Letter: A risky business (March 31, 2015)

Government takeover of privately owned water companies in California is a costly and risky business. Arguments for takeover usually involve rate competition between government and private water suppliers (California Public Utilities Commission versus local government control). California courts have apparently taken charge of this competition by ruling rates to be set by state engineers under a cost-of-service policy, thereby tending to normalize rate differences among the competitors.

Local governments try to use condemnation of private companies under eminent domain to establish in court that government would be a better source of management and if successful to seek fair market, court-ordered price for government purchase. Government takes the risk, given they initiate condemnation, of having to pay the legal costs for both parties in lengthy litigation such as … in Missoula, Montana. The risk of failure augers for a review of all known facts by a forensic accountant to determine the economic soundness of a potential filing, keeping in mind that FA findings are qualified in a court of law.

The reason such municipal purchases are popular in California and other states is because public money is fungible. This means that funds raised for one purpose can be expended for a different purpose. In order for this to work there has to be a large enough supply of money so some of it going south is not likely to be missed. State and federal governments use such things as gasoline taxes raised for road improvements to regularly spend elsewhere.

There are remedies to this funding mischief. A firewall should be built within the municipal structure which segregates personnel, budgeting and operations from other municipal activities. Set this up to operate like a private business, making one person (Chief Operating Officer) responsible for ensuring that all funds raised are expended for the cost of water delivery and maintenance or credited back to the ratepayers. All personnel would charge their time to accounts solely funded for water service costs. In other words, make money unfungible.

Source: Richard C. Schappert, Apple Valley, Daily Press