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Private water is a public problem

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The exorbitant bills paid by 120,000 New York American Water customers from Massapequa to Sea Cliff are a pressing problem. A 2019 study found that American Water customers in the Sea Cliff area paid an average of $1,124 annually, while customers of the nearby Jericho Water Authority, a municipal entity, paid average yearly bills of $196.

A 26% rate increase on American Water customers set to take effect May 1 will only increase the rage.

But as much attention as these huge bills attract, the water situation across Nassau County, with almost three dozen providers, creates broader concerns, too.

Water will be an increasingly worrying issue, as usage and costs to remediate pollution increase.

American Water’s for-profit model is a questionable method of distributing a vulnerable resource. A perverse incentive not to encourage conservation can be created because profits increase when customers use more of the water that belongs to all Long Islanders. Our sole-source aquifer already faces threats from localized saltwater intrusion and chemical contamination, which requires expensive remediation.

American Water says its bills are so high because of a special franchise tax enacted by the state and paid to the county in excess of $25 million annually, as well as property taxes on the system's physical assets. Municipal water authorities are exempt from such taxes. The franchise tax is the price American Water pays for exclusivity in the market and profits guaranteed by rates set by the Public Service Commission, and the county's arcane four-class tax system creates an unusually high bill for American Water.

Liberty Water, a company set to buy the American Water system, wants the franchise fee eliminated and blames it for high rates. But clearly there are still profits to be made because the massive tax hasn’t stopped it from offering $607 million for the business.

The way to eliminate taxes on utilities is by municipalizing those utilities, but that has downsides, too. The taxes don’t disappear, they just get shifted. If your American Water bill declines because the utility stops paying property taxes to your school district, your school taxes will likely rise. Even the school tax bills of taxpayers who are not American Water customers may jump. Similarly, if your water bill goes down because the utility stops paying a franchise fee, then either the expenses, and likely the customer bills, of other utility providers in the county, like LIPA and National Grid, will go up or county property tax bills will.

But there still is money to be saved by municipalizing American Water. A study commissioned by the Town of Hempstead concluded that municipalization is feasible and could cut American Water bills by 8% even if the same tax costs are passed on through water bills via a payment in lieu of taxes, and by as much as 43% if the taxes on the water system are lifted.

Significant savings can be realized when for-profit utilities are taken over by public authorities because the need for profit disappears and the cost of capital is reduced.

The Public Service Commission is studying municipalization of American Water. Hempstead Town, with 90% of American Water's customers and 37,000 water customers supplied by the town itself, looked at taking over the system and balked at the hundreds of millions of dollars in necessary borrowing, even as the study called such a takeover "feasible." The Massapequa Water District and the Village of Sea Cliff each studied taking over the parts of the system affecting their residents, and both also found feasible a takeover of around 5,000 customers each although how much the savings might be is unclear.

But such tiny local takeovers don’t fix the broader American Water billing issue, and they exacerbate a long-term problem: There are 35 water providers in Nassau County, and local leaders and environmental advocates increasingly and correctly argue that a unified approach to managing water needs and resources makes the most sense.

That’s why the most promising solution offered so far comes from the Suffolk County Water Authority, which is offering to operate the system via an agreement with a parallel Nassau authority that would have to be created.

The SCWA has 400,000 accounts, its own testing lab, and 585 full-time employees, and it estimates it can service American Water customers for $450-$500 a year because it can borrow cheaply, would be relieved of taxes, and does not have to make a profit. And it has, over time, acquired more than 40 public and private water systems in Suffolk.

A takeover by the SCWA, particularly if it removed exorbitant taxes from water bills, would likely offer American Water customers more relief than any other option.

It would also be a strategic move forward in consolidating control and protection of the region’s potable water.