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A Lower Cost Alternative To Selling A Non-Profit Utility

Is it a good idea to sell your crown jewels?  We do not think so.

However, local governments are often quick to grab offers from Big Water Companies.  Your local water or sewer system may not be a "crown jewel", but it is a valuable asset. 

We think there is a better alternative to selling it. 

Key Question

There is a universal question that should be answered when doing any economic decision making: What is the next best alternative?

 

If you have not carefully and fully answered that question, you are not serving your constituents properly.  In the case of a non-profit utility sale, the question might be a little better phrased:

 

Is there an alternative that could deliver the same benefit (the large sum of cash) at a lower cost to our citizens?

Actually, There Is A Better Alternative

In the large majority of cases the answer is going to be “YES”, unequivocally “YES”.  That alternative is to issue a bond for the same amount as the sale offer for the water or sewer system.  The debt service on that bond will be substantially less than the rate increase that Big Water will impose on their customers.  This is illustrated by the following chart:

As the chart shows, the Big Water rate increase required by their costs and profit is over 70% greater than if the local government issued a bond.  The difference is pretty dramatic.  And, the right hand bar on the chart shows the overwhelming impact of the profits “required” by the Big Water companies. 

So, Why Sell

Given this economic view, why would a local government ever consider selling their water or sewer utility?  There are several reasons, none of them very good in our opinion:

 

#1 - They may not have the competency to do this analysis themselves. 

 

#2 - However, a number of the sales we have tracked employed financial consultants to help them analyze the sale.  There is absolutely no excuse for professional financial “experts” to not do this analysis.  Yet, we have not seen any evidence of it being considered. 

 

#3 - Issuing a bond requires providing the funds to service that debt.  Very likely that would mean a tax increase.  It is also very likely that the citizens who would be paying the tax increase would turn the deal down flat when given the choice between the higher taxes and the supposed benefits of the cash windfall. 

 

#4 - The amount of cash is often multiples of the local government’s budget.  It is like winning the lottery.  The seductive power of that cash windfall can be overwhelming. 

 

#5 - There will be a lag time of 1 – 3 years before customers get hit with the big rate increases.  When the increase does hit, the responsible officials may or may not still be in office.  Even if they still are in office, they can try to deflect the blame on to the Big Water company. 

 

#6 - There is the possibility of a Beggar Thy Neighbor (LINK) situation.  This is a situation where some or many of the utility customers live outside of the selling jurisdiction.  They would receive none of the benefits of the sale, yet would be paying the price. 

 

#7 - It is possible that some local officials could see the sale as a career enhancing event and act accordingly. 

 

Here is another view of the same issues (LINK)

In spite of the better alternative, at least 26 systems have signed on the dotted line to sell their utility to a Big Water company.  We know of one exception in Pennsylvania – the Township of Tredyffrin.  They were offered $75 million for their sewer system.  They analyzed the options and declined the offer.  There are several other local governments in Pennsylvania where local officials very much wanted to sell, but citizen opposition was intense and the deal ultimately fell through. 

A pivotal issue here is whether the affected citizens would be willing to pay to fund a bond for an amount equal to the sale price.  As noted above, approval would be unlikely.  Most people feel overtaxed already.  They are not likely to see the supposed "benefits" as being enough to justify a tax increase.  If not, why should the responsible officials impose an even higher "backdoor" tax on its citizens in the form of water or sewer rate increases.  We do not think that is responsible political leadership.  It is succumbing to the Big Water profit growth "Playbook" (LINK).  

The Regulatory Role

Another concern revolves around the Public Utilities Commission (PUC) approving these deals.  The law requires the buyer to show substantial public benefit before the PUC can approve the deal.  Typically, the claimed benefits are vague generalities like “economy of scale” or “regionalization” of systems.  We feel that the benefit analysis should be much more quantitative.  That analysis should start with the premium price being paid as outlined above being considered a public harm.  Unless there are benefits that quantitatively offset that harm, the deal should not be permitted.  This will be dealt with in more depth in the next several months (before mid year 2024).

Conclusion

A hard logical analysis makes it difficult to justify selling a municipal water or sewer system.  Yet many have sold.  The outrage over the resulting rate increases continues to build.  We have hopes this will pressure legislative changes to require a more objective process in determining whether a sale is in the public interest or not.  

If your local officials are considering selling a water or sewer utility, you need to take action quickly.  The best approach is to organize large groups of affected customers to assertively make their views known.  This website details many of the issues that should be raised with your local officials.  

The mere announcement that a sale is being considered is a strong indicator that your local officials have already made up their minds about the sale.  That can make for a difficult situation to turn around.  But, large numbers of citizens demanding honest answers to legitimate questions can have a big impact.  Do not be reticent to express your views. 

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