Partnerships

Over the past decade, many governmental agencies in California have made arrangements for investor-owned utilities to provide water utility services to their constituents.

These contracts can all be grouped under the label public-private partnerships, and they range from the sale of a municipal water system to the procurement of a single service, such as reading water meters.

Partnership Success Stories

Case Study: Hawthorne
Hawthorne, California, the home of the Beach Boys and the birthplace of Marilyn Monroe, is just a stone's throw from the Los Angeles International Airport. Aviation was key to the city's initial success as the Northrop Corporation had one of its main facilities in town. While the end of the Cold War brought unparalleled economic opportunities to California, it did not do so without some communities experiencing painful adjustments. Hawthorne was one such community.

In the early 90s, production at Northrop was severely reduced, and along with it, one of Hawthorne's key sources of revenue. To avert financial catastrophe, the City Council decided to lease its water system on a long-term basis to the California Water Service Company (Cal Water), the state's largest investor-owned water utility and a neighbor in the nearby beach communities of Hermosa Beach and Redondo Beach.

In 1996, after winning a competitive bid, Cal Water entered into a 15-year lease of the Hawthorne water system. For this privilege, Cal Water made an upfront payment of $6.5 million and will pay an additional $100,000 per year. Over the 15-year lease term, Cal Water will receive all water system revenues, pay all expenses and make necessary capital improvements - subject to the approval of the City Council. The City Council also retains final approval over customer rates, although they are pegged to those Cal Water charges in Hermosa-Redondo and approved by the Public Utilities Commission.

So far, this lease has been nothing but positive for both parties. Hawthorne is now back on its feet. Cal Water hired all the employees of the city's water system and promoted one of them to run the Hawthorne operation. Over $3 million in capital improvements have been made and Cal Water has become an active part of the community. Since the lease was awarded in 1996, state law has also been changed to permit leases of a duration in excess of 15 years.

Case Study: San Jose
As an illustration of how the employment of underutilized utility assets may benefit both customers and shareholders, San Jose Water Company (SJWC) is performing billing and remittance work for several municipal entities. For example, the SJWC has contracted with the City of San Jose to perform the billing and cash receipts functions for the City's Recycle Plus program. The City provides all service and record keeping functions related to the Recycle Plus service, and then provides the SJWC with a billing file for all bills to be rendered each day of the month. The SJWC then produces and mails the City's bills and receives and applies all cash receipts.

Such contracts allow water companies to recover the costs of some of the utility assets that would otherwise not be fully utilized. These contracts lower costs for the contracting municipality while generating revenues that are shared between utility customers and shareholders.

Case Study: Tustin
A partnership between American States Utility Services (ASUS) and the city of Tustin in Orange County is a good example of a successful service contract. ASUS, a subsidiary of American States Water Company (AWR), provides service contract options. The contracted services are performed by the experienced staff of Southern California Water Company, AWR's operating subsidiary which provides services to more than one million people throughout California and Arizona.

The partnership works well for the both the city of Tustin and Southern California Water Company (SCWC). The city of Tustin benefits from economies of scale and receives cost effective services from a staff of professionals. SCWC provides meter reading and other services, collections, requests for start and termination of service, field investigations, meter and meter box cover replacements, and bill collections. Due to SCWC's presence in communities surrounding the city of Tustin, such as Lemon Heights, Cowan Heights, Placentia, Yorba Linda and Orange, the city of Tustin's meter reading routes are asily integrated into SCWC daily routines.

Why Partnerships Make Sense (and Cents)

There are as many reasons for entering into a public-private partnership as there are different types of partnerships. However, the primary drivers are costs and regulations.

As water systems age, the cost to maintain and improve them increases. This is money local governments often don't have or prefer to use for something else, like police services or fire protection. California's private water companies are well capitalized with good access to funds that they can invest in our state's water treatment and delivery infrastructure.

As costs increase, so do the number and stringency of state and federal water quality regulations. To operate a water system that provides high quality, safe drinking water now requires access to a high-level of technical expertise in areas such as biology, chemistry, engineering and other relevant fields. Private water companies have these capabilities and can provide them at an affordable price.

And that is the bottom line benefit of public-private partnerships. They work because private sector water utilities often enjoy significant economies-of-scale and expertise that smaller governmental systems often don't have. That means they can provide a high level of service at a low cost per customer – a benefit to water customers, local governments and water companies.