Are Water Rate Increases Inevitable?
Former Philadelphia Mayor and current Pennsylvania Governor Ed Rendell has seen his share of interesting events in his public service life. A prolonged cold spell during Rendell’s tenure as Mayor was once followed by a rapid warm-up. Rendell recalls that as the temperature suddenly warmed, water supply pipes began bursting throughout the city. In all, 58 water pipes broke, creating quite a municipal problem. Philadelphia water department managers later reported back to the Mayor’s office that many of the pipes that burst were installed back in the 1800s and were installed too near the surface to withstand the sudden temperature change.
Old pipes, treatment facilities and other infrastructure present significant challenges for many water utilities. Over the years, demand for water and wastewater treatment systems increased with growth. Expanding plant and facilities seemed sensible when local economies were growing and new customers were demanding service. New facilities were made possible by revenue from new customer demand.
Over time though, all facilities inevitably reach the end of useful service lives. As this point is approached, providers that do not have a growing population or expanding market need to confront the need to replace facilities even though revenues may be static or even declining. The cost of replacing existing systems could translate to major rate increases to current customers.
New York Times columnist Bob Hebert (February 15, 2010) opined that: “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 aging infrastructure issue to create jobs implies that the federal treasury should intervene with the funding. Unfortunately, this is only creating false hope that Washington will be riding to the rescue.
Utility managers are well acquainted with the need to replace treatment plants and delivery systems and they are trying to coax every last possible day of service out of existing facilities. Providing service with old equipment and facilities will only last so long. At some point, cities and water service providers will have to confront sometimes enormous replacement costs.
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.
The American water utility industry is made up mostly of small providers serving fewer than 3,300 customers. These utilities must confront the high cost of infrastructure repair and replacement without outside help. And spreading a multi-million dollar cost for replacing a water treatment plant among only a few thousand customers can add a great deal to each customer’s service rates.
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 economic advisor to water and wastewater utilities across the country. His organization, StepWise Water Utility Consultants, assist utility organizations improve management operations, improve cash flow management as well as manage customer rates in a challenging economic environment.