KRC Expresses Support For Removing Position of For-Profit Water Provider From Kentucky Infrastructure Authority Board

« Latest News

KRC Expresses Support For Removing Position of For-Profit Water Provider From Kentucky Infrastructure Authority Board  Posted: February 28, 2014

February 28, 2014

Hon. Derrick Graham
House of Representatives
Frankfort, Kentucky 40601

Hon. Robert Damron
House of Representatives
Frankfort, Kentucky 40601

Hon. Jody Richards
House of Representatives
Frankfort, Kentucky 40601

Re: House Bill 381

Dear Representatives Graham, Damron, and Richards:

I?m writing to express the support of the Kentucky Resources Council, Inc. for House Bill 381, which would remove the position representing for profit private water companies from the Kentucky Infrastructure Authority.

I attended the House Local Government Committee meeting at which the bill was discussed, and wanted to share KRC’s concern that there is a structural conflict of interest created when a for-profit, non-governmental (i.e. private) water provider is placed in a position of authority and responsibility to vote on allocation of public monies to public water and wastewater service providers.

I take at face value the representation to the committee from the current KIA Board member serving in that position that she believes herself to be objective because the private for-profit water company that employs her is ineligible to receive KIA funding. The problem, however, is not one of the objectivity of a particular appointee to that position, but in the inherent tension in the relationship of private, for-profit water providers and publicly-owned and operated water systems, and the structural conflict of interest that exists between the business imperatives of for-profit providers of water services, and those of non-profit municipal or other providers.

The 2004-2008 Kentucky-American Water Company Business Plan is one reflection of the structural problem that I believe is created by the inclusion of the for-profit private water provider on a Board intended to govern distribution to public entities of public monies for water infrastructure. The Business Plan identifies as one of the “strategic objectives” that of using “existing market share to expand into new service areas and expand the types of services provided.” The growth strategy identifies investment in upgrading and replacing current facilities, and “investment opportunities available through acquisition of water and wastewater systems as utilities consolidate.” The plan notes that

"The opportunity for merger and acquisition and merger is great in
Kentucky. There are many small public and private systems that cannot
replace aged plant, expand service area, and provide for economic
development at affordable prices due to their small customer base. The
State government is actively encouraging consolidation and privatization whenever possible, due to limited public sector funds available for water infrastructure improvements. The Company has and will continue to pursue these many opportunities when financially feasible to do so, through acquisition and innovative regional public/private partnership arrangements."

The utility is clearly in a growth mode that contemplates acquisition in some cases of those same public water and sewer service providers that could come before the KIA Board seeking financial assistance in order to “replace aged plant, expand service area, and provide for economic development” and to remain viable by utilizing “public sectors funds” to assist in “water infrastructure improvements.” The interest that a for-profit water provider has in enlarging the customer base and area served (because, as the KAWC business plan notes, per capita customer use continues to decline), is fundamentally and structurally incompatible with the provision of public monies to public utilities that would enable those water systems to make needed improvements and to remain viable.

The Development Plan portion of the 2004-2008 KAWC Business Plan further underscores this point, noting that a key assumption for continuation of the successful strategy of “tuck-in acquisitions and development of regional solutions using public/private partnerships” is that “[p]ublic systems will continue to not meet regulations and will require state and federal funding for capital needs.” The plan recognizes that reliance on funding sources such as KIA are important for continued viability of public systems, and denial or deferral of that funding would affect the vulnerability of a system to acquisition.

Finally, the 2004-2008 marketing plan reflects the tension between the for-profit water provider and the nearby municipal systems, reflecting that objectivity may be difficult to achieve despite the best of efforts, in making decisions concerning funding of public systems. “The opportunity for large acquisitions is not great in and around the existing service areas of KAWC due to the existence of many well-funded medium sized municipal systems. The Company plans to explore contract opportunities for services and operations as they arise. There is, however, an opportunity to pursue acquisitions in other parts of the state.” With respect to the relationship of KAWC and those municipal systems the plan candidly notes that “[n]eighboring systems will by (sic) openly friendly but covertly subversive.”

In order to eliminate this structural conflict between the prerogatives of growth for for-profit water systems in a time of flat or declining residential and industrial water use, and the allocation of resources for improvement and continued viability of municipal and non-profit governmental water providers that might otherwise become targets of acquisition efforts, the elimination of the voting position for a private for-profit water provider is advisable. As noted in committee, nothing in the bill would prevent a private, for-profit provider from being recommended by the AWWA if that appointee was felt to best represent the viewpoint of that organization of water professionals, nor would KAWC or any other private for-profit provider be hampered from participating in the discussions of the KIA.

Thank you in advance for considering these concerns.



Tom FitzGerald

cc: Hon. Steve Riggs, Chair
By Kentucky Resources Council on 02/28/2014 5:32 PM
« Latest News