Historically, many water utilities--particularly municipally-owned ones--have failed to set their rates regularly to produce revenue sufficient to recover the full costs of service. One explanation for this is system owners are hesitant to raise rates for fear of backlash from customers who are perceived as unwilling to pay for increased rates.
One of the important costs of service results from the necessity to repair and replace infrastructure from time to time and to fund reserves to pay for such work. Funding of such reserves is from revenue produced from rates. If rates are set to recover only operating costs, reserves will become unfunded and infrastructure issues will be deferred or disregarded. While a utility could incur debt, such as through a bond issue, to pay for plant replacement, the impact of debt service can have an unwelcome effect on rates.
Asset management begins with acknowledgement that facilities must be repaired, replaced and upgraded from time to time. That acknowledgement logically should arise with adequate and detailed records of assets, costs, depreciation, useful lives and condition reports. Water utilities, particularly municipally-owned ones, commonly acquired water plant from developer contributions in aid of construction at no cost to the municipal system. At some point in time, such plant must be replaced. If provision has not been made for depreciation or funding of replacement reserves, an infrastructure concern likely will arise.
The conclusion, it would seem, is that neither a utility nor its customers will benefit when rates sufficient to recover all costs of service, including funding of reserves, are deferred or when asset management is not adequate. The "catch-up" effect that can result when an infrastructure failure occurs, or when the system becomes inadequate to maintain quality of service, can prove a lot more costly than any perceived benefit from avoidance of timely rate adjustments.
© Daniel J. Kucera 2017