Drinking Water Research - July-September 2011

Uncertain Revenues. While costs are still a large concern for utilities, they recognize that they represent only half of the financial picture. Maintaining affordable rates was rated by the workshop participants high alongside full-cost recovery in the pre-forum survey. However, these two issues could easily be contradictory to one another.

Political pressure can influence utility rates in unexpected ways. If the utility is financially healthy, but the municipal government’s general fund is not, utility revenues may be used to cover the general fund’s deficit, some utility representatives stated. In addition, if the water utility is in desperate need of a rate increase, elected officials are less likely to approve it at the same time as a tax or fee increase.

Water conservation is another potential contradictory utility rate setting objective. Motivation for customer water conservation varies across the country. Sometimes it is driven by physical or environmental constraints, sometimes by public expectations. But even if a utility does nothing to promote conservation, American households seem to be using less water. One of the major causes of this decline is the plumbing standards put in place by the 1992 Energy Policy Act1. In the long run, reduced demand could be very financially advantageous for water utilities: less water demand means less resource expansion and infrastructure needs. But if the decline in water use catches a utility off-guard, it can be financially devastating.

Public unawareness. Lack of public
awareness of the growing divide between
utility costs and utility revenues only
exacerbates the problem for most utilities.
Utility representatives were frustrated that
there was a common misperception that
water is and should be close to free. In
addition, the utilities have a difficult time
communicating to the public that due to
conservation or static population growth,
the utility needs a rate increase to meet
largely fixed operating costs and increasing
regulatory requirements. It is difficult for the
public to understand that when their usage
goes down, utility costs do not. So when a
utility has to increase rates because people
did so well at conserving water, the public
and media disparage utility efforts.

1Rockaway, t.D., p.a.
coomes, J. Rivard &
B. Kornstein. (2011)
Residential water
use trends in north
america. Journal
AWWA. February 2011,
76-89.

The Solution: Strategies for Ensuring
Financial Resiliency

Utility representatives at the workshop were asked to nominate strategies they felt had merit for ensuring financial resiliency. Strategy bulletins were developed from this effort. These bulletins are snapshots of the discussion and not meant to serve as a comprehensive depiction of the strategy. The major topics of strategic discussion included:

1. Internal Financial Policies (Metrics-driven financial policies)

2. Cost Index Use for Rate Adjustments

3. Innovative Rate and Pricing Strategies

4. Revenue Enhancement Strategies

5. Integrated Planning Strategies

6. Water-Energy Nexus Strategies

7. Cost Control Strategies

8. Board and Customer Communication
Strategies
The following summaries provide a brief
introduction to the bulletins, which delve
deeper into each of these strategies, provide
potential benefits and drawbacks of certain
strategies, as well as specific examples.