Turning Cities' "Liquid" Assets Into Cash!

Privatization does increase efficiency, but the best way to maximize the citizens' benefits from apublic utility is not to turn a public monopoly into a private monopoly, rather it is to look at where theproductivity enhancing magic of competition can be introduced into the management of such a monopolyasset.

Working with W. R. Lazard as its financial advisor, the City of Jersey City has just completed apublic-private partnership with the United Water Company that will be the largest in the nation. In it, theCity of Jersey City will maintain ownership of its water utility facilities while contracting with UnitedWater to manage these assets. I think our agreement offers an example of how municipalities acrossAmerica can -- pardon the puns -- "liquify" the "untapped" budgetary potential of their water utilitieswithout having to forego the public ownership and control of these valuable monopoly assets.

Jersey City owns wonderful water assets: pipes, purification plants, reservoirs and significantquantities of surplus water. Unfortunately, under municipal management, these assets have never beenutilized to their fullest potential.

For instance, we have long wanted to sell our surplus water on the open market to generaterecurring, non-tax revenues. But we have never been successful in doing so. Our failure has not been fora lack of trying, we just are not professionals in the water business, and have not been very good at watersales. As a result, the full revenue potential of our surplus water has never been realized.

We have also had higher operating expenses than necessary, although it's been very difficult to tellin our non-market situation. Every successive City administration has admonished its Water Director toimprove productivity and cut unnecessary costs, and every successive Water Director has done his best. But operating costs have kept rising.

A still bigger problem has been getting all of our water to Jersey City. En route from oursuburban reservoirs, one-third of our water leaks from the pipes which transport it. Transporting watergreat distances is a significant engineering challenge, and our City, for all of the reasons which typicallytrouble public enterprises, has found it difficult to stanch these water losses.

Once the water gets to Jersey City, we have had difficulties with accurate billing. Unlike theprivate telephone and energy utilities which service our residents, and which send out their bills everymonth like clockwork, our municipal water utility has all too often sent out bills at irregular intervals. When our water bills finally do arrive, they sometimes are based on estimates of consumer usage insteadof actual meter readings, which can result in consumers getting walloped with a huge bill when an actualreading is made because estimates for several billing periods have been too low.

One final problem with our municipal utility has been collecting on water bills. Because ourcollection rate on billings has been lower than the norm at private utilities, the City has had to chargeunnecessarily high water rates to cover its losses from non-payers.

The City's new Water Director has made substantial progress on all of these problems in recentyears, but the utility still underperforms its private counterparts.

These difficulties help to explain why, among free-marketeers, the voguish solution to problemsat public utilities has been to privatize them. But is the outright sale of a public utility really the bestanswer to its problems?

Here in Jersey City, we have privatized many governmental operations, such as traffic signalmaintenance, in ways which have both improved performance and reduced costs. But with traffic signalmaintenance, if we don't get the kind of performance we want, or if the vendor suddenly wants to increaseprices, we always have the option of changing vendors or doing the maintenance ourselves again. But thatis not the case with selling a public water utility.

With a monopoly public utility, once you sell it, its gone! If the quality of service subsequentlydeclines, or if the vendor seeks to jack up rates, that's our tough luck. Rate guarantees written into thedocument of sale will only be good for the term of their duration. And expecting protection from a boardof public utilities may lead to disappointment. The only certain way to guarantee quality services and lowcosts for consumers is through vigorous competition. But the defining nature of a monopoly utility is thatthere is no competition. Therefore what serves the public's interest best may be not selling the monopolyutility, but instead competitively contracting for its management.

In Jersey City, we put together a Working Group which included both City Council andAdministration personnel, and then sent out a Request For Proposal, to hire a consultant, to help us writethe Request For Proposal, to hire a management company. It may appear that this represents an extra,unnecessary step, but contracting for the management of a water utility is complicated business, and wewanted to have an expert working with us to fully protect our citizens' interests.

Once the consultant was selected, we carefully planned out the kind of contract we wanted. Forinstance, we decided upon a relatively short-term contract of five years in order to keep pressure on thevendor to maintain quality services. Second, we included performance clauses, to absolutely ensure thatthe City would enjoy appropriate recourse in the event of vendor under-performance or sub-standardmaintenance. Third, we decided to retain control over, and responsibility for, capital investment, in orderto eliminate under investment as a means by which the private manager might maximize short-termoperating profits at the City's long-term expense. Fourth, we included employee protections to ensure thatour public employee unions would support the deal. And finally, and perhaps most importantly, we madeit clear that the City wanted to retain control of rate setting, and wanted all bids to be submitted on thebasis of a zero rate increase assumption. This last point is critical in order to ensure that bidders do notoffer overly aggressive concession fees which they intend to pay for merely by jacking up water rates.

We publicized the Request for Proposal widely to guarantee maximum competition, and scheduledseveral informational sessions for prospective bidders. By the time the deadline for submissions came,the City had seven extremely aggressive bids in hand by well-qualified vendors. The best bid, with allconsiderations included, was by United Water. Its terms represented a home run for the City!

Over the five year term of our contract, United Water is guaranteeing the City a minimum of $19million in surplus water sales, $16 million in operational savings, and $2.5 million in up-front concessionfees. Through stanching water leakage and improving billing and collections, United Water furtherprojects $20 million to $35 million of additional future economic benefits to the City and our localsewerage authority, for which the municipal water utility does billing and bill collection. Add it up andthe total economic benefit to our citizens should fall between $58 million and $73 million over five years-- or as much as $14 million per year! This represents an enormous savings for a City our size (total FY'96 property tax levy: $88 million).

five star hotel in Wroclaw Our citizens should also gain through improved service. United Water's advanced technology fordiscovering water leakage will not only help us stanch unnecessary water losses, but will decrease thefrequency and inconvenience to our citizens of water main breaks. As a second service benefit, UnitedWater will be installing computerized "Hands-Off Meter Reading," which will allow the company toconduct actual monthly meter readings by telephone line, avoiding the hassle of home visits and theaggravation of bills periodically based on estimates.

Our municipal water utility employees will also be making out well. With the support of the NewJersey State Department of Personnel, the City and the Company will be pioneering the "leasing" of ourpublic employees to the private vendor. While workers, for all practical purposes, will become employeesof the vendor, legally they will remain employees of the City, will retain their current wages and benefits,and will remain with the public retirement system. The vendor expects to decrease the number ofemployees retained to operate the system, but has committed to do so through attrition and early buy-outs,not through lay-offs.

To conclude, our water utility public-private partnership is safeguarding all of the advantages ofpublic utility ownership for our citizens, while also providing us the economic and quality of servicebenefits of competitively bid private management. In doing so, it is going a long way towards helpingJersey City financially to keep its head above water!