PhillyDeals: Analyst: Few benefits to selling utilities

Despite all the complaints from Mayor Nutter and business leaders that City Council's refusal to sell the Philadelphia Gas Works to a Connecticut company has hurt hopes for a heavy-industry renaissance in Philadelphia, the national trend is actually against selling off public utilities and in favor of municipal socialism.

With urban finances finally improving, cities such as Fort Wayne, Ind., and Nashua, N.H., have lately bought private, publicly traded, for-profit utilities and put them under public control. And voters in Claremont, Calif., have approved borrowing money to buy their private water system, veteran utility analyst Ryan M. Connors told clients at Janney Capital Markets in a recent report.

Even one of the most successful private-utility owners, Voorhees-based American Water, stung by urban voters' opposition to utility sales in places like Trenton, is instead focusing on buying and building up rural wastewater systems, Connors noted.

Isn't private management more efficient than government?

"Day to day, there is little to suggest that private-sector operation offers much advantage," Connors told me.

"In fact, contrary to the stereotype of municipal operators propagated by investor-owned utilities, most municipal systems are actually very well-run," Connors added.

Is the private sector better than government at raising money to finance utility improvements?

No, that's backward, said Connors: "The tax-advantaged status of municipal debt is a huge cost advantage for municipal systems. A private company can't borrow cheaper than tax-exempt local government bonds.

"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."

Investor-owned water utilities figure they have to invest about $3.50 in capital to generate $1 of higher profit, which ties up private investment dollars for years, Connors added. Gas investments are similarly expensive and also involve high risks, like gas-line explosions.

"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 concluded. Muni finance is cheaper.

So what explains all the pressure to sell utilities like PGW?

Sounds to me, I told Connors, that the problems with improving public utilities are not financial, economic, or technical, but rather political: Can the utility count on being able to collect delinquent accounts and negotiate labor and service contracts without the mayor or city council or some other official stepping in on behalf of well-connected voters or donors?

"Spot on," Connors said.

He told me he once 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.' "

The political, union, and collection issues were the reasons.

There is no natural, business, or finance reason that PGW can't do everything Nutter and the Chamber of Commerce and the energy companies want a private gas works to do - and do it cheaply and better.

The argument people who want to sell PGW are really making is, they don't trust Philadelphia voters to elect politicians who will want to run PGW efficiently.