Guest Column | June 6, 2016

Setting The Record Straight On Investor-Owned Water Utilities

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By Mark Strauss

Facts, figures, and case studies are presented to quell concerns over water and wastewater utility privatization.

All across America, communities are faced with massive challenges to replace critical water and wastewater infrastructure, with limited access to the capital needed to make these upgrades on an increasingly urgent timeline. When we talk about the aging infrastructure in our country, it’s important to keep in mind that upgrading the vast and complex systems is not the sole responsibility of any one group, organization, or entity.

With an estimated 650 water main breaks occurring every day, and 2 trillion gallons of treated water lost every year at a projected cost of $2.6 billion, aging and deteriorating public water systems threaten economic vitality and public health. The need to reverse years of under-investment in infrastructure, despite tighter budgets at every level of government, calls for us to rethink how we pay for and manage infrastructure investment.

There has been a longstanding debate over the role of investor ownership in the water utility sector, which some say — as an essential resource — should be in the hands of government entities. However, this argument is commonly grounded on misconceptions about how investor-owned utilities operate. In reality, investor-owned water and wastewater providers have a long history of financial and technical capabilities to address challenges for communities.

In reality, investor-owned water and wastewater providers have a long history of financial and technical capabilities to address challenges for communities.

Government-owned systems make up approximately 84 percent of our nation’s water systems, and more than 97 percent of our nation’s wastewater systems, but many municipalities are challenged by limited budgets, inability to raise capital, and competing priorities. In fully owning, managing, and operating a water or wastewater system or in working with municipalities via public-private partnership (PPP) agreements, investor-owned utilities can meet local needs and ensure communities receive high-quality, reliable water as well as reliable and environmentally sound wastewater service now and in the future.

The Question Of Rates
First, it is important to understand what drives increases in rates. Capital investment needs are the primary drivers of rate requests. This allows for the provision of reliable services — including repairs, upgrades, treatment upgrades, and new sources of supply. Rates are set by state regulators staffed with experts in utility regulation. All expenses of investor-owned utilities are disclosed to and reviewed by the economic commission staff and state ratepayer or consumer advocacy groups. The cost of providing water and sewer service is then billed to customers through their water rates only and is not partially funded by other taxes.

Government-owned utilities have a limited taxpayer and revenue base that must service all the municipalities needs, not just water and wastewater services. As a result, many municipalities, particularly medium to smaller systems, find themselves with significant constraints in their ability to attract capital to maintain reliable service and comply with increasing quality requirements.

A case in point: In June 2015, New Jersey American Water acquired the borough of Haddonfield’s water and wastewater system, which faced significant challenges. The company worked with the borough to identify the most critical system needs to be addressed and has an aggressive plan to make upgrades. Over the next five years, New Jersey American Water will spend more than $16 million on system renewal and modernization.

If the sale hadn’t gone through, the borough of Haddonfield Board of Commissioners, which recently raised the rates 25 percent, announced that rates would continue to rise to pay for much-needed capital improvements and would actually exceed New Jersey American Water’s rates. As part of the sale agreement, New Jersey American Water committed to leaving the water rates unchanged for three years. And, because New Jersey American Water is regulated by the New Jersey Board of Public Utilities, any future proposed changes in water and/or wastewater rates would be subject to extensive governmental review and approval.

Bigger Can Be Better
Public systems serving a small population have little bargaining power when it comes to paying for equipment, tools, chemicals, and a host of other requirements needed to support high-quality, reliable systems. Despite their tax base, they still must provide the same basic services such as billing, customer service, and water testing as a larger utility, meaning water and wastewater service management and maintenance comes at a much higher price. As operations become increasingly complex and costly, many small systems could find it difficult to meet performance standards and sustain operations.

Economies of scale brought by larger entities like American Water can benefit communities.

By operating on a larger scope and serving multiple communities, investor-owned water utilities can take advantage of economies of scale and bargain to keep down construction and operation costs. Investor-owned utilities are able to procure materials such as pipe, hydrants, and fleet vehicles for less than smaller systems and also manage systems more effectively.

Even with the willingness to spend the money, many communities lack the in-depth experience to design and/or implement infrastructure upgrades on their own or to operate and maintain systems that are becoming more complex due to increasing water quality requirements. With deep water industry experience, investor-owned water utilities can provide tailored, innovative solutions to meet a community’s specific needs. For American Water, this includes local pipe maintenance, leak detection, water reuse technology, and much more.

Along with managing and operating systems, because a primary aspect of a larger water company business is upgrading infrastructure, they accumulate skills based on operating multiple water and wastewater systems in a variety of geographic settings. In terms of resources, these water utilities maintain highly specialized staffs of scientific experts and engineers who can be made available to communities as needed. Through partnerships, municipalities gain affordable access to such expertise.

Real-World Value
For example, the San Clemente Dam Removal & Carmel River Reroute Project is the largest dam-removal project ever to occur in California and one of the largest to occur on the West Coast. An agreement with California American Water (CAW) and federal, state, and local agencies provides a framework to cooperatively remove the dam. It enables CAW to resolve dam safety concerns through the lowest-cost solution for ratepayers. Public agencies, led by the California State Coastal Conservancy and NOAA’s (National Oceanic Atmospheric Administration’s) National Marine Fisheries Service, will secure additional funds to pay for the dam-removal project. This project demonstrates that when public and private interests work together, benefits are realized far beyond what either could achieve alone. By overcoming numerous political and procedural challenges, the San Clemente Dam Removal Project can be a model for other public-private cooperative efforts.

Whether regulated or market-based, acquisitions or partnerships are about providing water and wastewater solutions. American Water consistently achieves water quality results that are 13 times better than the industry average for meeting all drinking water requirements and has invested almost $1.2 billion in 2015 to improve water and wastewater systems.

In May 2015, Missouri American Water announced the closing of the company’s acquisition of the city of Arnold’s sanitary sewer system, which added 8,800 sewer customers to Missouri American Water’s operations in St. Louis County. Like many municipalities around the country, Arnold was not charging residents what it needed to keep the system up to date, especially with increasingly stringent U.S. EPA and Clean Water Act requirements coming into force. Over the next four years, Missouri American Water will invest approximately $5 million to upgrade and improve the infrastructure of the Arnold sanitary sewer system.

The residents are now benefitting from outstanding customer service, stable rates (which are overseen by the Missouri Public Service Commission), infrastructure investment, and service to the community. In addition, sewer employees, formerly employed by the city of Arnold, continue to provide system operation and field services now as Missouri American Water employees.

Conclusion
Working with investor-owned water providers is a viable solution to a number of serious water industry problems. Investor-owned water companies can help address these challenges by offering access to capital for investment, identifying more cost-effective ways to deliver service, and providing industry expertise and experience. In working together with municipalities, investor-owned utilities can offer clear benefits to communities and remain fully committed to helping communities meet their local water and wastewater needs.


About The Author
Mark Strauss is senior vice president of Corporate Strategy and Business Development for American Water, the largest and most geographically diverse publicly traded U.S. water and wastewater utility company. With more than 20 years experience in senior leadership roles for the company, Mr. Strauss oversees strategy and major growth efforts for American Water’s regulated and competitive operations.