Six reasons why community water should not be for-profit

Based on a general historical analysis, it can be argued convincingly that municipal or district water utilities are overall more responsive, more reliable and more cost-effective than for-profit private or publicly-traded water companies

Send your comments and news tips to online.editor@valleyspringcomm.net or to Mr. Boschert, arrowbiz@austin.rr.com


Editor's Note: The RoundUp wishes to thank Rocky Boschert for his column (an abridged version) which supplements nicely the debate now furiously circulating about our water crunch in western Hays County, and what to do about it. Here, Mr. Boschert lists several good reasons why not to look to private for-profit water companies as part of the solution. It should be an easy read for county and city officials as they also grapple with this critical and time sensitive issue.

By Rocky Boschert

According to watchdog website “Food and Water Watch” (www.foodandwaterwatch.org), from which I borrowed some of their good research and text, here are 6 reasons (edited down from 10 reasons) why private companies – especially publicly-traded water corporations – should not be in the business of running community water systems:

1. Lack of Accountability
We have just gone through almost thirty years of creeping “free markets” privatization in most sectors of the economy, with the phenomenon accelerating irresponsibly in the last decade. Fortunately, regulatory oversight on Wall Street and corporate boardrooms in general is again getting much needed attention. Yet hidden in the background are the publicly-traded water companies tactfully remaining under the regulatory radar. Add in the convenience of private water companies doing business in an anti-regulation state such as Texas, the net effect is that private water companies can generally dictate their own regulatory destiny.

Directly stated, since water corporation executives are first and foremost accountable to their stockholders – and not to the people or communities they serve – they often operate with comparatively unchecked power. Some companies operate by cherry-picking small, vulnerable service areas, going after contracts with unincorporated or new communities who don’t have the legal, financial or organizational resources to later challenge the water companies in court or through the state regulators once the contracts are in place.

2. High Rates and Bad Service
Another reality raised in the researched global water management data is that private or publicly-traded water corporations almost always charge more than municipalities for both water and wastewater services. The data shows that privately-managed, for-profit water often costs as much as 65 percent more than municipal or non-profit water. Private sewer service can cost up to twice as much as public sewage service.

Additionally, in their effort to find ways to increase net profits for shareholders and to compensate top level company management, private water corporations often cut corners to increase profits. To squeeze out profits, private water corporations may use inferior construction materials, ignore or stall needed maintenance, or downsize the company workforce – all of which can impair quality water delivery to customers in the company’s service area. Such neglect can hasten equipment breakdowns and increase replacement costs, which the public ends up paying for once again with more rate increases and/or a degeneration of service. With most contracts, private water operators can technically comply with their contractual obligations while effectively shifting upkeep costs to the public.

3. Private vs. Public Financing.
In the case of the design and construction or expansion of a community’s water service, private sector bond financing is generally much more expensive than public sector financing. Even with top-rated corporations, the underwriting and funding of new corporate bonds are 25 percent costlier than municipal bonds. As a result, private companies are forced to charge more for their increasingly expensive water (due to their higher borrowing and underwriting expenses) through on-going rate increases

4. Profits and Taxes.
Private, for-profit water companies pay income, property and other taxes. Government controlled water utilities generally do not. As a result, in order to achieve profit margins promised to shareholders – management typically seeks at least a 10 percent profit on their investment – rate increases or service reductions are the easiest way to look good to shareholders and Wall Street analysts.

In total, corporate profit margins, bond and stock dividends and income taxes can add 20 to 30 percent to operation and maintenance costs, which in turn is passed on to customers through rate pricing. Comparatively, since government utilities generally pay no local or state property taxes, these cost savings can be reflected through constrained rate inflation.

Private water utilities also tie higher earnings to increased costs. Since they try to set a fixed rate of return on investment (ROI), they may spend more on the water system so a higher profit can be obtained. Of course, since increased costs have to be paid for somehow, any added expenses to the company are again passed on through customer rate increases or customer service compromises.

5. Contract Expenses
The preparation to contract with a private water firm can easily set a city back over $100,000 at minimum. Also, responsible monitoring of a water corporation’s contract performance can cost as much as 20 percent of the contract. In total, contract monitoring and administration, conversion costs, charges for extra work and the contractor’s use of public equipment and facilities can add up to 25 percent to the price of a contract. Cost overruns and eventual contract termination fees also can inflate the price of a private water management service.

6. Lack of Competition
One of the most risky sides of contracting with publicly-traded water companies is the fact that the water market is rarely competitive at the local level. Consequently, since access to credit during the current recession has become very limited, funding for the water infrastructure sector faces increasing difficulties. As a result, at the national level we will probably see more industry consolidation (mergers and acquisitions), resulting in a further monopolization within the water sector. Moreover, the credit crunch, along with the neglect of the nation’s current water infrastructure over the last couple decades, may make water corporations feel a more urgent need to merge with others so they can have greater access to capital to finance improvement projects.

In essence, if a local water monopoly’s profits can be manipulated due to a lack of market competition, the company can effectively minimize community responsibilities – and customers may have no room to negotiate. In the end, the community could get stuck with expensive contracts and unresponsive corporate management.

The Bottom Line

Based on a general historical analysis, it can be argued convincingly that municipal or district water utilities are overall more responsive, more reliable and more cost-effective than for-profit private or publicly-traded water companies. Since water is a life sustaining resource, we must guard against the trend of water being subject to the whims of entrepreneurs and corporations who by their legal and operational nature care more about their capital gains and profits than the quality of the water and the service required to effectively and efficiently maintain the water system.

In many ways, a community’s access to clean and affordable water is even more crucial than a good health care system and sustainable energy solutions. Our children and our communities need to be guaranteed the right to clean water and affordable access to water. And parents need to know they can rely on their local elected officials to make choices that benefit the community first.

In the end, it is probably best if the delivery of community water is not at the center of the debate for how a corporation can meet or not meet quarterly earnings estimates – so the CEO can keep his job and please institutional investors. Wall Street, when mixed with water, will more than likely leave a sour taste in the community.

Rocky Boschert has resided in Wimberley since 1993. He currently serves as board president of the Katherine Anne Porter School (KAPS) in Wimberley. Mr. Boschert owns and manages Arrowhead Asset Management.