AFFORDABILITY OF WATER SERVICE--PART 2

One issue arising from any discussion of affordability of water service is how should affordability be measured. Is it really simply a percentage of some assumed mean or median household income statistic? Water service benefitting users is not confined to water entering a house from a service line tapped into a street main. A public utility water system also includes water provided to hydrants that are essential for fire protection, water to places that provide employment to occupants of houses, water to shops where such people shop for food and goods, etc. Moreover, how should the percentage of income spent for water service compare to how much water users' income is spent on such items as cigarettes, television, beverages, etc.?

Court decisions may provide a measure of affordability. Under case law, a utility is required to charge reasonable rates for its service. Reasonable rates are defined as rates which recover reasonable costs of service from those who receive the service and thereby cause the costs. Generally, utilities establish reasonable rates by using the "cash basis" methodology or the "utility basis" methodology. Under the cash basis, rates are established to recover all the cash requirements of the system, including debt service, operating and maintenance expense, and reserves for repair and replacement Under the utility basis, rates are established to recover operating, maintenance and depreciation expense and a reasonable return.

Accordingly, affordability of rates for water service could be measured by the reasonableness of the rates--ie, whether the rates recover reasonable costs of service. Rates which recover more than costs of service from a customer class would be unreasonable. The same would be true for discounted rates to any customer class. Discounted rates would imply subsidization by other classes of customers--ie, unreasonable rates to the others. Accordingly, discounted rates would be unreasonable.

Another concern is whether it would be appropriate for water public utilities to engage in "social engineering", particularly even in the case of municipal-owned water systems, enterprise accounting is required. Subsidies for lower income utility users may be more appropriate for general governmental or other institutions. This may be true given the general legal prohibition against unreasonable rate discrimination in favor of or against particular classes of customers. Rate discrimination can arise when a particular class of customers is charged more or less than the reasonable costs to serve the class.