CENTER FOR URBAN POLICY AND THE ENVIRONMENT - NAWC

More documents

Recommendations

Info

Indiana University + School of Public & Environmental AffairsCenter for Urban Policy & the EnvironmentDelivered water is properly understood as a value-added commodity. Many consumersprobably do not fully appreciate the nature of water service; much of the utility infrastructure isinvisible to the consumer's eye. Although relatively abundant in nature, and seemingly "free,"water's value is enhanced by the source development, treatment, and delivery processes. Utilities·obviously must be compensated for prudent investments made to perform these functions onsociety's behalf.In the developing world, water for drinking and sanitation purposes is a first-orderpriority. In the United States, the high quality of water service easily can be taken for granted.Water and wastewater services are underappreciated in part because they are provided through"invisible networks. " 9 Most of the utility infrastructure is not seen by the customer. Crises thatdisrupt the availability of water (such as a drought), the reliability of water service (such as anearthquake), or the quality of water for drinking (such as a contamination), bring water's value tothe public's attention. ·But the attention span seems short; public support for rate hikes needed tomake improvements-even in the wake of a crisis-can be short lived, especially if the crisissomehow undermines the public's trust in the utility.As a general proposition, water probably has been underpriced relative to its trueeconomic and environmental costs. As a result, consumers probably do not fully appreciate thevalue of water service. In fact, some consumers seem to "resent" paying for water, seeming toview water service as an "entitlement" rather than a consumer good. Customers also will usewater less efficiently than they would if they received an appropriate price signal. Educatingconsumers about the value of water service is perhaps one of the industry's most importantchallenges. A well-educated consumer can become one of the water utility's greatest assets.Water prices are on the rise. The rising price of water may in part be attributed to historicunderpricing. Underpricing may be particularly apparent for publicly owned water systems,where tax revenues, grants, and other subsidies helped keep prices artificially low. Today, waterprices everywhere are under pressure because of the need to replace and improve the aginginfrastructure, meet stringent federal and state drinking water standards, and build capacity tosatisfy demand growth and extend service to new areas. Subsidies, particularly federal and stategrants, are far less available to mitigate rising water utility costs.The effects of these cost pressures can be seen in the Consumer Price Index for water andsewer services, as seen in Figure 1. Until the early 1980s, water prices remained comfortablybelow or near the overall inflation rate. Thus, price increases for water seem to be in keepingwith price increases for other consumer goods and services. Since approximately 1984, water andsewer price increases (that is, real prices) have outpaced inflation.9Ann Durkin Keating, Invisible Networks: Exploring the History of Local Utilities and Public Works. Malabar,FL: Krieger Publishing Company, 1994.6
Indiana University + School of Public & Environmental AffairsCenter for Urban Policy & the EnvironmentRecipe for Rate ShockRate = Costs/Salesif The Numerator (Costs)• Infrastructure replacement• SD W A compliance• New supply development• Efficiency pricing.0. The Denominator (Sales)• Stable per capita use• Slow or no economic growth• Limited expansion opportunities• Increasing end-use efficiencyThe rise in real water prices is a cause of concern toutilities, customers, and regulators. A sudden and sharpprice increase can lead to rate shock for customers. Theproblem of rate shock is further exacerbated by the general·belief that the upward pressure on water costs isaccompanied by constraints on revenue producing unitsales. In other words, the rising costs must be spread overa base that is not keeping pace. Utilities must strive toprovide service at the least possible cost, while meeting allappropriate standards. Ratepayers must strive to keep theirtotal water bill affordable, possibly through conservationmeasures. Regulators must strive to provide appropriateincentives for utility performance, including cost control.From an economic efficiency standpoint, pricingwater at its true economic cost will become increasinglyimportant. Only through efficiency-oriented pricing will customers receive an appropriate signalabout the value of water service, a signal that will allow them to make wise consumption andconservation decisions. Considerable responsibility rests on the water utility and rate regulators(at the state and local levels) to price water service correctly and build customer understanding ofhow that price reflects the value of water service. An added responsibility is to help ensure thatwater service is affordable to the utility's customers.Discussion Questions• Do water customers understand the true value of water service?• What can and should water utilities do to improve ratepayer understanding of the value ofwater?~ How can water utilities and regulators contend with rising water prices and rate shock?7
Page 1 and 2: NA WC Water Policy Forum:The Future
Page 3 and 4: ..,Indiana University + School of P
Page 5 and 6: Indiana University + School of Publ
Page 15: Indiana University + School of Publ
Page 19 and 20: Consumer Price Index for Water and
Page 31 and 32: FIndiana University + School of Pub
Page 33: Indiana University + School of Publ

CENTER FOR URBAN POLICY AND THE ENVIRONMENT - NAWC

Create successful ePaper yourself

Delete template?

Save as template?