Economic Failures of Private Water Systems

Food&Water Watch compared average water rates charged by publiclyand privately owned utilities in four states — California,Illinois,Wisconsin,and New York.¹The analysis found that privately owned waterutilities charge customers significantly higher water rates than theirpublicly owned counterparts:anywhere from 13 percent to almost 50percent more.

California

Data from Black and Veatch‚ 2006 California Water Rate Survey showthat households in districts with privately owned systems are paying,on average,20.28 percent more per month for clean drinking water thanhouseholds served by either municipal systems or special waterdistricts created by citizens and overseen by government officials.When Food&Water Watch divided the water districts into fivepopulation size categories,publicly owned water systems provedsignificantly more affordable for every bracket.²

Wisconsin

Wisconsin is served primarily by publicly owned water utilities,butthere are seven privately owned utilities operating. Averages compiledfrom a survey conducted by the Wisconsin Public Service Commissionreveal that the average monthly residential water price for customersserved by the seven utilities to be a startling 49 percent more thanthe average bill for customers served by publicly owned utilities.While public customers paid an average of $22.98 a month,privatecustomers paid an average of $34.26 a month. In other words,residentsof cities where the private sector controls the water flow are payingan average of $135.36 more each year.³

Illinois and Nine Other Midwestern States

City or water district population category	Consumers in privatelyowned districts in California paid,on average,this much more thanconsumers in publicly owned districts each year
25,000 or less	$63.48
25,000 , 50,000	$73.92
50,000 , 100,000	$107.88
100,000 , 200,000	$86.76
200,000 or more	$112.92

A 2000 survey of Illinois and nine Midwest states revealed thatcustomers of privately owned systems paid 13.65 percent more thancustomers of public municipal systems.⁴It stated that ‚publicly ownedsystems charged an average of $1.28 per 1,000 gallons of water lessthan private and ancillary systems.”⁵Based on this survey‚ averagemonthly water consump-tion estimate of 6,000 gallons,this pricedifference equates to an additional $92.16 paid each year by consumersin privately owned districts.⁶

New York

The six largest private water providers in New York state charge anestimated average of $34.25 to families consuming an average of 1,000cubic feet(7,480.52 gallons)of water per month.⁷A survey conductedby the American Water Works Association estimated that the averagemonthly water charge for households in this region consuming the sameamount of water is $27.29,making privately owned New York utilities 25percent more expensive than the average public utility in theirregion.^8,9

Private Companies Charge More to Provide Water for a Number of Reasons

Corporate Utilities Funnel Money Out of Communities and into the Pockets of Shareholders

International corporations can easily expect to make a 20 percent to 30percent margin of profit from investment in water service.Multinational water-providing giants Veolia,Suez,and RWE are hugelyprofitable corporations. In 2006,Veolia made a consolidated net incomeof ‚Ǩ759 million(nearly $1.12 billion),according to its 2006 annualreport. In addition,35 percent of Veolia‚ total revenue came fromwater,with 10 percent from North America.¹¹In the same year Suezearned a gross operating income of ‚Ǩ7,083 million(nearly $10.38billion),and RWE had a net income of ‚Ǩ3,847 million(almost $5.66billion).^12,13Some ‚Ǩ689 million($1.02 billion)of RWE‚ EBITDA(earnings before interest,taxes,depreciation,and amortization)camefrom its water division,known as U.S. water provider American Water.¹⁴In the United States,regulations limit the profits of private watercompanies to a margin of approximately 10 percent. However,companiesget around this by leveraging their assets. In other words,instead ofusing money they had borrowed for needed improvements to wateroperations and infrastructure,the companies invest in side businessesor other activities that diversify their operations to increaseprofits. In general,private companies have incentives to spend more oninvestments not directly related to the original purpose of improvingwater infrastructure so that more money goes into the pockets ofcorporate shareholders and executives.In California,three of the six corporate water companies reported acombined income of $78.88 million in 2006.¹⁵If this money had remainedin local areas to be reinvested in water infrastructure,it would haveconstituted a contribution in excess of $20 million more than theentire federal capitalization grant to California for the DrinkingWater State Revolving Fund(a federal fund that administers money tostates for water projects),which was able to grant only $67.15 millionin 2006.¹⁶

Financing is More Expensive for Private Companies

In order to protect the public interest,private water companies,unlike public utilities,are not eligible for municipal,tax,free bondsthat carry low interest rates. Therefore,they must rely on privatebonds that carry interest rates 2 percent to 3 percent higher.¹⁷Theseessentially are costs that companies often pass on to consumers in theform of higher water rates. Private companies also have their operatingcosts driven up by property and income taxes from which publicutilities are exempt.

Private Control of Water Does Not Lead to Greater Efficiency

It is commonly believed that the private sector can offer greaterperformance and economic efficiency than the public sector,but in thecase of public water utilities this has not proven to be true. Variousstudies have concluded that publicly owned utilities have lower coststhan privately owned utilities.¹⁸Another study of 214 water providersin the United States found that public sector performance was superiorto private sector performance.¹⁹The theory that private ownership is superior to public ownership isbased on the assumption of competition in the marketplace. However,inthe case of water utilities,one system controls an entire area,socompetition rarely,if ever,exists. Economists Germá Bel and MildredWarner write:‚That private production has failed to deliver consistentand sustained cost savings shows the inadequacy of theoreticalapproaches based mainly on assumptions about competition andownership.”²⁰Because competition is absent in the water sector,theyconclude that,‚Little support is found for a link betweenprivatization and cost savings. Cost savings are not found in waterdelivery.”²¹Writing in the journal Land Economics,ArunavaBhattacharyya found that,‚private water utilities in the sample of thestudy are less efficient than public water utilities both technicallyand in the use of variable inputs of labor,energy,and materials.”²²

Lessons From the United Kingdom and France

The United States would do well to learn from the problems of Franceand the United Kingdom,where governments have given private companiesmuch greater control of water. In France it was found that choosing toinvolve private companies in water distribution over direct publicmanagement increases the average retail price of water. ‚In allspecifications,we find that consumers pay more when municipalitieschoose PPPs[public-private partnership].”²³Chong et al. found thatthe average price for 120 cubic meters of water in a year jumped fromapproximately ‚Ǩ151 to ‚Ǩ176 when French public authorities decided tocontract with private companies instead of managing their ownsystems.²⁴Several studies have found that water privatization in theUnited Kingdom has also been unsuccessful. Saal and Park found higherprices and little improvement in productivity following the 1989 U.K.privatization of water.²⁵Cowan et al. estimated that ‚privatizationin the U.K. led to a net loss in total welfare,with consumers and thegovernment net losers and the firm[private corporation]and itsemployees net gainers.”²⁶

Conclusion and Recommendations for the Future of America‚ Water

Many citizens have had no choice but to pay a private corporation fortheir water. They are forced to pay higher rates and contribute to theprofits of distant executives and stockholders. Whereas privatecorporations are biased toward capital,intensive solutions that benefitthe corporation,and raise consumer rates,public utilities emphasizethe needs and goals of the local community. Public management givesevery citizen part ownership and direct say in the policies of theirwater service provider and reinvests money in local infrastructure. Toprevent private corporations from manipulating money,scarcemunicipalities into believing that privatization will benefit theirsystem,America needs secure public funding for water. Communitiesoften are pressed into privatization in hopes of avoiding the financialinvestments needed to maintain a water utility. To protect America‚water,the federal government should have a share in these investments.The establishment of a clean water trust fund will ease the financialburden on communities,help maintain public ownership of waterutilities,and keep water clean,safe,and affordable for everyone.