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University of Wisconsin Center for Cooperatives
Research on the Economic Impact of Cooperatives
Close to 3,300 water cooperatives in the U.S. are consumer-owned utilities formed to provide safe, reliable and sustainable water service at a reasonable cost. They provide drinking, fire protection and landscaping irrigation water. In addition, many of them provide wastewater services. Water cooperatives are most often found in suburban and rural areas that are located too far from municipal water companies to receive service.
Most water cooperatives are small (serving 501 - 3,300 consumers) or very small (serving fewer than 500 consumers). Eighty-nine percent of the population that is served by public water systems is served by either a publicly owned, municipal water system or a cooperative utility. The remaining 11% of Americans are served by privately owned water systems. Nonprofit cooperatives are the most common organizational form in very small communities.
The association between disease and polluted water was recognized by the early 1900s and steps were taken to treat water before its distribution for human consumption. In contrast to the development of other utilities, early water systems were owned by private, for-profit entities. However, as cities and towns grew exponentially and the capital needed to develop water infrastructures increased, municipal governments assumed control of private utilities. After World War I, Congress exempted municipal bond interest from Federal taxation, enabling cities and towns to issue bonds at low-interest rates that were still attractive to investors. Much of the country’s water infrastructure has been supported by these tax-advantaged municipal bonds. Today most water systems are owned by municipalities.
As is true of other utilities, the expense of providing water to rural residents is considerably higher than providing it to urbanites, due to the large distances water must be transported. The number of rural water cooperatives and mutual associations increased significantly during the late 20th century old farm wells ran dry or became contaminated and unsafe.
Water cooperatives have long benefited from government support. In 1946, the Farmers Home Administration (FmHA) was given responsibility for implementing water programs. Since 1990, the programs have been administered through the RUS's Water and Environmental Program (WEP). Many water cooperatives were developed with significant assistance from rural electric cooperatives, and local rural electrics have expanded into providing water services as well.
The EPA describes a public water system as an organization that “provides drinking water to at least 25 people or 15 service connections.” Most of the U.S. population (292 million) receive their water from the nearly 155,000 public systems in the U.S. (EPA, 2008). This figure includes municipal systems, water cooperatives and mutual associations, water districts, and nonprofits. Most systems serve small populations spread over large geographic areas. In 2005, 85% of the systems were estimated to serve just 10% of the population (Water Science and Technology Board, 2002). An estimated 3,352 of these public water systems are cooperatives or mutual associations, nearly all of which are small- or medium-sized utilities. About 60% of the nearly $40B in revenue generated by U.S. water utilities is from household consumption (Grigg, 2007).
Water utilities have three major components: a water source, a treatment facility to remove pollutants and impurities and a distribution system. This delivery infrastructure, which spans nearly 1 million miles, is the primary asset of public water systems and represents a significant capital investment (National Research Council, 2006). In addition to providing enough water for both potable and non-potable needs, the water must be safe, of acceptable quality, provided at appropriate pressure with minimal loss, and economical.
The water sector currently faces many challenges. To replace a rapidly aging infrastructure, much of which was built in the late 1800s and the early 1900s, the American Water Works Association estimated that $250B will be needed over the next 30 years (Water Science and Technology Board, 2002). Furthermore, consumers have become more educated about the industry, and are placing increasing demands on utilities for high-quality water provided in an environmentally sustainable way. Other challenges include meeting the increasingly stringent governmental standards for water quality, protecting the security of the water supply against potential terrorist threats, and replacing the large proportion of the experienced labor force approaching retirement age.
Significant investments in the water infrastructure are needed to meet these challenges, but represent costs that are particularly difficult for small- and medium-sized utilities to absorb. In 1998, the ratio of net utility plant cost per gallon of water supplied was about 3.5:1 for investor-owned water utilities, more than twice that of the energy and telecommunications utilities (Water Science and Technology Board, 2002). These costs are even higher for small and very small water systems, where the cost ratio is almost 8-10 times higher than for systems serving >50,000 customers. In response, some public water systems have turned to investor-owned firms, either to take ownership of the system and make needed capital investments, or to manage the system and provide needed technical expertise. Many are concerned about the loss of community control over the safety and distribution of water, and point to evidence from other countries that privatization may result in higher costs to consumers for lower quality water. Others think that private, profit-oriented capital investment is the only way to maintain the country’s water infrastructure.
The drinking water industry is regulated by a complex of local, regional, state, and national laws and organizations. Because water supply systems are monopolies, public utility commissions are responsible for regulating rates for private water companies, rates of return, and quality of service. However, publicly owned systems, cooperatives, and homeowners associations are exempt from price regulations. Because they operate on a nonprofit or not-for profit basis, and their directors are elected by consumers, it is presumed that the consumer or the public has control over rates (Water Science and Technology Board, 2002). Water quality is regulated by state agencies using Federal standards. In addition, drinking water systems that serve >3,300 people are federally required to periodically assess vulnerability to attacks by terrorists or others.
Water cooperatives are incorporated under state statutes specific to cooperatives, mutual associations, or nonprofit corporations. The term “water cooperative” is used here to indicate all of these organizational forms. Like other utility cooperatives, water cooperatives are considered nonprofit corporations and are granted Federal tax-exempt status under IRC section 501(c)(12), which requires that they operate on a nonprofit basis, provide water and/or wastewater services, and meet the 85% income from members rule. These cooperatives are found primarily in rural and suburban areas and provide water and wastewater services at cost.
Rural water cooperatives typically are organized by households and businesses that cannot connect to existing water systems, usually because they are located too far from an exiting system to make service financially feasible. In contrast, most mutual water associations were created to buy out the real-estate developers who built water systems to service their development properties (Young, 2002).
Each water system customer is a member-owner of the cooperative, and membership is required of all customers. Water cooperatives are democratically controlled enterprises either on a one-meter/one-vote or a one-member/one-vote basis. In nearly all cases, water cooperatives are monopoly providers, as are other water utilities. As a result, customers do not have the opportunity to choose among a variety of providers. Membership is typically open to any property owner within the designated water service area.
Water cooperatives are governed by a board of directors that establishes policies and provides oversight. Members elect the board of directors from among the membership. The number of directors on the board varies, depending on the size of the cooperative and the responsibilities of the board members. Since most water cooperatives are very small, there are usually no employees and the work is performed on a volunteer basis, often by the board members. The members typically elect 5 or more board members. While larger cooperatives hire staff to perform operational functions, board directors make most of the every-day decisions. Usually, directors are not compensated for their service.
Members usually vote only to elect board members. WEP provides loans and grants to water systems in rural areas with fewer than 10,000 residents to develop and/or repair water and wastewater systems, reduce costs to a reasonable level for rural users, and provide technical assistance and training directly or through grants. Loans are made at variable rates depending on the need to meet applicable health or sanitary standards, and the median household income in the service area (Miller, 2004) Additional funds for specified uses are available to water systems through USDA Rural Development’s Community Facility Programs, and may also be available through state programs.
The list for water cooperatives comes from the EPA and Guidestar. All economic data comes from survey work undertaken by the UWCC and Guidestar. The survey response rate was 35% for water cooperatives, 28.6% for water mutuals, 58.9% for water associations, and all reporting cooperatives provided us with 2005 - 2007 fiscal year-end data. We took a non-random sample of 445 water cooperatives with Guidestar information. The data collection and survey methodology is discussed in detail in the Data Collectionsection in the Appendix.
Table 4-5 shows the data we have from 923 water and waste cooperatives, and collectively these firms account for >$2.2B in assets, $1.7B in sales revenue, and pay $4.7M in wages. There are approximately 2 million memberships and 40,000 employees. As Table 4-5.3 shows, by extrapolating to the entire population (3,352 firms) and adding indirect and induced impacts to this activity, water and waste cooperatives account for close to $2.6B in revenue, 11,000 jobs, $408M in wages paid, and nearly $500M in valued-added income.