The City of Claremont has been trying to take ownership of the local water system from Golden State Water Co. A Los Angeles Superior Court judge recently rejected the takeover effort, finding that the city could not provide water at lower rates and would not invest more in infrastructure than Golden State Water.
The judge also concluded that water quality could be adversely affected by the proposed takeover. The Claremont City Council has spent more than $6 million in legal fees and other costs in its takeover effort. Now the court has ruled that the city must also pay $7.6 million of Golden State Water’s legal fees.
This story jumped off the page at me, because it affirmed the findings of a study my team had just completed. Our study, “The Economic Consequences of Contested Government Takeovers of Investor-Owned Water Utilities,” which was funded by the California Water Association, demonstrates that time and again government takeovers don’t deliver the benefits promised. Contested takeovers are very costly for the acquiring government entity, and water and tax bills under government ownership are higher than promised by the takeover advocates. Unfortunately, by that point, it’s too late to go back and prevent the costs from being incurred.
To determine the economic impact of change of ownership on utility customers and taxpayers, we conducted case studies of four contested takeovers. One case study involved the community of Felton, in Santa Cruz County. The San Lorenzo Valley Water District (SLVWD) acquired the Felton system from California American Water in 2008. In the course of building support for the change of ownership, takeover advocates assured customers that water rates would be lower under SLVWD control. However, SLVWD had to pay $13.4 million for the system, 76 percent more than initial estimates. The average monthly cost of water service in Felton immediately increased from $78.64 to $85.00, reflecting new property taxes to pay back the acquisition bond. Furthermore, SLVWD customers who do not live in Felton have been paying one-third of the acquisition cost. As time has passed, evidence continues to mount that this was a bad deal for Felton customers. SLVWD has been unable to meet expectations regarding rates; customers continue to pay more for water than was originally promised.
Another case study examined the San Mateo County community of Montara, which took control of its water system from California American Water in 2002. Residents paid for the takeover through higher property taxes required to finance the 25-year general obligation bonds used to acquire the system and finance system improvements. The total cost of water service increased following the acquisition, and, like Felton, rates today are higher than what was promised to voters.
Contested takeovers in Nashua, N.H., and Missoula, Mont., also ended up costing substantially more than originally promised, with no apparent benefits to customers.
In addition to the case studies, we also examined the economics underlying promises made to voters. Takeover advocates often argue that the elimination of taxes and “profit” are two financial benefits from changing ownership, but our research shows there is no sound basis in accounting or economics to support such expectations.
First, although government entities do not have to pay property or income taxes, this should not be considered a direct savings for utility customers. In fact, such a change in tax liabilities is an economic transfer from water customers to taxpayers, as the judge in the Claremont case concluded. The loss of tax revenues paid by the utility means that government agencies must either identify other sources of revenue or cut other public services.
Second, investor-owned utilities, like Golden State Water and California American Water, are subject to economic regulation by the state. These companies are allowed to earn a rate of return on capital investments to help finance infrastructure needed to produce, treat and deliver water — a feature more akin to paying interest on a loan, rather than a “profit” on a product or service. Government-owned utilities must also pay interest to creditors when they borrow money to invest or acquire a water system. In either case, customers pay for these obligations through their water bills, taxes or both.
Contested takeovers of water utilities are almost always based on promises of financial benefits, but our research shows these promises are not realistic; customers end up paying more for water service. In Claremont, the city’s takeover efforts have increased the burden on taxpayers with no prospect for any offsetting future benefit.
David Sosa, Ph.D., is a San Francisco-based principal of the Analysis Group, a private economics consulting firm.
Source: Inland Valley Daily Bulletin