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Review Necessary to Determine the Benefits of Ownership Changes for Public Water Utilities

Developed by the Maine Public Utilities Commission, June 2005 at the Request of the Utilities and Energy Committee

 

 

I.                    Summary

 

            As a result of a March 15, 2004 request by the Maine Water Utilities Association, in April 2004, the Utilities and Energy Committee asked the Public Utilities Commission to produce a report on what review should be undertaken by a municipality or water utility before a decision is made to change the ownership structure of a public water utility. 

 

            In brief, we believe that the review of a change of ownership of a public water utility should be no different from the review conducted to determine whether a private company’s ownership should be changed.  In short, one must determine the costs and benefits.  The real questions are how that determination is made and who should make the ultimate decision.

II.                  Background

 

            Before going into further detail, a brief description of the major ownership types that exist currently is warranted.  There are three forms of ownerships for public water utilities:  quasi-municipal districts; municipal departments; and private investor-owned companies.  PUC regulation of the quasi-municipal districts and municipal departments is the same.  Both of these ownership types are not-for-profit and their trustees are subject to some approval by district and municipal voters or are appointed by municipal officers as provided for in their legislative charters.  As a result, the regulation of these utilities is fairly limited.  Because of the profit motive, the regulation of the investor-owned utilities is more extensive.  However, from a regulatory point of view, one form of ownership is not considered preferable to the others.   The determining factor should be what is best for the ratepayers of the water utility.

 

            One additional difference between a district and a municipal department is the area served by the water utility.  In many cases, a district’s service territory encompasses customers in more than one municipality whereas a municipal department usually serves customers only in the municipality itself. 

III.                Areas of Review Necessary

 

1.                  Safe, Adequate and Reliable Water Service

 

                        While cost of operation is important, the ability to provide a safe, adequate and reliable source of water, now and in the future, should be the primary consideration of any utility.   When looking at the choices of ownership, the question should be what entity will best be able to achieve this end.  Potential new owners or operators need to demonstrate a thorough understanding of water utility operations and associated regulations.  To demonstrate this, the new owners, or ultimate operators if they are different, need to show that they have the necessary technical ability or will have it when they take over the water utility.  We would recommend a review of the planned staffing of the water utility, including a review of the resumes or backgrounds of the people

being hired and the job descriptions of those positions that the new owners plan to fill. 

 

In addition, we would recommend a review of any procedures that the new owners plan to implement upon taking over the water utility.  The operational function includes an understanding of all the rules and requirements of the Federal Safe Drinking Water Act and other rules of the Drinking Water Program.  Examples of specific requirements in the rules include the use of licensed operators and the testing of chemical levels in the water at certain times of the year.   Failure to meet those rules could result in fines or other penalties to the water utility.  The new operators must display thorough familiarity with the applicable rules.

 

2.                  Cost

 

After assuring that the new operators can deliver safe and reliable water, the decision makers can turn to costs.   Often the major reason given for recommending a change is that the new owners can provide the same or better service at a lower cost.  Making that statement and producing documents showing a lower cost can be done fairly easily.  The test comes in verifying that the estimates used are valid.  Did the new owners consider the full cost of operating the water utility, including all administrative costs?  Even if the new owners plan to use existing staffing to fulfill the duties of the water utility, the expenses related to water utility functions performed by those employees should be allocated to the water utility; this ensures that there is no subsidization of water service by other parties.   The same treatment should be given to the cost of facilities such as office buildings, garages, heavy machinery and other items shared with the water utility by the municipality or other entity that will direct its operations.  It may be possible to reduce a water utility’s costs if, as part of the planned ownership change, the utility can share facilities or staff with other entities, but care must be taken to allocate costs properly.

 

                        Labor is one of the largest costs of operating a water utility, after financing infrastructure needs. The same work needs to be done regardless of organizational structure.  If the new entity can operate the utility with that entity’s existing labor force in full or in part, it may be able to reduce the utility’s operating costs on an ongoing basis.  This is easier to accomplish when the utility is small and will thus impose a minimal burden on its new owner.  For example, if a utility currently sends out monthly bills to 1,000 customers, adding an additional 100 customers might not pose any problems.  However, adding an additional 1,000 customers and doubling the requirements of the billing system, might, because typically systems are designed for a certain maximum capability.  This can also be said for paying the bills of the water utility – if this function only adds a few checks a month, those costs can probably be absorbed without causing an increase in the number of accounting employees.  However, if the water utility itself has a full-time accounting staff that spends all of its time keeping the utility’s books and records, it is likely that this full-time staff would be necessary in the future and as a result, no cost savings would be produced as there would be no downtime to allocate to other duties.

 

            One other factor to examine before proceeding with a change in ownership structure is whether any of the savings could be generated without such a change.  For example, if part of the savings results from shared equipment, the savings could be obtained by the existing water utility renting the equipment to or from the other entity, reducing the costs to both.  Purchasing agreements may be entered into with other water utilities or entities for chemicals and piping, which could save money for all the utilities involved without an ownership change.  Metering and billing is another area where utilities might be able to share resources and save money.   

 

3.                  Conflicting Interests

 

                        In choosing between a water district and a municipal department, the primary consideration should be the interests of the customers being served.  In deciding what ownership form would best serve those customers, one needs to know the following:

 

·       The geographical boundaries of the water utility

·       The municipalities within the water district boundaries

·       The number of water customers taking service in each municipality

·       The number of taxpayers in each municipality

 

If the water utility serves many customers in a number of municipalities, it may be difficult for a department of one of those municipalities to effectively meet the needs of all those customers equally.   Alternatively, even if all the water users are in one municipality but very few taxpayers receive water service, there would be questions of the taxpayers’ needs overriding the needs of the water users.  

 

One area of concern and debate that has arisen in the past that highlights the different interests is the use of land – there may be conflicting interests between a water utility with land holdings for watershed protection and a municipality that has an interest in greater recreational use of such property or use for other monetary gains.  If the decision makers have equal responsibility to meet the needs of the municipality and water utility, it may be difficult to balance those interests.

 


4.                  Funding Availability

 

One other area that should be taken into account is the different sources of funding that may be available depending on the type of ownership.  In some cases, one form of ownership may lead to more funding options than another.  However, this tends to be on a case-by-case basis depending on the size and needs of the community.  The major funding sources are the Maine Municipal Bond Bank, the Drinking Water Program’s State Revolving Loan Fund, and U.S. Rural Development programs.  Each has different requirements for different projects.  Along similar lines, state law allows a municipal department a shorter repayment term on debt than it allows a water district.

 

IV.               Results of Previous Changes

 

Historically, changes in ownership have taken place in Maine.  However, it is not necessarily easy to ascertain whether the change is beneficial or not.  One would have to examine any rate increases after the change and determine if they would have been necessary regardless of ownership (for example if caused because of infrastructure needs.)  In addition, one would need to examine the operational efficiencies – the rates may be higher but if the quality of service provided is higher, the change would have been for the better.  In one recent case, there have been several rate increases since a change of ownership but those increases were related in part to the existing infrastructure needs.  There has not been enough time since the ownership change to evaluate whether the change has increased the operational efficiencies of that utility, which is the claim of the new owners.

V.                 Conclusion

 

In conclusion, before making a change in the ownership type of a water utility, decision makers should perform the same due diligence that is performed before entering into any business decision.  What entity can provide the best service for the lowest cost while still representing the ratepayers of the water utility?  Completing this review  prior to the decision being made maximizes the probability that the decision will be in the best interest of  the ratepayer.