Municipalities could be allowed to privatize their water systems

RALEIGH — Official interest in privatizing water utilities in cash-strapped U.S. cities is extremely high, said Aqua America CEO Christopher Franklin.

In his 24 years with the company, Franklin said he has “never before” seen such a high level of interest among mayors and public officials in selling off their publicly owned drinking and waste water systems.

Eight years after the end of the “Great Recession,” some local governments are still facing sluggish revenue growth, big unfunded pension liabilities and reduced levels of state aid.

Some municipalities, particularly in the northeastern U.S., have turned to selling public assets, including utilities, to help raise money or pay for infrastructure improvements that towns cannot afford on their own. However, in N.C. that is not happening.

“Unlike a lot of other states, we have some barriers, the biggest being that right now private utilities cannot typically pay a municipality for the fair market value of their assets,” said Shannon Becker, president of Aqua North Carolina.

“Just like you wouldn’t want to sell your $10,000 car for $100, municipalities aren’t really interested, even if they need to have capital available to make other investments that the need to, they aren’t going to give their assets away for free and the rules in N.C. are not real conducive to that exchange right now.”

Aqua North Carolina operates 800 water systems across 51 counties in the state, mostly in rural areas and new developments. They are among the groups trying to change the regulations so that municipalities have the option to privatize their water systems and use the money for other infrastructure investments.

A bill sponsored by Rep. Jeff Collins (R-Franklin), H.B. 351, passed the House in April, 89-30, and is currently in the Senate Rules Committee. Supporters say that privatization could help fund a looming $26 billion infrastructure need that N.C. faces.

“There is just not that much capital out there,” said Becker. “The state and federal government comes up with grants and low interest loans to subsidize these assets and installations. For municipalities, there is just not that much available, and the time it takes to access to that is considerable. So we want to be part of that solution.”

A handful of states — including Illinois, Indiana, Pennsylvania and New Jersey — have enacted legislation in the past few years that lets private companies pay fair market value for water systems instead of depreciated values.

But critics of privatization say towns sometime give away important assets for too little money in a quick, one-time budget fix.

Public interest groups like Food & Water Watch say accountability is limited by corporate ownership that is beholden to shareholders and that privately run water companies charge higher rates.

Some deals have turned sour. In 2003, Atlanta and Suez SA dissolved a private water system deal after just four years of a 20-year agreement. Users blamed the Suez unit for water main breaks, poor maintenance and slow billing operations.

Franklin says Aqua America strives to work with communities early on to avoid such problems.

“I’m not going to ruin [the company] by doing the wrong thing for the community we hope to serve for a long time,” he said.

So far this year, the company has bought three public water utilities — two in Indiana and a sewer system in Tobyhanna, Pa. — for a total of $5.8 million, Aqua said earlier this month.

Acquisitions of another four larger systems, worth an estimated $120.5 million in total, are in the works, it said. At the federal level, uncertainty about infrastructure funding has privatization proposals making the rounds on Capitol Hill.

“Private industry is out here and can be part of that solution,” said Becker. “We have an extra layer of protection; our rates are set by the utility commission. I cannot raise rates without going for a rate case, we’ve been doing it for 130 years, we have significant access to capital and we are not going to wait to make a decision on whether something needs an improvement or a change.”

Supporters of the bill say that the Senate plans to take it up during the legislative short session.