Should cities privatize water?

Are cities better off privatizing water utilities to pay for expensive infrastructure?
Written by Tyler Falk, Contributor

It's a debate happening in cash-strapped cities throughout the United States: Should public water services be run by a private company?

And it's not surprising. Some U.S. cities have water infrastructure that was built before the Civil War. We've also seen cities stuggle to fund municipal water operations in places like Detroit.

In the U.S. there are 73 million people already served by a private water company. Still, about 80 percent of the U.S. relies on public water utilities.

So are cities better off turning to private companies to run their water services?

The Wall Street Journal offers up a fantastic debate on the matter. The first opinion comes from Richard Little, a senior fellow at the Sol Price School of Public Policy at the University of Southern California. He argues that while privatization isn't the best option for every city, it's something cities should consider more often. He says that cities don't have the money to pay for much needed infrastructure upgrades and because cities keep the price of water artificially low these investments don't happen. Private companies charge rates that cover the true costs of a well-run water system.

The public interest is not well-served by keeping prices so low for everyone, including those who can well afford to pay, if it means there is insufficient revenue to support routine maintenance and renovation. On the contrary, a good system, public or private, keeps rates low for essential needs and increases consumption charges rapidly to discourage excessive use. The idea of asking commercial and industrial users to subsidize residential usage—as some privatization opponents suggest—only encourages wasteful practices such as watering expansive lawns, which disproportionately benefits the more affluent, not the poor.

On the other hand, Wenonah Hauter, executive director of Food and Water Watch, points to poor private track records of water companies operating in the U.S. She says that these companies have increased rates making it difficult for poor to afford and the services aren't always better.

Private water providers are businesses. They are motivated mainly by their bottom line. The pressure to deliver high rates of return for shareholders drives them to cut corners when they are operating under contracts, and to drive up costs when they are operating as regulated utilities. The latter is a well-established phenomenon known as the Averch-Johnson Effect, named for the economists who first modeled it in the 1960s. Under rate-of-return regulation, investor-owned water utilities make more money when they invest in infrastructure, giving them an incentive to "gold plate" systems. Yes, they are investing in improvements. But they may build an unnecessarily large treatment plant or choose a more capital-intensive treatment process, such as desalination.

Instead of raising prices for the average consumer, Hauter thinks the best way to pay for infrastructure upgrades is to charge commercial and industrial companies more. In addition, she believes a federal trust fund, similar to the one used to pay for highways, would help improve infrastructure.

Both have their points: we need to pay for expensive water infrastructure without taking it out of reach of poor residents. At the same time we need to make sure a clean, safe product is delivered to consumers.

It will be interesting to see if cities ultimately decide whether those goals are best met through public or private water utilities.

Are We Better Off Privatizing Water? [The Wall Street Journal]

Photo: Wikimedia Commons

This post was originally published on Smartplanet.com

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