Chance for Rational Thinking Missed : Privatizing: Debate about company’s bid to take over water district obscured positive economic issues.
If there’s a more obvious area for potential gains to be had from privatization than Orange County’s 54 separate water and sewer districts, I don’t know what it is. This hodgepodge of duplicative organizations, varying water rates, capitalizations and implicit subsidies simply cannot be rationalized in today’s economic world.
But having attended the recent Local Agency Formation Commission (LAFCO) hearing on the California-American Water Co.’s bid to buy the assets of the Santa Margarita Water District and take over its operations, it was apparent from the moment I encountered the “No Cal-Am” table and volunteers that this debate was probably not going to be about the economics of the situation and rational thinking. It was going to be about a private, profit-making, investor-owned company making a hostile takeover bid. And, by gosh, we’re simply not going to let them do it. It worked; by a 4 to 2 vote, LAFCO rejected the Cal-Am proposal.
It’s really too bad, since Cal-Am’s proposal and its experience in successfully operating other municipal water districts in California and elsewhere should have been taken very seriously. The LAFCO staff report established a clear bias against privatization from the very outset, warning that the Cal-Am purchase would establish a “monopolistic environment” where there is “no clear incentive to conduct business efficiently.” This is truly an amazing statement, since the existing SMWD operation is both monopolistic and bureaucratic, with an inglorious past highlighted by irresponsible investments, financial mismanagement and corruption.
The LAFCO staff report also goes on at length about “public accountability” and how it would be lost by the acquisition. Is it “public accountability” that explains the proliferation of water districts in Orange County? The citizens served by SMWD pay among the highest water rates in the county, yet that fact does not appear in the LAFCO staff report.
The California Public Utilities Commission, the state agency that regulates private utilities, provides for numerous “accountability” mechanisms, including public rate hearings. So, while direct local control would be subrogated to a state agency, it’s not as if “public accountability” would disappear. Moreover, from my experiences as a consultant, regulated monopolies are an effective delivery mechanism for public goods such as natural gas, electricity and water.
And contrary to the view portrayed in the LAFCO staff report, the recent trend in the United States has been in the direction of more privatization of county water supplies. As recently reported, the percentage of county water supply services privatized in the U.S. rose from 21% to 35% between 1987 and 1992; sewerage rose from 18% to 30% over the same period.
Privatization is not a panacea. Certainly a well-run municipal utility can operate efficiently and there are plenty of examples to prove the point. The Cal-Am proposal may not have represented the right deal for the citizens served by SMWD, but it was an attractive one. Cal-Am’s main strategic error was trying to ram something down the citizens’ throats via the Local Government Reorganization Act rather than appealing directly to the voters. That approach too may have failed, but at least the populace wouldn’t have been angered from the outset.
Somehow and soon, Orange County needs a breakthrough in its quest to restructure government. Privatizing SMWD or another water district could still provide such a catalyst if companies such as Cal-Am don’t get discouraged from trying. As someone explained in answer to the question why European men kiss women on the hand: you have to start somewhere!
