Truth from the Tap Responds to ITPI’s Claims About Privatization

The last time we heard from In the Public Interest (ITPI), we had to correct multiple false and misleading claims the activist group made in a Miami Herald op-ed. This time, the group is back with a so-called report on privatization, and, unfortunately, the false and misleading claims continue.

“How Privatization Increases Inequality” attempts to tie privatizations of all stripes – parking meters, public transit, GED testing, nutrition assistance, Medicaid, parks departments, tax collections, and water utilities – to increased socioeconomic inequality. Within the 61-page report, ITPI includes two water examples. And, once again, we have to correct the record and provide some well-documented facts that ITPI brazenly ignored in its latest smear of the private water industry.

Here are three key reasons to reject the private water claims in the latest report from ITPI:

The ITPI report cites a very flawed analysis that experts reject as misleading.

ITPI leads off its smear of the private water industry by citing a flawed rate-comparison analysis from Food & Water Watch (FWW). The report claimed utilities run by private operators charge a typical household more per year for water service than utilities run by local governments. As we have pointed out previously, here’s why the FWW analysis is so faulty:

  • First, the entire practice of rate comparisons – a practice that ill-informed activist groups love – is total fallacy. There are dozens of factors that influence water rates, including investment levels, water source, geography, service area size, service area density, and water treatment needs. Because there are so many factors specific to each service area (even within the same region), it is impossible to make a true apples-to-apples comparison of rates between systems.
  • Experts agree that this rate comparison practice is unwise. In fact, the FWW rate comparison analysis cites three separate papers that each explicitly warn against the very rate comparisons that the analysis employs:

“Casual comparisons of or generalizations about rates are strongly discouraged … Bill comparison [of water charges] should be used with an abundance of caution, as many factors influence water costs and rates.” — Janice A. Beecher and Jason A. Kalmbach, Institute of Public Utilities at Michigan State University, “2010 Great Lakes Water Survey” (2011)

“Factors such as geographic location, demand, political climate, water source, level of treatment, and age of system can greatly influence cost and rates. Careful attention must be given to these factors before drawing conclusions from a simple rate comparison.” — John Houtsma, “Water Supply in California: Economies of Scale, Water Charges, Efficiency and Privatization” Department of Economics, Mount Allison University (2003)

“It is important to consider this information [cost and revenue differences between systems] related to water service and rates charged for water service when comparing public and investor-owned purveyors.” — University of Delaware Institute for Public Administration, Water Resources Agency. “Water Rates in Delaware and Surrounding States” (2014)

Needless to say, citing experts that openly undercut the fundamental basis of your report is not the sign of a sound analysis.

The water examples in the ITPI report ignore key facts and contexts.

For starters, as is common when activists discuss private water utility rates, ITPI falsely states that private water utilities control and can increase their own water rates at will. In fact, private utility rates are set by the public utility commission (PUC) in each state. A private utility must prove to the PUC that its costs are justified and its rates are fair through a rate case – a public process that requires the release of supporting documentation and open public hearings to allow customers, elected officials and other stakeholders to participate. ITPI failed to include these basic facts about the state regulation of private water utilities in its report.

In addition, here are other important, well-documented points missing from the two water examples included in the ITPI report:

  • Coatesville, PA: Rate increases are a direct reflection of water utility investment. Therefore we found it odd that ITPI completely ignored the fact that since acquiring the Coatesville water and wastewater systems in 2001, Pennsylvania American Water (PAW) has invested heavily in critical infrastructure updates. The significant investments include building a new $55 million sewer treatment facility and a $24 million water treatment facility upgrade. Currently, the company is investing $7.6 million in the Coatesville system to replace deteriorating water and sewer lines that date back to the 1920s.

Notably, the investment in Coatesville’s wastewater treatment facility was required to resolve environmental and public health issues that the Pennsylvania Department of Environmental Protection identified in a Consent Order pertaining to hydraulic overloads at the wastewater plant. The new facility replaced an antiquated plant dating back to 1932.

  • Dillon Beach, CA: California Water Service’s (Cal Water) Dillon Beach service area is very small, with only about 250 customers.  With so few customers sharing the cost of operating, maintaining, and upgrading the water system, water rates and monthly bills in the Dillon Beach service area have for years been higher than those of some surrounding communities.  The rates of any water supplier in Dillon Beach – public or private – would be comparatively high simply as a result of the small customer base and substantial infrastructure needs of the service area.

Cal Water has always looked for ways to lessen the burden on its customers in Dillon Beach.  For example, as part of the California PUC’s most recent review of Cal Water’s rates, expenses, operations, and proposed infrastructure improvements, Cal Water introduced a plan to establish regional cost-sharing for its customers in Dillon Beach and those in its substantially larger Bayshore service territory in the San Francisco Bay Area.  In early September 2016, Cal Water and the PUC’s Office of Ratepayer Advocates (the arm of the Commission tasked with advocating for customers), filed an agreement that will enable the utility to move forward with the regional cost-sharing plan.  Under the terms of the plan, typical customers in Dillon Beach would see their monthly water bills decrease by nearly 40% in January 2017 as compared to September 2016.  This type of regional cost-sharing plan would not be possible if the Dillon Beach system were run as a stand-alone public utility.

The entire activist discussion on water rates disregards the bigger picture.

Activists love to focus on water rates, as the latest ITPI report illustrates. But rates and utility costs are important, complicated topics that shouldn’t be oversimplified.

In all their talk on rates, activists ignore the bigger picture: rates are a reflection of water utility investment. A utility that is investing to properly maintain its system will have higher rates than a utility that defers investments – but it will also have stronger water infrastructure that ensures the delivery of safe drinking water. Public or private, the easiest way for a utility to keep rates low is to not invest in a system, let it deteriorate and risk system failures.

Keeping rates artificially low and deferring investment has serious consequences. While private utility rates may be higher in some cases, studies show that utilities run by local governments are more likely to have violations of the Safe Water Drinking Act than utilities run by private operators.[1] In light of the Flint disaster and our greater national infrastructure crisis, it is absurd for activists to continue to blindly celebrate artificially low rates and ignore the real-world consequences of deferred investment.

Recent comments from ITPI Executive Director Donald Cohen make it abundantly clear how out of touch this group is with reality. All in the same breath, Cohen admits that we “have been fundamentally funding our water infrastructure in this country by not fixing it” but then criticizes the private sector for making the investments that he just said are needed![2]

The members of NAWC and the thousands of private water professionals across the country are proud of the work they do every day to ensure customers receive safe, reliable and sustainable drinking water. On the other hand, activist groups such as In the Public Interest continue to offer no real solutions to serious challenges.

[1] David M. Konisky, Georgetown University, and Manuel P. Teodoro, Texas A&M University, “When Governments Regulate Governments,” Sept. 2015
[2], “Examples of How City Services Privatization Leads to Inequality Are Piling Up,” 9/29/16
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