WATER UTILITIES FACE RATE INCREASE PRESSURES

Although the economy may be viewed as sluggish, and inflation rates currently are low, water and wastewater utilities nevertheless are experiencing pressures to increase rates for service. What are some of the drivers for the need to increase rates at this time?

1. Replacement of Aging Infrastructure. Various estimates range from $200 to $300 billion nationally to replace mains, treatment and pumping facilities that have exhausted their useful lives.

2. Compliance with Increasingly More Stringent Standards and Monitoring Requirements. Under the Safe Drinking Water Act and the Clean Water Act, utilities are subject to what appear to be ever increasing USEPA regulations as well as litigation claims.

3. Need for Enhanced Security Measures. Security has come to the forefront in imposing capital and operating costs, particularly for water utilities because water is essential for public health and safety.

4. Response to Diminishing Sources of Water Supply. Not every utility has the benefit of Lake Michigan water, but even that source of supply is limited. Surface waters such as rivers and ground water aquifers also have limitations in both quantity and quality. The more contaminated a source is, the more treatment and cost are required.

5. Expansion of Capacity. Although current economic conditions may have dampened customer growth for now, the fact is that growth can be expected in the future, which translates into expansion of mains and treatment facilities.

These factors, as well as other pressures, cause the need for rate adjustments to alleviate these cost drivers. Without such rate adjustments, utilities can be tempted to defer addressing needed expenditures. Insufficient rates can cause misallocation of water as a resource, impede replacement of assets, frustrate regulatory compliance, and reduce security and quality of service.

Rates should be reviewed and adjusted on a regular periodic basis and established to recover fully all costs of service, based upon cost of service studies. Further, innovative rate structures can be developed. For example, many utilities successfully have implemented rate riders or surcharges to base rates to recover costs incurred for ongoing main replacement programs.

Adequate rates also should facilitate utilities' attraction of financing at reasonable costs for required capital requirements. Certainly, utilities should not avoid needed rate increases in the hope of receiving federal or state grants of limited availability.