The End of Cheap Water?

Across the country, Americans are paying more for water than they did a decade ago, even as water utilities fall into debt and water infrastructure deteriorates, according to a recently released Columbia Water Center white paper.

While a number of recent studies shine light on the alarming rise in water costs over the past few years, the Water Center’s analysis is one of the first to explore in detail national-level water utility survey data on water rates, operational costs, efficiency and debt. The study groups water utilities into six clusters based on the characteristic factors – financial, geographic, and demographic – that differentiate their water rates. The results highlight the high cost of water scarcity and the difficulty of managing supply in the face of variable climate conditions.

According to the report, from 2000 to 2010, average water rates and debt load carried by water utilities rose by 23 and 33 percent, respectively, after adjusting for inflation. One-third of water utilities account for a disproportionate percentage of this increase, with both debt and rate increases of over 100 percent. Half of that top third reported that their debt had increased over 200 percent.

This trend has continued since 2010. According to a Circle of Blue study, from 2010 to 2012, the price of water rose 18 percent in 30 major US cities. And, as Reuters reported last year, in the first quarter of 2012 alone, municipalities issued $11 billion in new water utility bonds. Water utilities today carry some $330 billion in outstanding debt, representing about 10 percent of the municipal bond market.

At the same time, water infrastructure is rapidly deteriorating. In its 2009 report card, the American Society of Civil Engineers gave US drinking water infrastructure a D-, citing 7 billion gallons of drinking water lost daily from leaky pipes, an average of 850 pipe main breaks per day, and an $11 billion annual deficit to replace aged out facilities.

According to the Columbia Water Center analysis, no single factor accounts for the rate increases, but some conclusions do stand out. Many of the utilities that have seen the steepest price hikes are in water-scarce areas with low annual rainfall that draw their water from multiple sources. All other factors held constant, drawing water from multiple sources is almost always more costly than using one main source.

Utilities forced to expand their water supply with more expensive additional water sources may find themselves in a delicate balancing act between cost and demand. Santa Barbara, California, and Tampa Bay, Florida illustrate some of these challenges.

As a city with very low annual rainfall, Santa Barbara has in recent years tried to reduce its dependence on a precarious allocation from the Santa Ynez River. In response to a severe drought from 1989 to 1991, the city built an expensive desalination plant which has since been put in “long-term storage mode” and will only be reactivated when demand can no longer be met with current supplies.

In Tampa Bay, Florida, when a falling water table threatened groundwater sources, the utility turned to more expensive surface water. Eventually, it too built a desalination plant, which it paid for in part by raising user water rates. In response, consumers conserved water and reduced demand; as a result, today the desalination plant is only infrequently operated at capacity.

Critics rightly point to these examples as warnings of what can go wrong when utilities turn to expensive, energy-intensive and environmentally controversial water sources like desalination. These critics insist that conservation is almost always a better option; but finding the right way to encourage conservation without destroying revenue is itself a challenge.

For example, in Austin, Texas, Austin Water projected an $11.1 million increase in revenue for 2010 as it implemented “an increasing block rate structure.” Unlike normal pricing, in which the cost per unit of water is the same no matter how much you use, an increasing block rate structure charges high volume consumers more. As such, it sends a strong price signal to encourage users to conserve. But when an unusually high-rainfall year followed Austin’s pricing change, outdoor water needs fell dramatically and fewer users fell into the high-consumption bracket. As a result, Austin Water lost $38.1 million. In response they raised the fixed charge fraction of their water rates from 11.8 percent to 19.6 percent in 2012 in order to add additional buffer for variability in supply and consumer demand.

Nonetheless, the study suggests that prudent management can reap significant financial, conservation and reliability rewards. For example, while large investments to increase supply or to make urgent repairs in failing pipes usually require taking on debt, the Chicago Water Department has adopted a pay-as-you go approach by replacing old pipes before they reach a critical point using incoming revenue.

Along the same lines, the study identifies a group of small, mostly rural utilities that have some of the highest water rates, in spite of average operating expenses. Thus they maintain manageable debt. Given that many small utilities face looming infrastructure investments, this group could provide a model for cost recovery that leaves them well-positioned to absorb inevitable future outlays.

Finally, the report notes that a better understanding of debt service costs would greatly improve our understanding of how to better manage water rates. After all, whether it is through taxes, fees or debt, ultimately the cost of water “is in some way shouldered by the community.”