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Water privatization in the US

Water privatization is not just a headache in developing countries. See RWE AG’s troubles in the US:

Dreams of heady profits evaporated amid heated opposition in places such as this town of 6,500 people, south of San Francisco in California's coastal redwood forests. Today, RWE is in the midst of dismantling an international water empire that cost more than $10 billion to assemble and spanned more than 40 countries at its height.

Water turns out to be less like electricity than RWE had hoped. It's heavy and hard to transport, making it difficult for a big company to build economies of scale. Regulation is never predictable. In the United States, RWE found itself fighting in town referendums and state legislatures across the country, winning many battles but losing the war.

So where does private participation in water stand in the US?

Private-sector ownership of water in the United States remains stuck at 15 percent to 20 percent. Some industry participants think momentum will pick up as municipalities face pressure to upgrade long-neglected infrastructure. Still, "the market has grown more slowly than any of us thought possible," says Peter Cook, executive director of the National Association of Water Companies in Washington.

Of course, it didn’t help that RWE is a German company. Via Phil Miller. Also see EclectEcon on water shortages and regulation in England or a previous post on road privatizations in the US.

Comments

Perhaps, it is worth noting that private water supply systems were very common in the US until late 19th century. One of the most famous, or infamous, was the Manhattan Company that was really a shell for a bank that became to be known as Chase Manhattan. ( http://www.pupress.princeton.edu/titles/6782.html ) The transition from private to public ownership was driven by the same factors that are in play today. Private companies were unable or unwilling to provide service to growing municipalities as the business of water supply requires a lot of capital, the assets are not easily transferrable and the production process is heavily regulated at every step with little concern to cost-benefits ratios. In 1830s, New York City took over most of the water supplies, partly in response to inadequate water supplies, especially during fires. The city developed water resources from the Croton River, a step repeated a century later by Los Angeles strong-arming the Owens Valley. Regarding the RWE exit from the water business in the US, I do not know the details so I can only second-guess some factors. First, RWE was relatively new to the water business and acquired the largest (and quite successful) American private (i.e., publicly held) water company. They must have hoped for a DaimlerChrysler type of success in penetrating the US water market. They were not alone, the French were active in this area too. However, the US business conditions are difficult as shown in the case of Felton. In the US, over twenty thousand public water systems have fewer that 500 customers. In small places like this (or even in a slightly larger systems like Felton), making money could be possible by some kind of regional approach to realize the economies of scale. This is not happening despite “encouragement” by the regulators. If a private company could run the LA Water and Power, I am quite sure the money would be flowing in. A final question is whether dollar depreciation against the euro ( http://finance.yahoo.com/q/bc?s=USDEUR=X&t=5y ) (some 50% since 2001) had anything to do with the decision. Water companies in Argentina had similar but more dramatic experiences.

Submitted by Hernan C. on
Those numbers shocked me! Very good points. "In the US, over twenty thousand public water systems have fewer that 500 customers. In small places like this (or even in a slightly larger systems like Felton), making money could be possible by some kind of regional approach to realize the economies of scale. This is not happening despite “encouragement” by the regulators."

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