Offloading infrastructure woes
American towns selling their public water systems sometimes come to regret it
LAKE STATION, IND.» This hard-luck town just south of Chicago is weighing a decision confronting many small and midsize cities with shrinking populations and chronic budget deficits: whether to sell the public water system to a for-profit corporation.
Lake Station needs the cash. Once solidly middleclass, the town of 12,000 has suffered from cutbacks at nearby steel mills, statewide caps on property taxes and debt incurred to build a new City Hall.
Selling the water system would erase $11 million in utility debt and leave the city with a $9 million windfall. But the deal does not fund any of the water system’s $4 million in overdue repairs.
“You’re in bad shape financially to where you’re talking about laying off police, so you’re going to have to do something,” said Lake Station Mayor Christopher Anderson. In Lake Station, the divided City Council voted in June to sell the municipal water system to American Water.
Neglected water infrastructure is a national plague. By one estimate, U.S. water systems need to invest $1 trillion over the next 20 years. Meanwhile, federal funding for water infrastructure has fallen 74 percent in real terms since 1977, and low-interest government loans have not filled the gap.
The need to rehabilitate infrastructure is urgent for many of the nation’s 50,000 community water utilities. Broken or leaking pipes can contaminate water, flood streets, disrupt businesses and require expensive emergency repairs. Outdated treatment plants have trouble filtering potentially harmful chemicals. Old pipes can leach dangerous levels of lead into drinking water.
The prospect of offloading these headaches to for-profit water companies — and fattening city budgets in the process — is enticing to elected officials who worry that rate hikes could cost them their jobs. Once a system has been sold, private operators, not public officials, take the blame for higher rates.
But privatization will not magically relieve Americans of the financial burden of upgrading their water infrastructure. Water customers still foot the bill.
Privately owned water systems serve about 12 percent of Americans. But the figure is much higher — 30 to 70 percent — in Indiana and 14 other states, including many with industry-friendly policies. Indiana and several other states allow private water operators to spread their costs and price increases among customers from other water systems they own in the state. If regulators approve the deal, that means American Water could bill its customers throughout Indiana for the estimated expenses of buying Lake Station’s system. Those include the $20.7 million purchase price, plus the 6.6 percent profit that state regulators allow the company to earn; business and property taxes; legal fees and other incidental expenses, plus 6.6 percent profit on those costs; and a 6.6 percent profit on the $2.8 million that American Water plans to spend fixing Lake Station’s aging pipes over five years.
Even as more cities consider selling their water infrastructure, others are trying to wrest control of their systems back from private operators, usually because of complaints about poor service or rate hikes.
When residents of Mooresville, Ind., grew frustrated with rate hikes, the city tried to buy the system from American Water for more than $9 million. A judge ruled in Mooresville’s favor, but the court-approved price — $20.3 million — was more than the town of 10,000 was willing to pay.
In 2015, Fort Wayne, Ind., finished paying $67 million to take control of water systems in two areas. The eminent domain effort lasted 13 years and included two court cases, a trip to the state Supreme Court and protracted battles over price.
Missoula, Mont., took ownership of its water system in June after winning a fight that left the city of 70,000 facing an $88.6 million bill, plus millions of dollars more in expenses. Over the years, Missoula’s water system had been owned by a regional water company; by one of the world’s largest private-equity funds, the Carlyle Group; and by a subsidiary of Algonquin Power & Utilities, a Canadian corporation.