17837_Authority_Oct

22 The Authority | October 2024 The Perils of Privatization: Examining the Failures of Investor-Owned Utilities in Water Management By Scott Wyland, Esq. and Jack Kline, Esq., Salzmann Hughes, P.C. P ennsylvania’s authority-owned and operated water and wastewater utilities, and their associated elected municipal officials, face unrelenting pressure to sell to investor-owned utilities (“IOUs”). Act 12-2016 opened a new path for such acquisitions. Even the Commonwealth’s regulator, the Public Utility Commission (“PUC”), has its thumb on the scale and encourages the sale of publicly owned systems, although it recently has tightened its scrutiny. The Commonwealth indeed has some chronically underfunded or poorly managed publicly owned systems that may need the legitimate capital resources and operational expertise of IOUs. Just the same, there are many well run publicly owned systems that do not need private intervention. The PUC’s seemingly favorite option, sale to IOUs, is surely what the IOUs strongly desire – the ability to deploy their capital into fresh rate base. Expanded customer numbers, broader operations, and increased total revenues are the things that IOUs wish and push for daily. Yet there are strong and undervalued countervailing considerations inherent in sales of public systems to IOUs. The most notable is that IOUs must provide a return to their investors. Dividends are an added cost to the total revenue requirement of system operations that publicly owned systems do not have, and IOUs must provide. IOUs allege that they can provide larger capital pools for system maintenance and improvement; however, dollars are diverted to dividends rather than assigned to system repairs. The IOUs’ cost of capital in private markets may well be higher than Pennvest loans and grants available to publicly owned systems. After an IOU purchase, the normal outcome is materially increased user rates. Yes, sometimes the rates reflect the cost of deferred system improvements, but they also must include a rate of return for IOU shareholders. “Good service” from a baseline perspective means that toilets flush and taps produce potable water. Beyond that, regulatory compliance and service reliability must be achieved by owners. Sometimes, as we are about to see, private ownership does not result in more infrastructure investment and better operations. One way to judge the effectiveness of the PUC’s “push to privatize” policy is to use a time machine to see how it turns out years in the future after a public system is sold to an IOU. We have no time machine, but we do have the ability to look abroad for results of similar policy choices. We have done so recently, and it is not flattering for the IOUs. To be clear, we are not criticizing the specific management of any particular utility. We are examining the outcomes, however, for lessons on how the larger, often financial pressures affect the results of this experimentation with the privatization of water utilities. In recent years, the privatization of water utilities in England and Ireland has sparked significant public outrage and debate. The transition to the investor-owned structure was initially presented as a strategy to modernize aging infrastructure and improve efficiency. However, the reality has been far more troubling. Across both countries, privatized water companies have consistently prioritized shareholder dividends and executive bonuses over necessary investments in infrastructure and environmental compliance. This has led to ballooning user rates, deteriorating physical systems, and significant environmental threats, most notably through untreated wastewater spills. England: A Case Study in Environmental Neglect The United Kingdom's experiment with water privatization originated in 1989, with the aim of injecting “private sector efficiency” into the public water service business. However, more than three decades later, the results have been disappointing. The most glaring issue is the chronic underinvestment in infrastructure. Water companies in England have paid out more than £72 billion in dividends since privatization, largely financed through increased debt, rather than reinvesting in their systems. The result has been a severe degradation of service quality and environmental performance. This diversion of revenues to excess shareholder and executive rewards is not a threat when systems are publicly owned.