Why? Economies of scale in storageand conveyance.E.g.LA Department of Water & Power -retailer to cityMetropolitan Water District (MWD) -regional wholesalerState Water Project (SWP) -a statewide wholesalerLA County Department of Sanitation -serves countyPrice at point of abstraction (zero)SWP wholesale water priceMWD wholesale water priceLADWP retail water priceLACSD retail sewer priceWater users pay for the plumbing -the costs ofabstraction, storage and conveyance -but not for theresource per se.Consequently water prices throughout the US reflectplumbing costs but not the real scarcity of theresource.Only about 14% of the US population is served byinvestor-owned water utilities (in California, the figure iscloser to 5%). For electricity and gas, well over 60% ofusers are supplied by investor-owned companies; fortelecommunications, virtually all users are supplied byinvestor-owned companies.'..- ~~~~~,'"'"'-'-"'-"-'--"..THESE FEATURES ARE NOT A COINCIDENCEThe economies of scale make for monopoly supply.The fact that water is widely viewed as a social necessity makes it morenatural that the government would fill this particular monopoly role.The capital intensity of water supply make investment relativelyuncertain (it will take many years to payoff the investment) and financingproblematic (so much of the cost occurs up fron, rather than later in the formof operating costs). The government has a greater ability than the privatesector to finance such investments. .Hence the predominance of public ownershipBut note that the water industry in the US was not always thisway. Around the turn of the last century, much of the urban waterindustry in the US was private; private capital financed much of theexpansion in water supply infrastnl~re in the late C19.Why did this occur? I conjecture ~at it was not due to thecapi~l intensity per se but rather to(2) the desire for greater public control over the growth of thenetwork.Moreover, even the investor-owned water sectorreceives only limited economic oversightcompared to that applied (until recently) to energycompanies.Starting in the 1970s, the focus of regulation of theenergy industry in many states was not just toregulate prices and profits but also to promoteefficiency in planning and management, includingimproved cost estimation, demand forecasting andmarginal cost pricing. This was as necessary forpublicly owned companies as for investor-ownedcompanies.During 1972-1990, there was a major federalgovernment program to subsidize the sewagetreatment plant construction. A lack of dilutioncapacity to assimilate the discharge of treated sewageeffluent in inland waterways triggered the federalgovernment's imposition of water conservationprograms in Denver and Phoenix in 1980's.Water is expensive to transport relative to itsvalue.Water has the lowest ratio of operating (variable)costs to total costs.Annual investment in fixed assets in the US water andwastewater industry amounts to about 43% of grossannual revenues; after water, the other most capital-intensive industries are communications (SIC 48) andelectric services (SIC 491), in which annual investmentaverages 18% and 16% of gross annual revenues,respectively.N.~=~~~>~~~~o~~<~~~rJ'lO~ ~~~~=>~>~(;i~~~~~~~ z~ ~Perhaps it may becomes so when cities face the need tofinance major renovation or expansion of their water supplyinfrastructure.Nevertheless there is beginning to be a publicly visiblediscussion on privatization.::~'::~::Z:3:;:~:;~;{;~;;~...Investor-owned utilities are subject to economic regulation, especiallyrate regulation; publicly owned utilities are exempt for this economicre"gulation. Essentially the only regulation publicly owned water utilities faceis public health regulation.There is some political pressure on publicly owned water utilities tokeep pric~ l.ow.Strong political intervention to keep prices low (or make water free)and to ensure it is provided below cost to needy (or strategically important)groups -water supply is used as an instrument of political mobilizationWhere there is private ownership1 there may be a threat of governmentexpropriationThe role of the private sector in water supply and the question ofprivatization of existing publicly owned systems are hot topics for debatearound the world.';"«;"",;;;,;-.::~;:-ir~:;;,::;.;;;;:~;:;;~,":;;;":,:':"':""';";:;;; ::; .." .:"';~-,:::,PRIV ATE (INVESTOR-OWNED) UT~ITmS-.Pay property taxes-Pay corporate income taxes on their profits property-The interest they pay on their debt is taxable to their lenders-Cannot raise funds through taxes-Are subject to PUC regulationPUBLICLY OWNED SYSTEMS-Are exempt from property tax-Don't pay tax on their profits.The interest on their debt is partially tax exempt-Can levy taxes-Are exempt from PUC ~1ationREGULATION OF THE WATER INDUSTRYInvestor-Owned Water UtilitiesIn the US:-.Price-cap regulation by the (national) OFWATBenchmarking- by OFW ATIn the UK:,-...-"~PUC REGULATIONK.eY features of regulation by State Public Utility Commissions (PUCs)1. Franchise for monopoly service within a defined service area'2. Obligation of readiness to serve customers within this area3. Rate of return regulationpQ -allowed operating costsr = ~ r*undepreciated, allowed capital stockwherer* is the target rate of return, set by the PUCQ is the annual output expected to be soldand the PUC sets p so as to achieve the target rate of return r*Consequence of (3) -the Averch-Johnson Effect:Regulated utilities have an incentive to bias their choice of inputs towards anexcessively high ratio of capital to non-capital inputs.PROBLEM WITH US STYLE RATE OF RETURN REGULATIONPRICE-CAP REGULATIONIntroduced into the UK in 19805. Involves control by anindividual, independent regulator, specific to that industryRegulation focuses on prices, not profits or rate ofreturn. Prices are reviewed periodically.Prices are allowed to grow over time by RPI -X, whereRPI is the retail price index, and X is a factor that is set by theregulator. In the case of telephone in the UK, initially X wasset at 3%, which means