The Drive to Privatize: Who Wins, Who Loses When Towns Sell Their Water Infrastructure

Make no mistake about it, small town utilities can represent a lucrative investment for private companies who are offering cash-strapped officials across the nation a way out of their water woes. A recent article in the Washington Post is taking a long look at how municipalities are dealing with urgently needed repairs to their water infrastructure, sometimes by offloading the burden to for-profit water companies. According to the article, investor-owned companies bought 48 water and sewer utilities in 2015, 53 systems in 2016, and 23 more through March of this year (figures from Bluefield Research).

Yet the decision to sell can come at a great cost - literally. When a private company takes over a water system, decisions on rate increases are taken out of the hands of local officials and instead decided or monitored by a state utilities regulator. "What can initially seem like a great deal" says Bolingbrook, Illinois Mayor Roger Claar in this 2016 Better Government Association article, can turn quickly sour: “The reality is [these communities] get rate increases like they never imagined.” And there are other drawbacks as well.

Ask the residents of Charlestown, Indiana who are currently in the crossfire of their town's controversial move to sell their water system to Indiana American Water Company, a deal which will significantly raise their water rates. A community group called NOW (No Outsourcing Water) is actively opposing the sale, and has filed a complaint with the state's utility regulatory commission, calling into question their mayor's motives.

Indeed, loss of public accountability can be a result when towns sell utilities. With publically-owned systems, if public officials do not respond to public concerns about the water, they can be voted out of office in the next election cycle. But when a utility is sold, it no longer has to answer to voters for contamination problems, or for rate increases for that matter. In the meantime, the water system in Charlestown still suffers from excessive manganese which turns the water brown.

Although the nation-wide percentage of privately-owned water utilities is still rather small (12%), 30-70% of water utilities in Indiana and 14 other states have gone private according to the Washington Post article. Why are so many of these towns then willing to sell?

Well, for one, private water companies have the capital to invest in infrastructure and meeting water quality regulations. Simply stated, these companies are in a better position to fix problems created by a history of funding shortages. These water company acquisitions can free up towns to use their limited funds to hire and retain critical police/fire and other staff and make much-needed repairs to roads and more. So unless state and federal funding can keep up with the acute need for expensive water infrastructure improvements (which, according to this article, it hasn't - and in fact has been decreasing), there often is no place to turn for budget-crunched public officials looking to protect public health.

But this is not happening across the board. While some small towns are considering selling, groups like Food & Water Watch are actually seeing a reversal of the private water trend especially among larger municipalities - They have compiled the water rates of the 500 largest community water systems in the country (the largest water rate survey of its kind in the country) and found that there is an ongoing nationwide trend toward public ownership of water systems.

All the same, the key finding of this report is that of the 12% of water companies that do operate privately, most are located in small, rural communities. So who wins and who loses? Each situation is unique, and for many small towns, the answers do not come easily.

How are States Using Drinking Water Revolving Fund Set-Asides?

Question: What do the following small system programs have in common? 

• A small system electronic asset mapping project in Nevada
• Free consolidation assessments and facilitations in Texas
• New equipment to help with energy efficiency audits in Utah
• A licensed operator internship program in New Jersey

Answer: They were all funded with Drinking Water State Revolving Fund set-asides.

While there are many critical infrastructure needs the DWSRF program addresses across the nation, sometimes valuable non-infrastructure opportunities such as these can get lost in the shuffle. A new analysis from the EPA is helping shine a light on the wide variety of capacity-development projects funded via set-asides that have been implemented across the country. Taking a look at this analysis is particularly helpful if state-level decision-makers need ideas about how to use set-aside funding, or have questions about set-aside funding in general. 

Using data from state DWSRF plans and capacity development reports, the analysis can help answer these needs and questions. It shows that states are using set-aside funding in the following nine (9) areas: Training and Technical Assistance, Financial Management and Rate Studies, Source Water Protection, Program Implementation (Capacity Development), Water and Energy Efficiency, Partnerships, Data Management, and Emerging Contaminants. What is important to note here is that there is a large amount of flexibility inherent in the program, which is a great thing when you are looking for ways to support important capacity-building programs in your own backyard.

What exactly is a set-aside fund? According to the EPA, set-asides are portion of each state's annual capitalization grant that support water system capacity, operator certification, source water protection, and training/technical assistance to PWSs. Set-aside funding cannot be used for water system infrastructure projects. Instead, the set-asides support "activities necessary to ensure safe and affordable drinking water by: (1) providing states with flexible tools to assist water systems with training, technical assistance and pre-construction activities; and (2) extending and enhancing the impact of DWSRF funding by ensuring that water systems have the technical, managerial and financial capacity to obtain a loan and to effectively maintain their resources." States can take up to approximately 31 percent of their capitalization grant for set-aside funding. 

Each state can develop its own funding balance between infrastructure and non-infrastruture DWSRF loans, and this balance can change year-to-year. Finally, states should review their Public Water Supply System Program priorities on a regular basis to determine the effectiveness of set-aside usage. Happy planning! 

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If you're interested in getting an energy audit for your utility, RCAP staff are able to carry out energy audits for both water and wastewater utilities. To find the RCAP partner that serves your region, check their website.

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Contracting a Certified Water Operator

Many small systems across the nation depend on the services of a circuit rider, also known as a contract operator. In fact, according to an article by Lori Moore, Compliance Specialist at Colorado Department of Public Health, contract operators make up an incredible 33 percent of the total number of certified water professionals who supervise public systems!

Contract operators can help ensure regulatory compliance for less complex systems that do not need a full-time operator, they can respond to emergencies, attend sanitary surveys or help fill-in when a full-time operator cannot be found in the area. 

Whatever the reason, it is important to know how to select a contract operator, and then once selected, how to communicate effectively with them. The Pennsylvania Department of Environmental Protection has recently published such a guide, outlining the responsibilities of both the responsible official/owner and the certified water operator. The guide also includes a contract operator interview tool and topics for developing terms of a contract.

Pennsylvania isn't the only state offering guidelines for developing a contract. For example, here is Vermont’s Department of Environmental Conservation list of suggested information and requirements to include and the Illinois Environmental Protection Agency has it's own guide as well. Many states also offer lists of current certified contract operators, like this one. 

Once selected, communication with the operator is key to developing a successful relationship. Because the work contract operators do is immensely valuable, especially these days, establishing clear expectations can go a long way for everyone involved. 

It’s a bird, it’s a plane, it’s a DRONE!

So you are thinking it is about time to inspect the outside of your water tanks and above ground assets. According to the Illinois EPA, a water storage tank should be inspected at least every 5 years, so it just may be that time again.

You are probably familiar with the traditional tools for condition inspections such as ladders, scaffolding, harnesses, cherry pickers, helicopters, ROVs, divers and cameras. But these days, you can add another tool to your toolbox: unmanned aerial vehicles (UAVs), or more simply, drones. Drones can offer a safer and possibly more cost-effective method of visualizing the condition of a utility’s facilities. Certainly, these “eyes in the sky” can take a visual inspection to an entirely new level – literally.   

There are clear benefits to using drone technology. According to this Wall Street Journal article, researchers believe the use of drones could cut utility costs and improve worker safety, both for routine inspections and for surveying damage after disasters. Plus, set up and operating costs can be less expensive – initial drone systems can be had for as little as $6,000. Drones can also be used to supplement your GIS program for asset management and to map assets in remote and rural locations.

Yet there are some drawbacks as well. Depending on state and local ordinances and laws, there may be height and line of sight regulations as well as special training/licensing requirements for operators.

Interested in finding out more?

There will be a technical session on using drones at the 2017 APWA Public Works Institute in California in September. And the NCAWWA is offering a session at their 2017 Institute, also in September. Can’t wait until September? The Operator Training Committee of Ohio is offering a training in a few short weeks.

Ready to give it a try?

NJ Water Association offers a drone service for asset management purposes, emergency response planning, tank inspections and more. Their drone and operator are both registered with FAA to maintain compliance with FAA Part 107 requirements.

Funding for Water Infrastructure Improvements

Paying for maintenance and upgrades to your utility is no small task, and the U.S. Government Accountability Office estimates the cost of replacing water and wastewater infrastructure in rural communities could be almost $190 billion in the coming decades. It’s unlikely a single source can meet your costs, and smart financing will instead require a mix of external funding, capital planning and rate setting to meet your goal.

External funds

The U.S. EPA provides a thorough starting point for finding external funding sources. Federal funding for water infrastructure includes:

• U.S. Environmental Protection Agency’s Clean Water State Revolving Fund and Drinking Water State Revolving Fund
• U.S. Department of Agriculture’s Rural Development Water and Environmental Program
• U.S. Department of Housing and Urban Development’s Community Development Block Grants
• U.S. Economic Development Administration’s Department of Commerce Economic Development Administration

There is also funding available at various agencies designated specifically for water and wastewater utilities dealing with declared federal disasters, or those seeking funds for proactive planning and design.

Funding options at the state level vary, but the Environmental Finance Center Network maintains a list of funding sources by state. The lists will include the last date of update, basic information on how to apply, and staff contact information to learn more.

Finally, there may be local or private foundation grants available, depending on your situation.

Capital planning

As the Environmental Finance Center at the University of North Carolina-Chapel Hill states, “Long-term planning is required to schedule major infrastructure improvements and spread the capital costs over many years in order to avoid having to raise rates significantly in any one year to pay for a capital project that was unplanned.”

To that end, the center has developed resources and compiled best practice guides to help small utilities develop Capital Investment Plans and/or Asset Management Plans. These include the “Plan to Pay” tool, which uses Excel to project your fund balance (revenues, expenses and reserves), and necessary rate increases for the next 20 years.

Rate setting

Once you know your options for external funding and projected balance for infrastructure improvements, you’ll know whether and when a rate change is needed. View our past blogs on Laying the Foundation for a Successful Rate Approval Process and Tips to Help Utilities Get the Water Rates They Need.

As always, you can find additional resources in the WaterOperator.org document library, including examples specific to your state by selecting “Financial management” under Category and your location under State.

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To see more resources for water utilities from RCAC, check out their Guidebooks.