The Growing Wave of Water System Privatization and What It Means for Communities
The United States operates approximately 50,000 community water systems and nearly 17,000 publicly owned wastewater treatment facilities, the overwhelming majority of them under municipal control.
Investor-owned utilities currently serve an estimated 5% of the U.S. population, but that share is growing. Water system privatization is accelerating, driven by an infrastructure funding gap that federal appropriations cannot close and by Fair Market Value legislation that has fundamentally changed how public systems are priced when sold.
For municipal officials, their legal and financial advisors, and utility executives, understanding the forces behind this trend and what determines a defensible transaction price is essential to protecting the public interest.
Why Investor-Owned Utilities Are Acquiring Municipal Water Systems
The pressure on municipalities to consider a sale is structural and compounding. According to the EPA’s 7th Drinking Water Infrastructure Needs Survey (2023), the nation’s drinking water systems require an estimated $625 billion in investment over the next 20 years just to maintain and improve existing infrastructure. A separate 2024 EPA Clean Watersheds Needs Survey projects an additional $630 billion in needs for wastewater and stormwater systems, a combined gap exceeding $1.2 trillion that far outpaces available federal funding.
Smaller systems bear a disproportionate share of this burden. Roughly 90% of community water systems in the United States serve fewer than 10,000 people. Per-connection infrastructure costs for these small systems are significantly higher than for large urban utilities, and many operate without professional engineering staff or a long-range capital plan.
On the acquisition side, water and wastewater systems offer something that few asset classes can match: stable, rate-regulated revenue backed by essential-service monopolies. That profile has attracted sustained interest from large investor-owned utilities such as American Water Works, Essential Utilities, and Corix/Nexus Water Group, all of which have pursued active consolidation strategies over the past decade. According to Bluefield Research, approximately 1,200 acquisition deals have been submitted for regulatory approval since 2015.
The passage of Fair Market Value legislation transformed the economics of these deals. Under traditional book value pricing, acquisition premiums were constrained. Under FMV, municipalities can receive prices that reflect forward-looking economic value, substantially increasing seller incentives and accelerating deal activity in states where the legislation has passed.
What Fair Market Value Water System Legislation Changes and Why It Matters
Until relatively recently, the price a municipality could receive for its water system was anchored to depreciated book value, known as original cost less depreciation (OCLD). That constraint effectively capped acquisition premiums and limited seller incentives. FMV legislation changed that equation.
Under FMV statutes, municipalities can sell at a price that reflects the system’s actual economic worth, incorporating projected cash flows, infrastructure replacement value, and the strategic value of the asset to the acquirer. According to Bluefield Research and peer-reviewed analysis published in Water International (2024), 13 states have now enacted some form of FMV legislation, beginning with California in 1997 and accelerating significantly from 2013 onward.
Because the acquisition price becomes the rate base from which the acquiring utility earns its regulated return, a higher sale price translates directly into higher customer rates. This is the structural tension at the center of every FMV transaction, as what maximizes proceeds for the municipality also sets the ceiling for what ratepayers will absorb for years or decades to come.
How FMV Is Typically Determined
State FMV statutes generally require appraisals conducted under the Uniform Standards of Professional Appraisal Practice (USPAP), applying cost, income, and market approaches. Some states are specific about methodology. Texas SB 1725 requires three independent appraisers selected by the Public Utility Commission and mandates a licensed engineer to assess tangible assets under the cost approach.
Water valuations require a hybrid of regulatory analysis, engineering assessment, and long-term capital planning. The cost approach must incorporate underground infrastructure evaluated by a licensed engineer. The income approach must model PUC-regulated cash flows, not competitive market revenues. A complete appraisal also accounts for approved and projected rate structures, infrastructure condition per independent engineering assessment, service area rights, operating permits, environmental liabilities, demand and supply contracts, and assets both above and below ground.
What Communities Gain and Give Up
Water system privatization does not lend itself to a simple cost-benefit conclusion. The outcomes vary significantly by state regulatory framework, deal structure, and the rigor with which the transaction price was determined.
On the benefit side, investor-owned utilities can bring capital investment to deferred infrastructure projects, operational expertise, and relief from increasingly complex regulatory compliance requirements. Smaller communities with no professional utility staff may gain substantial operational resources they could not otherwise afford. The lump-sum payment from a sale can also be deployed toward other municipal priorities.
The rate impact, however, is well-documented. Research published in Water Policy (2022), surveying the 500 largest U.S. water systems, found that private ownership was the single most significant variable driving up utility bills, outweighing aging infrastructure, water supply conditions, and local regulatory requirements. In Pennsylvania, acquisitions under Act 12 resulted in rate increases ranging from 44.9% to 116.6%, according to testimony from the state’s PUC chair. In Illinois, per analysis from the Citizens Utility Board, private utilities charged customers 20–70% more than publicly managed systems drawing from the same Lake Michigan source water.
The outcome for any given community depends on the regulatory framework, the transaction terms, and whether the sale price was independently and rigorously determined. An inflated appraisal increases the rate base and compounds ratepayer costs across the full regulated life of the asset.
Why Independent Valuation Is Central to a Fair Transaction
In FMV water system transactions, both the buyer and the seller have a financial interest in a higher price. The municipality maximizes its proceeds and the investor-owned utility maximizes the rate base from which it earns its regulated return. An independent appraiser with no business relationship to either party is the mechanism that protects the process.
Regulatory bodies and courts scrutinize FMV appraisals closely. A defensible report requires documented methodology under USPAP, credentialed expertise, and demonstrable independence from both parties. Water utility appraisal is a specialized discipline that differs from standard business or real estate appraisal in ways that matter. The cost approach must incorporate underground infrastructure assessed by a licensed engineer, and the income approach must model PUC-regulated cash flows, not open-market revenues. A firm without genuine expertise in rate-regulated utility infrastructure is unlikely to produce a report that survives regulatory or legal scrutiny.
For municipal advisors such as bond counsel, financial advisors, and municipal attorneys, selecting the appraiser is among the most consequential decisions in the transaction process. The quality and defensibility of the valuation services applied will be tested by the PUC, opposing counsel, and potentially the courts.
The Valuation Determines More Than the Price
Water system privatization is accelerating. With FMV legislation now in force across 13 states and infrastructure funding pressures showing no signs of easing, the pace of acquisitions is unlikely to slow.
The most consequential decision in any privatization transaction is not whether to sell, but whether the valuation accurately reflects what the system is worth. Without an independent, defensible appraisal, municipalities risk underselling critical public infrastructure, and ratepayers may absorb costs that exceed the system’s actual economic value. An inflated or inadequately supported appraisal exposes the deal to regulatory challenge and can shape a community’s water rates for a generation.
Appraisal Economics has conducted valuations of water and wastewater utilities across the United States, applying cost, income, and market approaches to complex regulated infrastructure. Their team of CFAs, ASAs, and valuation economists brings the methodological rigor, sector expertise, and independence that Fair Market Value transactions require. To discuss a specific engagement, Contact Appraisal Economics directly.