THE INFRASTRUCTURE ISSUE, PART 2--WHO SHOULD PAY?

The long established principle of sound ratemaking is that rates should recover all the costs of service from those receiving service. That is, the cost causers should pay the costs of serving them. For example, one of the costs of service is depreciation expense on physical assets such as treatment facilities and mains used to provide service.

If water or wastewater infrastructure needs to be replaced or upgraded, what alternative sources of funds may be available for such work? In other words, who should pay for the infrastructure improvements? Possible alternatives may include the following:

** Rates. Depending upon the extent and timing of improvements, rates may provide a source of funding, either through rate increases, surcharges or special assessments.

** Reserves. A prudent utility have have established a depreciation reserve or replacement reserve from revenue to provide a source of funding for infrastructure improvements.

** Debt. Issuance of revenue bonds or other borrowings amy be a source of funding. Along these lines, a refinancing of existing debt to lower debt service may be helpful. The costs of debt will be recoverable in rates.

** Equity. In the case of investor owned utilities, additional equity investment may provide funding, with a return allowed on rate base increases.

** Contributions. In communities experiencing growth in residential or commercial customers, developer contributions of actual plant or payment of connection fees may satisfy infrastructure expansion or upgrade requirements.

** Privatization. In the situation of municipal owned utilities privatization may provide a solution. Privatization can be achieved through outright sales or leases, management contracts or public-private partnerships, any of which may include commitments by the private entity to fund capital improvements.

** Consolidation and Regionalization. Where individual utilities may be in proximity to each other, efficiencies and economies may be achieved by combining resources. For example, perhaps one utility may purchase finished water from an adjoining one, thus eliminating the need for a separate treatment plant or source of raw water.

** Regulatory Action. Where upgrade needs arise from possible regulation changes, a utility may choose to respond to more strict requirements by objecting to a proposed regulation, or seeking a variance or exemption, or asking for a phase-in over time or by outright litigation against the requirement.

** Government grants and low interest loans. Various federal agencies, including USEPA, give grants from time to time to utilities and states for infrastructure projects. In addition, with funding from USEPA, states may offer low interest loans to certain utilities. Two issues should be considered in the case of such programs. First, these resources are limited and clearly not every utility needing infrastructure improvements will get a grant or even a loan. Second, in the case of grants or possibly even loans, someone is subsidizing the funding for the benefit of some one else. The person subsidizing is, of course, the taxpayer, not the utility customer receiving service.