Policy Study

Restructuring America’s Water Industry

Comparing Investor Owned and Government Water Systems

Executive Summary

Who should supply consumers with water This study compares the performance of investorowned water companies with government-owned water companies in California to gauge the potential benefits of restructuring the industry, focusing on tax subsidization, the cost of capital, water charges, operating costs, investment income, and capital expenditures. It also discusses the related issues of regulation and employment. Analysis of the data yields the following results:

  • Investor-owned water companies provide comparable water services to consumers at the same price as government-owned water companies even though they pay taxes and do not receive extra nonoperating income.
  • Government-owned water companies receive generous tax subsidizes that otherwise could be used to lower taxes or fund other government projects with higher priorities.
  • The net cost of capital is higher for government-owned water companies than for investor-owned water companies.
  • The real water bill is higher for government-owned water companies than for investor-owned water companies.
  • Investor-owned companies are substantially more efficient in their operation of water services than government-owned water companies.
  • Government-owned water companies receive a substantial amount of non-operating income from excess cash balances and investments.
  • It is likely that government-owned water companies spend more on facilities than investor-owned water companies, although the data on this issue are not entirely conclusive.
  • Water service is highly regulated whether it is operated by an investor-owned company or a government-owned company.
  • Government can better regulate an investor-owned water company than a government-owned water company.

These results suggest that the decision to have government entities provide water to consumers should be reconsidered, since private companies can provide this same function at the same cost without subsidies or tax-exemptions. California and other states should adopt policies which encourage the termination of government provision. Such policies would have minimal impact on consumers, since the price of water is approximately the same for the two types of provider. Moreover, the revenues generated by terminating the government water companies could be used to reduce taxes or to fund other, higher-priority government programs.