IS "VALUE" OF WATER RELEVANT TO RATES?

Recently, I read an article which asserts that whether a water utility charges sufficient rates depends upon the perceived "value" of the water service it provides. The article submits that the ability to raise rates to provide revenue requirements for infrastructure improvements depends upon customer acknowledgement of the "value" of water. It added that the starting point for water utilities to achieve approval for rate increases is for utilities and their customers to understand the full "value" of water, and the need for customers to pay for this value.

However, contrary to these assertions, the so-called "value" of water has nothing to do with well-established rate-maaking principles. As enunciated in many court decisions and statutes, and echoed in the American Water Works Association rate-making manuals, the only proper basis for setting reasonable rates for water service is cost of service.

Reliance on the "value" of water service to justify rates is misguided and can deliver a wrong message to customers. First, "value" in this setting is a subjective term, and can mean different things to different water users. Indeed, as I wrote in my previous posting, who remembers, and therefore values, the water that flows from a faucet? People appear to value water only after it stops flowing.

Second, setting of rates based on recovery of costs of service necessarily requires objective numbers. Subjective opinion of "value" is incapable of quantification and does not advance establishment of revenue requirements.

Third, that water is essential for life, public health and safety, and is useful for production of food and products, is not in dispute. However, that rates must be increased from time to time to fund operating expenses, depreciation, debt service and reserves--all of which are costs of service--also is not in dispute.

Customers will understand that rates for water service must recover the costs to provide that service, with adequate communication to those customers. There is no reason to interject amorphous concepts of "value" in the rate-making equation to confuse both utilities and their customers. Instead, utilities should perform frequent reviews of the adequacy of their rates, and have the courage to increase rates when needed instead of trying to appease customers by deferring needed maintenance or infrastructure upgrades to avoid rate adjustments.

The fact is that the "value" of safe and adequate water service depends upon ongoing recovery of all costs of service, not upon philosophical verbiage about "value."