Case Study 2: Regionalizing water rates

Case Study 2: Regionalizing water rates

Roughly 80% of the U.S. residents receive piped water supply from a water utility; the rest rely on private water wells.  Smaller utilities suffer from several challenges, including chronic underinvestment in infrastructure, exacerbated by the small revenue base critical for such investment. Any capital investment, financed by low-interest loans or bonds, are eventually paid by the users, necessitating rate increases that can be especially challenging for low-income customers.

One way to avoid increases in water rates is to spread the cost over multiple water systems, especially if they are under the same ownership or management. Consolidated ownership becomes the basis for consolidated rates or single-tariff pricing, where a unified rate structure is used for separate water systems that are owned and operated by a single utility, but that may or may not be contiguous or physically interconnected (EPA, 1999).[1] Since everyone in the service area gets charged the same rate, the single tariff model benefits smaller municipalities where the cost of treatment and distribution is typically higher due to its size and weak network density.

Although not restricted to private investor-owned utility (IOU) systems, this is where it is most commonly observed. For example, Pennsylvania American Water (PAW), provides water service to more than 65 municipalities and 2.3 million people in Pennsylvania, including parts of Pittsburgh, Scranton, Hershey, and Wilkes-Barre. In 2017, PAW began a $4.1 million project to install 1.1 mile of new 24-inch water main in Scranton (population: 76,000 persons; median household income is two-thirds that of the national average) to improve reliability for customers and reduce service disruptions.[2] The following year, the utility installed a 120,000-gallon ground storage tank costing nearly $1 million. In a typical municipal-owned utility, such an investment would have resulted in a dramatic increase in water rates. Instead, the equivalent of a 2.3 percent annual rate increase applicable to all 2.3 million people served by PAW water and wastewater systems was approved by the Pennsylvania Public Utility Commission in 2017.[3] For comparison, a U.S. Department of Energy analysis of water rates during the period 2008-2016 found that cities in the Northeast and the Midwest experienced an average annual rate increase of 5-9 percent.[4]

The key feature of this mechanism is that it smooths out rate increases by avoiding large shocks to the revenue stream. The ability to use consolidated pricing and to get unified approval for rate increases also allowed the Indiana subsidiary of American Water to begin proactive lead service line replacement (both public and private components) of 50,000 lead service lines at no cost to homeowners and to take place over approximately 25 years.[5]. There are at least 100,000 lead service lines in the state of Indiana.

An example of a publicly-owned utility adopting single tariff pricing is in the Tidewater region of Virginia, where the Hampton Roads Sanitation District (HRSD) provides wastewater service to 18 cities and counties of southeast Virginia, over an area of more than 3,000 square miles with a population of 1.7 million. A wastewater utility chartered by the Virginia General Assembly in 1934, HRSD has been able to expand across municipalities near the Chesapeake Bay, with a mission of preserving the quality of the Bay’s waters and ecosystems.[6] The challenges of protecting a sensitive ecosystem in the Chesapeake Bay means that small communities would be unable to meet the stricter regulations for wastewater treatment and discharge. Although HRSD’s rates have continually increased over the past decade, its size and complexity have allowed it to use the best technology possible, contributing to a significant improvement in the Bay’s water quality.[7] The utility has won several awards for its various efforts in technical innovation, permit compliance, and regional cooperative model, including the 2018 US Water Prize and the Governor’s Environmental Excellence Award in 2019.

Although some level of utility consolidation would be necessary to adopt the single tariff model, the idea can be modified to create county-level or regional utilities that are physically independent, yet financially connected to allow the benefits of economies of scale and consolidated pricing to flow to all customers. This structure also allows utilities to offer generous customer assistance programs and address inequity in their pricing. For example, Pennsylvania American Water offers a “H2O Help to Others” program that assists low-income customers (with grants up to $500 per year toward the water/wastewater bill, an 85% discount on the monthly service fee (but not on the volumetric charge) and a free kit with water-saving devices.

 

[1] EPA. 1999. Consolidated Water Rates: Issues and Practices in Single-Tariff Pricing. Accessed at:

https://nepis.epa.gov/Exe/ZyPDF.cgi/P10052AU.PDF?Dockey=P10052AU.PDF

[2] Pennsylvania American Water. 2017. Press release. Accessed at: https://amwater.com/paaw/news-community/pa_news_feed/id/1035468

[3] Pennsylvania Public Utility Commission. 2017. http://www.puc.state.pa.us/about_puc/press_releases.aspx?ShowPR=3947

[4] Department of Energy, 2017. Water and Wastewater Annual Price Escalation Rates for Selected Cities across the United States. Accessed at: https://www.energy.gov/sites/prod/files/2017/10/f38/water_wastewater_escalation_rate_study.pdf

[5] Environmental Defense Fund. 2018. American Water lays out a plan for replacing lead pipes in its Indiana systems. http://blogs.edf.org/health/2018/02/24/american-water-plan-replacing-lead-pipes-indiana/

[6] Hampton Roads Sanitation District. 2019. https://www.hrsd.com/history

[7] DailyPress. 2019. Experts say Chesapeake Bay water quality is the best since monitoring began. March 27. Accessed at: https://www.dailypress.com/news/dp-nws-bay-water-quality-20190327-story.html