Market Spotlight: Water Utilities

As the economic slump pinches municipal budgets nationwide, some civic leaders are considering selling off their water utilities for a quick buck _ and that's garnering mixed reviews.

In March Providence, R.I., hinted it may sell off its network of water reservoirs and treatment plants to a private company. City councilors said at the time they hoped to raise between $400 million to $600 million, which could be used to pay down the city's large pension debt.

American Water Works Co., which recently went public, is in the midst of a $100 million negotiation to buy the suburban network of Trenton, N.J.'s water system.

Wall Street analysts generally like what they see in the sector. Indeed, water is essential and it's cheaper than gas or electricity. Yet some industry experts are asking why private companies would be interested at all in water utilities.

After all, the infrastructure used to bring the liquid from treatment plants to faucets is aging nationwide, and some consumers _ in a bid to save the environment _ are using less water, meaning less revenue.

Shares of American Water Works have gained 9 percent since its initial offering April 23, while others have not faired so well. In the same timeframe, shares of Aqua America Inc. shed 4 percent and shares of California Water Service Group slipped 7 percent.

Harvard professor Peter Rogers, who studies natural resource development, is perplexed by the privatization trend.

"I'd be surprised if anyone would want to buy a water utility in the U.S. right now," he said in a phone interview.

The Environmental Protection Agency currently estimates that $277 billion will be needed over the next two decades to repair and improve drinking water systems. Some engineers put the figure much higher.

Yet even in the face of those costs, Aqua America Inc., which bought Long Island's New York Water Service Corp. for about $50 million in cash and debt last year, is currently pursuing a "growth-through-acquisition strategy."

The company makes investments to improve water systems, which it says leads to more income in the long run.

"There definitely is a perception that, 'Water is a public right, why do I have to pay for it?'" Chief Financial Officer David Smeltzer said in an interview. Yet most customers realize rising rates go toward everything from repairs to water quality, he said.

Janney Montgomery Scott analyst Heike Doerr said large publicly owned companies are actually better prepared than many of the smaller, municipality-owned utilities nationwide to invest in and improve deteriorating systems _ and reap the rewards.

And while many in the industry are looking long term, in the end a maturing network of pipes and pumps might just be what publicly owned water utilities need.

"I would argue that this gives them tremendous opportunity," Doerr said.