Public, Private Showdown: Which Water Utility Model Is Best?

Which are more effective: public or private utilities?

A new paper published in the American Journal of Political Science stacks these two models against one another. It sums up the key difference between these two types of utilities by noting that one is a for-profit firm regulated by government agencies, while the other is a government agency regulated by government agencies. It argues that the latter model proves problematic, since governments are not great at regulating government agencies.

Still, the paper does not argue for the privatization of water utilities. That model also presents problems, the researchers said.

“We argue that government agencies have greater incentives than profit-maximizing firms to shirk regulation and/or seek regulatory relief through political channels. As a test of this theory, we analyze public and private entities’ compliance with three U.S. pollution control laws: the Clean Air Act, the Safe Drinking Water Act, and the Resource Conservation and Recovery Act. Analysis of data covering the period of 2000-2010 indicates evidence consistent with our argument,” the paper says.

Written by professors from Georgetown University and Texas A&M University, the paper lists drawbacks to the public model: “Its reliance on public support can compromise its ability to make crucial infrastructure upgrades. As a result of poor funding, public utilities can also fail to meet federal public regulations. And yet regulators are more lenient with them than with private utilities, since harsh punishment only further hurts the public,” the paper argues, according to The Atlantic ’s CityLab.

Key drawback for public water utilities are the political processes they must engage in, Citylab reported:

When public utilities try to increase their rates to pay for an infrastructure update or a new treatment plant, city council members or local commissioners have to vote to approve those rates. Those voting officials are tied to a constituency.

For example, about 85 percent of Americans get their water from a public utility, whether from a city, county, or special district. Particularly in the dry states of the West, water rate increases are a hot potato for local officials. Residents of one tiny, poor town in Fresno County, California recently voted down a proposed $30 monthly increase to their water bills — even though it may mean having their taps turned off. That story has become a well-publicized political minefield.

Public utilities struggle to find the money needed for infrastructure spending. So, should public water utilities be privatized, according to these authors? Not exactly.

“We’re really hoping this paper doesn’t cause people to say, ‘Privatize! Privatize!’” Konisky said, per Citylab. “Because that is a potential solution to these violations, but not the only solution.”

There are drawbacks to the private model as well, Citylab reported:

Indeed, because private utilities prioritize their investors rather than their customers, they have little incentive to create, for example, tiered rate structures that are crucial for low-income households. “Low-income pricing schemes and rebate schemes and retrofitting — those are not going to be something the investor engages in, unless they have that in their contract with the municipality,” says Teodoro.

Public utilities do another thing that private utilities have little incentive to do: conserve. To use the example of water again, Americans’ per capita daily water use has plummeted in the last several decades — largely a triumph of conservation efforts by public utilities. “In what other business do people say, ‘Please buy less of our product’?” says Teodoro. “No private utility would ever do that.”

Given the problems on both sides, what solutions are available? Citylab enumerated a few: “create subsidies for local governments so that they can get up to capacity without raising rates; ramp up enforcement from federal regulators; or, turn to private companies. But as for the last option, in this increasingly dry, overheating, and economically divided world, there are just too many drawbacks.”

For similar stories, visit Water Online’s Funding Solutions Center.