Prioritizing Troubled Water Systems for Consolidation and Acquisition

Almost one million Californians are served by small water systems that are failing to provide safe, clean, affordable drinking water. One solution to address these small failing water systems is to consolidate or combine these failing water systems with larger systems—those that have more resources and expertise in place to ensure utility customers have access to clean water.

Larger water systems may be publicly owned – like the water systems run by a municipality – or they may be privately owned – like one of the large investor-owned water utility companies that operate in California. When a privately-owned water company combines with a smaller water company, this is known as an acquisition (or sale).

Nearly thirty years ago, the state legislature instituted changes to try and incentivize large water companies to buy small, troubled water systems. However, when it comes to public benefits, not all consolidations or acquisitions are created equal. Large private water companies have taken advantage of a loophole, instead of using incentives intended to help distressed water systems, they are using these incentives to buy non-troubled systems for high purchase prices. Those high purchase prices then trickle down to ratepayers in the form of increased water bills. Incentives meant to help customers in need should not be used to increase profits for water utility companies in the form of increased water bills. These acquisitions only serve to divert resources that should be used to help the one million Californians whose water systems are in urgent need of assistance.

There is no question that acquisitions are in need of reform, and in 2022, the California Public Utilities Commission (CPUC) began a rulemaking (R.22-04-003) to improve the acquisition process. Our office believes that the recommendations below, if adopted, will drastically improve the acquisition process and help ratepayers avoid unnecessary increases to their water bills.

1. A revised framework needs to reign in the skyrocketing prices that the large water companies are paying for non-failing water systems.

   The CPUC should consider the results of several standard valuation methodologies produced by independent appraisers to ensure that the rates customers will pay to fund acquisitions are reasonable. Relying on the price proposed by buyer and seller places ratepayers at risk of funding unreasonable acquisitions.
   

2. Profits from acquisitions must be shared between shareholders and ratepayers.

   Currently, a private water company selling assets can receive unreasonable profits funded by ratepayers. The CPUC’s rules for sharing profits with ratepayers when assets are sold should be applied to water system acquisitions.
   

3. Existing ratepayers should not be on the hook for funding the purchases of water systems that lead to increases in costs.

   When the total costs of combining two systems increases solely because of the acquisition (without any beneficial improvements being made), ratepayers are funding diseconomies of scale. By preventing existing ratepayers from funding these inefficiencies, utilities will have a greater incentive to ensure that acquisition prices are just and reasonable.
   

4. Actual impacts on ratepayer bills should be determined at the time of acquisition.

   Typically, a private water company presents “illustrative” rates when it seeks approval of an acquisition. Having performed its due diligence for the acquisition, a utility should be able to develop and be held accountable for an operating budget and authorized rates.

A revised acquisition framework that includes these elements will ensure that acquisitions by large private water companies are fair to ratepayers and are firmly in the public interest. Our recommendations will also help ensure that private water companies prioritize the acquisition of small, troubled water systems and help California secure clean, safe, affordable water for everyone.