RAISING WATER SERVICE RATES TO BENEFIT CUSTOMERS

Last week, the Wall Street Journal reported that the Chinese government is raising rates for water service charged urban users with high levels of demand.* According to the Journal, cheap pricing for water in China had reflected a government policy to protect against inflation. However, low rates were resulting in overuse of water resources and deferred investment in infrastructure.

Under the rate increase, higher uses of water by customers will result in rates that are multiples--3x or 1.5x, depending on demand--of the base rate for water service. Thus, the revised rate structure is intended to encourage conservation as well as to facilitate new investment in water treatment facilities to meet expected more stringent drinking water standards in the near future.

The article also points out that the increased rates will address the "profitability concerns" of Chinese water utilities , as many allegedly operate at a loss or with low revenues that result in a disincentive to upgrade infrastructure to improve water quality.

Does this story sound familiar? Whether it is China, the United States or any other country, reasonable rates that recover all the costs of water service from customers who cause those costs are an imperative for safe and adequate water service. Revenue requirements include not only operating expenses but also funding of reserves for replacements, upgrades and expansions of infrastructure or for funding of debt service incurred for those purposes.

Depending on the availability of adequate sources of raw water supply, rate structure can facilitate conservation measures. Historically, water utilities frequently have structured their rates with declining rate blocks or steps for higher usages, reflecting economies of scale. However, rising rate blocks, along the lines of the Chinese model, have been implemented to encourage conservation of water resources.

In the United States, often water utilities--particularly those owned by municipalities--have maintained low rates that do not recover full costs of service and have resisted rate increases for political reasons. Maintenance of insufficient rates does not benefit water users, for all the reasons apparent to the Chinese regulators. Customers benefit only when revenues are sufficient to enable utilities to recover all costs of service and to fund infrastructure that assuredly provides safe and adequate water to meet demand.

_________________________________________________________

* January 4/5, 2014, p.A6