With rewards come risks when owning water system

For many Americans, water is the new oil. It was a point raised by Professor Brian Thomas at a dialog on water ownership held at Pomona College Monday evening, and hardly disputed by the crowd of city officials and community members.

Along with the rising price of gas and property tax, water rates have doubled and in some cases tripled in cities across the country. Fed up with rising rates amid water company profits, many cities like Claremont are weighing their options when it comes to taking over their local water system from investor-owned water companies like Golden State Water.

However, before taking the leap from private to public, Mr. Thomas warns it is vital for cities to really understand the extent of the potential risks involved.

“It’s important that you really know what you are getting into,” Mr. Thomas said. “As you start to think about acquisition, it is critical that you do a comprehensive risk assessment.”

Potential risks to be considered include those associated with the system’s operation, the influence of environmental factors and ever-more-stringent water regulations. It’s important to know the liabilities associated with infrastructure projects, such as understanding the elements that could affect a project’s schedule and the costs involved.

“The question of whether or not you are actually going to end up with lower rates is going to really depend on how well that entity is operated,” Mr. Thomas said. “At the end of the day, you are really going to have to have a good management team, a good management structure.”

Mr. Thomas explored such questions during his overview of water ownership and governmental structures, hosted by Sustainable Claremont. The community dialog was timely as the city moves forward with analysis of the potential acquisition of its water system, due before the council next week. Mr. Thomas was in a unique position to talk on the topic of water, having served as assistant general manager and chief financial officer of the Metropolitan Water District of Southern California from 2000-2011. He currently works as the managing director of a finance firm that represents public companies as they decide whether or not to sell their company.

Just because a private water company boasts profits does not necessarily signify a red flag, he asserted.

“Profits are not a bad thing,” he said. “Profit motivates people to do good work, it motivates efficiencies. The [water companies] also have to pay taxes and fees that could come to the benefit of the city.”

While remaining neutral—and reiterating that he has not done research into Claremont’s situation—he noted that while most other parts of the world have private agencies distributing their water, there is a reason 80 percent of our nation’s water is distributed by public agencies.

“Frankly, I think it’s because in the public sector we just do too good of a job,” Mr. Thomas said. “There hasn’t been the need to privatize those systems.”

While pointing out the potential risks, Mr. Thomas outlined plausible benefits of local ownership as well. There are several perks, said Mr. Thomas, one being that public systems have the advantage of tax-exempt rates. If the city of Claremont were to borrow a bond to invest in its water system, the interest received on that bond is free from taxes. While private companies must pay taxes, a public entity is able to directly invest the money saved from taxes and interest rates into its capital.

“So, the overall cost of capital is often lower for municipal agencies,” Mr. Thomas said.

Another benefit is the community’s ability to play a more involved role in its rate increases. Proposition 218 helps keep the public entity accountable, ensuring that all taxes and most charges to property owners are subject to voter approval. The public entity cannot just raise water rates, for example. Notification must be sent out and, if a majority of Claremont residents do not want the increase, the increases will not happen. While the California Public Utility Commission (CPUC), an appointed body, currently has power over rate increases, the citizens would have control with a locally-owned system, emphasized Claremont Mayor Larry Schroeder during a group discussion following the lecture. Mr. Thomas agreed.

“It gives you that direct link to your utility,” he noted. “The PUC provides mostly objective analysis  you can get a lot of data from them and they will help you understand that information, but it’s a different type of regulatory structure and a different kind of political structure.”

The city would also have the flexibility to incorporate other rate structures. One that received special attention from Councilmember Sam Pedroza and others was that of budget-based billing. With this rate-paying system, a certain amount of water would be allotted to each household depending on its size. Anything used over that designated amount would cost a significant amount more than the previous allotted amount. While recognizing that this system was effective in more easily managing larger and smaller properties, it proved to have more complex issues in the end, Mr. Thomas noted.  

At the end of the day, Mr. Thomas maintains that it all comes down to management. Whether or not the water company is owned by the public or private sector, the key is the effectiveness with which the company is organized and run.

“You have public entities with the highest rates, because of factors like geology or geography, but they are really well run. And then you have those entities that are poorly run but may have the lowest rates for a decade or 15 years and then things start to fall apart,” Mr. Thomas said. “You can never really get away from management structure.”

—Beth Hartnett



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