Pennsylvania is home to an estimated 2,200 municipally owned or investor-owned community drinking water systems that provide high-quality water to homeowners and businesses.

The U.S. Environmental Protection Agency (USEPA) and the Pennsylvania Department of Environmental Protection (PADEP) are charged with regulating drinking water standards for all those systems, while the Pennsylvania Public Utility Commission (PAPUC) regulates the rates and service of 100 investor-owned water systems and those municipal systems serving customers beyond their boundaries.

The PAPUC’s mission is to ensure that safe and reliable service is provided to customers at a reasonable price and that investors receive a reasonable rate of return on their investment. The federal Securities Exchange Commission (SEC) also regulates some investor-owned systems.

It is important to note that both publicly and privately owned water systems can and do operate efficiently and provide excellent customer service while fully protecting public health. However, many small to medium sized systems, both publicly and privately owned, are finding it increasingly difficult to provide water supply service that remains in compliance with stringent federal and state water quality standards.

Since the early 1990s, larger water systems have been encouraged by the PADEP and the PAPUC to acquire smaller systems in an effort to address the growing number of unviable water and wastewater systems in Pennsylvania. A viable system is one that is able to consistently comply with the provisions of the Safe Drinking Water Act (SDWA) on an ongoing basis. In recent years, the USEPA has also encouraged privatization and consolidation as an option to meet the industry’s growing infrastructure needs.

Consolidation

Smaller water systems, both publicly and privately owned, lack economies of scale and are having an increasingly difficult time finding the capital and human resources required to comply with stringent water quality standards to remain viable. These rising operational costs, coupled with political pressures on local elected officials to avoid rate increases, have made consolidation an attractive alternative for these systems.

Consolidation has taken many forms including: (1) acquisitions of public or private water systems by larger systems; (2) mergers between investor-owned utilities; and (3) regionalization, where publicly or privately owned systems integrate part or all of their water management systems to reduce costs, improve service, and maintain regulatory compliance.

As the water industry as a whole strives to increase economies of scale through consolidation various community groups encourage political activism against selling a water system through emotional arguments, without considering the industry's infrastructure, financial and regulatory challenges. Let's examine some of the issues:

(1) Control/Management of Scarce Water Resources: All water systems are regulated by the state. PAPUC regulated systems are the most highly regulated water systems in Pennsylvania and merely provide a service: delivering safe, reliable drinking water at the tap, while the government (i.e., USEPA, PADEP and PAPUC) has oversight and remains responsible for establishing and enforcing quality and reliability standards.

Water withdrawals, by either a publicly or privately owned system, are regulated through water allocation permits administered by the PADEP and in some cases the river basin commissions. Both types of systems are also governed by Pennsylvania’s drought contingency regulations administered by the PADEP and Pennsylvania Emergency Management Agency (PEMA). Moreover, a new state water plan is being developed to coordinate regional, county and local water allocation and use, land development planning and related zoning requirements under Act 220 of 2002.

(2) Cost to Citizens: The PAPUC exercises complete jurisdiction over the rates and service of investor-owned systems, while a municipality or authority board sets the rates of publicly-owned systems. In addition, the Office of Consumer Advocate (OCA) and Office of Small Business Advocate (OSBA) monitor the rates and service of investor-owned systems.

Comparing the rates of publicly owned systems to those of investor-owned systems is not a fair comparison. As the Congressional Budget Office (CBO) noted, “Ultimately, society as a whole pays 100 percent of the costs of water services, whether through ratepayers’ bills or through federal, state, and local taxes.” Investor-owned systems pay taxes – not just state and federal income taxes, but state and local property taxes and the state Capital Stock & Franchise tax – thus contributing to the welfare of the Commonwealth and the communities they serve.

Some water system costs may be subsidized through various grants, taxes and the non-payment of taxes. Failure to have rates based on the full cost of service sends the wrong economic signals, discouraging conservation, and because revenues received from customers do not support all the costs, may lead to undesirable practices such as deferred investment and cutbacks in service or health protection.

(3) Customers Come First: Providing quality and reliable service to its customers is every water utility’s first responsibility. Both publicly and privately owned systems also have a fiscal responsibility to its bondholders and shareholders. Investment from bondholders and shareholders provides the necessary capital to rehabilitate, upgrade, or install infrastructure. Investor-owned systems are economically regulated by the PAPUC, which sets and approves rates, assures sound capital investments, reliable service and balances the interests of the customer and the shareholder. Cost savings are realized through economies of scale, mass purchasing power, better insurance coverage and lower premiums, effective cost controls, innovation, and sound asset management practices.

(4) Local Ownership: While some investor-owned water systems are global businesses and have parent companies based abroad, this does not affect the state regulation of water. All water systems are still subject to the same regulation by the USEPA and the PADEP, as well as the PAPUC for the investor-owned systems. Another essential service: food is just as essential as water and is often distributed through global businesses. The ownership of the supermarket or the product does not affect our decision to purchase the food, nor does it adversely impact the quality, availability or the price of the food.

Conclusion

Communities considering the sale of their water system should not make the ownership status of perspective purchasers the determining factor. They should, however, evaluate their need and ability to make the necessary capital investments for replacement and upgrading of plant, equipment and infrastructure to comply with stringent water quality standards, while improving system reliability and enhancing customer service in the most cost-effective manner.

Pennsylvania has been a leader in consolidation with an impressive record of successful acquisitions by both publicly and privately owned systems. Occasionally, there is going to be conflict and competition amongst systems vying for acquisitions, but every situation is different and some systems, whether publicly or privately owned, may be a better fit than others to meet a community’s needs.

Jeffrey R. Hines, P.E. is vice President of Engineering for The York Water Company and is current serving as the Chairman of the Pennsylvania Chapter of the National Association of Water Companies. The York Water Company provides water to 33 municipalities in York County. (Reprinted with permission from The Water News Source, PAAWWA’s newsletter.)

10/28/2005