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Water pricing and affordability in the US: public vs. private ownership [1]

['Zhang', 'Department Of City', 'Regional Planning', 'Cornell University', 'Ithaca', 'Ny', 'González Rivas', 'Graduate School Of Public', 'International Affairs', 'University Of Pittsburgh']

Date: 2022-03-01

We examined the 500 largest community water systems in the US to explore whether ownership is related to annual water bills, and the percent of income that low-income households spend on water. Regression results show that, among the largest water systems, private ownership is related to higher water prices and less affordability for low-income families. In states with regulations favorable to private providers, water utilities charge even higher prices. Affordability issues are more severe in communities with higher poverty and older infrastructure. Water policy needs to address ownership and regulation and explore new mechanisms to ensure water affordability for low-income residents.

Our study builds upon previous studies examining factors related to water pricing and affordability for community water systems in the US ( Beecher & Kalmbach, 2013 ; Wait & Petrie, 2017 ; Onda & Tewari, 2021 ). In addition to comprehensive representation (including the entire universe of large water systems in the US), our study expands the analysis in the following ways: we are interested if ownership can differentiate water rates (the annual water bill for a typical household) and affordability (the percent low-income families spend on water). We also are interested if water price and affordability vary by state regulatory environment (regulation favorable to private providers), age of water infrastructure and community socioeconomic conditions (poverty and race).

The importance of ownership structure in water service provision has been widely discussed in the literature. Water prices include the costs of acquisition, treatment and delivery of water. One argument is that privately owned utilities might be more efficient than public ones because profit maximization drives the incentive for efficient allocation of resources and cost reduction, an incentive that might be lacking for public utilities (Rubenstein, 2000). However, others have argued that the same idea of profit maximization drives privately owned utilities to seek rate increases, as they try to maximize their rates (Lobina & Hall, 2000; Lobina, 2005; Romano & Guerrini, 2014). There are empirical studies across the world supporting both arguments, but a meta-regression analysis found that there is no statistical support for lower costs with private water operators (Bel et al., 2010). Other studies found that there is no conclusive evidence that sets one ownership structure superior to the other (Bel & Warner, 2008; Abbott & Cohen, 2009).

Property rights theory argues for-profit operators will try to reduce quality in order to increase profits (Hart, Shleifer & Vishny, 1997). However, close regulation of water operators' quality through the Environmental Protection Agency (EPA) standards, and of pricing through state Public Utility Commissions (PUCs), prevents reductions in quality to enhance profits, so drinking water standards in the US must be met by both private and public utilities (Wait & Petrie, 2017). However, with a natural monopoly such as water, problems with information asymmetry make it difficult to structure contracts. This is why Megginson (2005), who generally supports privatization in other sectors, recommends water services should not be privatized. Other studies explore the relationship between prices charged by privately owned utilities and their exposure to competition, as observed in contract renewals (Chong et al., 2006), or ‘benchmark’ competition within the same localities (Wallsten & Kosec, 2008). We must distinguish competition for the market from competition in the market (Bel & Warner, 2008). As a natural monopoly, there is generally no competition in water service delivery at the local level.

As a natural monopoly, water requires careful regulation to ensure quality and avoid excessive pricing, but also requires attention to issues related to the environment, public health and equity (Cotta, 2012). The regulatory framework, regarding both environment and price, is a key factor that influences water rates and other water policies (Megdal, 2012). For example, Bel et al. (2013), in a comparison of privatization of water services across two regions in Spain, found that the institutional capacity of regional regulatory agencies is central for protecting the interests of users. More specifically to the US, a study of the role of public vs. private sector for water management in Arizona (Megdal, 2012) argues that the state regulatory commission and local bodies can have significant implications for water utility practices regarding investments, water conservation, and other policies. These in turn can have an effect on rates.

There are many other factors, besides ownership, that might affect water rates, namely size, source of water, age of system, etc. (comprehensive reviews of the factors affecting water prices include Zetlan & Gasson, 2013; González-Gómez & García-Rubio, 2018). The size of the utility may make a difference in water pricing because of economies of scale (Carvalho et al., 2012). Water systems are capital-intensive, and small systems lack economies of scale, which leads to a higher per-capita cost in smaller communities (AWWA, 2013; Perch, 2017). Rural systems have high per-capita costs in particular because they are less dense, require more miles of water lines per customer and tend to be located in more economically distressed areas (National Research Council, 1997). Larger utilities can reduce costs of operation through their ability to obtain cheaper prices for larger orders for inputs and materials given their size. For example, scale economies help explain higher levels of efficiency in water utilities in Portugal (Correia & Marques, 2011). But, in the case of investor-owned utilities, whether these savings get passed on to ratepayers in lower prices depends on whether they get passed on to shareholders as profit instead.

Other physical characteristics affect water rates, such as topographic characteristics of the place and water source, as this has implications for the technology used and the costs incurred to access water. Water is generally classified into ground and surface water, and while both sources can provide safe drinking water, the process of treating groundwater tends to be less costly than for surface water because, in general, it is less polluted and more reliable during drought periods (Howe, 2005; Safe water, 2017; González-Gómez & García-Rubio, 2018). However, costs of groundwater are higher in drought-prone areas where requirements for recharge and concerns regarding nitrate pollution or need for desalination are higher (Megdal, 2012; Moran, et al., 2017). Therefore, in regions where severe drought is recurrent, water utilities will incur higher costs for water production (Wait & Petrie, 2017; AWWA, 2019b).

The characteristics of the cities where utilities operate, such as population density and population growth, can also potentially affect what water utilities charge for services, as it is more cost efficient to maintain infrastructure in areas with higher densities (Bel & Warner, 2008). Utilities also need to consider the costs of infrastructure maintenance and expansion in areas experiencing population growth to keep up with increasing water demand, which contributes to increasing costs (Jacobs & Howe, 2005). By contrast, in communities with small or declining population, water systems face sunk infrastructure costs and a declining consumer base, which can also lead to higher rates (Jacobson, 2016; González Rivas, 2020; Grant, 2020; Hellwig & Polk, 2020).

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[1] Url: https://iwaponline.com/wp/article/24/3/500/87702/Water-pricing-and-affordability-in-the-US-public

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