Thatcher and Water Utility Privatization: Part I

As I was on the road last week I’m very late by Internet standards to the topic of Thatcher’s death. As Prime Minister, one of her major initiatives was water utility privatization. Her legacy on this matter remains controversial to this day.

I’m not going to make a definitive statement on whether her initiatives were on the whole good or bad. I am skeptical that such a statement is possible and would advise against fully trusting anyone who believes it is. Privatization is always a politically controversial issue particularly when it involves such fundamental public needs as water. And is likely to rise in salience again with the start of negotiations of a U.S.-E.U. Free Trade Agreement later this year. Furthermore there is a lot of confusion around this topic, and many times ideology is mixed up with economic science, predictably muddling political discourse. Because of this muddling, I’ll focus this post on the economic theory surrounding privatization by parsing the economic scientific arguments from a free market ideology. In a second post, I’ll take a brief look at Thatcher’s specific policies as a case study of privatization.

The basic theoretical argument for free markets is fairly simple. People look after their economic self interest. In doing this some people will supply goods and services that others demand and sell these goods and services at a profit. Those demanding the goods and services will look for the best price they can find, and so where there are multiple suppliers there will competition on price as the suppliers try to maximize their profits by undercutting others on price to sell more units. At the end of the day, some price is found by which supply roughly equals demand and just about all the goods and services are sold to willing buyers. This last bit is the empirical bit, and one should remember that when all kinds of fantastical claims are being made for and against markets.

This simple picture of markets quickly disappears when we talk about the water sector as we have what is termed a “natural monopoly.” It is too costly to build multiple water supply and sewer networks so consumers are going to be stuck dealing with one supplier. This gives the supplier substantial power over the consumers, and the supplier can abuse this power like any monopolist and charge consumers  “monopoly rents” (which basically means it charges them through the nose).

As we cannot very well ask people to go without water, in many cases we have it managed publicly to tame any kind of profit motive. But what if we believe that our public utility is being run inefficiently? For example, it is not using up to date asset management practices (which is very common in the U.S.). Or one sees that public rate setting boards are artificially depressing rates for political reasons and thus preventing it from making capital investments? Well one may seek to privatize it.

But even if one does privatize it, because of the natural monopoly problem, there needs to be some regulatory control of rates. And thus we’re still stuck with one of the problems that a public utility struggles with: how to set appropriate rates. And we have a new one: even if the private utility is incentivized to minimize costs, it has to make a profit. So the public is going to lose some of those efficiency gains to shareholders.

The “public versus private” debate in the water sector is not a world for panaceas. The choices are hard and imperfect, and often unsatisfactory as we’ve already strayed quite far from the economic ideal. In fact, I think it is a mistake to frame the debate as “public versus private,” terms which are politically loaded, in part due to Ms. Thatcher. The terms “organization versus market” (Simon 1996) are good for sidestepping this ideological mess. Because anyone who has had a problem with the DMV or a cable company can tell you, human organizations are going to lead to frustrations whether they are run for the public interest or for a profit motive. If we really want to improve our organizations we have to look at where markets are good at disciplining them, and where we have to look for other means.

Water Issues Across the U.S.: A Grossly Unscientific Survey

When one has been immersed in an issue for a few years it is hard not to think about it everywhere one goes. And so it was that I thought about water issues everywhere I visited during my recent U.S. road trip. While the survey of issues is far short of scientific,  I do think it captures something of the diversity of water challenges facing our nation.

Raleigh, NC: As NC has developed, sediment and pathogens from stormwater have threatened drinking water supplies and shellfish beds. They have taken some action, but I’m not sure how serious. For sure, they’re not as serious about water quality as they are about highways, their highways are wonderful.

Atlanta, GA: Water shortages and really bad aging water infrastructure issues. Here was a city with severe water shortages that was losing around 40% of its drinking water due to leaky pipes. Apparently it is now taking its water issues seriously which is why it now has water and sewer bills nearly seven times those of Chicago (according to Wikipedia). I’ve heard a couple of stories about how they mustered the political will to raise rates. One was a successful campaign to be the “water mayor.” The other was that EPA threatened to arrest the rate setting board if they didn’t increase rates.

New Orleans, LA: The land underneath the redevelopment project at right stood under about eight feet of water during Hurricane Katrina. The project was in the Saint Bernard Parish which was one of the last to flood and was believed to be safe until the levees failed, catching many unfortunates by surprise. New levees are under construction to protect the redeveloped area.

Austin, TX: They have a pretty river walk. I don’t know any more than that.

Santa Fe, NM: Very little water and, based on my previous post, don’t seem to be doing a lot about it.

Golden, CO: Has first rights to the water coming out of the mountains so has loads of water even though Denver (which is downstream) is restricting lawn watering to two days a week. Coors uses this water to make watery beer.

Moab, UT: Colorado river water, while intensely fought over, is gross to drink. Smart rock climbers use a spring from the surrounding rocks to fill their water bottles.

Las Vegas, NV: Not a lot of water but intense codes in place to keep down consumption. Apparently the visible lack of water in nearby Hoover Dam has been a strong visual messenger for more serious measures.

And that’s sort of the theme of the West into CA. This theme leant credence to the oft repeated (apocryphal) quote from Mark Twain: “Whiskey is for drinking, and water is for fighting over.”

Please let me know anything I missed. Or shoot an email to chris [at] whiskeyatwater.com.

Cute Room, Unserious Water Policy

As many of you know I’m currently driving from DC to CA. My wife and I stopped in at the adorable Pueblo Bonito in Santa Fe, NM. Look how cute it is.

Kiva Photo

They give you wood for the fireplace every night. We are in a desert however, so the City of Santa Fe has taken the forceful measure of requiring a sign to be posted in every room to tell the inhabitant to save water!

Ordinance

But in the bathroom, traditional high flow toilet and shower head. I can’t believe they’re that serious.

High Flow toiletHigh Flow Shower

 

And we haven’t seen any recycling in GA, TX, or NM. One forgets how behind much of this country is when it comes to resource conservation.