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Turning to Outsiders to Finance Water Deals

In a growing trend across Texas, municipalities and public agencies are reaching out to the private sector for funding. Advocates say it's the only way to meet Texas’ growing water needs, but critics worry about accountability and rising water rates.

Kent Satterwhite, general manager of the Canadian River Municipal Water Authority at Lake Meredith near Borger, Texas, on Tuesday, Dec., 18, 2012.

Developers say the site for the proposed Lake Columbia reservoir in East Texas is not much to look at right now.

“They call it the Mud Creek floodplain,” Fred Brown, a partner at Tomlin Infrastructure Group, said of the site, which is about 120 miles southeast of Dallas. “I’d say it lives up to that name.”

But if it is built, the 15-mile-long reservoir, which would cover more than 10,000 acres and hold more than 64 billion gallons of water, could be a model for the changing way Texas is financing water projects.

Tomlin, a private infrastructure company, intends to take a major stake in what would traditionally be a public project. It is part of a trend spreading across the state as cash-strapped municipalities and public agencies reach out to the private sector for financing and management services. Advocates say that private sector involvement is the only way to meet Texas’ growing water needs, but critics worry about how accountable private firms will be to the public, and about the possibility of higher water rates.

“In the public system, elected officials are held responsible,” said Ken Kramer, the recently retired director of the Lone Star Chapter of the Sierra Club. “Private entities are not necessarily very accountable to public attitudes. You might lose some ability for the public to have a say in decision-making around water.”

Nonetheless, he acknowledged the need for new water sources and for a private-sector role.

Private entities have become increasingly active in selling groundwater to public suppliers. In the most prominent such deal, Mesa Water signed a deal last year to sell $103 million of groundwater rights in the Panhandle to the Canadian River Municipal Water Authority, which provides water to Lubbock and Amarillo. The water authority needed new supplies as Lake Meredith, a reservoir north of Amarillo, dried up.

But the Tomlin partnership — with the Angelina and Neches River Authority, a public entity that manages water supplies for a swath of East Texas — is highly unusual for handling surface water, according to Ronald A. Kaiser, who chairs Texas A&M University’s water program. Whereas groundwater can be pumped and sold by private landowners with relative ease, surface water projects are costly and time-consuming, which is why they have traditionally been built by governments at all levels.

The Lake Columbia deal, announced last month, allows Tomlin to put up 47 percent of the cost of building a reservoir in exchange for the rights to 47 percent of its water. Tomlin plans to pull in an additional financial partner, which would share in the water rights.

Construction costs are projected at $330 million for the reservoir, which would provide water for 150,000 Dallas-Forth Worth area households and some industrial users.

“We haven’t seen large-scale private investment in infrastructure like this,” Kaiser said. “Lake Columbia is really an unprecedented development.” 

The Lake Columbia partnership and other forays by the private sector into municipal water development come as cities’ water supplies, and financing, run dry.

“The fiscal condition the country is in, down to municipality X, Y and Z, makes it very difficult for traditional funding to happen,” said Bill West, general manager of the Guadalupe-Blanco River Authority, a water district based in Seguin. “There’s no way for the state to finance all the water infrastructure it needs.”

The river authority is considering its own public-private partnership for a plant along the Gulf Coast that would desalinate seawater and produce power. The Brazos River Authority and the city of Odessa are two examples of public entities interested in similar partnerships to build plants to desalinate either brackish groundwater or seawater. The expense of developing these new water sources — often hundreds of millions of dollars — makes local utilities eager for private capital. The private groups, for their part, are interested in profits and also in the water.

Kelley Holcomb, general manager for the Angelina and Neches River Authority, said tight budgets made navigating expensive and lengthy permitting processes for a reservoir impossible under traditional financing arrangements. He added that a final administrative step for the Lake Columbia project — a permit from the Army Corps of Engineers — could cost up to $13 million. “Local folks just don’t have the cash for that,” he said.

But the high investment costs can also be a barrier for private companies. Kaiser said that even as private entities called water marketers rush to sell groundwater to cities, public entities still typically build the expensive pipelines that carry the water.

Private water groups have also long occupied another niche in Texas: selling water to rural Texas communities. Recently, those companies have come under scrutiny from the Legislature for their rates. David Burghard, a Hays County resident, told a legislative committee last month that his water rates rose more than 200 percent in February and that he was concerned there would be “no limits.” The private companies counter that they are pouring millions of dollars into upgrading water infrastructure.

Some experts say concerns about the private sector transparency are overstated. Tom Pankratz, editor of Global Water Intelligence, a publication covering the international water market, said a public-private partnership in areas like desalination “doesn’t mean the private sector owns the water rights and can hold them hostage. The contracts are written specifically to protect both the city and private interests, but especially the city.”

Control over water sources is not the only issue critics raise against the private sector. Increased costs are also a concern. According to West, the Guadalupe-Blanco River Authority considered two other public-private partnerships recently, but refused partnering because the firms involved wanted a higher profit margin than the public was willing to pay.

“I think there is a role for the private sector in water development,” he said. “But in my opinion, they have to realize a reasonable rate of return for mayors and municipalities may not be the same as it is for businesses.”

Gabriel Eckstein, director of the International Water Law Project and a professor at Texas Wesleyan University School of Law, said consumers may need to adjust their expectations about water costs. Water rates in most places are “dirt cheap,” he said, and when rates are hiked, it is often to offset the enormous costs associated with water development.

“We don’t consider water at its true value and the true costs to bring it to the tap,” Eckstein said. “I agree water has a special character — it’s the main ingredient for life — but it still costs.”

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