A Practical Look at Privatizing Municipal Water and Sewer Systems

Water systems are a type of public service most people don’t think about until something goes wrong. In Pennsylvania, however, water and sewer infrastructure has become a significant financial and political challenge for local governments. Many small municipalities face deteriorating pipes, stricter state and federal regulations, and limited tax bases. For most, the question isn’t whether repairs are needed, but how to pay for them. In this context, selling or leasing public water and wastewater systems to private companies, or "privatization," has become an increasingly attractive option for some local governments.

My personal experience comes from a municipal sewer system built in the early 1970s with clay tile pipes that, over the years, gradually separated and/or broke. Aged customer tap-in areas leaked, and the lines from homes and businesses experienced excessive inflow and infiltration, known as “I&I,” which significantly increased flow and caused system overloads, especially during rain events. We were treating unnecessary amounts of clear water and, like a toothache, it wasn’t going to get any better. 

In Pennsylvania, privatization mostly involves the complete sale of a municipal or authority-owned water system to an investor-owned utility. Sometimes, municipalities opt for long-term leases or management agreements that keep ownership in the public sector but transfer operational control to private entities. These setups are often called partnerships, though their long-term effects can differ significantly from traditional public ownership. Pennsylvania's legal environment makes privatization especially appealing. Since Act 12 was passed in 2016, private water companies can pay “fair market value” for public systems instead of their depreciated book value and then recover that cost through future rate increases approved by the Pennsylvania Public Utility Commission. This single policy change has made many small systems more attractive to corporate buyers and has spurred a lively market for municipal water assets.

Local officials who consider privatization usually do so out of necessity rather than ideology. Selling a system can provide a large one-time payment that reduces debt, funds pension obligations, or strengthens overall finances. Private utilities also claim they can invest more rapidly in system upgrades by accessing capital markets that small towns typically cannot reach. For communities struggling to meet DEP mandates or avoid consent decrees, the expertise and compliance capacity offered by private companies can seem like a vital resource rather than a luxury. In essence, privatization can lift a significant operational burden from local governments while ensuring residents continue to receive safe, regulated services.

However, there is another aspect of this issue that must be considered – rates. After a private utility takes over a municipal system, rates often increase sharply within a few years. This isn’t necessarily because private companies are inefficient; it mainly stems from how state regulation works. When the Pennsylvania Public Utility Commission allows a company to recover its costs, including the purchase price, customers end up paying for it. The same sale that brings a financial gain to a municipality can also lead to higher monthly bills for its residents. It’s the Pennsylvania Public Utility Commission’s role to ensure utility rate requests are fair and reasonable. This is why all rate requests must be vetted and approved by the PUC before they are permitted to move forward.

Loss of local control is another consideration. Under public ownership, residents can attend authority meetings, petition elected officials, and demand transparency. Once those systems are under control of a private entity, consumers must go through the company’s customer service department with any questions or concerns. And, of course, they can send concerns to the PUC, which has oversight.

It's a balance between two economic forces: Privatization of water and sewer systems often leads to efficiency improvements and enhanced infrastructure investment, but affordability for consumers is also a key consideration. For municipalities considering a sale, the most crucial step is conducting a long-term analysis, which weighs the ongoing and expected cost of operating the system against the potential financial and operational benefits to privatization, while also recognizing impacts to consumers.

For local leaders, the choice is rarely ideological; it’s practical and fiscal. Safe, affordable water and effective sewage treatment are nonnegotiable. The challenge is finding a financially sustainable way to deliver these services without depleting a community’s assets. It’s a tough decision, so “fire this thing up” and analyze the short-term and long-term impacts of privatization. 

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About the Author

David L. Anthony is a member of the Keystone Municipal Solutions team of experts. He is a veteran of municipal government, having served more than 33 years in various positions of public service. Contact him at david@keystonemunicipalsolutions.com. To learn more about David and the Keystone Municipal Solutions team, click here.