Water Supply in California: Economies of Scale, Efficiency, and Privatization

In a water supply industry that consists of private and public providers, questions of interest include the following: Are there significant economies of scale, and if so at which population levels? How, on average, do private and public sector rates compare? Has there, over time, been a systematic change in the gap between private and public sector rates? Can it be demonstrated that investor owned companes are more efficient than their public sector counterparts? Given major differences in taxes and subsidies, is the real water bill for government owned utilities higher than for investor owned companies? The first three questions will be answered by a statistical analysis of water charge data collected by Black and Veatch Corp. on a biannual basis for the period 1995-2001. The remaining two questions received affirmative answers in a 1996 study commissioned by the Reason Foundation, a conservative think tank located in Los Angeles. The current paper reexamines the last two questions in light of a broader literature on privatization, and by drawing on the more extensive and more representative data set referred to above. The findings and conclusions reached in this paper provide a new and quite different perspective on the fundemental questions as to who should supply the consumers water. In the past communities have opposed proposals for privatization because of concerns over whether the Public Utilities Commission would, or would be able to, keep water rates at acceptable levels. The present paper also sheds light on this question.