Private Property

March 27, 2014
The pros and cons of privately owned municipal water

About the author: Michael Klein is a partner in the Energy, Environmental and Public Utility practice at Cozen O’Connor. Klein can be reached at [email protected]. Chelsea Corbin is editorial assistant for SWS. Corbin can be reached at [email protected].

As many municipalities struggle financially, some private institutions are petitioning for a stake in providing affordable water. SWS Editorial Assistant Chelsea Corbin spoke with attorney Michael Klein, co-chair of the Energy Industry Team at Cozen O’Connor in Washington, D.C., to learn about the increasing demand for privatized municipal water services and the effects of privatization. 

Corbin: What is motivating a discussion about the privatization of municipal water services? 

Klein: Municipal water systems are expensive to maintain, and major infrastructure upgrades and replacements are simply too cost-prohibitive for many municipalities to make during these lean economic times. For some municipalities, removing this financial burden from the books is attractive. What is even more attractive is the possibility of raising a significant amount of cash in the process by selling the water system in the marketplace. 

Corbin: What are the benefits and drawbacks of privatizing water? 

Klein: Privatization of a municipal water system can take various forms, from the sale of the municipally owned water assets to an investor-owned company, to the outsourcing of operation, maintenance and other various services. Another form of privatization is the long-term lease of the municipally owned water assets. 

The pros include elimination of a significant expense for the municipality; receipt of a large payment for the water system that can pay for other municipal services; a new owner of the water system that has better access to capital markets and the ability to raise capital to fund major infrastructure improvements and replacements; and ownership by a professional organization, often with a national network of laboratories and professionals to serve the water system. 

The cons include loss of control over the water system and associated jobs, and water rate increases—usually regulated by a state agency—to pay for the acquisition and necessary improvements and to make a profit.

Corbin: What are examples of water systems or municipalities in the U.S. that have benefited from privatization? 

Klein: Bayonne, N.J., is a recent example of where a 40-year water and wastewater concession was utilized. The Bayonne Municipal Utilities Authority will continue to own the water and sewer systems. A joint venture of United Water and KKR & Co. will operate and make improvements to the systems. Proceeds from the concession agreement were used by Bayonne to repay existing debt and improve general finances. 

Pennsylvania-American Water Co. acquired the assets of Coatesville, Pa.’s water and sewer asset through a sale, which resulted in construction and operation of a major regional sewage treatment plant, completed in 2010 at a cost of $55 million, which helped promote economic growth in the region. In 2012, a $24 million upgrade was made to a water treatment plant, increasing plant production to meet customer demand. The net proceeds of the sale were used to implement earned income tax cuts and fund various municipal programs

Sales and/or leases of the assets of municipal water and sewer systems do not always result in privatization. For example, after conducting a competitive bidding process, Allentown, Pa., awarded a 50-year lease of its water and sewer systems to a municipal authority, the Lehigh County Authority. The lease provides for a $220 million upfront payment and other financial considerations. The lease payments will be used by Allentown to address financial needs, including pension obligations. 

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About the Author

Chelsea Corbin