CAN RATEMAKING ENHANCE WATER UTILITY SERVICE?

Under well-established ratemaking principles, the primary objective of water rates is to recover the costs incurred to provide water service to a utility's customers. In practice, however, this objective can become overlooked or disregarded. For example, unregulated municipal-owned water utilities often hesitate to raise rates to cover costs of service for political or or reasons. Regulatory agencies often deny recovery of certain costs for various reasons, or lower allowed rates of return on rate base.

Provision of adequate water service involves more than recovery of current operating expense and use of depreciating infrastructure acquired at historic original cost. It is not a steady state photograph of cost Rather, provision of water service involves a dynamic and ever-changing scenario of cost. For example, today water utilities are exposed to a moving target of environmental regulatory compliance, increasingly more serious security risks and vulnerabilities, the necessity to replace basic infrastructure having expired useful lives, and diminishing sources of supply, among other things.

Statutes, regulations and insufficient rates that only cover at best some historic operating costs do not, and cannot, mitigate the growing risk costs being experienced by water utilities. However, perhaps creative and anticipatory ratemaking can. Determination of rates, whether by a municipal-owned system or a regulated system can seek to look beyond current or historic operating expense recovery. For example, rates could be set based upon estimated costs in a future test year that can take into consideration costs to be incurred to deal with anticipated risks. Or, rates could be determined to fund reserves in addition to operating costs, reserves in particular related to infrastructure replacement. Rates could be established that include automatic adjustment clauses for increases in certain costs. Finally, rates could be determined so as to encourage or facilitate possible consolidation of smaller systems to achieve economies of scale or public-private partnerships.

Perceptive ratemaking not only may benefit a utility. It may also benefit customers with continued assurance of adequate water service.


© Daniel J. Kucera 2020