Last month, the Wall Street Journal reported that more commercial and manufacturing customers are generating their own electricity supplies instead of purchasing power from electric public utilities. (September 18, 2013, page A1). This trend, which has quadrupled since 2006, in turn is threatening the revenues and growth of the utilities losing such loads on their systems.
Regulators as well as electric utilities are concerned. As large electric users leave a utility system, the remaining customers, including residential users, likely will pay higher rates to produce sufficient revenue to pay costs associated with infrastructure such as power generation facilities and transmission and distribution lines.
The movement to self-generation appears to be driven by advances in solar panels, fuel cells, wind turbines, and natural gas turbines and reciprocating engines, which make energy independence economically feasible. In addition, for some, self-generation may seem to be more reliable.
Water utilities also can experience a similar trend toward customer water self-suffiency. For example, a large commercial or industrial water user may decide to install its own wells and to disconnect from its local water utility. Or, the customer may retain connection only for standby purposes. The effect upon remaining customers of the utility can be quite dramatic. They will likely experience rate increases necessary to bear the full revenue requirements for the infrastructure such as wells, treatment facilities, pumping and storage facilities and mains.
Can a water utility protect its customers and itself when faced with a significant revenue shortfall resulting from a large volume customer leaving the system? I think there are some possible measures.
For example, a large user institutional customer of one of my water utility clients threatened to leave the system to become self-sufficient by drilling its owns wells and constructing its own treatment facilities. The utility and the customer negotiated a long term contract under which the customer agreed to purchase all its water requirements from the utility at a discounted rate which covered variable costs plus a contribution to fixed costs. The arrangement provided an attractive alternative to the customer building its own system. Retention of the customer benefited the other customers because the special rate produced revenue to cover a portion of fixed costs. The regulatory agency approved the contract.
Where a large water user installs its own water supply but seeks to retain a connection to the water utility for standby purposes, it would seem appropriate for the utility to develop a standby service rate or readiness to serve rate that would produce revenue sufficient to recover the customer's allocable share of revenue requirements associated with infrastructure needed to provide service if called upon.
Some municipalities require that all residents take water service from the municipal-owned water utility. Some court decisions have upheld such requirements. Accordingly, a large water user in such a municipality may not have the option to become water self-sufficent. When a potential large water user requests service from a utility, and infrastructure expansion or upgrade is necessary to provide the requested service, contracts can be structured to obtain from such a customer advances for the cost of such construction and commitments for a term of service.
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