Who says private utilities are better than city-owned?

(Link to print-column version, and comments, in Jan. 4 Phila. Inquirer here) Despite all the claims by Philadelphia business leaders and Mayor Nutter allies that City Council President Darrell Clarke's refusal to sell the Philadelphia Gas Works to Connecticut-based UIL has set back the already-battered cause of private business and hopes for a petro-based heavy-industry renaissance here, the national trend is actually in favor of "municipalization" of public utilities and away from private utility operators, as America emerges from recession and urban finances improve, writes veteran utility analyst Ryan M. Connors (formerly of Janney Capital Markets, now of Boenning & Scattergood) in a recent report to clients.

The cities of Fort Wayne, Ind., and Nashua, N.H. have lately forced private, publicly-traded, for-profit utilities to sell their water systems and put them under citizen control, and Claremont, Calif. voters have approved borrowing money to buy back their own, Connors notes. Successful private operators like Voorhees-based American Water, battered by voters' recent opposition to privatization in places like Trenton, N.J., are instead focusing on rural wastewater systems. For utilities, in short, "privatization is a less compelling growth driver than widely believed," he adds.

But isn't private management more efficient than government? I asked Connors. "Day to day, there is little to suggest that private-sector operation offers much advantage," he told me. "In fact, contrary to the stereotype of municipal operators propagated by investor-owned utilities, most municipal systems are actually very well run."

Isn't bigger, better, at least? "Scale can confer benefits, particularly when bad things happen," Connors agreed, to a point. For example, Voorhees-based American Water's response to the lethal chemical spill in West Virginia earlier this year 'was rapid, comprehensive and effective" because the company was able to fly in its specialists from across the country." (Though municipal utilities could band together to build emergency capacity, too.)

Is it cheaper to finance private-sector improvements? No, it's the reverse: "The tax-advantaged status of municipal debt is a huge is a huge cost-of-capital advantage for municipal systems," Connors noted. No private company borrows cheaper than the typical government, which has the power to raise taxes and rates when it really needs cash.

"In addition to the debt financing advantage, municipal utilities also don't have to earn a return on equity capital, further slanting the cost-of-capital edge in their favor," Connors added. 

Indeed, private utility investors have a tough time getting their clients' money back quickly: "Investor-owned (water) utlities talk of needing $3.50 or more in capital expenditure to generate just $1 of earnings," Connors told me. "Gas is not far behind, and also involves substantial liability risks," such as life and property risk from gas line explosions. 

Do all the investment bankers lined up to finance private-sector utility improvements provide any value to private utility owners? "There is a lot of talk about financing being an advantage of private sector participation, but this is really about the amount of capital available, not the terms on which that capital can be accessed," Connors told me. "Ratepayers have to pay up" to finance private borrowing. Muni is cheaper.

At bottom, I asked, are the problems with improving utilities like PGW not financial, economic, or technical, but rather political -- the difficulty of getting an urban utility to collect delinquent accounts, or price labor costs (in talks with politically powerful unions or contractors), and the risk of mayoral or city council interference?

"Spot on," Connors agreed. "I asked (a major investor-owned utility official) how he would finance the acquisition of a 'crown jewel' system like Philadelphia's if it were to become available. He told me he 'wouldn't touch it with a 40-foot pole' due to the political, union and collection issues." 

Well-managed, there's no reason PGW can't do everything Mayor Nutter and the Chamber of Commerce and the investment bankers want a private gas works to do. But this is Philadelphia, where even the public school district isn't trusted with its own taxing powers.

So back to Square One; We get the government, and services, we vote for.