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Reading's Water Lease and the Costs of Privatization

Reading's Water Lease and the Costs of Privatization

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Published by Food and Water Watch
The Reading city council president wants to allow for-profit, private water companies to bid on a long-term lease to take over the water services for decades. This is a risky and potentially very costly ploy to raise some quick funds to cover part of the city’s budget shortfalls and liabilities.
The Reading city council president wants to allow for-profit, private water companies to bid on a long-term lease to take over the water services for decades. This is a risky and potentially very costly ploy to raise some quick funds to cover part of the city’s budget shortfalls and liabilities.

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Published by: Food and Water Watch on May 28, 2014
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06/25/2014

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Reading’s Water Lease and the Costs of Privatization
    
WATER 
T
he Reading City Council is considering opening up the city’s water system to privatization. The city council president wants to allow for-profit, private water companies to bid on a long-term lease to take over the water services for decades.
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 This is a risky and potentially very costly ploy to raise some quick funds to cover part of the city’s budget shortfalls and liabilities. While Reading’s fiscal difficulties are serious, the city must address them directly and avoid budget gimmicks like water privatization that will increase costs for generations of Reading residents.
Taxing Through the Tap
“
There are no ree lunches.”
2
 Households and local businesses will ulimaely pay he price o any unds ha he ciy receives rom a long-erm lease o he sysem. Consumers simply pay or i wih ineres hrough heir waer bills insead o heir propery axes.
3
 Because a long-erm lease allows he ciy o raise waer revenue o pay or general ciy services, in effec, i axes households and businesses hrough he ap.
4
 
Rate Hikes
Reading should expec larger rae increases i i leases is waer sysem o a privae company.
5
 Because privaized waer sysems generally are no more efficien han publicly run ones,
6
 a privae operaor mus cu services or hike raes o mee is proi goals.
7
 For example, since privae companies ook over he ive larges privaized waer sysems in Pennsyl-vania, household waer bills have more han ripled on average afer accouning or inlaion (see able and igure). Based on he experience o oher ciies, or Reading, a complex ormula in he lease conrac would likely deermine he severiy o he rae hikes.
8
 
Expensive Financing 
I Reading leases is waer sysem o a privae company, he uiliy would lose access o low-cos, ax-exemp governmen borrowing, increasing he uiliy’s inancing coss and orcing he uiliy o reire is ousanding deb
9
 o abou $95 million.
10
 In is place, he privae operaor would use privae inancing (a mix o corporae deb and equiy), which ypically coss 7.5 per-cen o 14 percen or higher.
11
 In comparison, he Reading Area
Typical Annual Water Bills Before and After Privatization
 
(For Households
       
Constant 2014 Dollars)
Before privatizationAfter privatization
Bensalem TownshipMedia BoroughCoatesvilleBristol BoroughWest Chester$0 $200 $400 $600 $800
$147$667$174$720$422$732$278$720$294$720
 
2
Waer Auhoriy’s ax-exemp revenue bonds have ineres raes o 2.1 percen o 5.25 percen.
12
 Consequenly, a long-erm lease o a privae company would orce he uiliy o reinance he sysem’s exising deb
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 a a higher ineres rae while increas-ing he cos o uure capial improvemen projecs. Consumers would oo he bill or his inancial imprudence.
Impaired Service
Over a long-erm lease, he waer sysem could deeriorae,
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 and he privae operaor could cu corners o increase is prois a he public’s expense. A privae operaor may atemp o cu coss by downsizing he workorce and scaling back employee beneis. These pracices could worsen cusomer service. Downsizing can slow responses o service requess and emergencies,
15
 and scaling back compensaion can impede he uiliy’s abiliy o atrac qualiied operaors.
16
 
Trapped for Decades
Privaizaion could inerere wih Reading’s abiliy o re-spond o changing circumsances and o proec he area’s waer qualiy. Long-erm leases wih privae companies are complex ransacions, and he conrac language can make i difficul or he ciy o compel signiican changes, including cerain improvemen or waer supply projecs, or o exi he deal early.
17
 Over a long-erm lease, residens will have litle recourse when he privae operaor perorms poorly or ails o address heir concerns.
Fiscally Irresponsible Gimmick 
Privaizing he waer sysem will no reduce liabiliies or ad-dress he reasons why he ciy’s general und is unbalanced. Raher, he lease would jus dig he hole deeper, increasing he oal deb burden while pushing i off budge and ono generaions o waer users.
18
 
Stop the City Council From Opening Up the Water System to Privatization
Reading aces some ough iscal decisions o balance is bud-ge. While hese decisions are undersandably dauning, ciy officials mus rise o he challenge and ace he issue head-on in an open and ransparen manner. They mus avoid budge gimmicks like leasing he waer sysem o a privae company, which merely creaes he illusion o balanced budges while increasing uure coss or households and local businesses. Insead o morgaging is waer resources and sacriicing local public conrol over a vial service, Reading needs a real solu-ion ha osers inancial susainabiliy. Reading should keep local public conrol o is waer sysem.
Take Action
Ac now o sop a privae akeover o one o your mos valu-able public resources — your waer. Tell he ciy council no o lease your drinking waer sysem o a privae company.
Rate Hikes Following the Privatization of Large Pennsylvanian Water Systems
A
 
(as of May 2014)
Municipality
(Seller)
Corporation
B
(Buyer)
Date of SaleTypical Annual Household Bill
  
dollars)
C
Increase
  
dollars)
C
Before
(Public)
After
(Private 2014)
IncreasePercent Increase
Bensalem TownshipAqua America1999
19
 $105
20
($147) $667
21
$562 ($520)537%(354%)Bristol Borough AuthorityAqua America1997
22
$120
23
($174) $720
24
$601($546) 503%(313%)City of Coatesville AuthorityAmerican Water2001
25
$320
26
($422) $732
27
$412($309) 129%(73%)Media BoroughAqua America1995
28
$181
29
($278) $720
30
 $539($442)297%(159%)West Chester Area Municipal AuthorityAqua America1998
31
$205
32
($294)$720
33
$515($426) 251%(145%)
Average$526($449)343%(209%)
                                        

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