THE VALUE OF WATER, PART 7--PRICING

Water utilities do not sell water. They provide water service. Their water service commonly may include withdrawal of raw water from a source, transport to a central treatment facility, treatment of the raw water to safe drinking water standards, storage of finished water in tanks which also may maintain desired pressure, and delivery of the finished water to users in a distribution network. They charge a price for their water service. Accordingly, water utility rates are not the prices of water delivered--such as the price of a bottle of water at a store--but are the prices of water service provided to customers.

From time to time, some have asserted that water utility rates should be based upon the "value of water" perceived by users. Such assertions are flawed and misplaced. It is unlikely that users of a water system could agree on a single definition, or measure, of such "value". Moreover, such perceived "value" has no correlation with the provision of water service and the costs incurred to provide the service. Simply stated, the value of water is incapable of an acceptable objective methodology for its calculation.

The only objective and fair methodology for water utility rate making is cost of service recovery. This fact has been confirmed repeatedly by numerous court decisions, statutes, regulatory commission polices and writings.

At times, some jurisdictions have attempted to adjust cost of service rate making to effect a particular goal or social engineering. For example, to encourage water use conservation, some agencies have modified rate structure to increase rates as water use increases. Others have suggested special rates for certain levels of low income users, with costs subsidized by other users.

Another example may be denial of the full cost of service recovery to reflect a finding that water service was not of an acceptable quality. In one case, an agency reduced a water utility's recovery in rates of its full cost of capital (rate of return on rate base) for such a reason.

In short, water utility rates do not, and cannot, measure or be predicated upon the perceived value of water.