If there's one thing for which the Great Lakes State is known, it's water. But private water utilities are almost unknown in Michigan-and are uncommon throughout the country.
Almost. Up in Calumet, a city located in Michigan's scenic Upper Peninsula, one of America's relatively few privately owned and operated water utility systems can be found. And its success proves that water need not be a government-run concern.
Investor-owned water utilities are more prevalent in Europe. England privatized its entire water and sewer system in 1989. In France, 75 percent of the population is served by private water utilities. By contrast, only 20 percent of American water systems are privately owned, and they serve only 15 percent of the population.
Calumet's system has always been private, having been built by the for-profit Calumet and Hecla Mining Company, which drew and distributed surface water from Lake Superior as early as 1895. Ownership of the system changed several times during the next century, and it was eventually purchased by the private water company American Water Works in 1993.
American Water Works is currently America's largest private water-utility business, serving 10 million customers in 23 states. In September 2001, the German utility firm RWE agreed to purchase American for $4.6 billion, although the deal has not been finalized.
In Calumet, water is drawn from a series of wells and pumped up an enormous incline to both personal and industrial users. The hill up which the water must be pumped is so steep that 10 percent of the utility's expenses are dedicated to electricity alone. The system delivers a daily average of 1 million gallons of water to more than 4,600 customers, through 115 miles of water mains that it either owns or maintains under contract.
How does American Water Works, known as "Michigan-American" in the U.P., compare to municipally owned and operated water systems?
It is not always easy to compare the performance of two water distribution facilities, because systems treat water differently depending on environmental factors and basic geography. Still, analysts have developed a few ratios to generalize about performance and then qualify comparisons as conditions warrant.
For example, some municipal employees are assigned to one department (electricity, for instance), but spend 25 percent of their time working for the water department. In Table 1, in order to make calculations as accurate as possible, the author counted such a person as 25 percent of an employee in the water department when necessary, rather than counting them as employed in the department full-time. Meter reading and billing employees are included in the estimates to ensure a closer apples-to-apples comparison with the investor-owned utility, because it does not have the luxury of charging employee costs to other departments. It is important to note, in fairness, that many municipalities do charge the costs of employees to various departments based on how much time they spend in that department.
The table above shows four important categories, three measuring efficiency and one measuring the amount of taxes paid by each water operation, for purposes of making the very important point that private utilities pay taxes and public ones do not. This should make private utilities inherently more attractive to policy-makers in economic terms. In addition, Calumet must use a portion of its operating revenues to pay its investors, who in turn pay taxes on their profits. Government systems need not set aside revenue for this purpose, which should give them an operational advantage over their private-sector competition.
The private Michigan-American finishes first ahead of the Houghton, Norway, Gladstone, Wakefield, and L'Anse municipal systems in two categories: connections per employee and tax revenue. A "connection" is a common term in the industry used to describe billed customers. Michigan-American treats and delivers its products with fewer employees than its rivals-and by a wide margin. Indeed, the employees at Michigan-American handle about 2.5 times more connections per employee than Gladstone, which is just north of Escanaba, their nearest rivals per connection, which have 402 connections per employee.
The city of Houghton comes in ahead of Michigan-American in two other categories, employees per million gallons daily and total operating expenses per connection. The former measurement indicates how many staff members it takes on a gallons-pumped basis and the latter measures an operation's expenses for every connection. Houghton pumps 1,274,000 gallons each day, which works out to 3.1 employees per million gallons daily. Calumet's Michigan-American pumps an average of 1.05 million gallons each day, which works out to 4.3 employees per million gallons daily. Houghton also reports less expense per connection.
While Houghton does deserve credit for operating efficiently, a couple of qualifications must be made. Houghton's biggest customer is Michigan Technological University (MTU), which receives its water wholesale. As a wholesale customer, MTU must provide operation and maintenance on its own system, which should reduce the cost of Houghton doing business. In addition, Houghton doesn't pump its water up a steep incline, as must Calumet.
What makes Michigan-American's performance all the more remarkable is that it does not receive non-operating income to supplement its performance, as is often the case with municipal systems. Non-operating income can come in the form of subsidies from the local unit of government or from grants transferred to the utility by the state and/or federal government. The federal government may not issue the grants directly, but rather, must give them to state governments first.
Simply because towns and cities across Michigan have long-held monopolies on the distribution of water in their respective areas doesn't mean that is the best way to go about it. If municipal officials in the state of Michigan are looking for better, more efficient, less expensive ways of doing things, they should take a serious look at privatizing their water systems.
Michael LaFaive is managing editor of Michigan Privatization Report.