A California surprise, Part I
Something unexpected happened when California ordered its utilities to save water: the state’s investor-owned private utilities out-conserved local governments.
California’s long-term drought began as early as 2007, but intensified to crisis conditions by 2012. Conditions worsened, and in response 2015 Governor Jerry Brown and the California State Water Resources Control Board imposed restrictions on 408 drinking water utilities designed to reduce urban water usage by 25% statewide. The order required utilities to cut water use, but left individual utilities to choose the means by which to achieve conservation. The mandate assigned each utility its own conservation target, with standards ranging from 4-36% reductions relative to 2013 levels. These standards were formulaic, and varied based on utilities’ historical water consumption.
These conservation rules were in place for twelve months—June 2015 through May 2016—and applied to both local government utilities and private, investor-owned utilities. Conservation rules were assigned based on historical demand patterns and supply considerations only, not on ownership or governance.
Happily, the State of California has shared utility-level conservation data lavishly—a boon to water policy researchers! Over the past year, I’ve been sifting through that mountain of data with Youlang Zhang and David Switzer to see how California’s conservation efforts have fared. We’re discovering some fascinating things. The first of our studies is now forthcoming in Policy Studies Journal.
Restricting the flow
Faced with water scarcity, communities frequently restrict residential outdoor water use, such as car washing and especially lawn/garden irrigation. These water restrictions are effective in driving immediate reductions in water consumption. In California those restrictions typically take the form of limiting the number of days when outdoor irrigation is allowed each week. The graph below shows how public and private utilities regulated outdoor irrigation during the drought.
Eyeballing that graph, there doesn’t appear to be much difference between public and private utilities. But after adjusting statistically for a host of factors like utility size, demographic composition, and hydrological conditions, it turns out that private, profit-seeking, investor-owned utilities restricted irrigation about 4% more than public, local government utilities. That may not seem like much, as we’ll see it’s actually huge.
Meeting the mandate
We were also interested in what made utilities more or less likely to comply with the state’s conservation rules. Overall compliance was about 53%–that is, on average 53% of utilities reached their conservation targets each month. We modeled compliance statistically, and found a number of interesting correlates of success and failure. But most notable was a yawning gap between public and private sector: after adjusting for other factors, private utilities were nearly twice as likely as similar public utilities to meet the state’s conservation standards.
Finally, we analyzed overall conservation during the mandatory conservation period. And again, we found that, after accounting for other factors, private utilities conserved an average of 3% more water each month than their public counterparts during the mandatory restriction period. Although this difference is small in percentage terms, it reflects an enormous difference in absolute volume of water. This plot presents the distributions of conservation results from June 2015-May 2016 for local government utilities (green), and what it would have been if each utility had saved 3% more:
The areas within the white bars on the right side of the distribution represent the conservation that didn’t happen due to differences in ownership. Three percent greater conservation would have boosted public utilities’ restriction compliance rate from 51 to 62 percent.
In substantive terms, three percent greater conservation by California’s local government utilities during the mandate period would have reduced the state’s water consumption by 54.6 billion gallons—enough to supply the City of San Francisco for more than two years.
So what happened?
California is once again in the midst of a hot, dry summer; other parts of the world are, too. So it’s worth trying to figure out what’s behind the public-private disparity in drought response. Although it’s surprising at first blush, it’s actually a logical result of the institutions that govern water in America generally and California specifically. My next post will explain why.*
*Spoiler: as usual, it’s about money and politics. If you can’t wait for the next post, you can read the forthcoming article.
The City of Jacksonville, FL is contemplating sale of JEA, its municipal electric, water, and sewer utility. For years Jacksonville has toyed with the idea of selling JEA to a private investor, but the possibility has gained new urgency recently with the release of a valuation study. The city’s current mayor is advocating for the sale, which has generated significant controversy within the city council; a former mayor recently weighed in on the issue with an Op-Ed.
Why sell a utility?
This kind of privatization is uncommon for a couple reasons. First, JEA is a very big utility: it serves more than 450,000 electricity, 340,000 water, and 264,000 sewer customers. Privatization is uncommon for utilities of that size; most privatizations (or municipalizations, for that matter) occur with small or medium-sized utilities.
Second, sale of a municipal utility usually follows some kind of failure. The utility may be failing due to poor investment decisions, mismanagement, or inadequate revenue. Alternatively, a city in financial crisis may choose to sell an otherwise solid utility simply for a badly needed cash infusion. Neither seems to be the case in Jacksonville; by all accounts, JEA is a well-managed utility with a strong record of financial, regulatory, and environmental performance. The city appears to be in solid financial shape. The utility generates a great deal of revenue for the city, both in service fees and taxes.
Instead, it seems that the proposed JEA sale is simply an arbitrage opportunity for Jacksonville. It’s a seller’s market for utilities, and some of the city’s leaders apparently see the multi-billion-dollar windfall from the JEA sale as a chance to channel resources to other city priorities. From a governance and policy perspective, the critical question is: what would Jacksonville do with the billions in proceeds from a JEA sale?
Along with such economic considerations, the sale would shift JEA’s primary governance from city hall to the state’s Public Utilities Commission. For better or worse (or better and worse), JEA’s new owners would make supply, contracting, employment, and investment decisions with its investors in mind.
City as holding company?
The JEA controversy also prompts deeper questions about the nature and purpose of municipal government. In colonial America, the first municipalities were private, investor-owned companies (that’s why the process of forming a city government is called “incorporation”!)—collections of assets that generated profits for their owners. At some level, a municipality is still a collection of assets—utilities, streets, parks, stadiums, etc.—any of which might theoretically be commodified and sold to investors.
But as Alexis deTocqueville observed, local governments are also social institutions that facilitate citizenship and foster democracy. When public infrastructure moves from municipal to investor ownership, the span of local governance shrinks; democracy becomes technocracy, and another element of daily life is transformed from collective choice to private transactions.
This is the second in my series of posts on the recently released White House infrastructure plan.
We’re at a strange point in America’s fiscal history.
Cash on corporate ledgers is high, bond rates remain at historic lows, and investors at home and abroad continue to see the United States as an attractive place to invest. Yet public infrastructure crumbles for want of capital reinvestment. What’s needed is a way to channel all that idle financial capital into public infrastructure. There are basically three ways for the federal government to do that:
(a) tax capital accumulation and spend the tax revenue on infrastructure;
(b) incentivize local/state governments to tap private capital through the bond market; or
(c) encourage direct private investment in public infrastructure.
As noted in my earlier post, option (a) is probably unrealistic without seismic shifts in national politics. Such shifts happen on occasion, but they’re uncommon and unpredictable. The White House plan basically lays a course for a combination of options (b) and (c).
Understanding the ways in which the White House plan seeks to expand private investment in public infrastructure requires getting down in the weeds a bit. First, although the infrastructure matching grant programs in Sections I and II are aimed at state and local governments, those governments are invited to engage private capital in crafting their proposals. Second, it appears that private corporations would be eligible for the $20 billion Section III “Transformative Projects Program.”
The real eyebrow-raising provisions come in Section IV. The federal government already runs a series of programs to support public infrastructure investment, either through direct financial support (e.g., subsidized/simplified loans) or through the tax code (e.g., tax exempt municipal bonds). The White House proposal would relax eligibility for several of these programs so that privately-financed projects (or joint public-private projects) could qualify.
Finally, the White House plan would tweak the tax code to encourage expanded use of Private Activity Bonds (PABs). Without getting into the gory details, these changes would extend many of the tax advantages of municipal bonds to private infrastructure investment. Moreover, public debt assumed by private firms when they purchase public facilities would retain tax exempt. That provision would be most meaningful for large firms seeking to acquire public facilities, and so would make full privatization a more attractive alternative for many governments.
The expanded role for private capital in American infrastructure is perhaps the most controversial element of the president’s proposal. The White House infrastructure plan unabashedly seeks to expand private investment in public works; in response, critics have charged that the plan is a giveaway to corporations.
That critique is accurate but a bit misleading. Privately-owned infrastructure is already common in the United States (especially in energy and telecommunications), and an elaborate regulatory regime already governs pricing, profit, service, safety, and environmental protection for those firms. The shift of infrastructure ownership from public to private sector does not eliminate public governance; indeed, my recent research with David Konisky suggests that regulations are more effective with private than public utilities. Rather, increasing privatization of public works changes the venue of governance from state legislatures, city councils and special district boards to legalistic, technocratic regulatory authorities. The real concern with infrastructure privatization is not so much for rapacious corporations, but rather a loss of local democratic influence over critical infrastructure–David Switzer’s excellent dissertation advanced this idea.
The distributional impacts of infrastructure privatization are worth noting. That means some portion of toll, fee, and rate revenue from infrastructure investment flows to investors. Those investors tend to be relatively wealthy; poor and working-class Americans do not, by and large, own significant shares in utility corporations. Publicly-owned, democratically-governed facilities do not have this distributional effect.
The trouble is that, in too many cases, local democratic governance is a big part of why America faces an infrastructure funding crisis. State and local politicians have been too often unwilling to raise the taxes and fees necessary to maintain infrastructure adequately—even with municipal bond rates at historic lows. National political dynamics make it unlikely that Congress will produce a multi-trillion-dollar infrastructure bailout. Long-term shifts in national politics might eventually change that picture, but the roads, dams, plants, pipes, and ports don’t care. They’ll continue to degrade without reinvestment.
Private ownership of public works strikes many as counterintuitive, maybe even inherently wrong. But the investment capital available in the American economy today is in private coffers. For fans of public infrastructure, channeling that capital into public works through direct investment might be the best available route.