14 Sep 2011

The dynamics of water pricing

I am revising a paper on global water tariffs (309 cities in 106 countries!) and sent it to some colleagues for comments. Reagan Wascom and Chris Goemans (Colorado State U.) offered these interesting insights on the relation between the price of water to customers and the costs of running a water system that tariffs are supposed to cover. (They claimed "no originality" but I appreciate their concise insights.

Reagan said:
What we are seeing here in Colorado is that the older utilities with established water portfolios and utility works have significantly lower rates, just because they got in the game early and developed their water supplies long ago. Now they worry about firming supplies and aging infrastructure, while the newer satellite communities struggle to develop much more costly water supplies.
We see rates as low as $3/1000 gal upwards to $20/1000gal here in CO. Almost everyone in the Front Range is going to inclining tiered rate structures, if not water budget approaches.
Interestingly, demographics are starting to catch up with us. By that I mean two things – many of the water utilities or districts were previously in a growth dominated model and much of their total revenue was generated by tap fees and plant investment fees for new development. This could previously mask or compensate for low rates. As service areas become built out, this business model doesn’t work, as there are not enough new taps to sell to sustain the utility capital needs. This puts pressure on elected City Council members to raise rates to compensate for lost fees. Obviously, almost all of the utility costs are fixed – treated water volume really is insignificant compared to fixed labor and infrastructure, so the inclining rate structure is a mechanism to capture more revenue, while at the same time it depresses consumption and thus revenue. Second, this collides with the demographics of an aging population, who are more likely to have fixed incomes and thus are “rate sensitive”. These same aging boomers are more likely to be politically active and monitor the activities of rate setting commissions and councils.
All of this is to say that the rate per volume of treated water sold is on an upward trend here in Colorado and this trend will continue, but of course the agricultural disconnect remains intact.
Chris said:
Not much to add beyond what Reagan has said. However, I would divide utilities on growth, not age. For example, I tend to think of Colorado Springs Utilities as an "older" utility, yet their prices are rising as fast as anyone's. Primarily because, as Reagan mentions, they are "struggling to develop much more costly water supplies."
Mark Pifher (Aurora) and John Fredell (Colorado Springs) gave very similar talks at this year's Colorado Water Congress. Both talked about their respective cities new water supply infrastructure and the price increases that have come along with it.
Somewhat related, and along the lines of future infrastructure costs, the Western Governors Association has a report out entitled: Water Resources Infrastructure Strategies: Identifying, Prioritizing and Financing Needs [PDF]
The future short-term infrastructure costs they estimate are pretty staggering (in the trillions). As Reagan says, the funding model which paid for this through growth is most likely going to need revisiting (not that this is a bad thing).
On that note, Reagan added:
The utility managers and their financial officers know well what is needed to sustain their systems, but there is a political downside for the elected officials if rates rise too rapidly in order to get where they need to be to achieve sustainable operations. What I observe is that the elected are balancing many financial shortfalls in all categories of public services and that funding for schools, roads and prisons seem to carry the most political upside for them. The other side of this that would be interesting to investigate is the debt load that water utilities are carrying to pay for infrastructure investments that were not adequately captured in rates and fees.
[My] Bottom Line: Water prices based on the cost of past investments and changing infrastructure needs mean that customers in the same region can face very different prices for water service. Different prices may not seem fair, but they may not even be efficient if they do not reflect water scarcity.

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