting 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 capi- tal 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 of- ten inadequate. As a result, there is a large backlog of deferred mainte- nance on the nation’s water infrastructure. Local officials are interested in options that promise to relieve these pressures. vii viii PREFACE 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 ex- pansion 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 pub- lic-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 com- mittee license to provide an independent review of the key issues: Ameri- can 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 com- prised of a range of water service industry experts, public and private managers, water industry consultants, officials of water industry associa- tions, 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 envi- ronment 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 offi- cials 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 proce- dures 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- PREFACE ix sible and to ensure that the report meets institutional standards for objec- tivity, evidence, and responsiveness to the study charge. The review com- ments 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 construc- tive comments and suggestions, they were not asked to endorse the con- clusions 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 ex- amination of the report was carefully carried out in accordance with the institutional procedures and that all review comments were carefully con- sidered. 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 writ- ing process—all with good humor whatever the pressure from reviewers or the committee chair. Ms. Ellen De Guzman provided excellent arrange- ments for all our meetings and endless, highly competent assistance in formatting and editing the chapters and tables, figures and all. Ms. Rhonda Bitterli also provided excellent editorial advice. Charles W. (Chuck) Howe Chair