How Current Pricing for Water is Too Weak
By Jacob Hopkins
Statistical analysis by water expert Brett Watson has shown that, since 2010, water rates have risen an average of 41 percent in the nation’s thirty largest cities. No geographic region was spared, with rates going up everywhere from D.C. to Texas to California. This is causing worry among those monitoring the affordability of water for America’s poor. While some well-meaning members of the public are attempting to conserve in order to increase supply, they are actually contributing to the upward pressure on prices.
In order to begin understanding why prices are rising, one must first know that water utilities are not actually businesses, but, in almost all cases, parts of municipal governments. These local governments run all the water infrastructure in the United States, without any input from the federal government. While this is a problem in terms of having a comprehensive nationwide plan for water, it is mostly a problem of debt, as cities are required to take on massive infrastructure spending funded almost entirely by bonds.
Monthly payments on these bonds makes up over ninety percent of a water utilities costs, with the cost of actually pumping and treating the water making up the remainder of a utilities spending. However, over ninety percent of a ratepayer’s bill is determined by how much water they actually use from month to month, paying only a few small set of fixed fees to the utility each month. This cost-revenue disconnect means that when ratepayers conserve too much water, a utility can’t cover its costs and raises rates. However, ratepayers respond to higher rates by saving more, leading to an upward cost spiral.
This problem is compounded by the terms that lenders require water utilities to maintain for low interest rate bonds bonds. Water utilities are often required to collect 1.2 times of their costs by bond covenant. Even some utilities that are solvent are legally obligated to raise rates because they aren’t collecting enough to appease creditors. This has lead credit rating groups such as Fitch Ratings to predict an indefinite rise in water rates.
And failing to collect enough revenue from a water utility can be crippling for a city government. In 2010, a decline in residents watering their lawns led to a $53 million dollar budget shortfall in Austin, Texas. In 2013, Fort Worth, Texas had its credit rating downgraded after failing to meet lenders’ revenue collection requirements. Under Jerry Brown’s mandatory water conservation plan in California, cities across the country are expected to have a $1 billion dollar budget shortfall.
While it might seem like a simple solution to change the way people pay for water, with most of ratepayers costs coming from fixed charges, this also presents a plethora of problems. For one, it is a form of a regressive tax that forces the poor to contribute a higher percentage of their income to pay for a community’s water infrastructure. Secondly, it takes away the ability of water managers to increase rates to indicate scarcity to consumers. In times of drought, water rates need to go up in order to control the amount of water that cities use in order to ensure there will be enough water for the city to thrive until rain. Changing the way that water bills function takes away water managers’ best tool for making people conserve. Finally, in states such as Idaho where consumers only pay fixed fees for their water bill each month, water usage tends to skyrocket putting future generations and the environment in jeopardy.
While it might seem that there are no options for water utilities to combat rising rates, there are several options still on the table. First of all, water utilities need to invest in more efficient pumps that use less energy to pump the same amount of water. In 2012 the Energy Sector Management Assistant Program, a trusted group known for its skills in assessing the energy sector, found that most water utilities in the United State can reduce their energy intensity by five to twenty-five percent. Cutting down energy costs is particularly important, because for every five dollars the utility saves, the amount they are required to collect goes down by six dollars. Running efficient utilities is critical to maintaining the affordability of water for all.
Secondly, cities need to better invest in the people and actuaries that can help them determine how much water they can expect their cities will demand from year to year. A 2008 survey by the American Water Works Association found that a majority of America’s water utilities used projection structures that were overly simplistic and shown to be inaccurate. Though it may require a city to spend more money, investing in these high level actuaries would allow water utilities to operate on the data that the private sector already benefits from.
Finally, and most importantly, cities need to implement innovative rating structures that can encourage conservation while maintaining the affordability of water. However, it appears as if utilities are far away from implementing any sort of major reform. A 2013 survey of utilities by the consulting group Black & Veatch found that 17.5 percent of utilities across the country didn’t know how much they would have to raise rates in order to cover their costs. When utilities are so far away from even knowing how to cover costs, it is unlikely they could ever make the change to more innovative models without help.
While water affordability might not have the same appeal as the movement for a carbon tax or the fight to protect the social safety net, water prices affect us all in some way or another, and we can’t neglect them.
However, the country’s electric utilities, which are actually regulated monopolies, may have already provided water utilities with a roadmap to success. In an attempt to remove risk from their business models, electric utilities have worked with state governments to pioneer a new way to charge consumers rates called decoupling. A decoupled utility collects revenue in largely the same way that current rating structures do; however, when utilities don’t sell enough electricity to cover their costs, they can collect the difference in a small surcharge on every ratepayers bill the next month.
While this might seem like an unfair model that allows utilities to make endless profits, if they collect too much revenue, the state requires that the utility give every ratepayer a small discount on the next bill, thus making up for the months when they collect too little revenue.
This model has been shown to promote conservation effectively while maintaining the financial solvency of utilities who adopt the model. It’s no coincidence that a state such as California, which adopted the decoupling model early on, is one of the most energy-efficient states in the country. By learning from how electric utilities have adapted the model, water utilities have an ability to make a much smoother transition to a more nimble and effective model for managing the United States’ water resources.
In the absence of strong action on this issue, water rates will continue to climb, and poorer communities will struggle even more to survive in an economy with stagnant wages. Water managers will be unable to effectively plan the use of already scarce water resources that climate change will only make more scarce. While water affordability might not have the same appeal as the movement for a carbon tax or the fight to protect the social safety net, water prices affect us all in some way or another, and we can’t neglect them.