Public-private partnerships in providing water and wastewater utility service: the trend toward privatization in Florida.

• Author: Cowdery, Kathryn G.W.

There is a long history of private sector involvement in providing water and wastewater utility service in this country. Municipalities began chartering privately owned water companies before the signing of the Declaration of Independence.[1] These chartered or franchised utility companies typically were granted the exclusive right to provide service in a particular territory. In turn, the government retained the responsibility of utility regulation regarding rates and service.

As population centers grew, in some cases it became both economically feasible and advantageous for the government to provide utility service to previously unserved territory or territory already served by a privately owned utility. As a result of continuing growth in Florida, competition and litigation between governmental entities and private utilities over the right to serve new developments is growing as well.[2]

Historically, when the public sector has provided utility service it has relied on the private sector for the provision of certain aspects of water and wastewater utility service, such as plant construction.[3] Privatization of water and wastewater utility services today has expanded to encompass long-term contractual agreements for operation, maintenance, and even the purchase of government-owned utilities (GOUs) by the private sector. This article discusses the national trend of privatization and explores how Florida law has been amended to accommodate privatization of water and wastewater utilities.

What Is Privatization?

Privatization, also referred to as "public-private partnership," may be defined as an arrangement under which private firms become involved in financing, designing, constructing, owning, or operating public facilities or services.[4]

Long-term privatization contracts, 20 years or longer, usually involve capital investment by the private business. For example, construction/operation arrangements involve private construction of capital facilities followed by a transfer in ownership back to the government, perhaps 25 years later. These arrangements generally include provisions for private operation of the utility either before or after the transfer of the asset back to the public entity.[5] Less common are asset transfers, which involve the sale of a GOU to a private buyer to operate utility services for the public.[6] An example of privatization through asset transfer on the international scale is Great Britain, which in the 1980s undertook massive privatization of state-owned industries, including the nation's water and electric utilities, telecommunications, and British Gas.[7]

Privatization of more limited utility services may involve an agreement by a private entity for GOU management, operation and maintenance, or for more specific services, such as billing or meter reading. Many of these contracts are typically short term, usually five years or less, and do not generally include any capital investment by the private entity.[8]

The National Trend Toward Privatization

Privatization of water and wastewater utility service was facilitated by several actions of the federal government in the 1990s. In 1992, Presidential Executive Order 12803, a privatization initiative, encouraged privatization through the disposition or transfer of government infrastructure assets, such as by sale or long-term lease, to a private party.[9] Federal construction grant forgiveness regulations followed. A barrier to long-term privatization contracts was lifted by 1997 Internal Revenue Service regulations which extended the maximum time period for contracts serving projects financed through tax-exempt municipal bonds from five years to 20 years.[10] Also in 1997, Congress authorized the secretary of each military department to convey all or part of any utility system under that secretary's jurisdiction to a municipal, private, regional, district, or cooperative utility company or other entity.[11] The Department of Defense implemented the federal law such that privatization is required, with some exceptions, by September 30, 2003. Privatization is defined for this purpose as the total divestiture of a utility system through transfer and conveyance of the installation's utility infrastructure assets in conjunction with and for the purpose of the conveyance providing utility distribution services on a long-term basis.[12] Tension between state regulatory jurisdiction and federal authority regarding Department of Defense utility privatization has not yet been fully resolved.[13]

Local governments nationwide are privatizing water and wastewater services.[14] The U.S. Conference of Mayors has taken a keen interest in privatization, advancing studies on public-private partnerships in municipal water, and wastewater systems.[15] It has also sponsored the Excellence in Public-Private Partnership Awards, recognizing the tens of millions of dollars individual cities have saved through privatization.[16]

The trend toward privatization is fueled in large part by governmental desire to keep utility rates low while at the same time providing high quality service from environmentally compliant facilities. In this regard, it has long been recognized that the element of competition which the private sector brings to the provision of services stimulates productivity and results in cost sayings.[17]

Heavily regulated and technologically sophisticated water and wastewater treatment facilities are expensive to build, operate, maintain, expand, and, in some cases, to bring into compliance with current environmental regulations. Financially, local governments may be faced with constraints which preclude them from competing in this arena. These constraints include outdated civil service systems and collective bargaining contracts.[18] Constraints on municipal tax exempt borrowing and "capital avoidance" issues, though not problematic in Florida, are, however, faced by local governments elsewhere.[19]

Privatization contracts allow for the efficient upgrading of aging infrastructure, identification of system improvements, and application of advanced operating techniques to bring GOU systems into compliance with environmental regulations. On a smaller scale, contracting for services may allow GOUs to avoid investment in certain equipment, such as office equipment and computer hardware and software used in billing, thus saving the GOU these costs. Although GOUs maintain control of rates in operation and maintenance contracts, private contractors have been able to limit potential rate increases by implementing efficient capital expenditure programs and using innovative finance mechanisms. High quality customer service results from costs savings and efficient...