Water and Sewer Privatization is Hurting Customers
In New Jersey, Pennsylvania, and other states, investor-owned water/sewer utilities have recognized concern about PFAS chemicals and the backlog of repairs and upgrades in many water and sewer systems as a BIG opportunity — to make huge profits. In contrast to earlier periods in their history, investor-owned utilities (a.k.a. water/sewer corporations) have come to embrace the concept of shareholder primacy — that corporate boards must put shareholders first, ahead of all other stakeholders. Ahead of employees, ahead of customers, and ahead of communities. The belief in the primacy of shareholders drives corporate water/sewer utilities to use their considerable lobbying power to change water and sewer regulations and laws to make them more advantageous for privatizing government-owned public water and sewer systems. Aqua New Jersey, which is owned by Essential Utilities, has euphemistically characterized these efforts as overcoming “regulatory hurdles.” The lobbying has produced changes that reduce public input, limit transparency, accelerate the selling process, and maximize the “value” corporations can extract from water and sewer systems. Knocking down these so-called “hurdles” has resulted in much higher water/sewer bills for ratepayers — 20 percent, 50 percent, 100 percent,even 200 percent more — than what customers of government-owned water/sewer utilities are paying for comparable service.
The U.S. Government Accountability Office says that roughly 97 percent of sewer customers in the U.S. get their service from a government system. Corporate water controls about 10 percent of drinking water service. But corporate ownership of water and sewer systems is growing.
One example of pro-shareholder legislation is so-called “fair market value” (FMV) laws. They have passed in 12 states. North Carolina passed FMV legislation in 2018, New Jersey in 2015, and Pennsylvania in 2016. There are also FMV laws in California, Iowa, Illinois, Kentucky, Maryland, Missouri, Virginia, and West Virginia.
FMV laws change the way water and sewer systems are valued. Traditionally, the approach is to use “book value,” which is original cost less depreciation. With FMV, valuing utility assets includes factors such as future revenue streams. FMV laws also allow corporate utility purchasers to recover the full cost of the sale price in future rates. Consumer advocates have harshly criticized FMV laws because they result in huge water and sewer rate increases. The Pennsylvania Consumer Advocate told a legislative hearing in January that since the passage of Act 12, the Commonwealth’s version of FMV, customers of Pennsylvania American and Aqua Pennsylvania have spent $1.1 billion more for their water and sewer service than they would have otherwise — and for “substantially the same service.”
In ten states, corporate water has succeeded in getting the ground rules changed to allow what they call “infrastructure mechanisms.” These are surcharges that allow rate increases to be imposed multiple times a year, without prior approval of public utilities commissions, and outside of the rigorous rate case process that occurs every couple of years. Surcharges underwrite infrastructure repairs, lead service line replacement, adaptation to climate change, and more. The work itself is often necessary. The problem is that it gets done with less scrutiny. Regulators at public utilities commissions have far less opportunity to carefully review the corporation’s books and review proposed projects to ensure they are truly necessary, are being done efficiently, and with the least possible rate impact. The states that permit infrastructure mechanisms are Iowa, Illinois, Indiana, Kentucky, Missouri, New Jersey, Pennsylvania, Tennessee, Virginia, and West Virginia.
The New Jersey Rate Counsel, a consumer advocate agency for NJ utility ratepayers, strongly criticized surcharges called the Distribution System Improvement Charge (DSIC) and the Wastewater System Improvement Charge (WSIC). Rate Counsel staff said the DSIC bypasses “traditional ratemaking,” a process put in place to protect ratepayers. Rate Counsel staff said corporate water assertions that DSIC and WSIC surcharges promote economies of scale and lead to lower installation costs “is not supported in any way by the record in this matter.” The consumer advocates said, “the DSIC record clearly demonstrates that the unit cost of water main replacements has increased not decreased, since the DISC rule was implemented and … the increase in cost of these projects has far outpaced inflation.”
The policy wish list aimed at knocking down “regulatory hurdles” to plump up profits at the expense of ratepayers includes more than FMV laws and a free hand with surcharges. Water quality accountability legislation imposes highly specific and one-size-fits-all planning and maintenance procedures that, according to many water sector professionals, are better left to the discretion of utilities operators. New Jersey’s law, for example, gets into the weeds of how often individual valves must be exercised, making work that is often unnecessary and that diverts utility workers away from completing operations tasks that would be more advantageous to their particular system. Increasing regulatory requirements like these does not necessarily improve water quality, but it does drive privatization.
Another wish list item is the “consolidated tariff.” A consolidated tariff lumps all customers of a corporate utility together so that all customers pay for all capital projects, no matter where they are or whether customers will receive any direct benefit. Under the consolidated tariff, if a corporate utility replaces well heads for five wells in a small system in one part of the state, all customers, even those living across the state, foot that bill. Consolidated tariffs also permit costs of corporate expansion — acquiring new systems — to be imposed on existing customers, even though acquisitions benefit shareholders. This also makes it harder to tease out acquisition-related cost impact on ratepayers.
“Affordability programs,” another item on the Big Water wish list, blunt criticisms about the negative impact of rate increases on low-income customers, and they shift the cost burden of those impacts onto other customers. Affordability programs do not reach all those in need, and they don’t help out middle class customers struggling to pay higher bills related to the costs impacts of consolidated tariffs, fair market value acquisitions, and surcharges.
During policy discussions, at regulatory proceedings, and at legislative hearings, corporate wish list items are invariably presented by the water lobby as the only way to ensure water quality and the only way aging infrastructure can be addressed. Privatization is presented to communities as if it were the only real solution. The NJ FMV statute, written by legislators “guided” by the state’s powerful corporate water lobby, misleadingly states that systems can be so far gone as to be “beyond governmental capacity to restore.” This is a fallacy. Government, nonprofit, and corporate service delivery models are equally capable of providing good management, reliable service, and adequate funding. The corporate model, however, is by far the most expensive way to do it.
Municipal leaders, especially those whose constituents have lower incomes, don’t need to resort to corporate agreements heavily favoring shareholders to address water/sewer issues. Their options include regionalizing with other government systems or entering into service contracts with other public systems. They can hire qualified water sector professionals who know how to manage infrastructure-related debt to stabilize rates and limit rate shocks, and who understand how to leverage the low-cost borrowing available from state revolving funds, rural water financing programs, and municipal bonding.
Public solutions don’t mean that rates won’t ever rise, but they remove the cost of profits for shareholders from the equation.
