To In-house or Outsource? This Is the Question for Many Municipal Water and Wastewater Utilities

30 Jan 2023  |  Greg Goodwin

For most of us, turning on the faucet or flushing the toilet is something to which we give little thought—that is, until these everyday functions cease to work properly. Recent news stories of operational water & wastewater failures at the utility level have highlighted the criticality of utility operations & maintenance (O&M) in places like Jackson, Mississippi, and Gloucester, Massachusetts.

When it comes to effective utility O&M, there are several key factors that play into success: adequate funding, qualified personnel, effective and efficient oversight, structurally healthy infrastructure, and more. But who manages the process is a thorny and increasingly relevant question to consider as we, as a country, evaluate the necessary investments, financing, and execution to secure a future where reliable everyday water utility functions remain the norm. 

There are different ways that utility O&M is—and can be—approached. Some systems are fully private but regulated (as investor-owned utilities or IOUs), some are a core function embedded fully in municipal governance, and some municipalities contract elements of their O&M out to third parties for various reasons. Cost savings, difficulty in hiring qualified local personnel, operational efficiencies, and political outlook over governmental role in society are all factors in the ultimate decision on whether a municipality should outsource or keep these functions in-house. 

What determines why, where, and when a municipality will elect to outsource O&M operations? In our research and experience, between public and private sectors, there are typically key similarities in circumstances across asset capacity/health, rates, and local political considerations. Overall, a small number of municipalities across the country, less than 5%, engage in contracted third-party O&M but these systems serve over 30 million people in total. And circumstances are coalescing to grow the number of municipalities choosing to outsource. Below are a few key considerations on how it will likely play out.

  1. High population growth/infrastructure needs: Many areas in the Western U.S., including Colorado, Idaho, Utah, and the Southwest in general, are facing twin challenges of double-digit population growth and planning for their long-term future water security, as long-used sources like the Colorado River become increasingly unreliable. We see similar types of debates shaping conversations on the outskirts of large population centers like Denver, Salt Lake City, and Phoenix. In Broomfield, Westminster, and Thornton, Colorado, for example, City Council debates of the past few years have all included multiple discussions over rate structures, infrastructure needs, and concerns over future water supply security. We expect these needs to grow, and drive O&M outsourcing discussions in those and similar communities.
  2. Administrative and legal considerations: Does the municipality reside in a state with high public sector unionization or is it right to work? Is it a Home Rule state? Organized labor considerations and what power municipalities have under state constitution and/or statute are key influences in how utilities may be administratively structured and the manner in which labor fills out operational positions. For example, in an instance where municipalities carve out a specific administrative function and source of funding, utilities may be wholly dependent on rates for funding operations and improvements, with no access to any tax revenue that may be available under a general fund under a different administrative scheme. 
  3. What are the local public and governmental attitudes around outsourced services in general? Has the city/municipality increased or decreased its Full-Time Equivalent (FTE) positions in its budget? Are city finances healthy or is there serious pressure from pension obligations driving the administration to reduce the number of public workers on the public books? Does the municipality currently outsource or have recent experience with other common municipal outsourcing functions like trash pickup, janitorial and landscaping services, school busing, or public foodservice? Existing contracts in these areas and public sentiment around them are good indicators of how a water/wastewater O&M contract may be perceived. 

In addition to—or perhaps, above even—these interlocking common drivers are unique, site- specific criteria that range from council/mayoral electoral prospects to specific operational challenges related to water quality issues. But knowing how these factors all play into the decisions that affect how municipalities structure their operations is critical in understanding how the market will develop in specific regions over time. 

Bluefield tracks over 2,000 O&M contracts through our Private Water Corporate Subscription. We also regularly advise utilities on their O&M strategies and help O&M providers identify opportunities through our Consulting Service.