Thank you!

Wes

As far as low-cost loans or other tax subsidies, I think the best observation is about how the government creates rules to favor its own proprietary operations and disfavor competition from the private sector. It’s a cautionary tale about the perils of government power. In fact, despite the (sometimes) lower cost of capital for government-owned utilities, on average private utilities have rates that are comparable to government-owned utilities due to greater efficiencies in other, non-cost of capital aspects of their operations. Of course, every utility has different rates based of their varying costs and size efficiencies.

Wes

Yes, I still actively maintain the blog although the post you found is older.

The issue of reduced utility revenues based on water conservation continues to cause rate increases across the country. The general reason is that water utility service is a very capital-intensive enterprise. In fact, it requires more capital expenditure per dollar of revenue than any other utility business, roughly $10 to $15 of capital expenditure per $1 of revenue. Thus, capital recovery is stretched out over long periods of time, fixed costs represent a significant percentage of total utility costs, and the revenue required for a utility to cover its capital costs does not vary by the amount of water used. For example, if a water utility needs to replace an aging pipe, the capital cost of that pipe will be the same regardless of the amount of water flowing through the pipe. While a utility will build the pipe based on projected water usage, it is impossible to be completely accurate, and it generally makes sense to build infrastructure with a view to future as well as current demands, to avoid having to dig up and replace the pipe a few years later at great expense. Water usage has generally declined across the US in the past 3-4 years based on the intersection of dry conditions and the stagnant economy.

It is important to keep in mind that what is kept constant is the amount of revenue required by the utility for its operations. The utility can collect the same amount of revenue by charging a higher rate on less water, or a lower rate on more water. An increase in water rates under those circumstances will not necessarily result in an increase in overall utility bills. For example, assume that a water utility collects $25.00 from an average customer for 25 units of water, or $1.00 per unit. If customers on average reduce their usage to 20 units, then the utility would need to charge $1.25 to generate the same revenue as before. An average customer would still pay $25.00, however, so the financial burden would not have increased. What does happen is that customers who conserve more than average will pay less than before, while customers who conserve less than average will pay more. This is in line with the concept of using pricing to encourage conservation, but in practice it is difficult to accurately predict exactly how much water will be conserved at a given rate. Utilities try to make the pricing as close as possible, but adjustments are almost inevitably needed. It is, of course, understandable for customers to be frustrated by the adjustment process.

In the current economic situation, many utilities (both investor- and government-owned) have attempted to undertake reasonable austerity measures, but there are limitations based on manpower needs, regulatory requirements for drinking water safety and environmental protection, and union contracts. In some cases, water utilities have sought to take austerity measures that were disapproved by the state public service commission. I do not know about the specifics of the United Water rates you reference so cannot comment there. One issue that investor-owned utilities face is that some states do not allow them to receive State Revolving Fund (SRF) loans or other financial assistance. That is unfortunate, since use of SRF funds directly benefits customers, and the customers of investor-owned utilities pay federal and state taxes that fund the SRF program on an equal basis with the customers of government-owned utilities. In addition, the federal government significantly subsidizes government-owned utilities through the tax exemption on local government debt. Ending these inequalities would go a long way to helping customers of investor-owned utilities such as United Water. In the long-term, I would not expect SRF or other federal subsidies to be available to any water utilities, as financial pressures increase on the federal budget related to the systemic deficit.

Wes

We have a public hearing coming up on United Water’s proposal to raise water rates 20% due to decreased income based on successful ratepayer conservation efforts. This has created quite a stir, particularly in these difficult economic times.

Perhaps you can comment on why Utility costs do not decrease in accordance with reduced demand for product, as is common in industry. A drop in consumer demand for water should be accompanied by a corresponding decrease in O&M costs (less pumping, less chemicals, less sludge for disposal, less maintenance, reduced fuel for vehicle fleet etc).

It would also be interesting to know austerity measures Ultility Companies employ to reduce their costs in such situations, e.g. decreasing overtime costs, mothballing underused facilities (such as unit treatment processes), reduced travel and training costs etc.

Since it appears a main driving force for higher rates is to maintain a high credit rating and an attractive rate of return for Utility bonds for funding capital-intensive projects, why don’t water companies take advantage of low-interest State Revolving Funds loan for capital projects?? and create attentuated capital replacement/repair accounts?

Thank you for your consideration, and I look forward to hearing from you.

Kevin

Wes