A flock of geese fly past a smokestack at the privately owned Jeffery Energy Center coal power plant near Emmitt, Kansas. AP Photo/Charlie Riedel

When it comes to complying with important health regulations, private companies far outperform the public sector.

When local governments turn to private companies to manage vital utilities like water, energy, and public health, the poorest customers often lose. By law, private utilities can set their rates based directly on the cost of their investments, which means they can charge a lot, with little concern for how that impacts low-income consumers. Unlike public utilities, private utilities do not serve a constituency—they serve investors.

But according to a forthcoming paper in the American Journal of Political Science, the public utility model has some drawbacks, too. Its reliance on public support can compromise its ability to make crucial infrastructure upgrades. As a result of poor funding, public utilities can also fail to meet federal public regulations. And yet regulators are more lenient with them than with private utilities, since harsh punishment only further hurts the public.

Public utilities need to please voters

When public utilities try to increase their rates to pay for an infrastructure update or a new treatment plant, city council members or local commissioners have to vote to approve those rates. Those voting officials are tied to a constituency.

For example, about 85 percent of Americans get their water from a public utility, whether from a city, county, or special district. Particularly in the dry states of the West, water rate increases are a hot potato for local officials. Residents of one tiny, poor town in Fresno County, California recently voted down a proposed $30 monthly increase to their water bills—even though it may mean having their taps turned off. That story has become a well-publicized political minefield.

”People are sensitive to water rate increases in the way they are to tax increases,” says Manuel Teodoro, an associate professor of political science at Texas A&M, and one of the authors of the new paper. “In local politics, it becomes a huge issue.”

Teodoro and co-author David M. Konisky, an associate professor of public affairs at Indiana University, argue that because rate hikes are so politically sticky, it’s harder for public utilities to generate the revenue required for crucial infrastructure updates or even simple maintenance. By contrast, private utilities have no problem setting high rates and building new pipes and plants. In fact, they are incentivized to raise rates, because that’s how they turn a profit. “Investor-owned utilities want more and more stable revenue,” says Teodoro.

That means resource-challenged public utilities can be more likely to fail to meet federal environmental and health regulations than resource-rich private utilities. Unlike public utilities, private companies also have competitors, which also incentivizes them to staff up, build out and comply with federal standards.

Teodoro and Konisky studied rates of public agency and private firm compliance with the EPA-regulated Clean Air Act (CAA) and Safe Drinking Water Act (SDWA) between 2000-11, and 2010-13, respectively. In both cases, public power plants, health care providers, and water agencies failed to comply with a range of regulations—for example, how often inspections occurred, amount of emissions, health of local groundwater—at a significantly higher rate than those that were privately held.

An LA Department of Water and Power worker attends to a water pipe burst in September 2014.  (REUTERS/Jonathan Alcorn)

Government loves government

Not only were public utilities less likely than privates to comply with those federal regulations, but federal regulators were less likely to impose severe punishment on them. One reason is that fining a city is essentially punishing the public that both government bodies are supposed to serve. Another is because public utilities are often monopoly providers of essential services, so threatening to revoke their license would be an empty threat.

“The EPA could not shut down or strip the license from the U.S. Navy for violations,” says Teodoro. “They can’t shut down the city of Baltimore, or the Tennessee Valley Authority. But they can easily shut down a private business if they failed to comply with regulations.”

Again, Teodoro and Konisky tracked the EPA’s rates of enforcement of CAA and SDWA regulations on public and private utilities. They found that the EPA was less likely to take formal enforcement action against public water utilities than they were against utilities owned by private firms.

Still, privatization isn’t necessarily the answer

Although Teodoro and Konisky found private utilities outperform public ones on regulatory compliance, they’re also sensitive to their many shortcomings. “We’re really hoping this paper doesn’t cause people to say, ‘Privatize! Privatize!’” says Konisky. “Because that is a potential solution to these violations, but not the only solution.”

Indeed, because private utilities prioritize their investors rather than their customers, they have little incentive to create, for example, tiered rate structures that are crucial for low-income households. “Low-income pricing schemes and rebate schemes and retrofitting—those are not going to be something the investor engages in, unless they have that in their contract with the municipality,” says Teodoro.

Public utilities do another thing that private utilities have little incentive to do: conserve. To use the example of water again, Americans’ per capita daily water use has plummeted in the last several decades—largely a triumph of conservation efforts by public utilities. “In what other business do people say, ‘Please buy less of our product’?” says Teodoro. “No private utility would ever do that.”

Still, utility infrastructure—particularly for water—is crumbling around the nation, and public utilities are having a lot of trouble getting up to code. There are some basic solutions: create subsidies for local governments so that they can get up to capacity without raising rates; ramp up enforcement from federal regulators; or, turn to private companies. But as for the last option, in this increasingly dry, overheating, and economically divided world, there are just too many drawbacks.

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