Water is a valuable public asset which should be available to all, not sold to the highest bidder to exploit for profits.
Does Big Water Cost Less?
For the ratepayer the flat out answer is NO!
Yet when a municipality wants to sell a water or sewer system to Big Water, lower costs are usually a selling point. How can this be?
The claims usually revolve around both operating costs and capital costs. There is a grain of truth in each. But, in making these claims there is an elephant in the room that both the seller and buyer seem to prefer to ignore. Read on for more detail.
Capital Investment
The standard story is that municipal capital costs are 25% - 35% higher. This means that a construction project that Big Water could execute for $10 million might cost a municipality over $13 million. This grain of truth is based on federal law requiring local governments to pay prevailing wage rates for work they contract. In effect, this means paying union shop wages. Non-union contractors may pay lower wage rates and be used by Big Water. Since labor is usually a big part of construction costs, it is possible that municipal improvements costs could be higher. Although we have seen this claim several times, we have never seen it substantiated. But, lets assume capital costs really are 30% higher for a municipality.
The real issue that matters to ratepayers is how that capital investment will impact their rates. We have never seen that issue addressed. Here is an illustration that explains why. Assume that Big Water could install a capital project for $10 million, or a municipality could do it for $13 million - the 30% higher cost. The following chart shows the ratepayer impact:
Most municipalities would fund major improvements by issuing a bond. Rates would most likely have to be raised to cover the “mortgage payments” for the bond. This is a very equitable way for users of the system to pay for the improvements. Those who benefit pay the extra cost. When the bond is paid off, the extra cost goes away.
The Big Water company will pay for the improvements via their normal capital management system. This typically would be a mix of borrowing, depreciation and reinvested earnings. When the improvements are complete, Big Water will move to increase rates. Over 70% of what they collect from ratepayers depends on their investment. So they quickly move to fully recover their costs plus earn a substantial profit.
The short answer is that although Big Water’s capital cost may be 30% less, Big Water will charge ratepayers about a third more.
We Can't Afford The Repairs
On a related subject, when a municipality wants to sell a water or sewer system a common claim is that needed repairs would be so expensive that we cannot afford them. But, whatever capital investment Big Water puts into a system, it will cost ratepayers more than if the system was not sold. More detail on this issue here.
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If you are hearing this story line, we suggest you challenge it vigorously.
Operating Cost
Here, the grain of truth is that Big Water has economies of scale that enable them to operate at lower cost. For small municipal systems this is probably true. For large systems, the savings probably diminish considerably. The problem is that lower operating cost does not offset Big Water’s other costs. The following charts illustrate why.
Only about 25% of the ratepayer’s dollar goes to Big Water’s operating cost. Reducing that by 20% would only reduce the ratepayer’s bill by 5%.
Profit and depreciation comprise over 60% of Big Water’s costs – both of which are paid for by ratepayers. And, these are costs not incurred by a municipal system. Therefore, they are a big part of the rate increase when a municipal system is sold to Big Water. So, the talking point before the sale is operating savings. The ~5% savings is touted but the 60% increase is not mentioned.
Aqua’s acquisition of New Garden’s sewer system illustrates how this works. New Garden is a small system with less than 2,500 customers. In their PUC filings, Aqua noted that they had several nearby systems that could share costs. Indeed, Aqua’s rate filing data indicates that they have reduced operating cost by almost 40%. That is a substantial savings. Yet, they raised our residential rates by almost 80%. The following chart illustrates what happened:
Clearly, there are operating savings. Equally clear is how profit and depreciation totally overwhelm those savings.
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The increase we saw in 2022 was just the first step. When Aqua files its next rate case, much of that "$1 Million Paid By Other Customers" will be shifted to New Garden customers. This is part of the PUC's policy to mitigate "Rate Shock", but move systems to their full cost of service.
This is not an isolated case. Every Big Water acquisition we have looked at shows this same pattern.
Conclusions
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There are significant differences in the financial structures of Big Water and municipal water and sewer utilities. The two noted above usually favor Big Water. And, when Big Water wants to buy a system, those advantages are touted. But the money Big Water will be collecting from ratepayers for profit and depreciation are the elephant in the room that both buyer and seller want to ignore.
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If your water or sewer system is up for sale, you need to understand these issues and:
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