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Should Cities Sell Water & Sewer Utilities as Defense vs. Recession?

April 22, 2010

In these tough times, some cities and local governments are considering selling their water and sewer utilities to private concerns.  USA Today ran a story on this recently: “Cities consider selling water, sewer systems for cash“.  The issues raised in the USA Today story are interesting.  As noted on this blog, we’ve seen at least one high-level example where the City of Indianapolis changed its water utility operations from purely private (Veolia Water) to a public-private partnership.  The question raised here though is whether selling a utility makes sense as an effort to raise cash in an environment where tax revenue is too low to support other local government programs.

We’ve commented many times here on what we characterized at the pitfalls of private ownership.  We have written many articles on the topic, all of which show how water rates and sewer rates spiral upward under private ownership.  In general, selling a utility currently owned and operated by a local government to a private interest is likely to turn out with higher rates for customers.  We’ve certainly documented the huge rate increases proposed by private companies in these pages, but the USA Today article provides yet another example:

“Pekin, Ill., City Manager Denny Kief tracked rates for the first 20 years after Illinois American Water bought the water system from a local company and says rates — for 6,000 gallons a month — rose 204%.”

Sometimes, local communities face impossible choices and selling an asset like a water or sewer utility is the only reasonable choice.  However, if the criteria are about long-term costs and benefits to the customer, all else being equal, selling to a private utility is probably not the best choice.  As we’ve documented before, unless the private operator is able to achieve steep long-term efficiencies, there is really no comparison.

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