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and the fiscal reliability and stability of the private enterprise, particularly in changing economic conditions. This paper discusses privatization trends in the water and wastewater sector, in general and in Texas specifically. It explores the potential benefits--and the risks--of privatization of these services. The paper concludes with recommendations for consideration by the Texas legislature and state agencies. AN OVERVIEW OF PRIVATIZATION OF WATER AND WASTEWATER SERVICES As of 2000, about 85 percent of the water systems in the U.S. were owned by municipalities.4 Fifteen percent of the market is privately owned? but that percentage is expected to double over the next five years. Municipalities, as well as small private and regional utilities, are in need of substantial funds and capital improvements to repair aging infrastructure, and to meet growing demands at the same time that they are facing fiscal restraints and demands by the public to cut costs. Privatization is touted as one way to address these issues. Moreover, large electric utilities want to diversify into the water business and large-investor- owned water utilities want to expand their services to include designing, building and operating water- wastewater facilities. Both are seeking to obtain a share of an estimated $82 billion annual US market.6 Municipalities have traditionally hired private companies to design and build water and wastewater facilities while the city continued to operate and manage the system. In recent years, more communities have been contracting out the management and operation of their systems. In addition, some municipalities are signing long- term contracts with private companies to design, build, operate and maintain their systems or specific projects,s This latter type of water utility privatization has been taking place in Europe for some time, but its adoption in the U.S. is more recent.