Opinion: When Water Utilities Are Sold, the Customers Should Benefit

Daniel J. Van Abs | March 15, 2016 | Opinion
It’s a fact often overlooked or misunderstood, but it’s customers -- not simply taxpayers -- who pay for water utilities

Daniel J. Van Abs
The debate is joined. Should municipality X sell its water system to another entity, and thus reap the benefits of that sale for its taxpayers? Or should the municipality sign an operations contract with another entity, with an upfront payment to the municipality that, again, benefits the taxpayers?

As just one example, the emergency manager for Atlantic City recommended that the city consider “monetization opportunities” of the Atlantic City Municipal Utilities Authority, an issue that has been the subject of considerable discussion. However, the troubled resort certainly isn’t the only place where these discussions have occurred in recent years.

Whether a sale or operations contract is proposed, the other entity is almost always an investor-owned company, since public purchasers or partners won’t have the millions available for the deal. Government-owned utilities also aren’t organized and managed to think of mergers and acquisitions as a business strategy, as I discussed in a previous column. Privatization is the normal response.

These privatization discussions have mostly ignored two fundamental questions. Who paid for that utility in the first place, and why shouldn’t those who paid for it benefit from its sale?

First, a quick overview of our current situation. New Jersey is a state with an extraordinary number of water utilities. We have more water-supply systems than municipalities, and hundreds of wastewater systems. The systems serve a wide range of areas, from individual developments to multiple counties.

Of these utilities, most are publicly owned, usually by municipalities or utility authorities, and the authorities may serve part of or an entire municipality, multiple municipalities, or a full county. There are also regional agencies formed through direct legislative authorization, such as North Jersey District Water Supply Commission and Passaic Valley Sewerage Commission.

Then we have the private sector. Many small systems are privately held companies, but large investor-owned companies such as Suez (formerly United Water), NJ American Water, and Aqua-NJ serve by far the most area, including roughly 40 percent of all water-supply customers in New Jersey.

This confusing welter of utilities certainly doesn’t help ensure well-financed, sound, effective water supply and wastewater services to all customers. By comparison, New York City, with nearly the same population as New Jersey’s, has one utility that handles both functions. We will never get to that point, but the difference is striking.

These hundreds of utilities are managed more or less well, depending on the ownership and their commitment to sound operations, maintenance, capital projects, and upgrades. Inevitably, utilities that are in trouble, or serve distressed municipalities, are the ones considered for sale or operations contracts. And even more inevitably, the decision to sell or contract out operations is not made by or on behalf of the utility customers. The emphasis is on revenue to benefit municipal budgets, and therefore taxpayers.

But the customers paid for the existing utilities, in nearly every situation. Why are they left out? After all, when an incoming utility either buys the municipal system or pays an upfront sweetener, they are doing so with every expectation of getting paid back, with interest and a profit.

Further, many utility customers are not taxpayers; what benefits the taxpayers will harm those customers. Think about the religious institutions, school systems and colleges (public and private), and other governments from county to federal, all of which are utility customers but don’t pay taxes. Why should they pay higher rates to subsidize local taxpayers? I am not an attorney, but it would be very interesting to see that issue tested in court, challenging it as a backdoor way of taxing the tax-exempt, through utility rates.

Some may argue that the municipality (and therefore taxpayers) did pay for the utilities. There are a few water utilities that are and always have been paid for using property taxes rather than rates. I’m not sure why such systems exist, but they do and in those few cases a sale would benefit the same people who paid in the first place. While a sale should be decided on the merits, at least the results would be more equitable.

In other cases, the municipality may have funded the initial creation of the utility, such as in our core urban areas. However, those systems are very old, the costs have long since been paid off, and most of those old lines need replacement. In addition, the customers have been paying for operating the systems for decades, and therefore have a far more recent and compelling case for benefits from any sale or sweetener, especially as they will be paying it back.

I often hear people say that in suburbs, much of the water utility system was paid for by developers. Sorry, but developers don’t pay for anything — that is how you become a bankrupt developer. It was the buyers of those homes, offices and stores who paid for the utilities, not the developers.

Finally, the example of Bayonne comes up frequently, but often inaccurately. Whether the contract will work for the city in the long run is an open question. A key point is that the contract between Bayonne Municipal Utilities Authority and United Water (now Suez) provided a large chunk of money to the Bayonne MUA, but that money did not flow to the city. Rather, the MUA retired its entire debt. The result was a shift in debt from the MUA to United Water, but the customers are paying for that debt either way.

The takeaway point from this discussion is simple. We, the customers, paid for the utilities, and we, the customers, should benefit from any sale or contract sweetener, because we, the customers, will be paying it back within interest. Therefore, we have a direct financial interest in what happens. But customers aren’t being given a vote. I strongly suspect that if the laws required that utility customers must reap all the benefits from a sale or operations contract, there would be far fewer discussions. Perhaps, just perhaps, we could instead focus on the more critical question of ensuring sound, cost-effective operations of all water utilities, regardless of ownership.