23 Nov 2008

Small Water Systems

My list of things to do (it's long, like a roll of toilet paper) has one item labeled "community water."

I want to examine the effect of size on performance, i.e., it is harder for customers to monitor bigger water providers (private or public) so they may be run less-efficiently than smaller providers. Of course, there's an argument that smaller providers may not have the economies of scale (thus lower costs or better management) of bigger firms.

If you believe both of these arguments, there should be a "sweet spot" (optimal size) for water providers that's neither large nor small.

Luckily for me, Lee and Braden have just published an article [PDF] that directly addresses this topic through the study of merger activity among small water providers. (The US has 50,000 community water services, of which 90% serve fewer than 10,000 people.)

Their results indicate that mergers are more likely when firms are smaller, violate monitoring or water quality guidelines, and are private. The first two results make sense if the firm wants access to better management; the last result (private firms merge more often than public firms) makes sense if mergers are politically sensitive.

Unfortunately, Lee and Braden do not check to see if newly merged firms improve on monitoring or quality. I'm guessing that question will be answered in a follow-up paper.

Bottom Line: When fixed costs are high (as is often the case with water), it makes sense to grow larger. Just don't grow so large that you lose touch with your customers. (Hear that, LADWP?)