Monday, October 5, 2009

Money Down the Drain

Back in February I proposed that the city privatize its water and sewer services. And by privatize I mean sell them--assets and all--to private companies. I do not mean psuedo-privatization, in which the city retains the assets and outsources operations. We now have more evidence of the city's mismanagement of those systems, and under the watch of our businessman mayor Bill White. (HT: houblog via blogHouston)

KHOU reports that city council is considering a rate hike for water and sewer services.

In a report to city council members Wednesday, White recommended hiring Dallas-based McKinsey, a private consulting firm, to examine ways to save money within the system before any rate hike.

“The important thing to do is to scrub the system,” White said. “Other big cities have been raising rates. We want to go through this process before we have a rate increase.”

When a system is spending more than it brings in, raising rates seems like a logical conclusion. And when your "customers" have no options you don't have to worry too much about losing them. The city has captive "customers", and the only repercussions to a rate increase are angry voters and more people needing assistance to pay their water bills.

Unlike a business, which must attract customers through voluntary consent, the city has a monopoly on the provision of water and sewer services in Houston. While the federal government pursues anti-trust charges against Microsoft and other companies, municipalities are allowed to engage in far more egregious "anti-competitive" activities. While private businesses cannot outlaw competition and threaten violators with prison time, the city government certainly can.

City council is looking for ways to turn the system around and break even. Interestingly, at least part of the answer is known:

White said the McKinsey study will also help the city trace another mystery: hundreds of millions of gallons of treated drinking water vanish from the city’s aging underground pipes every year, never reaching paying customers.

“Why do we produce more water than is consumed?” White asked. “There is a lot of lost inventory within this system. We’d better find out where it goes.”

Imagine a business that allowed so much lost inventory. Such a business would not be a business for long. A business has a financial incentive to identify the cause of lost inventory and take the actions necessary to stop that loss. A municipality has no such incentive, despite the proclamations of city officials to operate in a more business-like manner. The fact is, a municipality cannot operate like a business. Government is an agent of force; a business must obtain the voluntary consent of its customers. If the city truly wishes that water and sewer services be operated more like a business, then the only solution is to allow those services to be provided by businesses.

Admittedly, these are some practical challenges in completely privatizing water and sewer services. The infrastructure requirements for such services lead many to believe that they are natural monopolies. In industries that lend themselves to this claim, such as utilities, our infinitely wise government has decided to create coercive monopolies by making competition illegal. While claiming that private, unregulated companies would gouge consumers, the government incompetently manages the resource and rapes consumers whenever it chooses.

But practical challenges are merely that--challenges. By privatizing water and sewer services, we will allow innovation. We will permit entrepreneurs to find new, better, and less expensive methods for delivering water to homes and businesses. More importantly, we will remove an artificial barrier to economic activity and an immoral infringement of individual rights.

When your water bill goes up, the proper response is not to complain to your councilman. The proper response is to demand that the city restrict itself to the protection of your rights. The proper response is to demand that the city get out of the water and sewer business. Until it does, you will continue to watch your money go down the drain.

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