Are Water Rate Increases Inevitable?
Wednesday, March 3rd, 2010Pennsylvania Governor Ed Rendell is fond of repeating a story from his days as Mayor of Philadelphia. After a prolonged cold snap, temperatures quickly soared into the upper 50s causing 58 water main breaks in the city service area. The Philadelphia water managers reported back to him that some of the pipes had been installed in the 19th century and were not buried deep enough. When the rapid change in weather occurred, the ancient parts of the water service infrastructure simply failed.
Although few utilities currently use equipment brought into service during the 1800s, managing aging infrastructure is an ever present challenge for most water providers. Most utilities grew up along with their communities, providing increased services to meet the need of a growing consumer population. Building new facilities to meet increasing need only made sense and new customers meant additional revenue to the provider.
As infrastructure assets reach the end of their service lives though, communities without an expanding revenue base struggle to find ways to pay for not for expansion but for infrastructure and facility replacement. Should a key piece of that infrastructure fail unexpectedly, smaller communities may have to absorb significant service rate increases.
In a recent New York Times opinion, (February 15, 2010) columnist Bob Hebert wades into the issue of decaying facilities and the battles states and communities are facing when it comes to replacing expensive infrastructure. “Ignoring these problems imperils public safety, diminishes our economic competitiveness, is penny-wise and pound-foolish, and results in tremendous missed opportunities to create new jobs on a vast scale.” Using the ‘jobs’ rationale, Hebert implies that Washington DC can provide a funding solution and thereby deliver relief from high unemployment rates.
Squeezing every possible day of service out of existing facilities is good management. But providing continued service with old facilities is begging for trouble. At some point, water and sewer service providers will have to confront the very real possibility that they will have to replace expensive plant and facilities by themselves. Handling these costs – some of which could be enormous – has many managers losing sleep.
The best way to handle this problem according to Hebert, is to look for help from the national treasury. Budget hawks are sure to resist. With the current deficit and budget crises, resolving this conflict won’t be easy and could certainly be expensive. Communities and water utilities – like Rendell’s Philadelphia water department – will still have to come up with a way to pay for repair and replacement costs. Washington may not have the ability to help.
Water utilities in the United States typically serve small groups of customers. In fact, 85% of American water utilities serve fewer than 3,300 customers. Some of these small business units are now faced with huge expenditures for facility replacement. Distributing many millions in facility replacement costs to just a few thousand customers can mean huge service rate increases.
The Times Hebert recognizes that a failure to replace important infrastructure has far reaching negative consequences. Finding the dollars to do the job is – as it always is – the main problem. Water providers need to plan sooner rather than later for the unavoidable need to replace expensive equipment and facilities – or wait for the next set of pipes to burst and figure out how to pay for it then.
Specializing in Water Utility Consulting, author Jason Mumm is a respected financial advisor to water and wastewater service providers across the country. His organization, StepWise Water Utility Consultants, assist utility organizations improve operations, improve cash flow management as well as manage customer rates in a difficult financial situation.