Columbia Could Benefit From Privatizing City’s Water and Electric Utilities

Columbia, like many cities across the country, faces budget shortfalls for the current year and the expected future. City officials and residents have debated various methods that might help to deal with this reality, such as which taxes to increase or which services to cut. Those involved in the discussion should consider that Columbia provides two major services that the private sector is fully capable of managing: water and electric utilities.

There is no standard method for providing utility services in Missouri cities. Springfield, for instance, has a city-owned public utility that provides every utility service. Alternately, almost all of the 1 million residents of Saint Louis County are customers of private utilities for water, gas, and electricity. The private sector also provides the majority of the utility services in Jefferson City.

Despite the structural differences between public and private provision, there is little variance in utility costs between Columbia and Jefferson City. In Missouri’s cost-of-living rankings for the first quarter of 2010, both cities placed far below the national and statewide averages for utility costs. During the summer months, a residential electric customer in Columbia with an average usage of 822 kilowatt-hours would pay $87.19. In Jefferson City, that same usage would cost $87.52. That’s a small difference in the summer, and the rates actually favor customers of Jefferson City’s private utility during winter months.

Studies have demonstrated that private utilities are generally more efficient than municipal utilities. In 2000, economist B. Delworth Gardner of Brigham Young University determined that private water utilities in Utah charged lower rates for water than comparable public utilities, even after accounting for the large advantages in taxation and regulation that public companies have. Economists Daniel Hollas and Stanley Stansell found in a 1994 study that private gas utilities were more economically efficient than public gas utilities.

Going back further, to a 1970 study of electric utilities that included Columbia, University of Missouri economists Richard Wallace and Paul Junk examined the diseconomies of scale faced by many municipal electric utilities. They noted that small public electric utilities were comparatively inefficient and recommended purchasing power from larger suppliers. These recommendations were implemented to some extent, because Columbia Water and Light purchases most of its power today.

It is a reasonable supposition that private utilities would be more efficient in their costs and operations than Columbia’s current municipal utilities. Privatizing the utilities could benefit the city in a number of ways. Most importantly, the city would experience an immediate cash infusion from the sale. Florissant, in Saint Louis County, sold its municipal water utility to Missouri-American Water for $14.5 million in 2002. Officials used that money to finance immediately needed public improvements, and placed $10 million into a reserve fund. Columbia is larger than Florissant, and Columbia’s electric and water utilities could likely be auctioned off for more than $14.5 million each. The substantial sale price could be used to continue funding city services that are slated for cuts, be deposited into a reserve fund, or be put to a variety of other uses that would benefit city residents.

Columbia would also see other fiscal benefits from privatizing the city utilities. The assets of the newly private utilities would become taxable, expanding the Columbia and Boone County tax base. Finally, reducing the number of municipal employees entails scaling back the long-run taxpayer costs associated with government pensions and health care.

Private utilities are just as capable of providing quality services at a low price to the residents of Columbia, and likely more efficient than city departments. Privatization of the Columbia Water and Light Division would bring a needed cash infusion to the city, add substantial assets to the tax rolls, and reduce long-term public employee costs. Cities such as Florissant and others have seen positive results from such privatization efforts, and there is good reason to believe that Columbia taxpayers and residents would also benefit.

David Stokes is a policy analyst for the Show-Me Institute, a Missouri-based think tank.