Privatization of municipal utility systems (water mostly)

Britain has created big problems by privatizing its water and sewage systems, abetted by minimal regulation and even more minimal fines which seem to have zero punitive power in getting the companies to follow the law.  

Since privatization, more than half the net profit has been returned as dividends to the private owners, while investment in infrastructure languishes ("Water privatization: a dirty story about profit," "Watery grave," and "Water firms exist to sustain life. They should answer to citizens, not shareholders," Guardian).

In response to the lead poisoning in the water system of Flint, Michigan, resulting from the city--in bankruptcy then and operated by a state entity--switching from "Detroit" water to local water but with a water treatment system unable to provide the right kind of water treatment--I wrote that Flint's real problem was the system of municipal finance in the US.

--  "The real lesson from Flint Michigan is about municipal finance," 2016

That system was created when the US was growing and industry was thriving, and was dependent on commercial and residential property taxes, and ever rising property values.  

Flint's economy was based on the success of General Motors manufacturing and when the company declined, it cratered local finances and property values--GM has less than 10% of the employees in Flint that it did at its peak.  It's the equivalent of a natural disaster, and very little can be done when 50%-75% of your local tax revenues disappear overnight.

Similar situations beset other communities, often smaller ones, as they face the costs of modernizing and rehabilitating infrastructure--roads, water systems, bridges, streetlights, buildings--that was constructed 50-75 years ago, and now has to be rebuilt, and the community's taxing capacity is no longer commensurate with the need.

For example, I've written about how some communities are selling their bridges to private equity concerns, and allowing the bridges to be tolled, because they can't afford to fix the bridges ("The company buying two Bay City bridges wants to connect with the community," Second Wave Media).

Similarly, water systems owned by local governments are being privatized because they can't keep up with the cost of modernization and new and more stringent environmental regulation.

Towamencin Township residents organize a petition drive to create a November ballot measure to change the township's charter in response to the town's decision to sell its public sewer system for $115.3 million to NextEra Water, a private Florida company. Photo: Charles Fox, Philadelphia Inquirer.

One of the latest examples is Towamencin Township, Pennsylvania, where they have the water treatment system out for bid, and they received a larger than normal bid from a company, NextEra Systems, that is looking to create a business line in water systems ("A Florida company’s $115 million sewer bid stuns a suburban Philly town," Philadelphia Inquirer). For obvious reasons, they accepted that bid.

They bid extranormally high, not on economic considerations, as a way to create a node for further operations.

This is comparable to what rail firms like Keolis did at the start of operations in the US.  They outbid Amtrak to operate commuter rail systems, because they were focused on building their business, not having to run the systems profitably.

Definitely the sales will result in higher bills.  Even though higher bills are inevitable because of the infrastructure needs.  But there will still be a profit percentage, which will come out of the pockets of "customers" where if the system remained owned by the local government, that wouldn't have to happen.

The solution is to have a huge federal infrastructure bank to loan local governments money to deal with infrastructure costs.  But that won't be happening any time soon.

Fortunately, as weak as it can be (e.g. Flint, King George's County, Virginia, etc.) the regulatory system in the US is better than the UK, and the EPA is funded much better, although its ability to regulate is being constrained by the conservative Supreme Court ("The Supreme Court curbed EPA’s power to regulate carbon emissions from power plants. What comes next?," Harvard School of Public Health; "Supreme Court uses 'shadow docket' to revive Trump EPA clean water rule," Reuters), and fines are so much higher in the US, that privatized water utilities are less likely to go rogue the way they do in the UK. 

From "Water firms exist to sustain life. They should answer to citizens, not shareholders":

Add in the failures of privatisation dramatised by excessive water leakages and raw sewage blighting many beaches and rivers, an impossibly overstretched NHS, and workers being badged as irresponsible for merely trying to resist dramatic cuts in their real incomes. All this has crystallised how the whole Thatcherite edifice of economic and social policy, decaying for years, is suddenly and obviously redundant. ...

A centrepiece of Thatcherism – that privatisation plus “light touch” regulation could be applied in any utility – is under siege as never before. Camilla Cavendish, head of the No 10 policy unit under David Cameron, catches the moment when she writes in the Financial Times that water privatisation as designed has failed. What matters for utilities is that they deliver the public interest of cost effectiveness, resilience, reliability and service. That cannot be said today of the universe of energy and water companies. ...

There is little evidence that laying out up to £200bn to take over every utility will bring the universal benefits needed; moreover, this is cash that could be better deployed elsewhere – on levelling up and the drive to net zero.

The better option is more forensic. Look more closely and there is an intriguing spectrum of performance. The government’s 2021 environmental evaluation of nine English water companies shows, miserably, that six receive either one or two stars. (Southern and South West, beach polluters-in-chief, are the one-star performers.) But there are three companies – Northumbrian Water, Severn Trent and United Utilities – that all earn the maximum four stars. What is needed is a regulatory, licensing and governance regime that fosters many more top-star performers, with public ownership the last resort option for the one-stars.

Importantly, the top performers all place social purpose at the heart of their business. All closely engage customers in their decision-making, variants of how the publicly owned Scottish Water, another high performer, has established an independent customer group (ICG) as a permanent independent watchdog that it closely consults and informs. This should not be the preserve of the best. Every water company should embrace a public benefit requirement along with an ICG.

Note that US municipal water systems do tend to be under-regulated too, and like Scottish Water, should have independent customer groups and adequate regulation.