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Abstract
A prolific theoretical and empirical literature has examined the relevance of structures and institutions to public utility performance, with a particular emphasis on the discrete role of ownership. The empirical findings are inconsistent and mostly indeterminate. A narrow emphasis on ownership deflects attention from the inextricable role of governance. The impact of privatization may be marginal compared with alternative governance reforms. Offered here is an informal, practical, and parsimonious conceptual model that distinguishes between structural (endogenous) and institutional (exogenous) governance. Three structural dimensions (ownership form, practice standards, and enterprise autonomy) are juxtaposed against three institutional dimensions (market contestability, external review, and economic regulation). Each dimension may be complementary or substitutive. Given persistent monopoly, privatization may be unnecessary and will be insufficient for ensuring performance. Economic regulation is a prerequisite for privatization but privatization is not a prerequisite for reform. Focusing on the US water sector, this paper offers a descriptive analysis for understanding why this is the case. A pragmatic approach is to strengthen core governance capacities in relation to performance priorities, which ultimately matter most of all.
Acknowledgements
This paper is based on a presentation and discussion at, ‘Quality of Institutions and the Performance of Public Service Providers,’ Tenth Milan European Economy Workshop in Milan, Italy, June 8–9, 2011. The author gratefully acknowledges the research and editorial assistance of Jason Kalmbach, Brian Suzuki, and David Wagman.
Notes
1. The author first asserted ‘it depends’ to much chagrin at a 1996 academic colloquium.
2. According to the Global Water Partnership (Citation2002), ‘The current water crisis is mainly a crisis of water governance.’
3. The Baietti, et al. (2006) framework emphasized managerial capacities related to six dimensions: external autonomy, external accountability, internal accountability for results, market orientation, customer orientation, and corporate culture.
4. Scale economies, as measured by operating expenses per gallon sold (excluding debt and other capital-related costs), are apparent for publicly- and privately-owned utilities; small privately-owned utilities are more efficient than small publicly-owned utilities, but large publicly-owned utilities are more efficient than large privately owned utilities (Renzetti and DuPont 2004; USEPA 2009).
5. In the US, environmental regulators count ‘systems’ and economic regulators count ‘utilities.’
6. The largest of the IOUs are also known as ‘public corporations’ because ownership shares can be traded on the stock exchanges; some operate as multi-state holding companies.
7. Scale may be limited by geopolitical boundaries and regulations, including franchises and certificates of need.
8. A potential advantage of local governments in debt financing is that property owners can face liens if they fail to pay their water bills.
9. Private communication from a senior regulatory staff analyst in 2012.
10. Regulatory segregation of financial assets is assumed.
12. Citizens Energy Group Citation2011 Annual Report (available at www.citizensenergygroup.com).
13. Indiana Code 8–1-11.1–1 (2012).
14. A few states exclude very small private systems from regulation.
15. The private water sector has no presence in the state except for not-for-profit systems, which are not regulated.
16. Wisconsin Public Service Commission website at psc.wi.gov.
17. Higher rates for the not-for-profit systems are likely attributable to the comparatively small scale of operations.
18. Rates reveal little about efficiency due to cost-of-service differences, some of which are due to scale. Higher prices may be more efficient than lower prices if cost based.