By Jason Mumm
For anyone tracking the U.S. water industry – a sector encompassing both water and wastewater providers, largely managed by municipal entities – a paradox unfolds. Reports frequently highlight consistent rate increases while simultaneously detailing the alarming deterioration of vital water infrastructure. We discover, with the benefit of hindsight, that rates have often climbed significantly faster than core inflation, sometimes two to three times as quickly.
Yet, the infrastructure these rates are meant to support often receives the kind of unsatisfactory grades from the American Society of Civil Engineers that would once lead to serious discussions during parent-teacher conferences. If you scan the American Water Works Association’s (AWWA) State of the Industry Report, you’ll uncover another interesting observation running contrary to the rapidly rising rates: utility managers recently ranked financial sustainability among their top challenges.
How Much is Enough?
Despite rapidly rising rates, the industry appears to be struggling to keep pace financially, whether we look at the health of infrastructure or the overall sentiment among executives, though we acknowledge these are subjective measures. Regardless, healthy water infrastructure is essential to our communities, and keeping those systems healthy comes with necessary, ongoing investments.
This leads to a fundamental question: “How much will truly be enough?” The most sensible and common answer points to rates needing to genuinely reflect the full costs of service. For many utilities, this might sound familiar, as they meticulously calculate revenue requirements and work diligently to secure approval from their governing bodies, often believing they’ve already achieved full-cost pricing. But have they?
Perhaps a more accurate way to frame it is that they’ve secured approval for their current spending priorities. These priorities, however, have often been adjusted, delayed or repositioned to strike a balance between the true costs and what the organization perceives as publicly acceptable.
Even these rapidly increasing utility rates, as challenging as they may be, often represent compromises and don’t always encompass all important priorities. This can lead to critical roles remaining unfilled, projects being postponed, risks going unmanaged, future liabilities (like those tied to asset management) remaining unfunded, and externalities left unaddressed. It’s no wonder why the AWWA report continues to find financial sustainability a top industry challenge.
Ultimately, a utility provider’s annual revenue requirement is a reflection of what it prioritizes and advocates for. It captures an understanding of costs, but only within the framework of existing obligations and those future needs the organization is prepared to champion. Real costs become invisible, leading to something far less than full-cost pricing.
Shifting to Full-Cost Pricing
By truly embracing the concept of full-cost pricing, our industry can shift the current trajectory of infrastructure health and executive and public sentiment for the better. Unfortunately, because the industry has trained itself into a cycle of self-bargaining, the path to full-cost pricing is neither simple nor short.
AWWA recognizes the challenge and is doing something about it. Starting in 2022, AWWA hosted a series of focus groups aimed at addressing the challenges that would define the water industry in 2050. AWWA assigned the topic of full-cost pricing to a strategic implementation team to recommend tangible steps utilities could take to better achieve full-cost pricing by 2050.
The team has already developed several draft proposals, which will undergo a series of reviews before publication, to improve financial sustainability by 2050. Although it remains too early to reveal specific proposals, the industry can generally expect the recommendations to address the necessity of identifying the full costs of owning and operating a community’s utility system, as well as ensuring that this information is available to elected bodies and the public at large. It will address key roadblocks that make rate proposals difficult to navigate by proposing recommendations to enhance staff capabilities and the rate-setting acumen of elected bodies, as well as the need for utility-funded affordability programs to ensure equitable access to services, and improved public communication about costs and resulting rates.
“How much will truly be enough?” The most sensible and common answer points to rates needing to genuinely reflect the full costs of service.
The aim is to improve public decision-making about rates by shifting the dialogue from the self-bargaining mode that currently defines the industry and virtually ensures below-cost pricing, to one that starts with the real needs — supported by rigorous evidence — leading to decisions where the consequences of below-cost pricing are well understood.
It is often said that the only good utility is the one you never hear about. There’s some truth in that because the good utility is never in the news. The public is best served when everything about the utility service is working right. It’s only when it doesn’t work that people take note of the fact that, beneath their feet and out of sight, lie millions, if not billions, of dollars of infrastructure without which our society could scarcely function. Water and sewer infrastructure add immense value to our daily lives, whether we are aware of it or not. It is something that communities should want to pay for rather than being perceived as another financial burden.
A renewed discussion about the true cost of those services is both timely and necessary. As federal and state investment in the industry continues to prove insufficient and may remain so, the only sustainable source for vital water and sewer infrastructure is the local communities those systems serve. Full-cost pricing is, ultimately, the only reliable strategy.
Jason Mumm is senior director of infrastructure finance at Brown and Caldwell. He has 30 years of experience helping local government utilities solve complex financial and operational challenges. A nationally recognized expert in utility rates, fees and charges, he also has helped author significant portions of AWWA’s water utility rates and he currently chairs the Water2050 Strategic Implementation Team responsible for recommendations to guide utility providers closer to full-cost pricing by 2050.
Leave a Reply