Privatization does increase efficiency, but the best way to maximize the citizens' benefits from a public utility is not to turn a public monopoly into a private monopoly, rather it is to look at where the productivity enhancing magic of competition can be introduced into the management of such a monopoly asset.

Working with W. R. Lazard as its financial advisor, the City of Jersey City has just completed a public-private partnership with the United Water Company that will be the largest in the nation. In it, the City of Jersey City will maintain ownership of its water utility facilities while contracting with United Water to manage these assets. I think our agreement offers an example of how municipalities across America can -- pardon the puns -- "liquify" the "untapped" budgetary potential of their water utilities without having to forego the public ownership and control of these valuable monopoly assets.

Jersey City owns wonderful water assets: pipes, purification plants, reservoirs and significant quantities of surplus water. Unfortunately, under municipal management, these assets have never been utilized to their fullest potential.

For instance, we have long wanted to sell our surplus water on the open market to generate recurring, non-tax revenues. But we have never been successful in doing so. Our failure has not been for a lack of trying, we just are not professionals in the water business, and have not been very good at water sales. As a result, the full revenue potential of our surplus water has never been realized.

We have also had higher operating expenses than necessary, although it's been very difficult to tell in our non-market situation. Every successive City administration has admonished its Water Director to improve productivity and cut unnecessary costs, and every successive Water Director has done his best. But operating costs have kept rising.

A still bigger problem has been getting all of our water to Jersey City. En route from our suburban reservoirs, one-third of our water leaks from the pipes which transport it. Transporting water great distances is a significant engineering challenge, and our City, for all of the reasons which typically trouble public enterprises, has found it difficult to stanch these water losses.

Once the water gets to Jersey City, we have had difficulties with accurate billing. Unlike the private telephone and energy utilities which service our residents, and which send out their bills every month like clockwork, our municipal water utility has all too often sent out bills at irregular intervals. When our water bills finally do arrive, they sometimes are based on estimates of consumer usage instead of actual meter readings, which can result in consumers getting walloped with a huge bill when an actual reading is made because estimates for several billing periods have been too low.

One final problem with our municipal utility has been collecting on water bills. Because our collection rate on billings has been lower than the norm at private utilities, the City has had to charge unnecessarily high water rates to cover its losses from non-payers.

The City's new Water Director has made substantial progress on all of these problems in recent years, but the utility still underperforms its private counterparts.

These difficulties help to explain why, among free-marketeers, the voguish solution to problems at public utilities has been to privatize them. But is the outright sale of a public utility really the best answer to its problems?

Here in Jersey City, we have privatized many governmental operations, such as traffic signal maintenance, in ways which have both improved performance and reduced costs. But with traffic signal maintenance, if we don't get the kind of performance we want, or if the vendor suddenly wants to increase prices, we always have the option of changing vendors or doing the maintenance ourselves again. But that is not the case with selling a public water utility.

With a monopoly public utility, once you sell it, its gone! If the quality of service subsequently declines, or if the vendor seeks to jack up rates, that's our tough luck. Rate guarantees written into the document of sale will only be good for the term of their duration. And expecting protection from a board of public utilities may lead to disappointment. The only certain way to guarantee quality services and low costs for consumers is through vigorous competition. But the defining nature of a monopoly utility is that there is no competition. Therefore what serves the public's interest best may be not selling the monopoly utility, but instead competitively contracting for its management.

In Jersey City, we put together a Working Group which included both City Council and Administration personnel, and then sent out a Request For Proposal, to hire a consultant, to help us write the Request For Proposal, to hire a management company. It may appear that this represents an extra, unnecessary step, but contracting for the management of a water utility is complicated business, and we wanted to have an expert working with us to fully protect our citizens' interests.

Once the consultant was selected, we carefully planned out the kind of contract we wanted. For instance, we decided upon a relatively short-term contract of five years in order to keep pressure on the vendor to maintain quality services. Second, we included performance clauses, to absolutely ensure that the City would enjoy appropriate recourse in the event of vendor under-performance or sub-standard maintenance. Third, we decided to retain control over, and responsibility for, capital investment, in order to eliminate under investment as a means by which the private manager might maximize short-term operating profits at the City's long-term expense. Fourth, we included employee protections to ensure that our public employee unions would support the deal. And finally, and perhaps most importantly, we made it clear that the City wanted to retain control of rate setting, and wanted all bids to be submitted on the basis of a zero rate increase assumption. This last point is critical in order to ensure that bidders do not offer overly aggressive concession fees which they intend to pay for merely by jacking up water rates.

We publicized the Request for Proposal widely to guarantee maximum competition, and scheduled several informational sessions for prospective bidders. By the time the deadline for submissions came, the City had seven extremely aggressive bids in hand by well-qualified vendors. The best bid, with all considerations included, was by United Water. Its terms represented a home run for the City!

Over the five year term of our contract, United Water is guaranteeing the City a minimum of $19 million in surplus water sales, $16 million in operational savings, and $2.5 million in up-front concession fees. Through stanching water leakage and improving billing and collections, United Water further projects $20 million to $35 million of additional future economic benefits to the City and our local sewerage authority, for which the municipal water utility does billing and bill collection. Add it up and the total economic benefit to our citizens should fall between $58 million and $73 million over five years -- or as much as $14 million per year! This represents an enormous savings for a City our size (total FY '96 property tax levy: $88 million).

Our citizens should also gain through improved service. United Water's advanced technology for discovering water leakage will not only help us stanch unnecessary water losses, but will decrease the frequency and inconvenience to our citizens of water main breaks. As a second service benefit, United Water will be installing computerized "Hands-Off Meter Reading," which will allow the company to conduct actual monthly meter readings by telephone line, avoiding the hassle of home visits and the aggravation of bills periodically based on estimates.

Our municipal water utility employees will also be making out well. With the support of the New Jersey State Department of Personnel, the City and the Company will be pioneering the "leasing" of our public employees to the private vendor. While workers, for all practical purposes, will become employees of the vendor, legally they will remain employees of the City, will retain their current wages and benefits, and will remain with the public retirement system. The vendor expects to decrease the number of employees retained to operate the system, but has committed to do so through attrition and early buy-outs, not through lay-offs.

To conclude, our water utility public-private partnership is safeguarding all of the advantages of public utility ownership for our citizens, while also providing us the economic and quality of service benefits of competitively bid private management. In doing so, it is going a long way towards helping Jersey City financially to keep its head above water!

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