City chooses private manager for its water utility

Privatization advocates are encouraging cities throughout the U.S. to privatize their municipal water utilities to increase utility efficiency. Opponents of privatization contend that the divestment of a money-losing water utility may assist a city’s budget in the short term, but only at a steep cost to consumers once the city’s rate-setting ability is transferred to a private buyer. In reality, both sides are right.

Privatization can increase efficiency, but turning a public monopoly into a private monopoly is not always the best way to maximize public benefits from a utility. Rather, looking for areas where competition can be introduced to enhance productivity is the preferable route.

Jersey City, N.J., recently established a public-private partnership with United Water Resources, Harrington Park, N.J. The city will maintain ownership of its water utility facilities while contracting with the water company to manage these assets. The agreement offers an example of how municipalities can liquefy the un-tapped (pardon the puns) budgetary potential of their water utilities without giving up their public ownership and control.

Under municipal management, Jersey City’s water assets — pipes, purification plants, reservoirs and significant quantities of surplus water — had never really been used to their fullest potential.

For instance, the city had long wanted to sell its surplus water on the open market to generate recurring, non-tax revenues, but it had never succeeded in doing so.

The water utility has also had higher operating expenses than necessary, although that had been difficult to tell in a non-market situation. In spite of the best efforts of several administrations and water directors, operating costs continued to rise.

Delivering water to Jersey City had been an even bigger problem, as one-quarter of the city’s water had been leaking from the pipes carrying it from suburban reservoirs. Transporting water great distances is a significant engineering challenge, and the city, for all the reasons that typically trouble public enterprises, had found it difficult to stop these water losses.

The city also encountered difficulty with accurate billing. Unlike the private telephone and energy utilities, which send out their bills every month like clockwork, the municipal water utility had too often mailed bills at irregular intervals. In addition, the bills were sometimes based on estimates of consumer usage instead of actual meter readings. This situation could result in huge bills once an actual reading was made, because estimates in prior billing periods had been too low.

Finally, bill collection had been a problem. Because the water utility’s collection rate had been lower than the norm at private utilities, the city charged higher water rates to cover the losses caused by non-payers.

Although the city’s new water director made substantial progress on all of these problems in recent years, the utility still underperformed its private counterparts.

The privatization option was not new to the city, as many other government operations, such as traffic signal maintenance, have been privatized to improve service delivery while reducing costs. In the case of traffic signal maintenance, the city has the option of changing vendors or resuming responsibility for maintenance if it does not receive quality services or the vendor suddenly wants to increase prices.

Selling a public entity like a water utility can take away such options. If the quality of service subsequently declines or the vendor seeks to raise rates, that is basically tough luck for the city and its ratepayers. Price guarantees written into the document of sale are valid only for the term of their duration. And expecting protection from state regulators can often lead to disappointment.

Therefore, competitively contracting for a public utility’s management, rather than selling the utility, may best serve the public’s interest.

In Jersey City, a working group that included the city council and administration personnel was formed to evaluate options. The city then sent out an RFP for a consultant, which would in turn help the city write the RFP for a water management company. This step may seem unnecessary, but the city wanted the help of an expert to fully protect its interests during the selection process.

The city decided on a relatively short-term contract of five years in order to keep pressure on the vendor to maintain high-quality services. It included performance clauses to ensure appropriate recourse in the event of sub-standard performance or maintenance from the vendor.

Jersey City also decided to retain control over, and responsibility for, capital investment to prevent the private manager from under-investing in infrastructure to maximize short-term operating profits. The city included employee protections to ensure that public employee unions would support the deal.

Finally, and perhaps most importantly, the city made it clear that it wanted to retain control of rate setting and wanted all bids to be submitted on the basis of a zero rate-increase assumption. This point was critical in order to ensure that bidders did not offer overly aggressive concession fees to the city in exchange for future rate increases.

The water company now guarantees the city a minimum of $19 million in surplus water sales, $16 million in operational savings and $2.5 million in up-front concession fees. And, by stanching water leaks and improving billing and collection, it projects $20 million to $35 million in additional revenue to the city and the local sewerage authority, for which the municipal water utility does billing and collection. The total economic benefit should fall between $58 million and $73 million over five years — or as much as $14 million per year. This is an enormous impact for Jersey City, which had a FY ’96 property tax levy of $88 million.

Citizens also stand to gain through improved service, as the water company’s technology will decrease the frequency and inconvenience of water main breaks. The company will install computerized “Hands-Off Meter Reading” equipment that will allow the company to conduct monthly readings by telephone line, avoiding the hassle of home visits and the aggravation of estimated bills.

In addition, with the support of the state’s department of personnel, the city and the water company will be pioneering a new concept — the “leasing” of public employees. The employees will, for all practical purposes, become employees of the vendor, but legally they will remain city employees, retaining their current wages and benefits and their place in the public retirement system. The vendor expects to decrease the total number of employees retained to operate the system, but has committed to do so through attrition and early buy-outs, rather than through lay-offs.

Jersey City’s public-private partnership safeguards the advantages of public utility ownership, while providing the economic and quality-of-service benefits produced by competitively bid management. In forming this partnership, the city has set a course that will keep its head above water in the long run.

This article was written by Jersey City Mayor Bret Schundler.