Are Water Rates Too Low?

According to the Economist, "A recent survey of municipal water projects financed by the World Bank showed that the price charged for water covered only around 35% of the average cost of supplying it. The shortfall is made up by subsidies, or by allowing water infrastructure to decay." Economist, Feb. 24, 1996.

Although this statement is global in its scope, it likely has application to many water systems in the United States, particularly municipal-owned systems. Often encountered is a reluctance to raise rates, or if rates are increased, they are not based on any true cost of service study.

Water utility reluctance to charge adequate rates may be due to a loss of perspective. Water systems may ignore rate issues due to political considerations, a desire to avoid upsetting customers, lack of appreciation of the necessity for adequate rates, or simply a negative inertia. A 10-, 20- or 30-% rate increase can seem monumental, particularly as time passes since any prior rate adjustment. However, water is a bargain even at more realistic rates. For example, at $4 per 1,000 gallons, a gallon of water is only 4/10 of one cent.

Rates for water service should be determined so as to provide the opportunity to recover the costs of service. True, many courts have tempered this principle to allow flexibility. However, there is no escape from the reality that, unless all costs of service are recovered, someone is subsidizing water operations or some cost is not being recovered. This conclusion is even more true as water systems upgrade plants and other facilities, or incur increased operating expense to satisfy ever more stringent Safe Drinking Water Act requirements.

There are, of course, alternate methodologies for calculating cost of service, such as the cash basis and utility basis. Also, there are alternative methodologies for allocating costs to different functions, services and customer classes.

However, the point is to recognize that costs of service should be identified and recovered equitably. This fact particularly is important in today's environment of aging infrastructure, increased demand and, in the United States, increasingly more stringent regulations under the federal Safe Drinking Water Act. Rates are not "reasonable" if they are inadequate to assure good service into the future. In point of fact, rates that are "too low" are no bargain.

Dan Kucera is a partner with the Chicago law firm of Chapman and Cutler, specializing in public utilities, water and wastewater and environmental law. Tel: (312) 845-3757; Fax: (312) 701-2361; email: wimbush@chapman.com.